UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D. C. 20549
FORM
10-K
(Mark
One)
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x
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ANNUAL
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the fiscal year ended December 31, 2008
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¨
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TRANSITION
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the transition period from to
Commission
file number: 000-052211
ZAGG
INCORPORATED
(Name
of small business issuer in its charter)
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NEVADA
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20-2559624
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(State
or other jurisdiction of
incorporation
or organization)
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(I.R.S.
Employer
Identification
No.)
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3855
S 500 W, Suite J, Salt Lake City, UT
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84115
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(Address
of principal executive offices)
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(Zip
Code)
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Issuer’s
telephone number: (801) 263-0699
Securities
registered under 12(b) of the Exchange Act: None
Securities
registered under 12 (g) of the Exchange Act:
Common
Stock, par value $0.001
(Title
of Class)
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes o No þ
Check
whether the issuer is not required to file reports pursuant to Section 13 or
15(d) of the Exchange Act. Yes o No þ
Check
whether the issuer (1) filed all reports required to be filed by Section 13 or
15(d) of the Exchange Act during the past 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes þ No o
Check if
there is no disclosure of delinquent filings response to Item 405 of Regulation
S-B contained in this form, and no disclosure will be contained, to the best of
registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o Accelerated
filer o
Non-accelerated filer o Smaller reporting
company þ
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o No þ
The
aggregate market value of the voting and non-voting common equity held by
non-affiliates as of June 30, 2008 was $7,988,802. For purposes of
the foregoing calculation only, directors and executive officers and holders of
10% or more of the issuer’s common capital stock have been deemed
affiliates.
The number
of shares outstanding for the Registrant’s common stock as of March 25, 2009 was
19,283,995.
ZAGG
INCORPORATED
2008
FORM 10-K
TABLE
OF CONTENTS
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Page
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PART
I
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ITEM 1.
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BUSINESS
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1
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ITEM 1A.
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RISK
FACTORS
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6
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ITEM 1B.
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UNRESOLVED
STAFF COMMENTS
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6
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ITEM 2.
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PROPERTIES
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6
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ITEM 3.
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LEGAL
PROCEEDINGS
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7
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ITEM 4.
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SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
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7
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PART
II
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||
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ITEM 5.
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MARKET
FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND
ISSUER PURCHASES OF EQUITY SECURITIES
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7
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ITEM 6.
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SELECTED FINANCIAL DATA |
9
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ITEM
7.
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MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND
RESULTS OF OPERATIONS
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9
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ITEM 7A.
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QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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14
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ITEM
8.
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FINANCIAL SATTEMENTS AND SUPPLEMENTARY DATA | 14 |
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ITEM
9.
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CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND
FINANCIAL DISCLOSURE
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15
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ITEM 9A.
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CONTROLS
AND PROCEDURES
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15
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ITEM 9B.
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OTHER
INFORMATION
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16
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PART
III
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ITEM 10.
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DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
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16
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ITEM 11.
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EXECUTIVE
COMPENSATION
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19
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ITEM 12.
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SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
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21
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ITEM 13.
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CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
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22
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ITEM 14.
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PRINCIPAL
ACCOUNTANT FEES AND SERVICES
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22
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PART
IV
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ITEM 15.
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EXHIBITS,
FINANCIAL STATEMENT SCHEDULES
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22
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SIGNATURES
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23
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PART
I
Special
Note Regarding Forward-Looking Statements
Information
included or incorporated by reference in this Annual Report on Form 10-K
contains forward-looking statements. All forward-looking statements are
inherently uncertain as they are based on current expectations and assumptions
concerning future events or future performance of the Company. Readers are
cautioned not to place undue reliance on these forward-looking statements, which
are only predictions and speak only as of the date hereof. Forward-looking
statements usually contain the words “estimate,” “anticipate,” “believe,”
“expect,” or similar expressions, and are subject to numerous known and unknown
risks and uncertainties. In evaluating such statements, prospective investors
should carefully review various risks and uncertainties identified in this
Report, including the matters set forth under the captions “Risk Factors” and in
the Company’s other SEC filings. These risks and uncertainties could cause the
Company’s actual results to differ materially from those indicated in the
forward-looking statements. The Company undertakes no obligation to update or
publicly announce revisions to any forward-looking statements to reflect future
events or developments.
Although
forward-looking statements in this Annual Report on Form 10-K reflect the good
faith judgment of our management, such statements can only be based on facts and
factors currently known by us. Consequently, forward-looking statements are
inherently subject to risks and uncertainties and actual results and outcomes
may differ materially from the results and outcomes discussed in or anticipated
by the forward-looking statements. Factors that could cause or contribute to
such differences in results and outcomes include, without limitation, those
specifically addressed under the heading “Risk Factors Related to Our Business”
below, as well as those discussed elsewhere in this Annual Report on Form
10-KSB. Readers are urged not to place undue reliance on these forward-looking
statements, which speak only as of the date of this Annual Report on Form 10-K.
We file reports with the Securities and Exchange Commission (“SEC”). You can
read and copy any materials we file with the SEC at the SEC’s Public Reference
Room, 100 F. Street, NE, Washington, D.C. 20549. You can obtain additional
information about the operation of the Public Reference Room by calling the SEC
at 1-800-SEC-0330. In addition, the SEC maintains an Internet site (www.sec.gov)
that contains reports, proxy and information statements, and other information
regarding issuers that file electronically with the SEC, including
us.
We
undertake no obligation to revise or update any forward-looking statements in
order to reflect any event or circumstance that may arise after the date of this
Annual Report on Form 10-K. Readers are urged to carefully review and consider
the various disclosures made throughout the entirety of this annual report,
which attempt to advise interested parties of the risks and factors that may
affect our business, financial condition, results of operations and
prospects.
ITEM
1. BUSINESS
Our
Business
Headquartered
in Salt Lake City, Utah, ZAGG Incorporated designs, manufactures and distribute
protective coverings, audio accessories and power solutions for consumer
electronic and hand-held devices under the brand names invisibleSHIELD™ and
ZAGGaudio™.
Our
flagship product, invisibleSHIELD, is made from a protective, film covering that
was developed originally to protect the leading edges of rotary blades of
military helicopters. We determined that this same film product could be
configured to fit onto the surface of electronic devices and marketed to
consumers for use in protecting such devices from everyday wear and tear;
including scratches, scrapes, debris and other surface blemishes. The film also
permits touch sensitivity, meaning it can be used on devices that have a
touch-screen interface. The invisibleSHIELD film material is highly reliable and
durable since it was originally developed for use in a high friction, high
velocity context within the aerospace industry. The film provides long lasting
protection for the surface of electronic devices subject to normal wear and
tear. The film is a form of polyurethane substance, akin to a very thin,
pliable, flexible and durable clear plastic that adheres to the surface and
shape of the object it is applied to.
1
The
invisibleSHIELD is designed specifically for iPods®, laptops, cell phones, digital
cameras, PDAs, watch faces, GPS systems, gaming devices, and other
items. The product is “cut” to fit specific devices and packaged
together with a moisture activating solution which makes the invisibleSHIELD
adhere to the surface of the device, literally “like a second skin,” and
virtually invisible to the eye. The patent-pending invisibleSHIELD is
the first scratch protection solution of its kind on the market. The
invisibleSHIELD is not ornamental, but rather provides a long lasting barrier to
preserve the brand new look of the surface of an electronic
device. Currently, ZAGG offers over 3,000 precision pre-cut designs
with a lifetime replacement warranty through online channels, big-box retailers,
electronics specialty stores, resellers, college bookstores, Mac stores, and
mall kiosks. We plan to increase our product lines to offer new
electronic accessories to our tech-savvy customer base, as well as an expanded
array of invisibleSHIELD products for other industries. With millions
of invisibleSHIELDs sold to date by early adopters, we are poised to introduce
the invisibleSHIELD product to mass-market consumers worldwide. Given the
amazing success of the invisibleSHIELD, ZAGG has the unique opportunity to offer
additional accessories from a trusted source to gadget enthusiasts,
worldwide.
The
ZAGGaudio line of electronics accessories and products was released in late
2008, and focuses on innovation and superior value. The flagship
product within ZAGGaudio is the award winning, Z.buds™. Winner of the
coveted CES, Design and Innovation award, it has been very well received by
professional reviewers, experts and the consumer base. Other
headphone, speaker and audio products have been released and will be released in
the coming months and years.
We
maintain our corporate offices and operational facility at 3855 South 500 West,
Suites B, C, J and R, Salt Lake City, Utah, 84115. The telephone number of the
Company is 801-263-0699. Our website address is www.ZAGG.com.
Strategy
At ZAGG,
we are “Zealous About Great Gadgets.” We believe that
hand-held devices and gadgets have been developed to be aesthetically pleasing
as designed and that bulky silicone, plastic or leather cases impede the overall
end users’ enjoyment of the form and function of their
device. Consumers purchase these types of accessories to help protect
their devices from getting scratched and damaged. The invisibleSHIELD
provides the end consumer with an alternative to bulky cases that provides
unparalleled device protection without impeding the functionality and enjoyment
of the consumers’ device.
We will
continue to expand our product offering and focus on innovative products and
services that we can target market to our customers based on their purchase
history. When a customer purchases an invisibleSHIELD from ZAGG, we
know exactly what type of device they have as the invisibleSHIELD is custom cut
for each device. With that information we can develop specific
marketing plans to sell additional products including power supplies, car
charges, ear buds and other accessory items. Our current line of
accessory items, branded as ZAGGaudio, is available to our customers through our
website at www.ZAGG.com and
through our retail distribution channels as well.
As we
continue to develop and enhance our brand name and reputation, we anticipate
entering into additional complementary industries to provide our invisibleSHIELD
product line.
Design
and Packaging
We design
and cut the invisibleSHIELD product
for application on hundreds of specific electronic devices. We
acquire raw materials from third party sources that are delivered to our
facilities and assembled for packaging. In addition, we out-source high volume
precision-cutting of the materials, which we consider to be more cost
effective. We then package the configured materials together with an
installation kit, consisting of SHIELDspray™, a moisture
adhesive-activating solution, a squeegee, and instructions for application on
specific electronic devices and also outsource some of these packaging processes
to independent third-parties. We have developed relationships with
package assembly and shipping and logistics companies that allow us to expand
our production and shipping capacity as we continue to grow.
We have a
patent pending on the process of wrapping an entire gadget body in a
transparent, durable and semi-permanent film. We also custom design
each cut-out for the film and currently have unique designs for over 3,000
devices. The cut-out designs are developed internally and owned
exclusively by us. We do not own the patent for the base materials,
but believe that our relationship with the manufacturer of the raw material is
on excellent terms and anticipate no interruption in our ability to acquire
adequate supplies of the materials and produce products.
We have
developed our retail packaging with the input of major retailers to appeal to
the end consumer on a retail basis. We have designed the cardboard
box packaging to be informative and attractive for point-of-sale
displays.
2
Market
for Products
The
portable electronic device market, notably handheld devices, is continuing to
see advancements in performance and functionality in existing
models. Furthermore, the market is expanding as evidenced by new
product developments in portable electronic devices. Correspondingly,
the aesthetics of such devices is increasingly important to the extent that
buyers are considering the look and feel of such devices, as much as
performance, in making their purchasing decisions.
As a
result, an industry and significant market has emerged in protecting portable
electronic devices, notably the “high end” devices – both in terms of price, and
design/functionality. Consumers are seeking ways to protect the device from wear
and tear and damage, but not impede the look, feel, or functionality of the
device.
We sell
directly and through our distributors and retail sellers, the invisibleSHIELD to
consumers of electronic household and hand-held devices. We sell a
significant amount of product for use on Apple’s iPod and iPhone
devices. The invisibleSHIELD covers and protects the iPod and iPhone
without detracting in any manner from the look and feel of the device or its
functionality. The handheld electronics industry has continued to
market and develop devices with touch screen interfaces. The
invisibleSHIELD is the ideal device protection offering for these types of
gadgets as it does not interfere with the functionality of the device while
offering complete scratch proof protection. We will continue to focus
our marketing efforts around these types of gadgets as the premier protection
solution while maintaining the overall form and functionality of the
device.
To date,
we have not partnered with any manufacturers of electronic devices to bundle our
products with such devices on initial sale, or to include as part of the device,
the application of our products. In the future, we may seek such an arrangement
or an alternative co-marketing agreement, but we have not entered into
definitive negotiations for such an arrangement as yet.
Market
Segments
With over
3,000 invisibleSHIELD products/product configurations available, we have a
protective covering for all major market segments of handheld electronic
devices, including: iPods, other brand MP3 players, PDAs, cell
phones, laptops, GPS devices, watch faces, and similar devices and surfaces. We
intend to continue to configure the invisibleSHIELD product for use in newly
developed consumer devices. Unlike manufacturers of competing device cases that
need months to design and manufacture customized accessories for new devices,
the invisibleSHIELD can be quickly configured and packaged for new devices as
they enter the consumer marketplace, making the invisibleSHIELD available for
purchase ahead of competing accessories for new electronic devices.
One of
our fastest growing market segments is the iPod consumer. Most often, iPod
buyers are drawn to the device by its elegant design, as well as its easy-to-use
functionality. However, everyday use often mars the iPod's finish,
screen and other areas that receive wear and tear. Traditional
protective products are bulky and detract from an iPod's elegance by covering it
up. Other common protectors either do not offer enough protection -- such as
leaving the iPod's function buttons uncovered -- or they are not durable enough
to properly protect the device. However, an invisibleSHIELD covering is exactly
that-- invisible-- meaning it does not cover up the design, form or
functionality of the iPod.
As sales
of electronics continue to grow, we anticipate that sales of our complimentary
products will continue to grow, as well. Four of the largest areas of
our market opportunities relate to sales of iPods, cellular telephones, digital
cameras and gaming systems. According to industry sources, over 54,800,000 iPods
and over 11,600,000 iPhones were sold in Apple Corporation’s most recent fiscal
year. Over 1.2 billion cell phones were sold worldwide in
2008. Over 119,000,000 units of digital cameras were sold in
2008. Sony’s PSP sold over 50,000,000 units as of January 2009 and
Nintendo’s DS Lite sold over 96,000,000 units during the same
period. ZAGG is positioned to serve all of these markets with its
after-market invisibleSHIELD products.
Marketing
and Distribution
We sell
our products directly on our website, through distributors, through kiosk
vendors in shopping malls and retail centers, and through electronics
retailers. Our products are available for sale worldwide via our
website. Currently we advertise our products on the internet and
through point of sale displays at retail locations. We also advertise
our products on television and radio both locally and nationally. We
intend to expand our advertising by implementing a broader television
advertising strategy over the course of 2009. We are also seeking to
create strategic partnerships with makers of iPod and electronic
accessories.
3
Website
Sales
We sell
our products worldwide directly to consumers on our website at www.ZAGG.com. For
the year ended December 31, 2008, we sold approximately $10,305,455 of product
on our website, or approximately 52% of our overall sales for 2008.
We also
generated revenue from shipping charges to customers. For the year
ended December 31, 2008, we generated approximately $1,067,719 from shipping
charges, or approximately 5% of our overall sales for 2008.
Mall
Kiosk Vendors
We sell
our invisibleSHIELD
products to kiosk vendors in shopping malls and retail centers. We
enter into agreements with such vendors who purchase the products and resell
them to consumers. For the year ended December 31, 2008, we sold
approximately $1,758,561 of product, or approximately 9% of our overall sales
for 2008, through our corporate owned mall carts and to licensed cart
owners. The third party licensed cart owners are required to enter
into a standard license and resale agreement with us wherein we charge an
upfront license fee that is recognized into revenue over the life of the
license.
Wholesale
Channels
We sell
our invisibleSHIELD products through wholesale channels including big box
retailers, domestic and international distributors, independent Apple retailers,
university bookstores and small independently owned consumer electronics
stores. For the year ended December 31, 2008, we sold approximately
$6,617,761 of product through this wholesale channel, or approximately 34% of
our overall sales for 2008. We require all wholesale channel partners
to enter into a standard reseller agreement with us.
We
continue to utilize multiple distributors to market and place our products for
sale in the United States and abroad. We have entered into
distribution agreements for many geographic locations including the United
States, United Kingdom, Australia, Hong Kong, South Korea, Mexico, Germany and
South America for the marketing, distribution and sale of our
products.
We are
continuously negotiating for new distribution relationships in the United States
and abroad to increase the marketing and sale of our products in retail
locations.
Company
Organization
Our
operations are divided and organized as follows: marketing and sales, which
includes the development and maintenance of our website, customer service,
production, distribution and shipping, art and graphics, product design, and
general and administration functions.
Competitors
Our chief
competitors are companies that develop, market and sell protective devices for
consumer electronics. The market for sales to consumers for “after
market” accessories for electronic devices is very competitive. We
are aware of some companies who have developed similar products to our
invisibleSHIELD products using inferior films. There are numerous
companies that sell protective devices for cell phones, iPods, MP3 players,
laptop and computer screens and similar devices, none of which have
specifications similar to our products. Rather such products tend to
be larger, bulkier, heavier, ornamental and visually distracting, and cover the
design and features of the device, rather than enhance its
design. These products are typically made from leather, plastic or
silicone. While we compete with such companies for sales to consumers
generally, we do not consider such other products per se to be competitive to
the invisibleSHIELD.
4
Warranties
We offer
a lifetime guaranty of the durability of our invisibleSHIELD
products. If the invisibleSHIELD is ever scratched or damaged (in the
course of normal use), a customer simply needs to send back the old product and
we will replace it for free. To date only a nominal amount of our
invisibleSHIELDs sold have been returned under the warranty
program.
Intellectual
Property Rights
Patents
We have
filed a patent application for a Protective Covering for Electronic Device with
the United States Patent and Trademark Office. The patent relates to
the field of protective coverings and systems and methods for covering such
devices with thin films. This includes both partial coverings and
full coverings. The Patent Application will not be published until the Patent is
issued.
Trademarks
We have
received the following Trademarks with the United States Patent and Trademark
Office:
|
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·
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INVISIBLE
SHIELD, Serial Number 77096911
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|
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·
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SHIELD
ZONE, Serial Number 77146708
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·
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SHIELD
DESIGN TRADEMARK, Serial Number
77148206
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We have
filed the following Trademark Applications with the United States Patent and
Trademark Office:
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|
·
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INVISIBLESHEILD
(with stylized logo image), Serial Number
78905019
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·
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ZAGG,
Serial Number 77146689
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·
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SHIELD
DESIGN filed on, Serial Number
77148206
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We also
claim common law trademark rights in the following marks: “ShieldZone,”
“Shieldspray,” “Pay Once Protect Forever,” “Invisible Invincible,” “Protect Your
Digital Life,” “Ultimate Scratch Protection” and “Zealous About Great
Gadgets.”
We have
also received the following Trademark Applications with the European
Community:
|
|
·
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INVISIBLE
SHIELD, Serial Number 006157465
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·
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ZAGG,
Serial Number 006328215
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We have
also received the following Trademark with Hong Kong:
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·
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ZAGG,
Serial Number 301217754 – Hong Kong
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·
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ZAGG,
Serial Number 83759/2008 – Japan
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·
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ZAGG,
Serial Number 40-2008-0048050 – South
Korea
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·
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ZAGG,
Serial Number 967076 - Mexico
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|
|
·
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ZAGG,
Serial Number 1742932 – India
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Government
Regulations
Our
operations are subject to various federal, state and local employee workplace
protection regulations including OSHA. We believe that compliance with federal,
state and local environmental protection regulations will not have a material
adverse effect on our capital expenditures, earnings and competitive and
financial position. Although we believe that our worker and employee
safety procedures are adequate and in compliance with law, we cannot completely
eliminate the risk of injury to our employees, or that we may occasionally,
unintentionally, be out of compliance with application law. In such
event we could be liable for damages or fines or both.
5
Employees
We have
70 full-time employees and 4 part time employees including our management
team. We have 19 employees in sales and marketing including our
website, 4 in general and administration, 8 in operations, 4 in technology
support, 2 in graphic design, and 37 customer service agents. We have 24
employees employed on an hourly or part-time basis at our retail cart/kiosk
locations. No employee is represented by a labor union, and we have
never suffered an interruption of business caused by labor
disputes.
Our
Corporate History
We were
formed as a Nevada corporation on April 2, 2004, under the name Amerasia Khan
Enterprises Ltd (“AKE”). On February 8, 2007, AKE executed an
Agreement and Plan of Merger (the “Merger Agreement”) by and between
AKE and its wholly owned subsidiary, SZC Acquisition, Inc., a Nevada
corporation (“Subsidiary”) on the one hand, and ShieldZone Corporation, a Utah
corporation (“ShieldZone”) on the other hand. Pursuant to the Merger Agreement,
ShieldZone merged with Subsidiary, with ShieldZone surviving the merger and
Subsidiary ceasing to exist (the “Merger”).
Following
the Merger, ShieldZone was reincorporated in Nevada as a subsidiary of AKE. On
March 7, 2007, ShieldZone was merged up and into AKE. At that time, AKE changed
its name to ZAGG Incorporated, and the operations of the surviving entity (ZAGG
Incorporated) are solely that of ShieldZone. As a result of these
transactions, the historical financial statements of ZAGG Incorporated are the
historical financial statements of ShieldZone. The fiscal year end of the
Company is December 31.
We
changed our name from ShieldZone Corporation to ZAGG Incorporated to better
position the company to become a large and encompassing enterprise in the
electronics’ accessories industry through organic growth and through making
targeted acquisitions. The ShieldZone name was very specific to the
invisibleSHIELD product line and although the invisibleSHIELD is and will
continue to be our core product, the name change will enable us the opportunity
to easily add new products to our product offering. ZAGG will continue to search
out other complimentary proven products and companies that fit the ZAGG
lifestyle and strategy for fast growth.
|
ITEM
1A.
|
RISK
FACTORS
|
A smaller
reporting company is not required to provide the information required by this
Item.
|
ITEM
1B.
|
UNRESOLVED
STAFF COMMENTS
|
None.
|
ITEM
2.
|
PROPERTIES
|
Real
Property
Our
principal executive offices and manufacturing facilities are currently located
in 16,300 square feet of office and warehouse space located at 3855 South 500
West, Suites B, C, J and R, Salt Lake City, Utah 84115. In January
2008, we signed a master lease agreement covering all of the suites that expires
January 31, 2010 at a monthly lease rate of $9,900. We believe these
facilities are adequate for the foreseeable future.
6
|
ITEM
3.
|
LEGAL
PROCEEDINGS
|
We are
not presently party to any legal proceedings. We are not aware of any
pending legal proceeding to which any of our officers, directors, or any
beneficial holders of 5% or more of our voting securities are adverse to us or
have a material interest adverse to us.
|
ITEM
4.
|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY
HOLDERS
|
During
the fourth quarter of the fiscal year ended December 31, 2008, no matter was
submitted to a vote of security holders.
PART
II
|
ITEM
5.
|
MARKET
FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
|
Market
Information
Our
common stock is currently quoted on the OTC Bulletin Board (“OTCBB”), which is
sponsored by FINRA. The OTCBB is a network of security dealers who buy and
sell stock. The dealers are connected by a computer network that provides
information on current "bids" and "asks", as well as volume information. Our
shares are quoted on the OTCBB under the symbol “ZAGG.”
The
following table sets forth the range of high and low bid quotations for our
common stock for each of the periods indicated as reported by the OTCBB. These
quotations reflect inter-dealer prices, without retail mark-up, mark-down or
commission and may not necessarily represent actual transactions.
|
2008
Quarter Ended
|
High
|
Low
|
||
|
December
31, 2008
|
$1.09
|
$0.60
|
||
|
September
30, 2008
|
$1.17
|
$0.65
|
||
|
June
30, 2008
|
$0.82
|
$0.56
|
||
|
March
31, 2008
|
$0.97
|
$0.59
|
|
2007
Quarter Ended
|
High
|
Low
|
||
|
December
31, 2007
|
$0.87
|
$0.56
|
||
|
September
30, 2007*
|
$2.10
|
$0.56
|
||
|
*Trading
began on July 25, 2007
|
Penny
Stock
The SEC
has adopted rules that regulate broker-dealer practices in connection with
transactions in penny stocks. Penny stocks are generally equity securities with
a market price of less than $5.00, other than securities registered on certain
national securities exchanges or quoted on the NASDAQ system, provided that
current price and volume information with respect to transactions in such
securities is provided by the exchange or system. The penny stock rules require
a broker-dealer, prior to a transaction in a penny stock, to deliver a
standardized risk disclosure document prepared by the SEC, that: (a) contains a
description of the nature and level of risk in the market for penny stocks in
both public offerings and secondary trading; (b) contains a description of the
broker's or dealer's duties to the customer and of the rights and remedies
available to the customer with respect to a violation of such duties or other
requirements of the securities laws; (c) contains a brief, clear, narrative
description of a dealer market, including bid and ask prices for penny stocks
and the significance of the spread between the bid and ask price; (d) contains a
toll-free telephone number for inquiries on disciplinary actions; (e) defines
significant terms in the disclosure document or in the conduct of trading in
penny stocks; and (f) contains such other information and is in such form,
including language, type size and format, as the SEC shall require by rule or
regulation.
7
The
broker-dealer also must provide, prior to effecting any transaction in a penny
stock, the customer with (a) bid and offer quotations for the penny stock; (b)
the compensation of the broker-dealer and its salesperson in the transaction;
(c) the number of shares to which such bid and ask prices apply, or other
comparable information relating to the depth and liquidity of the market for
such stock; and (d) a monthly account statement showing the market value of each
penny stock held in the customer's account.
In
addition, the penny stock rules require that prior to a transaction in a penny
stock not otherwise exempt from those rules, the broker-dealer must make a
special written determination that the penny stock is a suitable investment for
the purchaser and receive the purchaser's written acknowledgment of the receipt
of a risk disclosure statement, a written agreement as to transactions involving
penny stocks, and a signed and dated copy of a written suitability
statement.
These
disclosure requirements may have the effect of reducing the trading activity for
our common stock. Therefore, stockholders may have difficulty selling our
securities.
Holders
of Common stock
On
December 31, 2008, there were 88 registered holders or persons otherwise
entitled to hold our common shares pursuant to a shareholders’ list provided by
our transfer agent, Empire Stock Transfer. The number of registered
shareholders excludes any estimate by us of the number of beneficial owners of
common shares held in street name.
Dividends
There are
no restrictions in our articles of incorporation or bylaws that restrict us from
declaring dividends. The Nevada Revised Statutes, however, do prohibit us from
declaring dividends where, after giving effect to the distribution of the
dividend:
|
|
§
|
We
would not be able to pay our debts as they become due in the usual course
of business; or
|
|
|
§
|
Our
total assets would be less than the sum of our total liabilities, plus the
amount that would be needed to satisfy the rights of shareholders who have
preferential rights superior to those receiving the
distribution.
|
We have
not declared or paid cash dividends on our common stock since our inception, and
our Board of Directors currently intends to retain all earnings for use in the
business for the foreseeable future. Any future payment or dividends
to holders of common stock will depend upon our results of operations, financial
condition, cash requirements, and other factors deemed relevant by our Board of
Directors.
Securities
Authorized for Issuance Under Equity Compensation Plans
|
Plan
Category
|
Number
of
securities
to be
issued
upon
exercise
of
outstanding
option,
warrants
and rights
|
Weighted-average
exercise
price
of
outstanding
options,
warrants
and
rights
|
Number
of
securities
remaining
available
for
future
issuances
under
equity
compensation
plans
|
|||
|
Equity
compensation plans approved by security holders
|
1,635,000
|
$0.65
|
315,000
|
|||
|
Equity
compensation plans not
approved by security
holders
|
--
|
--
|
--
|
|||
|
Total
|
1,635,000
|
$0.65
|
315,000
|
On July
24, 2007, the Board of Directors approved the issuance of 800,000 shares of our
common stock to employees and consultants under a separate stock issuance
plan.
8
On
November 13, 2007, the Board of Directors adopted the ZAGG Incorporated 2007
Stock Incentive Plan wherein we may issue an aggregate of 2,000,000 options to
purchase shares of our common stock or shares of our common
stock. There were 50,000 shares issued and 1,635,000 options issued
under the plan as of December 31, 2008.
Recent
Sales of Unregistered Securities
We issued
options to purchase 6,000 shares of our common stock during the third and fourth
quarters of 2008.
|
ITEM
6.
|
SELECTED
FINANCIAL DATA
|
A smaller
reporting company is not required to provide the information required by this
Item.
|
ITEM
7.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
Certain
statements, other than purely historical information, including estimates,
projections, statements relating to 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,” “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 affect on our operations and future prospects on a
consolidated basis 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.
Our
Business
We
custom-design, manufacture and distribute a form of protective covering, audio
and power accessories for consumer electronic and hand held
devices. Our flagship product the invisibleSHIELD is made from a
protective, film-like covering that was developed originally to protect the
leading edges of rotary blades of military helicopters. We determined that this
same film product could be configured to fit onto the surface of electronic
devices and marketed to consumers for use in protecting such devices from
everyday wear and tear including scratches, scrapes, debris and other surface
blemishes. The film also permits touch sensitivity, meaning it can be used on
devices that have a touch-screen interface. The invisibleSHIELD film material
is highly reliable and durable since it was originally developed for use in a
high friction, high velocity, aerospace context. The film provides long lasting
protection for the surface of electronic devices subject to normal wear and
tear. The film is a form of polyurethane substance, akin to a very thin,
pliable, flexible and durable clear plastic that adheres to the surface and
shape of the object it is applied to.
Critical
Accounting Policies
The
discussion and analysis of our financial condition and results of operations are
based on our financial statements, which have been prepared in accordance with
accounting principles generally accepted in the United States (U.S. GAAP). The
preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses, and related disclosure of contingent assets and liabilities. On an
on-going basis, we evaluate our estimates based on historical experience and on
various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions. Significant estimates include the allowance for
doubtful accounts, inventory valuation allowances, sales returns and warranty
liability, the useful life of property and equipment and the valuation allowance
on deferred tax assets.
9
Revenue
recognition
We follow
the guidance of the Securities and Exchange Commission’s Staff Accounting
Bulletin 104 for revenue recognition. In general, we record revenue
when persuasive evidence of an arrangement exists or product delivery has
occurred, the sales price to the customer is fixed or determinable, and
collectability is reasonably assured. Our revenue is derived from
sales of our products to retailers, resellers and end consumers and from the
sale of distributor license fees. For sales of product, we record
revenue when the product is shipped, net of estimated returns and
discounts. For license fees, we recognize revenue on a prorated basis
over the life of the distribution contract.
The
Company follows the guidance of Emerging Issues Task Force (EITF) Issue 01-9
“Accounting for Consideration Given by a Vendor to a Customer” and (EITF) Issue
02-16 “Accounting by a Customer (Including a Reseller) for Certain
Considerations Received from Vendors.” Accordingly, any incentives received from
vendors are recognized as a reduction of the cost of products. Promotional
products given to customers or potential customers are recognized as a cost of
sales. Cash incentives provided to our customers are recognized as a reduction
of the related sale price, and, therefore, are a reduction in
sales.
Reserve
for Sales Returns and Warranty Liability
Our
return policy generally allows our end users and retailers to return purchased
products for refund or in exchange for new products within 30 days of end user
purchase. We estimate a reserve for sales returns and record that reserve amount
as a reduction of sales and as a sales return reserve liability.
We
generally provide the ultimate consumer a warranty with each product and accrue
warranty expense at the time of the sale based on our prior claims
history. Actual warranty costs incurred are charged against the
accrual when paid.
Recently
Issued Accounting Pronouncements
In
September 2006, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standard Number 157, Fair Value Measurements,
(SFAS 57) which defines fair value, establishes a framework for measuring fair
value in generally accepted accounting principles and expands disclosures about
fair value measurements. The provisions of SFAS No. 157 related to
financial assets and financial liabilities were effective during
2008. With respect to certain nonfinancial assets and nonfinancial
liabilities, SFAS No. 157 is effective for fiscal years beginning after
November 15, 2008, and interim periods within those fiscal
years. We do expect that the adoption of SFAS No. 157 with
respect to nonfinancial assets and nonfinancial liabilities will have a material
impact on our consolidated financial statements.
In
December 2007, the FASB issued SFAS No. 141(R), Business Combinations, and
SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements. SFAS No. 141(R) requires an
acquirer to measure the identifiable assets acquired, the liabilities assumed
and any non-controlling interest in the acquiree at their fair values on the
acquisition date, with goodwill being the excess value over the net identifiable
assets acquired. SFAS No. 160 clarifies that a non-controlling interest in
a subsidiary should be reported as equity in the consolidated financial
statements, consolidated net income should be adjusted to include the net income
attributed to the non-controlling interest and consolidated comprehensive income
shall be adjusted to include the comprehensive income attributed to the
non-controlling interest. The calculation of earnings per share will continue to
be based on income amounts attributable to the parent. SFAS
No. 141(R) and SFAS No. 160 are effective for financial
statements issued for fiscal years beginning after December 15,
2008. Early adoption is prohibited. We have not yet
determined the effect on our consolidated financial statements, if any, upon
adoption of SFAS No. 141(R) or SFAS No. 160.
10
In March
2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities. SFAS No. 161 is intended
to improve financial reporting about derivative instruments and hedging
activities by requiring enhanced disclosures to enable investors to better
understand their effects on an entity's financial position, financial
performance, and cash flows. SFAS No. 161 is effective for financial statements
issued for fiscal years and interim periods beginning after November 15, 2008,
with early application encouraged. We do not expect that the adoption
of SFAS No. 161 will have a material impact on our consolidated financial
statements.
In May
2008, the FASB issued SFAS 162, The Hierarchy of Generally Accepted
Accounting Principles. SFAS No. 162 identifies the sources of
accounting principles and provides entities with a framework for selecting the
principles used in preparation of financial statements that are presented in
conformity with GAAP. The current GAAP hierarchy has been criticized
because it is directed to the auditor rather than the entity, it is complex, and
it ranks FASB Statements of Financial Accounting Concepts, which are subject to
the same level of due process as FASB Statements of Financial Accounting
Standards, below industry practices that are widely recognized as generally
accepted but that are not subject to due process. The Board believes
the GAAP hierarchy should be directed to entities because it is the entity (not
its auditors) that is responsible for selecting accounting principles for
financial statements that are presented in conformity with GAAP. The
adoption of FASB 162 is not expected to have a material impact on our financial
statements.
In
October 2008, the Financial Accounting Standards Board (the "FASB") issued
Emerging Issues Task Force ("EITF") 08-6 Equity Method Investment Accounting
Considerations, which addresses how the initial carrying value of an
equity method investment should be determined, how an impairment assessment of
an underlying indefinite-lived intangible asset of an equity method investment
should be performed, and the proper accounting of an equity method investee's
issuance of shares. Our management believes that this will not have a material
impact on our consolidated financial statements.
Results
of Operations
YEAR
ENDED DECEMBER 31, 2008 AS COMPARED TO THE YEAR ENDED DECMEBER 31,
2007
Net
sales
Net sales
for the year ended December 31, 2008 were $19,791,603 compared to net sales of
$5,135,715 for the year ended December 31, 2007, an increase of $14,655,888 or
285%.
The
significant increase in product sales is mainly attributed to continued strong
sales of our invisibleSHIELD products with approximately 52% of our product
being sold through our website to retail customers, 9% being sold through mall
carts and kiosks, 34% through wholesale channels, and 5% from shipping and
handling charges.
Cost
of sales
Cost of
sales includes raw materials, packing materials and shipping and logistics
costs. For the year ended December 31, 2008, cost of sales amounted to
$6,593,718 or approximately 33% of net sales as compared to cost of sales of
$1,340,850 or 26% of net sales for the year ended December 31,
2007. The increase in cost of sales as a percentage of net revenues
for the year ended December 31, 2008 as compared to the year ended December 31,
2007 is attributable to the overall sales mix shift to wholesale customers which
have a lower average selling price than our internet sales which have
historically represented a larger percentage of the total
sales.
11
Gross
profit
Gross
profit for the year ended December 31, 2008 was $13,197,885 or approximately 67%
of net sales as compared to $3,794,865 or approximately 74% of net sales net
sales for the year ended December 31, 2007. The decrease in gross
profit percentage was again due to the sales mix shift from internet sales to
wholesale customers which have a lower average selling price. There
are no assurances that we will continue to recognize similar gross profit
margins in the future.
Operating
expenses
Total
operating expenses for year ended December 31, 2008 were $10,818,936, an
increase of $5,786,521 from total operating expenses for year ended December 31,
2007 of $5,032,415. The increases are primarily attributable to the
following:
|
|
·
|
For
the year ended December 31, 2008, salaries and related taxes increased by
$469,657 to $2,896,919 from $2,427,262 for the year ended December 31,
2007, which includes $845,000 related to the issuance of restricted stock
to our employees. The overall increase is due to the increase
in our management and production staff as we continue to build the people
infrastructure to meet the demand for our product, the payment of a
discretionary bonus of $155,000 during the first quarter to our employees
and non-cash expense related to equity based compensation of $215,741,
partially offset by the non-cash expense recognized for the year ended
December 31, 2007 of $845,000 related to the issuance of shares of our
common stock to employees.
|
|
|
·
|
For
the year ended December 31, 2008, marketing, advertising and promotion
expenses were $3,976,015, an increase of $3,031,300 as compared to
$944,715 for the year ended December 31, 2007. We continue to
invest heavily in the development of the invisibleSHIELD and ZAGG brands
through internet key word advertising, traditional print media and radio
advertising. During the year ended December 31, 2008, we also
printed coupons and handed them out at various trade shows and events
wherein customers logged onto our website through a specific link and were
able to redeem the coupon. These coupons run for specific time
frames with expiration dates and the redemption of the coupons of
$1,569,184 was recognized as marketing and advertising
expense. We expect our marketing and advertising expenses to
continue to be a significant expenditure as our revenues increase and
expect to spend increased funds on advertising and promotion of our
products as well as sales training. During fiscal 2009, we
intend to continue to expand our marketing efforts related to our existing
products and for new product
introductions.
|
12
|
|
·
|
For
the year ended December 31, 2008, other selling, general and
administrative expenses, net of salaries and related taxes described
above, were $3,946,002 as compared to $1,660,438 for the year ended
December 31, 2007. The increase was attributable to the
increase in operations as we implement our business plan and is summarized
below:
|
|
2008
|
2007
|
|||||||
|
Professional
fees
|
$ | 194,400 | $ | 280,496 | ||||
|
Contract
labor
|
614,022 | 260,340 | ||||||
|
Rent
|
437,440 | 193,593 | ||||||
|
Credit
card and bank fees
|
387,144 | 127,195 | ||||||
|
Travel
and entertainment
|
197,134 | 102,311 | ||||||
|
Depreciation
and amortization
|
160,544 | 86,160 | ||||||
|
Investor
relations
|
442,648 | 71,172 | ||||||
|
Insurance
|
226,115 | 74,987 | ||||||
|
Telephone
and utilities
|
133,276 | 58,861 | ||||||
|
Office
supplies
|
69,466 | 51,960 | ||||||
|
Printing
expenses
|
88,688 | 40,166 | ||||||
|
Commissions
|
410,642 | 12,471 | ||||||
|
Bad
debt
|
155,695 | 14,263 | ||||||
|
Consulting
|
101,500 | 39,100 | ||||||
|
Other
|
327,288 | 247,363 | ||||||
|
Total
|
$ | 3,946,002 | $ | 1,660,438 | ||||
Income
(loss) from operations
We
reported income from operations of $2,378,949 for the year ended December 31,
2008 as compared to a net loss from operations of ($1,237,550) for the year
ended December 31, 2007, an increase of $3,616,499. The increased
income from operations for the year ended December 31, 2008 as compared to the
year ended December 31, 2007 is primarily attributable to the overall increase
in sales due to deeper market penetration and continued expansion of the
distribution channel for our products.
Other
income
For the
year ended December 31, 2008, total other income was $221,201 compared to other
income of $29,219 for the year ended December 31, 2007. The increase
is primarily attributed to interest income of $215,332 and other income of
$12,215 for the year ended December 31, 2008 compared to interest income of
$60,761 for the year ended December 31, 2007 primarily due to notes receivable
issued during 2008. These increases were partially offset by interest
expense of $6,022 for the year ended December 31, 2008 compared to interest
expense of $31,452 for the year ended December 31, 2007. We
recognized an income tax expense of $501,188 for the year ended December 31,
2008 compared to an income tax benefit for the year ended December 31, 2007 of
$448,820.
Net
income (loss)
As a
result of these factors, we reported net income of $2,098,962 or $0.11 per share
for the year ended December 31, 2008 as compared to a net loss of ($759,511) or
($0.05) per share for the year ended December 31, 2007.
13
Liquidity
and Capital Resources
At
December 31, 2008, we had a cash balance of $1,065,652.
Our
working capital position increased by $3,203,559 to working capital of
$5,718,388 at December 31, 2008 from working capital of $2,514,829 at December
31, 2007. This increase in working capital is primarily attributable to the
overall increased current assets of $4,524,959 including accounts receivable of
$3,191,441, increased inventories of $1,466,253, increased prepaid expenses and
other current assets of $1,066,970, increased deferred tax assets of $68,834 and
decreased notes payable of $21,867 partially offset by increased accounts
payable of $1,120,815, increased sales returns liability of $267,258, increased
deferred revenues of $265,679, decreased prepaid advertising of $204,976,
increased accrued liabilities of $176,940 and increased accrued wages and wage
related expenses of $25,575.
Net cash
used in operating activities for the year ended December 31, 2008 was ($196,684)
as compared to net cash used in operating activities of ($842,490) for the year
ended December 31, 2007. For the year ended December 31, 2008, net
cash used in operating activities was attributable primarily to increased
accounts receivable of $3,347,136, increased inventories of $1,466,253,
increased prepaid expenses and other current assets of $541,755, currency
exchange gain of $102,764, and gain on asset disposals of $12,215, partially
offset by net income of $2,098,962, increased accounts payable of $1,120,815,
non-cash expense related to stock-based compensation of $406,064, deferred
income tax expense of $370,347, increased sales return liability of $267,258,
increased deferred revenues of $265,679, decreased prepaid advertising of
$204,976, , depreciation and amortization of $160,269, bad debt expense of
$155,695, increased wages and wage related expenses of $25,575 and
decreased other assets of $20,859.
Net cash
used in investing activities for the year ended December 31, 2008 was ($895,012)
attributable to issuance of notes receivable of $513,000, the purchase of
property and equipment of $380,102, payments for intangible assets of $4,904,
partially offset by proceeds from the sale of fixed assets of
$2,994.
Net cash
provided by financing activities was $28,133 for the year ended December 31,
2008. Net cash provided by financing activities for the year ended
December 31, 2008 was attributable to the net proceeds from the sale of common
stock upon the exercise of outstanding warrants of $50,000, partially offset by
repayments of debt $21,867.
We
reported a net decrease in cash for the year ended December 31, 2008 of
$1,063,563.
For the
years ended December 31, 2008 and 2007, we generated revenues of $19,791,603 and
$5,135,715, respectively and had net income of $2,098,962 and incurred a net
loss of ($759,511), respectively, and had negative cash flow from operating
activities of ($259,684) and ($842,490), respectively. As of December
31, 2008, we had stockholders’ equity of $5,816,727, retained earnings of
$1,356,574, working capital of $5,718,388, accounts payable of $1,626,390,
deferred revenues of $366,590, sales returns liability of
$291,119, accrued wages and wage related expenses of $121,112,
accrued liabilities of $212,754 and notes payable related to equipment financing
of $20,223. Management believes that existing cash, along with cash
generated from the collection of accounts receivable and the sale of products
and the addition of a line of credit facility will be sufficient to meet the
Company’s cash requirements during the next twelve months.
Off
Balance Sheet Arrangements
As of
December 31, 2008, there were no off balance sheet arrangements.
|
ITEM
7A.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
|
A smaller
reporting company is not required to provide the information required by this
Item.
|
ITEM
8.
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY
|
The full
text of our audited consolidated financial statements for the fiscal years ended
December 31, 2008 and 2007 begins on page F-1 of this report.
14
|
ITEM
9.
|
CHANGES
IN AND DISAGREEEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
|
No events
occurred requiring disclosure under Item 307 or 308 of Regulation S-K during the
fiscal year ended December 31, 2008.
|
ITEM
9A.
|
CONTROLS
AND PROCEDURES
|
Evaluation
of Disclosure Controls and Procedures
Under the
supervision of and with the participation of our management, including our Chief
Executive Officer and Chief Financial Officer, at December 31, 2008, the Company
carried out an evaluation of the effectiveness of the design and operation of
our disclosure controls and procedures, as defined in Rules 13a-15(e) and
15d-15(e) of the Securities and Exchange Act of 1934, as amended (the “Exchange
Act”). These disclosure controls and procedures are designed to
provide reasonable assurance that the information required to be disclosed by
the Company in its periodic reports with the SEC is recorded, processed,
summarized and reported within the time periods specified by the SEC’s rules and
forms, and that the information is accumulated and communicated to the Company’s
management, including our Chief Executive Officer and Chief Financial Officer,
as appropriate to allow timely decisions regarding required
disclosure. The design of any disclosure controls and procedures is
based in part on certain assumptions about 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.
During
the course of our evaluation, our Chief Executive Officer and Chief Financial
Officer have concluded that our disclosure controls and procedures were
effective at the reasonable assurance level as of December 31,
2008.
Management’s
Report on Internal Control Over Financial Reporting
Under the
supervision and with the participation of our management, including our Chief
Executive Officer and Chief Financial Officer, we conducted an evaluation of the
effectiveness of our internal control over financial reporting based on the
framework established by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) as set forth in Internal Control - Integrated
Framework. Based on our evaluation under the framework in Internal Control -
Integrated Framework, our management concluded that our internal control over
financial reporting was effective as of December 31, 2008.
This
annual report does not include an audit or attestation report of our registered
public accounting firm regarding our internal control over financial reporting.
Our management’s report was not subject to audit or attestation by our
registered public accounting firm pursuant to temporary rules of the SEC that
permit us to provide only management’s report in this annual
report.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. It should be noted that any system of controls,
however well designed and operated, can provide only reasonable, and not
absolute, assurance that the objectives of the system will be met. In addition,
the design of any control system is based in part upon certain assumptions about
the likelihood of future events. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
15
Changes
in Internal Control Over Financial Reporting
No change
in the Company’s internal control over financial reporting occurred during the
year ended December 31, 2008, that materially affected, or is reasonably likely
to materially affect, the Company’s internal control over financial
reporting.
|
ITEM
9B.
|
OTHER
ITEMS
|
None.
PART
III
|
ITEM
10.
|
DIRECTORS,
EXECUTIVE OFFICERS, AND CORPORATE
GOVERNANCE
|
The
following table sets forth information regarding the members of our board of
directors and our executive officers and other significant
employees. Messrs. Robert G. Pedersen II and Brandon T. O’Brien were
appointed in their respective positions on the effective date of the Merger. Mr.
Larry Harmer was appointed as a director on May 12, 2008. All of our
directors hold office until the next annual meeting of stockholders and their
successors are duly elected and qualify. Executive officers serve at the request
of the board of directors.
|
Name
|
Age
|
Position
|
||
|
Robert
G. Pedersen II
|
42
|
Chief
Executive Officer, Chairman
|
||
|
Larry
Harmer
|
37
|
Director
|
||
|
Brandon
T. O’Brien
|
38
|
Chief
Financial Officer
|
Set forth
below is a brief description of the background and business experience of our
current executive officers and directors.
Robert G.
Pedersen II - Mr. Pedersen provides the overall vision and leadership of
ZAGG Incorporated. Mr. Pedersen has more than 20 years' experience in executive
management, sales and marketing, communications, as well as owning and managing
several start-up businesses and enterprises. Since 1998, Mr. Pedersen was a
co-owner and executive manager for Del Sol, LC, a Utah-based international
specialty retailer of apparel and accessories, where he implemented the in-line
retail store model. Del Sol now has more than 80 stores world-wide.
Additionally, Mr. Pedersen created and was the director of DelSol.com, Del Sol
LC’s Internet presence. In 2002 Mr. Pedersen founded PayTeck, Inc., a Utah
provider of Internet-based payment processing services, which was later sold to
Zion's Bank, a public company, in 2005. Mr. Pedersen joined ZAGG in October 2005
as a consultant and then in January 2006 joined the company as a full partner in
a full time capacity and has served as its Chief Executive Officer and Chairman
since that time. Mr. Pedersen is also the Company’s largest shareholder. Mr.
Pedersen earned a degree in business administration (BSBA) from the University
of Phoenix and a Masters Degree (MBA) from Brigham Young University in Business
Administration with an emphasis in marketing, finance and organizational
communications.
Larry Harmer –
Mr. Harmer co-founded a consumer products company that, under his
leadership, grew from a licensee with several brands including the Polaroid
brand to a global organization with revenues that exceeded $1.5 billion (in
about 4 years). Mr. Harmer played a significant role in the purchase,
privatization and divestiture of the Polaroid asset portfolio and was
responsible for all international vendor and customer relationships. He has
extensive experience in selling the retail industry. Mr. Harmer’s
previous experience includes serving as CEO for the Polaroid Corporation,
Managing Director of SGSV Ltd a global asset management firm, Director of
Business Strategy for PricewaterhouseCoopers LLP, Director of Organizational
Development for Nortel Networks, and co-founding Wholonics Leadership Group,
LLC. Mr. Harmer earned an MBA, an MOB and a BA in Chinese & Asian
Studies from Brigham Young University. He has taught Rapid Prototyping and
Process Design in University of Michigan’s Executive MBA Program. He is
fluent in Mandarin Chinese, equally comfortable conducting business in English
or Chinese.
16
Brandon T.
O’Brien - Mr. O’Brien became our Chief Financial Officer on February 12,
2007. Prior to assuming his position as the Chief Financial Officer for the
Company, Mr. O’Brien, served as the Vice President of Finance at Fonix
Corporation, a speech recognition software company, from January 2003 to January
2007, and as an independent financial consultant from September 2001 to January
2003. Mr. O’Brien has extensive experience in mergers and acquisitions,
accounting for financial transactions with foreign subsidiaries and the
application of financial accounting standards and principles. Mr. O’Brien has
broad experience with both small micro-cap public companies and with large
multinational public companies. Mr. O’Brien is a licensed Certified Public
Accountant and has attained the Certified Management Accountant and Certified
Financial Manager designations. Mr. O’Brien earned a Bachelor of Science degree
in Accounting from Utah State University in 1995 and a Masters of Business
Administration from the University of Utah in 1996.
Term
of Office
Our
Directors are appointed for a one-year term to hold office until the next annual
general meeting of our shareholders or until removed from office in accordance
with our bylaws. Our officers are appointed by our board of directors and hold
office until removed by the board.
Significant
Employees
We have
no significant employees other than our officers and directors.
Family
Relationships
There are
no family relationships among our directors, executive officers or persons
nominated or chosen by us to become directors or executive
officers.
Involvement
in Certain Legal Proceedings
To the
best of our knowledge, during the past five years, none of the following
occurred with respect to a present or former director, executive officer, or
employee of the Company: (1) any bankruptcy petition filed by or against any
business of which such person was a general partner or executive officer either
at the time of the bankruptcy or within two years prior to that time; (2) any
conviction in a criminal proceeding or being subject to a pending criminal
proceeding (excluding traffic violations and other minor offenses); (3) being
subject to any order, judgment or decree, not subsequently reversed, suspended
or vacated, of any court of competent jurisdiction, permanently or temporarily
enjoining, barring, suspending or otherwise limiting his or her involvement in
any type of business, securities or banking activities; and (4) being found by a
court of competent jurisdiction (in a civil action), the SEC or the Commodities
Futures Trading Commission to have violated a federal or state securities or
commodities law, and the judgment has not been reversed, suspended or
vacated.
Audit
Committee
We do not
have a separately-designated standing audit committee. The entire
board of directors performs the functions of an audit committee, but no written
charter governs the actions of the board of directors when performing the
functions of that would generally be performed by an audit committee. The board
of directors approves the selection of our independent accountants and meets and
interacts with the independent accountants to discuss issues related to
financial reporting. In addition, the board of directors reviews the scope and
results of the audit with the independent accountants, reviews with management
and the independent accountants our annual operating results, considers the
adequacy of our internal accounting procedures and considers other auditing and
accounting matters including fees to be paid to the independent auditor and the
performance of the independent auditor.
We do not
have an audit committee financial expert because of the size of our company and
our board of directors at this time. We believe that we do not
require an audit committee financial expert at this time because we retain
outside consultants who possess these attributes.
17
For the
fiscal year ending December 31, 2008, the board of directors:
|
|
1.
|
Reviewed
and discussed the audited financial statements with management,
and
|
|
|
2.
|
Reviewed
and discussed the written disclosures and the letter from our independent
auditors on the matters relating to the auditor's
independence.
|
Based
upon the board of directors’ review and discussion of the matters above, the
board of directors authorized inclusion of the audited financial statements for
the year ended December 31, 2008 to be included in this Annual Report on Form
10-K and filed with the Securities and Exchange Commission.
Compliance
with Section 16(a) of the Exchange Act
Section
16(a) of the Exchange Act requires our directors and executive officers and
persons who beneficially own more than ten percent of a registered class of the
Company’s equity securities to file with the SEC initial reports of ownership
and reports of changes in ownership of common stock and other equity securities
of the Company. Officers, directors and greater than ten percent
beneficial shareholders are required by SEC regulations to furnish us with
copies of all Section 16(a) forms they file. To the best of our
knowledge based solely on a review of Forms 3, 4, and 5 (and any amendments
thereof) received by us during or with respect to the year ended December 31,
2008, the following persons have failed to file, on a timely basis, the
identified reports required by Section 16(a) of the Exchange Act during fiscal
year ended December 31, 2008:
|
Name
and principal position
|
Number
of late reports
|
Transactions
not timely reported
|
Known
failures to file a required form
|
|||
|
Robert
G. Pedersen II
Chief
Executive Officer, Chairman
|
--
|
--
|
--
|
|||
|
Brandon
T. O’Brien
Chief
Financial Officer
|
--
|
2
|
--
|
|||
|
Larry
Harmer
Director
|
1
|
--
|
--
|
Code
of Ethics and Corporate Governance
We
adopted a Code of Business Conduct and Ethics (the “Code”) on March 16, 2007
that applies to all of our directors and employees, including our chief
executive officer and chief financial officer. The purpose of the
Code is to, among other things, focus our directors, officers and employees on
areas of ethical risk, provide guidance to help them recognize and deal with
ethical issues, provide mechanisms to report unethical or unlawful conduct and
to help enhance and formalize our culture of integrity, respect and
accountability. A printed copy of the Code may also be obtained free
of charge by writing to ZAGG Incorporated, Attention: CFO, 3855 S 500 W, Suite
J, Salt Lake City, UT 84115.
18
|
ITEM
11.
|
EXECUTIVE
COMPENSATION
|
Summary
of Executive Compensation
The
following table sets forth information regarding the compensation earned by each
of the named executives for the fiscal years ended December 31, 2008 and
2007.
Summary
Compensation Table
|
Name
and Principal Position
|
Year
|
Salary
|
Bonus
|
Stock
Awards
|
Option
Awards
|
All
Other
Compensation
|
Total
|
||||||||||||||||||
|
Robert
G. Pedersen II President,
Chief
Executive Officer and Director
|
2008
|
$ | 179,000 | $ | 34,000 | -- | $ | 9,728 | (1) | -- | $ | 228,728 | |||||||||||||
|
2007
|
$ | 120,000 | $ | 12,000 | $ | 95,000 | (1) | -- | -- | $ | 227,000 | ||||||||||||||
|
Brandon
T. O’Brien
Chief
Financial Officer
|
2008
|
$ | 120,000 | $ | 16,000 | $ | 64,400 | (1) | $ | 8,107 | (1) | -- | $ | 208,507 | |||||||||||
|
2007
|
$ | 101,846 | $ | 12,000 | $ | 120,000 | (1) | -- | -- | $ | 233,846 | (2) | |||||||||||||
_________________________
|
(1)
|
These
amounts reflect the dollar amount recognized for financial statement
reporting purposes for the fiscal years indicated in accordance with
Statement of Financial Accounting Standards (“SFAS”) No. 123R, Share Based
Payments of awards of restricted stock and stock options, as applicable,
granted pursuant to the Company’s long-term incentive
plans. Assumptions and methodologies used in the calculation of
these amounts with respect to the 2008 fiscal year are included in
footnotes to the Company’s audited financial statements for the fiscal
years ended December 31, 2008 and 2007 which were included in the
Company’s Annual Reports on Form 10-K for those
years.
|
|
(2)
|
Mr.
O’Brien was appointed our Chief Financial Officer on February 12,
2007.
|
Outstanding
Equity Awards
The
following table sets forth information concerning unexercised options, stock
that has not vested and equity incentive plan awards for each named executive
officer as of December 31, 2008.
Outstanding
Equity
Awards
at
Fiscal
Year-End
|
OPTION
AWARDS
|
STOCK
AWARDS
|
||||||||||||||||||||||||||||
|
Name
of Executive
|
Number
of
Exercisable
Securities
Underlying
Unexercised
Options
|
Number
of
Unexercisable
Securities
Underlying
Unexercised
Options
|
Option
Exercise
Price
|
Option
Expiration
Date
|
Number
of
shares
or
Units
of
Stock
that
Have
Not
Vested
|
Market
Value
of
Shares
or
Units
of
Stock
That
Have
Not
Vested
|
Equity
Incentive
Plan
Awards:
Number
of
unearned
Shares,
Units
or
Other
Rights That
Have
Not
Vested
|
Equity
Incentive
Plan
Awards:
Market
or
Payout
Value
of
Unearned
Shares,
Units
or
Other
Rights
That
Have
Not
Vested
|
|||||||||||||||||||||
|
Robert
G. Pedersen II
|
-- | 60,000 | $ | 0.65 |
3/6/2013
|
60,000 | $ | 55,800 | -- | -- | |||||||||||||||||||
|
Brandon
T. O’Brien
|
-- | 50,000 | $ | 0.65 |
3/6/2013
|
50,000 | $ | 46,500 | -- | -- | |||||||||||||||||||
Compensation
of Directors
The table
below summarizes all compensation of our non-employee directors for the year
ended December 31, 2008.
|
DIRECTOR
COMPENSATION
|
||||||||||||||||||||||||||||
|
Name
|
Fees
Earned
or
Paid
in
Cash
|
Stock
Awards
|
Option
Awards
|
Non-Equity
Incentive
Plan
Compensation
|
Non-Qualified
Deferred
Compensation
Earnings
|
All
Other
Compensation
|
Total
|
|||||||||||||||||||||
|
Larry
Harmer
|
-- | -- | $ | 113,399 | (1) | -- | -- | -- | $ | 113,399 | ||||||||||||||||||
_________________________
|
|
(1)
|
This
amount reflects the dollar amount recognized for financial statement
reporting purposes for the fiscal year indicated in accordance with SFAS
No. 123R, Share Based Payments of awards of restricted stock and stock
options, as applicable, granted pursuant to the Company’s long-term
incentive plans. Assumptions and methodologies used in the
calculation of these amounts with respect to the 2008 fiscal year are
included in footnotes to the Company’s audited financial statements for
the fiscal year ended December 31, 2008 which were included in the
Company’s Annual Report on Form
10-K.
|
Narrative
Disclosure to the Director Compensation Table
We do not
pay any cash compensation to our directors.
19
|
ITEM
12.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
|
The
following table sets forth, as of March 25, 2009, certain information regarding
the ownership of our capital stock by the following persons on such date: each
of the directors and executive officers, each person who is known to be a
beneficial owner of more than 5% of any class of our voting stock, and all of
our officers and directors as a group. Unless otherwise indicated below, to our
knowledge, all persons listed below had sole voting and investing power with
respect to their shares of capital stock, except to the extent authority was
shared by spouses under applicable community property laws.
Beneficial
ownership is determined in accordance with the rules of the Securities and
Exchange Commission and generally includes voting or investment power with
respect to securities. Shares of our common stock subject to options, warrants
or convertible securities exercisable or convertible within 60 days of March 25,
2009 were deemed outstanding for computing the percentage of the person or
entity holding such options, warrants or convertible securities but are not
deemed outstanding for computing the percentage of any other person, and was
based upon the number of shares of the Common Stock issued and outstanding, as
of March 25, 2009 which was 19,283,995 shares.
|
Title
of
Class
|
Name
and
Address
Of
Beneficial
Owners
(1)
|
Amount
and
Nature
Of
Beneficial
Ownership
|
Percent
Of
Class
(2)
|
|||
|
Common
Stock
|
Robert
G. Pedersen II
President
and Chief Executive Officer (3)
|
7,402,557
|
36.91%
|
|||
|
Common
Stock
|
Brandon
T. O’Brien
Chief
Financial Officer (4)
|
497,447
|
2.57%
|
|||
|
Common
Stock
|
Andrew
C. Park
201
Post Street, 11th Floor
San
Francisco, CA 94108
|
1,587,353
|
8.01%
|
|||
|
Common
Stock
|
SunCreek,
LLC
2873
Tolcate Lane
Holladay,
Utah 84121
|
5,000,000
|
25.93%
|
|||
|
Common
Stock
|
Larry
Harmer
Director
(5)
|
333,333
|
1.73%
|
|||
|
All
officers, directors and director nominees as a group (3
persons)
|
8,233,337
|
40.87%
|
|
(1)
|
Unless
otherwise noted, the address for each of the named beneficial owners is:
3855 South 500 West, Suite J, Salt Lake City, Utah, 84115. Unless
otherwise indicated, beneficial ownership is determined in accordance with
Rule 13d-3 promulgated under the Exchange Act and generally includes
voting and/or investment power with respect to securities. Shares of
common stock subject to options or warrants that are currently exercisable
or exercisable within sixty days of March 25, 2009, are deemed to be
beneficially owned by the person holding such options or warrants for the
purpose of computing the percentage of ownership set forth in the above
table, unless otherwise indicated.
|
|
(2)
|
The
calculations of percentage of beneficial ownership are based on 19,283,995
shares of common stock outstanding as of March 25,
2009.
|
|
(3)
|
Includes
1,595,000 shares of Common Stock held directly by Mr. Pedersen, 5,000
shares of Common Stock held by Mr. Pedersen’s spouse and 5,000,000 shares
of Common Stock held by SunCreek, LLC, an entity wholly owned by Mr.
Pedersen. Mr. Pedersen exercises sole voting and investment
control over the shares held by SunCreek, LLC. Also includes warrants to
purchase 750,000 shares of common stock at $1.30 per share and options to
purchase 20,000 shares of common stock at $0.65 per
share.
|
|
(4)
|
Includes
406,853 shares of Common Stock held directly by Mr. O’Brien, warrants to
purchase 73,927 shares of common stock at $1.30 per share and options to
purchase 16,667 shares of common stock at $0.65 per
share.
|
|
(5)
|
Includes
options to purchase 333,333 shares of common stock at $0.60 per
share.
|
20
|
ITEM
13.
|
CERTAIN
RELATIONSHIPS AND RELATED
TRANSACTIONS
|
In
November 2006, the Company entered into a convertible note with an affiliate of
the Company’s Chief Executive Officer in the original principal amount of
$100,000. The note was convertible at the holder's option any time up
to maturity at a conversion price equal to $0.35 per common share. The note was
due on May 15, 2007, bore interest at 20% per year and was
unsecured. In March 2007, the Company repaid $50,000 of the principal
balance of the note. In addition, the remaining $50,000 of principal
plus accrued interest of $1,749 was converted into 147,853 shares of the
Company’s common stock.
The note
was a conventional convertible instrument and the Company evaluated the
conversion feature and determined that there was not a separate derivative
instrument associated with the note and no derivative liability was
recognized. The Company determined that there was no beneficial
conversion feature associated with the note as the conversion price was equal to
the deemed market value on the date of grant.
Except as
disclosed above, none of our directors or executive officers, nor any proposed
nominee for election as a director, nor any person who beneficially owns,
directly or indirectly, shares carrying more than 5% of the voting rights
attached to all of our outstanding shares, nor any members of the immediate
family (including spouse, parents, children, siblings, and in-laws) of any of
the foregoing persons has any material interest, direct or indirect, in any
transaction over the last two years or in any presently proposed transaction
which, in either case, has or will materially affect us.
|
ITEM
14.
|
PRINCIPAL
ACCOUNTANT FEES AND SERVICES
|
Hansen,
Barnett & Maxwell, P.C. (“HBM”) has served as our independent registered
public accounting firm since April 17, 2007. During the years ended
December 31, 2008 and 2007, we paid HBM fees in the aggregate amount of $46,500
and $50,500, respectively, for the annual audit of the Company’s financial
statements, the quarterly reviews of our financial statements included in our
quarterly reports on Form 10-Q and the review of our registration
statements.
During
the years ended December 31, 2008 and 2007, we paid HBM $4,600 and $0 for tax
services.
PART
IV
|
ITEM
15.
|
EXHIBITS
AND FINANCIAL STATEMENT SCHEDULES
|
|
Exhibit Number
|
Description
|
|
|
3.1*
|
Articles
of Incorporation of Registrant as filed with the State of
Nevada
|
|
|
3.2*
|
Bylaws
of Registrant
|
|
|
14*
|
Code
of Ethics
|
|
|
21.1
|
List
of subsidiaries
|
|
|
31.1
|
Section
302 Certification of Principal Executive Officer
|
|
|
31.2
|
Section
302 Certification of Principal Financial Officer
|
|
|
32.1
|
Section
906 Certification of Principal Executive Officer
|
|
|
32.2
|
Section
906 Certification of Principal Financial
Officer
|
* previously filed with the
Securities and Exchange Commission
21
SIGNATURES
Pursuant
to the requirements of section 13 or 15 (d) of the Securities Exchange Act of
1934, the Registrant has duly caused this Report to be signed on its behalf by
the undersigned, thereunto duly authorized.
|
ZAGG
INCORPORATED
|
||
|
Dated: March
30, 2009
|
By:
|
/s/ ROBERT G. PEDERSEN
II
|
|
Robert
G. Pedersen II
President,
CEO and Chairman
(Principal
Executive Officer)
|
||
|
Dated: March
30, 2009
|
By:
|
/s/ BRANDON T.
O’BRIEN
|
|
Brandon
T. O’Brien
Chief
Financial Officer
(Principal
Accounting and Financial Officer)
|
||
|
Dated: March
30, 2009
|
By:
|
/s/ LARRY
HARMER
|
|
Larry
Harmer
Director
|
||
22
ZAGG
INCORPORATED AND SUBSIDIARY
INDEX
TO FINANCIAL STATEMENTS
|
CONTENTS
|
Page
|
|
Report
of Independent Registered Public Accounting Firm
|
F-2
|
|
Financial
Statements:
|
|
|
Consolidated
Balance Sheets at December 31, 2008 and 2007
|
F-3
|
|
Consolidated
Statements of Operations for the years ended
December 31, 2008 and
2007
|
F-4
|
|
Consolidated
Statements of Stockholders’ Equity for the years ended
December 31, 2007 and
2008
|
F-5
|
|
Consolidated
Statements of Cash Flows for the years ended December 31, 2008 and
2007
|
F-6
|
|
Notes
to Consolidated Financial Statements
|
F-8
|
|
HANSEN, BARNETT & MAXWELL, P.C.
A
Professional Corporation
CERTIFIED
PUBLIC ACCOUNTANTS
5
Triad Center, Suite 750
Salt
Lake City, UT 84180-1128
Phone:
(801) 532-2200
Fax:
(801) 532-7944
www.hbmcpas.com
|
Registered
with the Public Company
Accounting
Oversight Board
 A
Member of the Forum of
Firms
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Shareholders of
ZAGG
Incorporated
We have
audited the accompanying consolidated balance sheets of ZAGG Incorporated and
subsidiary (the “Company”) as of December 31, 2008 and 2007, and the related
consolidated statements of operations, stockholders’ equity, and cash flows for
the years then ended. These financial statements are the responsibility of the
Company’s management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of ZAGG
Incorporated and subsidiary as of December 31, 2008 and 2007, and the results of
their operations and their cash flows for each of the years then ended, in
conformity with accounting principles generally accepted in the United States of
America.
HANSEN, BARNETT & MAXWELL,
P.C.
Salt Lake
City, Utah
March 27,
2009
F-2
|
ZAGG
INCORPORATED AND SUBSIDIARY
|
||||||||
|
CONSOLIDATED
BALANCE SHEETS
|
||||||||
|
December
31,
|
||||||||
|
2008
|
2007
|
|||||||
|
ASSETS
|
||||||||
|
Current
assets
|
||||||||
|
Cash
|
$ | 1,065,652 | $ | 2,129,215 | ||||
|
Accounts
receivable, net
|
3,593,887 | 402,446 | ||||||
|
Inventories
|
1,913,297 | 447,044 | ||||||
|
Prepaid
advertising
|
- | 204,976 | ||||||
|
Prepaid
expenses and other current assets
|
676,077 | 122,107 | ||||||
|
Notes
receivable
|
513,000 | - | ||||||
|
Deferred
income tax assets
|
81,663 | 12,829 | ||||||
|
Total
current assets
|
7,843,576 | 3,318,617 | ||||||
|
Property
and equipment, net
|
549,370 | 328,077 | ||||||
|
Deferred
income tax assets
|
4,937 | 444,118 | ||||||
|
Deposits
and other assets
|
9,688 | 30,547 | ||||||
|
Intangible
assets, net
|
47,344 | 46,894 | ||||||
|
Total
assets
|
$ | 8,454,915 | $ | 4,168,253 | ||||
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
||||||||
|
Current
liabilities
|
||||||||
|
Notes
payable
|
$ | 20,223 | $ | 42,090 | ||||
|
Accounts
payable
|
1,626,390 | 505,575 | ||||||
|
Accrued
liabilities
|
212,754 | 35,814 | ||||||
|
Accrued
wages and wage related expenses
|
121,112 | 95,537 | ||||||
|
Deferred
revenue
|
366,590 | 100,911 | ||||||
|
Sales
returns liability
|
291,119 | 23,861 | ||||||
|
Total
current liabilities
|
2,638,188 | 803,788 | ||||||
|
Total
liabilities
|
2,638,188 | 803,788 | ||||||
|
Stockholders'
equity
|
||||||||
|
Common
stock, $0.001 par value; 50,000,000 shares authorized;
|
||||||||
|
19,163,995
and 18,853,995 shares issued and outstanding, respectively
|
19,165 | 18,855 | ||||||
|
Warrants
to purchase common stock
|
739,338 | 750,476 | ||||||
|
Additional
paid-in capital
|
3,808,280 | 3,341,388 | ||||||
|
Cumulative
translation adjustment
|
(106,630 | ) | (3,866 | ) | ||||
|
Retained
earnings (deficit)
|
1,356,574 | (742,388 | ) | |||||
|
Total
stockholders' equity
|
5,816,727 | 3,364,465 | ||||||
|
Total
liabilities and stockholders' equity
|
$ | 8,454,915 | $ | 4,168,253 | ||||
F-3
|
ZAGG
INCORPORATED AND SUBSIDIARY
|
||||||||
|
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
||||||||
|
For
the Years Ended December 31,
|
||||||||
|
2008
|
2007
|
|||||||
|
Net
sales
|
$ | 19,791,603 | $ | 5,135,715 | ||||
|
Cost
of sales
|
6,593,718 | 1,340,850 | ||||||
|
Gross
profit
|
13,197,885 | 3,794,865 | ||||||
|
Operating
expenses:
|
||||||||
|
Advertising
and marketing
|
3,976,015 | 944,715 | ||||||
|
Selling,
general and administrative
|
6,842,921 | 4,087,700 | ||||||
|
Total
operating expenses
|
10,818,936 | 5,032,415 | ||||||
|
Income
(loss) from operations
|
2,378,949 | (1,237,550 | ) | |||||
|
Other
income (expense):
|
||||||||
|
Interest
expense
|
(6,022 | ) | (31,452 | ) | ||||
|
Interest
and other income
|
227,223 | 60,671 | ||||||
|
Total
other income (expense)
|
221,201 | 29,219 | ||||||
|
Income
(loss) before (provision) benefit for income taxes
|
2,600,150 | (1,208,331 | ) | |||||
|
Income
tax (provision) benefit
|
(501,188 | ) | 448,820 | |||||
|
Net
income (loss)
|
$ | 2,098,962 | $ | (759,511 | ) | |||
|
Basic
net income (loss) per common share
|
$ | 0.11 | $ | (0.05 | ) | |||
|
Diluted
net income (loss) per common share
|
$ | 0.11 | $ | (0.05 | ) | |||
|
Weighted
average number of shares outstanding - basic
|
18,971,399 | 16,139,177 | ||||||
|
Weighted
average number of shares outstanding - diluted
|
19,265,229 | 16,139,177 | ||||||
F-4
|
ZAGG
INCORPORATED AND SUBSIDIARY
|
||||||||||||||||||||||||||||
|
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY
|
||||||||||||||||||||||||||||
|
Outstanding
|
Accumulated
|
|||||||||||||||||||||||||||
|
Additional
|
Warrants
|
Retained
|
Other
|
Total
|
||||||||||||||||||||||||
|
Common
Stock
|
Paid-in
|
to
Purchase
|
Earnings
|
Comprehensive
|
Stockholders'
|
|||||||||||||||||||||||
|
Shares
|
Amount
|
Capital
|
Common
Stock
|
(Deficit)
|
Loss
|
Equity
|
||||||||||||||||||||||
|
Balances,
December 31, 2006
|
10,175,000 | $ | 10,175 | $ | 117,075 | $ | - | $ | 17,123 | $ | - | $ | 144,373 | |||||||||||||||
|
Issuance
of common stock
and
warrants for cash
|
3,610,856 | 3,611 | 2,736,633 | - | - | - | 2,740,244 | |||||||||||||||||||||
|
Issuance
of common stock
with
reverse merger
|
3,346,000 | 3,346 | (3,346 | ) | - | - | - | - | ||||||||||||||||||||
|
Issuance
of common stock
in
conversion of debt
|
862,139 | 863 | 299,138 | - | - | - | 300,001 | |||||||||||||||||||||
|
Issuance
of common stock
to
employees
|
860,000 | 860 | 844,140 | - | - | - | 845,000 | |||||||||||||||||||||
|
Issuance
of warrants for
settlement
of dispute
|
- | - | (652,252 | ) | 734,981 | - | - | 82,729 | ||||||||||||||||||||
|
Issuance
of warrants
associated
with short-term
loan
|
- | - | - | 15,495 | - | - | 15,495 | |||||||||||||||||||||
|
Foreign
currency translation loss
|
- | - | - | - | - | (3,866 | ) | (3,866 | ) | |||||||||||||||||||
|
Net
loss
|
- | - | - | - | (759,511 | ) | - | (759,511 | ) | |||||||||||||||||||
|
Balances,
December 31, 2007
|
18,853,995 | 18,855 | 3,341,388 | 750,476 | (742,388 | ) | (3,866 | ) | 3,364,465 | |||||||||||||||||||
|
Issuance
of common stock
to
employees
and
consultants
|
210,000 | 210 | 178,229 | - | - | - | 178,439 | |||||||||||||||||||||
|
Issuance
of common stock
for
exercise of warrants
|
100,000 | 100 | 49,900 | (11,138 | ) | - | - | 38,862 | ||||||||||||||||||||
|
Option
expense
|
- | - | 238,763 | - | - | - | 238,763 | |||||||||||||||||||||
|
Foreign
currency translation loss
|
- | - | - | - | - | (102,764 | ) | (102,764 | ) | |||||||||||||||||||
|
Net
income
|
- | - | - | - | 2,098,962 | - | 2,098,962 | |||||||||||||||||||||
|
Balances,
December 31, 2008
|
19,163,995 | $ | 19,165 | $ | 3,808,280 | $ | 739,338 | $ | 1,356,574 | $ | (106,630 | ) | $ | 5,816,727 | ||||||||||||||
F-5
|
ZAGG
INCORPORATED AND SUBSIDIARY
|
||||||||
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
||||||||
|
For
the Years Ended December 31,
|
||||||||
|
2008
|
2007
|
|||||||
|
Cash
flows from operating activities
|
||||||||
|
Net
income (loss)
|
$ | 2,098,962 | $ | (759,511 | ) | |||
|
Adjustments
to reconcile net income (loss) to net cash
|
||||||||
|
used
in operating activities:
|
||||||||
|
Non-cash
expense related to stock-based compensation
|
406,064 | 845,000 | ||||||
|
Depreciation
and amortization
|
160,269 | 86,160 | ||||||
|
Deferred
income tax expense (benefit)
|
370,347 | (449,566 | ) | |||||
|
Expense
related to issuance of warrants
|
- | 82,729 | ||||||
|
Bad
debt expense
|
155,695 | 14,263 | ||||||
|
Gain
on asset disposals
|
(12,215 | ) | - | |||||
|
Foreign
currency translation adjustment
|
(102,764 | ) | (3,866 | ) | ||||
|
Changes
in assets and liabilities
|
||||||||
|
Accounts
receivable
|
(3,347,136 | ) | (295,560 | ) | ||||
|
Inventories
|
(1,466,253 | ) | (344,522 | ) | ||||
|
Prepaid
advertising
|
204,976 | (204,976 | ) | |||||
|
Prepaid
expenses and other current assets
|
(541,755 | ) | (1,927 | ) | ||||
|
Other
assets
|
20,859 | (18,428 | ) | |||||
|
Accounts
payable
|
1,120,815 | 210,201 | ||||||
|
Accrued
liabilities
|
176,940 | 17,733 | ||||||
|
Accrued
wages and wage related expenses
|
25,575 | (26,191 | ) | |||||
|
Deferred
revenues
|
265,679 | 14,110 | ||||||
|
Sales
return liability
|
267,258 | (8,139 | ) | |||||
|
Net
cash used in operating activities
|
(196,684 | ) | (842,490 | ) | ||||
|
Cash
flows from investing activities
|
||||||||
|
Payments
for intangible assets
|
(4,904 | ) | (48,764 | ) | ||||
|
Notes
receivable
|
(513,000 | ) | - | |||||
|
Proceeds
from disposal of equipment
|
2,994 | - | ||||||
|
Purchase
of property and equipment
|
(380,102 | ) | (146,463 | ) | ||||
|
Net
cash used in investing activities
|
(895,012 | ) | (195,227 | ) | ||||
|
Cash
flows from financing activities
|
||||||||
|
Payments
on debt
|
(21,867 | ) | (250,000 | ) | ||||
|
Proceeds
from notes payable
|
- | 200,000 | ||||||
|
Proceeds
from issuance of common stock and warrants
|
50,000 | 2,798,550 | ||||||
|
Payments
on convertible note payable - officer
|
- | (50,000 | ) | |||||
|
Net
cash provided by financing activities
|
28,133 | 2,698,550 | ||||||
|
Net
(decrease) increase in cash and cash equivalents
|
(1,063,563 | ) | 1,660,833 | |||||
|
Cash
and cash equivalents at beginning of the period
|
2,129,215 | 468,382 | ||||||
|
Cash
and cash equivalents at end of the period
|
$ | 1,065,652 | $ | 2,129,215 | ||||
|
Supplemental
disclosure of cash flow information
|
||||||||
|
Cash
paid during the period for interest
|
$ | 6,022 | $ | 17,959 | ||||
F-6
ZAGG
INCORPORATED AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Supplemental
schedule of noncash investing and financing activities
For the Year Ended December 31,
2008:
Issued 210,000 shares of common stock
to employees and consultants.
For the Year Ended December 31,
2007:
Issued 714,286 shares of common stock
in conversion of convertible note payable.
Issued 147,853 shares of common stock
in conversion of convertible note payable - officer and accrued
interest.
Issued 860,000 shares of common stock
to employees and consultants.
Issued warrants to purchase 100,000
shares of common stock in connection with note payable valued at
$15,495.
Issued warrants to purchase 2,401,953
shares of common stock in settlement of a dispute.
F-7
ZAGG
INCORPORATED AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – ORGANIZATION AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES
The
Company
ZAGG
Incorporated (the “Company”) was incorporated in the State of Utah on March 25,
2005 as Protective Solutions, Inc. On January 30, 2006, the Company
amended its articles of incorporation and changed its name to ShieldZone
Corporation. On February 8, 2007 the Company was acquired by an
inactive publicly held company, Amerasia Khan Enterprises Ltd. in a transaction
accounted for as a recapitalization of the Company. On March 1, 2007,
the Company redomesticated its operating subsidiary by reincorporating it in the
State of Nevada and on that same date the Company merged that subsidiary into
Amerasia Khan Enterprises Ltd, the parent, who was the surviving
entity. In connection with the merger the Company changed the name of
Amerasia Khan Enterprises Ltd. to ZAGG Incorporated. The Company
continues to operate the historical business of ShieldZone Corporation and may
use the ShieldZone name as a tradename (see Note 2).
The
Company designs, manufactures and distributes protective coverings, audio
accessories and power solutions for consumer electronic and hand-held devices
under the brand names invisibleSHIELD™ and ZAGGaudio™.
The
consolidated financial statements include the accounts of ZAGG Incorporated and
its wholly owned subsidiary ZAGG Europe Limited. All intercompany
transactions and balances have been eliminated in consolidation.
Use
of estimates
The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates. Significant estimates in
2008 and 2007 include the allowance for doubtful accounts, inventory valuation
allowances, sales returns and warranty liability and the useful life of property
and equipment.
Cash
and cash equivalents
For
purposes of the statements of cash flows, the Company considers all highly
liquid instruments purchased with a maturity of three months or less and money
market accounts to be cash equivalents.
Fair
value of financial instruments
The
carrying amounts reported in the balance sheets for accounts receivable,
accounts payable and accrued liabilities approximate fair value because of the
immediate or short-term maturity of these financial instruments. The
carrying amounts reported for notes receivable and notes payable approximate
fair value because the underlying instruments are at interest rates which
approximate current market rates.
Accounts
receivable
The
Company sells its products to end-users through wholesale distribution channels
and other resellers who are extended credit terms after an analysis of their
financial condition and credit worthiness.
The
Company also accepts orders from its website store and corporate owned kiosk
stores and receives credit card payments through its merchant bank.
Credit
terms to wholesale distributors and resellers, when extended, are based on
evaluation of the customers' financial condition and, generally, collateral is
not required. 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 a number of factors. Accounts receivable are
generally due within thirty days of the invoice date and considered past due
after thirty days. Estimated losses are based on the aging of
accounts receivable balances, a review of significant past due accounts, and
historical write-off experience, net of recoveries. If the financial
condition of the Company’s customers were to deteriorate, whether due to
deteriorating economic conditions generally, in the industry, or otherwise,
resulting in an impairment of their ability to make payments, additional
allowances would be required.
F-8
ZAGG
INCORPORATED AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Accounts
receivable from merchant banks are due to the clearing time the merchant banks
take to post the transactions to the Company’s bank account. There is
typically a two to five day lag between the charge date and the posting
date.
The
Company establishes an allowance and charges bad debt expense on accounts
receivable when they become doubtful of collection, and payments subsequently
received on such receivables are credited to the bad debt expense in the period
of recovery.
Inventories
Inventories,
consisting primarily of finished goods and raw materials, are valued at the
lower of cost or market and are accounted for on the first-in, first-out
basis. Management performs periodic assessments to determine the existence
of obsolete, slow moving and non-saleable inventories, and records necessary
provisions to reduce such inventories to net realizable value. The
Company recognizes all inventory reserves as a component of cost of
sales.
Property
and equipment
Property
and equipment are stated at cost and depreciated using the straight-line method
over their estimated useful lives. 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 other selling, general and administrative
expense.
Intangibles
and other long-lived assets
In
accordance with Statement of Financial Accounting Standards (SFAS) No. 144,
“Accounting for the Impairment or Disposal of Long-Lived Assets”, the Company
reviews the carrying value of intangibles and other long-lived assets for
impairment at least annually or whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be
recoverable. 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. 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 property, if any, exceeds its fair market
value.
Accounting
for Derivatives
The
Company evaluates its convertible debt, options, warrants or other contracts to
determine if those contracts or embedded components of those contracts qualify
as derivatives to be separately accounted for under Statement of Financial
Accounting Standards 133 “Accounting for Derivative Instruments and Hedging
Activities” and related interpretations including EITF 00-19 “Accounting for
Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Company’s Own Stock”.
The
result of this accounting treatment is that the fair value of the embedded
derivative is marked-to-market each balance sheet date and recorded as a
liability. In the event that the fair value adjustment is recorded as
a liability, the change in fair value is recorded in the consolidated statement
of operations as an other income or expense. Upon conversion or
exercise of a derivative instrument, the instrument is marked to fair value at
the conversion date and then that fair value is reclassified to equity. Equity
instruments that are initially classified as equity that become subject to
reclassification under SFAS 133 are reclassified to liability at the fair value
of the instrument on the reclassification date.
F-9
ZAGG
INCORPORATED AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Contingencies
Certain
conditions may exist as of the date financial statements are issued, which may
result in a loss to the Company, but which will only be resolved when one or
more future events occur or fail to occur. The Company's management and
its legal counsel assess such contingent liabilities, and such assessment
inherently involves an exercise of judgment. In assessing loss
contingencies related to legal proceedings that are pending against the Company
or unasserted claims that may result in such proceedings, the Company's legal
counsel evaluates the perceived merits of any legal proceedings or unasserted
claims as well as the perceived merits of the amount of relief sought or
expected to be sought therein. If the assessment of a contingency
indicates that it is probable that a material loss has been incurred and the
amount of the liability can be estimated, then the estimated liability would be
accrued in the Company's financial statements. If the assessment indicates
that a potentially material loss contingency is not probable but is reasonably
possible, or is probable but cannot be estimated, then the nature of the
contingent liability, together with an estimate of the range of possible loss if
determinable and material, would be disclosed.
Revenue
recognition
The
Company follows the guidance of the Securities and Exchange Commission’s Staff
Accounting Bulletin 104 for revenue recognition. In general, the
Company records revenue when persuasive evidence of an arrangement exists or
product shipment has occurred, the sales price to the customer is fixed or
determinable, and collectability is reasonably assured. The Company’s
revenue is derived from sales of its products to wholesale distributors,
resellers and end consumers and from the sale of exclusive license
agreements. For sales of product, the Company records revenue when
the product is shipped, net of estimated returns and discounts. For
license fees, the Company recognizes revenue on a prorated basis over the life
of the license agreement.
The
Company follows the guidance of Emerging Issues Task Force (EITF) Issue 01-9
“Accounting for Consideration Given by a Vendor to a Customer (Including a
Reseller of the Vendor’s Products)” and (EITF) Issue 02-16 “Accounting by a
Customer (Including a Reseller) for Certain Considerations Received from
Vendors.” Accordingly, any incentives received from vendors are recognized as a
reduction of the cost of products. Promotional products given to customers
or potential customers are recognized as a cost of sales. Cash incentives
provided to the Company’s customers are recognized as a reduction of the related
sale price, and, therefore, are a reduction in sales.
Reserve
for Sales Returns and Warranty Liability
The
Company’s return policy generally allows its end users and retailers to return
purchased products for refund or in exchange for new products within 30 days of
end user purchase. The Company estimates a reserve for sales returns and
records that reserve amount as a reduction of sales and as a sales return
reserve liability. At December 31, 2008 and 2007 the sales return
liability was $291,119 and $23,861, respectively.
The
Company generally provides the ultimate consumer a warranty with each product
and accrues warranty expense at the time of the sale based on the Company’s
prior claims history. Actual warranty costs incurred are charged
against the accrual when paid. During the years ended December 31,
2008 and 2007, warranty expense and the reserve for warranty liability,
respectively, was not material.
Shipping and Handling
Costs
Amounts
invoiced to customers for shipping and handlings are included in
sales. During the years ended December 31, 2008 and 2007 shipping and
handling charges paid by customers were $1,067,719 and $360,513,
respectively. Actual shipping and handling costs to ship products to the
Company’s customers are included in cost of sales and were $2,267,898 and
$607,745, respectively.
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 is not 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.
F-10
ZAGG
INCORPORATED AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Stock-based
compensation
Effective
January 1, 2006, the Company adopted Statement of Financial Accounting Standards
No. 123 (revised 2004), Share
Based Payment (“SFAS No. 123R”). SFAS No. 123R establishes the
financial accounting and reporting standards for stock-based compensation
plans. As required by SFAS No. 123R, the Company recognizes the cost
resulting from all stock-based payment transactions including shares issued
under its stock option plans in the financial statements based upon the fair
value of such equity instruments granted. As there were no common
stock options granted or outstanding in 2007, there was no financial effect to
the Company upon implementation of SFAS No. 123R. For the year ended
December 31, 2008, the Company recognized stock-based compensation expense of
$215,471, related to the issuance of common stock and options issued under its
stock incentive plan.
Research
and development
Research
and development costs, if any, are expensed as incurred. For the
years ended December 31, 2008 and 2007, research and development costs were not
material and included in the accompanying statements of operations in other
selling, general and administrative expenses.
Advertising
General
advertising is expensed as incurred. Advertising expenses for the years ended
December 31, 2008 and 2007 were $3,976,015 and $944,715,
respectively. Included in the December 31, 2008 expense was $190,787
related to an infomercial that the company had produced, but subsequently
abandoned.
Foreign
Currency Transactions
The
British Pound (GBP) is the functional currency of the Company’s operating
subsidiary. The respective balance sheets have been translated into
USD at the exchange rates prevailing at each balance sheet date. The respective
statements of operations have been translated into USD using the average
exchange rates prevailing during the periods of each statement. The
corresponding translation adjustments are included as part of stockholders’
equity.
Reclassifications
Certain
amounts in the 2007 financial statements have been reclassified to conform to
the 2008 presentation. The reclassifications had no effect on net
income.
Recent accounting
pronouncements
In
September 2006, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standard Number 157, Fair Value Measurements,
(SFAS 57) which defines fair value, establishes a framework for measuring fair
value in generally accepted accounting principles and expands disclosures about
fair value measurements. The provisions of SFAS No. 157 related to
financial assets and financial liabilities were effective during
2008. With respect to certain nonfinancial assets and nonfinancial
liabilities, SFAS No. 157 is effective for fiscal years beginning after
November 15, 2008, and interim periods within those fiscal
years. The Company does not expect that the adoption of SFAS
No. 157 with respect to nonfinancial assets and nonfinancial liabilities
will have a material impact on its consolidated financial
statements.
In
December 2007, the FASB issued SFAS No. 141(R), Business Combinations, and
SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements. SFAS No. 141(R) requires an
acquirer to measure the identifiable assets acquired, the liabilities assumed
and any non-controlling interest in the acquiree at their fair values on the
acquisition date, with goodwill being the excess value over the net identifiable
assets acquired. SFAS No. 160 clarifies that a non-controlling interest in
a subsidiary should be reported as equity in the consolidated financial
statements, consolidated net income should be adjusted to include the net income
attributed to the non-controlling interest and consolidated comprehensive income
shall be adjusted to include the comprehensive income attributed to the
non-controlling interest. The calculation of earnings per share will continue to
be based on income amounts attributable to the parent. SFAS
No. 141(R) and SFAS No. 160 are effective for financial
statements issued for fiscal years beginning after December 15, 2008. Early
adoption is prohibited. The Company has not yet determined the effect on its
consolidated financial statements, if any, upon adoption of SFAS
No. 141(R) or SFAS No. 160.
F-11
ZAGG
INCORPORATED AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
In March
2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities. SFAS No. 161 is intended
to improve financial reporting about derivative instruments and hedging
activities by requiring enhanced disclosures to enable investors to better
understand their effects on an entity's financial position, financial
performance, and cash flows. SFAS No. 161 is effective for financial statements
issued for fiscal years and interim periods beginning after November 15, 2008,
with early application encouraged. The Company does not expect that
the adoption of SFAS No. 161 will have a material impact on its
consolidated financial statements.
In April
2008, the FASB issued FSP FAS 142-3, Determination of the Useful Life of
Intangible Assets (FSB FAS 142-3). FSP FAS 142-3 amends the
factors that should be considered in developing renewal or extension assumptions
used to determine the useful life of a recognized intangible asset under SFAS
No. 142, Goodwill and Other
Intangible Assets. The intent of this FSP is to improve the consistency
between the useful life of a recognized intangible asset under FAS FAS 142 and
the period of expected cash flows used to measure the fair value of the asset
under SFAS No. 141(R) and other generally accepted accounting principles. FSP
FAS 142-3 is effective for fiscal years, and interim periods within those fiscal
years, beginning after December 15, 2008. The Company has not yet determined the
effect on its consolidated financial statements, if any, that will occur upon
adoption of FSP FAS 142-3.
In May
2008, the FASB issued SFAS 162, The Hierarchy of Generally Accepted
Accounting Principles. SFAS No. 162 identifies the sources of
accounting principles and provides entities with a framework for selecting the
principles used in preparation of financial statements that are presented in
conformity with GAAP. The current GAAP hierarchy has been criticized
because it is directed to the auditor rather than the entity, it is complex, and
it ranks FASB Statements of Financial Accounting Concepts, which are subject to
the same level of due process as FASB Statements of Financial Accounting
Standards, below industry practices that are widely recognized as generally
accepted but that are not subject to due process. The Board believes
the GAAP hierarchy should be directed to entities because it is the entity (not
its auditors) that is responsible for selecting accounting principles for
financial statements that are presented in conformity with GAAP. The
adoption of FASB 162 is not expected to have a material impact on the Company’s
financial statements.
In
October 2008, the Financial Accounting Standards Board (the "FASB") issued
Emerging Issues Task Force ("EITF") 08-6 Equity Method Investment Accounting
Considerations, which addresses how the initial carrying value of an
equity method investment should be determined, how an impairment assessment of
an underlying indefinite-lived intangible asset of an equity method investment
should be performed, and the proper accounting of an equity method investee's
issuance of shares. The Company's management believes that this will not have a
material impact on the Company's consolidated financial statements.
Other
accounting standards that have been issued or proposed by the FASB or other
standards-setting bodies that do not require adoption until a future date are
not expected to have a material impact on the financial statements upon
adoption.
Net Income (Loss) Per Common
Share
Basic net
income (loss) per share is computed by dividing net income (loss) by weighted
average number of shares of common stock outstanding during each
period. Diluted net income (loss) per share is computed by dividing
net income (loss) by the weighted average number of shares of common stock,
common stock equivalents and potentially dilutive securities outstanding during
each period.
F-12
ZAGG
INCORPORATED AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
The
following is a reconciliation of the numerator and denominator used to calculate
Basic and Diluted EPS:
|
Net
Income (Loss)
|
Weighted
Average
Shares
|
Per
Share Amount
|
||||||||||
|
Year
Ended December 31, 2007
|
||||||||||||
|
Basic
EPS
|
$ | (759,511 | ) | 16,139,177 | $ | (0.05 | ) | |||||
|
Effect
of common stock equivalents
|
-- | -- | -- | |||||||||
|
Diluted
EPS
|
$ | (759,511 | ) | 16,139,177 | $ | (0.05 | ) | |||||
|
Year
Ended December 31, 2008
|
||||||||||||
|
Basic
EPS
|
$ | 2,098,962 | 18,971,399 | $ | 0.11 | |||||||
|
Effect
of common stock equivalents
|
-- | 293,830 | -- | |||||||||
|
Diluted
EPS
|
$ | 2,098,962 | 19,265,229 | $ | 0.11 | |||||||
The
calculation above for the year ended December 31, 2007 excludes the exercise of
4,299,453 of the outstanding warrants as the exercise of these warrants would
have an anti-dilutive effect on earnings per share. The calculation
above for the year ended December 31, 2008 excludes the exercise of 4,146,953 of
the outstanding warrants as the exercise of these warrants would have an
anti-dilutive effect on earnings per share.
NOTE
2 – RECAPITALIZATION
On
February 8, 2007 (the “recapitalization date”), the Company executed an
Agreement and Plan of Merger (the “Merger Agreement”) by and between Amerasia
Khan Enterprises Ltd. (a public shell), now known as ZAGG Incorporated, and its
wholly-owned subsidiary, SZC Acquisition Inc., a Nevada corporation
(“Subsidiary”) on the one hand and ShieldZone Corporation, (“ShieldZone”) a Utah
corporation, on the other hand. Pursuant to the Merger Agreement,
Subsidiary was merged into ShieldZone with ShieldZone surviving the merger. In
consideration, the stockholders of ShieldZone received 10,175,000 shares of
Amerasia Khan Enterprises Ltd., now known as ZAGG Incorporated, common stock
which was approximately 69% of the total common shares outstanding just
subsequent to the merger but before the simultaneous sale of 785,856 common
shares for $275,050 ($0.35 per share) and conversion of a $250,000 convertible
promissory note for 714,286 common shares. The Company issued
warrants as a fee to Empire Financial in conjunction with the sale of the
785,856 common shares. The Company issued warrants to purchase 52,500
shares of its common stock at an exercise price of $0.35. These
warrants may be exercised until March 18, 2012, at which time they will expire
if not exercised. The warrant holders also had piggyback registration
rights. In connection with the merger/recapitalization, the Company
is deemed to have issued 4,600,000 common shares to the original stockholders’
of Amerasia Khan Enterprises Ltd. Subsequent to the
merger/recapitalization, 1,254,000 shares owned by certain original shareholders
of Amerasia Khan Enterprises Ltd. were cancelled.
The
merger was accounted for as a recapitalization of ShieldZone, a Utah corporation
because on a post-merger basis, the former stockholders of ShieldZone
Corporation held a majority of the outstanding common stock on a voting and
fully-diluted basis and had Board and management control. As a
result, ShieldZone is deemed to be the acquirer for accounting
purposes. In March 2007, ShieldZone Corporation was merged into its
parent, Amerasia Khan Enterprises Ltd., now known as ZAGG Incorporated, and the
name of the surviving entity, Amerasia Khan Enterprises Ltd., was changed to
ZAGG Incorporated.
Accordingly
the balance sheets just subsequent to the recapitalization date consists of the
balance sheets of both companies at historical cost and the statement of
operations consists of the historical operations of ShieldZone and the
operations of Amerasia Khan Enterprises Ltd., now known as ZAGG Incorporated,
from the recapitalization date.
All share
and per share data in the accompanying financial statements have been
retroactively changed to reflect the effect of the merger and
recapitalization.
F-13
ZAGG
INCORPORATED AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
3 – ACCOUNTS RECEIVABLE, NET
Accounts
receivable consisted of the following:
|
December
31,
|
||||||||
|
2008
|
2007
|
|||||||
|
Accounts
receivable
|
$ | 3,812,823 | $ | 436,839 | ||||
|
Less:
Allowance for doubtful accounts
|
(218,936 | ) | (34,393 | ) | ||||
|
Accounts
receivable, net
|
$ | 3,593,887 | $ | 402,446 | ||||
Bad debt
expense for the years ended December 31, 2008 and 2007 was $155,695 and
$14,263, respectively.
NOTE
4 – INVENTORIES
Inventory
consisted of the following components:
|
December
31,
|
||||||||
|
2008
|
2007
|
|||||||
|
Finished
goods
|
$ | 204,766 | $ | 230,937 | ||||
|
Raw
materials
|
1,708,531 | 216,107 | ||||||
|
Total
inventory
|
$ | 1,913,297 | $ | 447,044 | ||||
NOTE
5 – PROPERTY AND EQUIPMENT
Property
and equipment consisted of the following:
|
December
31,
|
|||||||||
|
2008
|
2007
|
||||||||
|
Useful Lives
|
|||||||||
|
Computer
equipment and software
|
3
to 5 years
|
$ | 271,287 | $ | 155,603 | ||||
|
Equipment
|
3
to10 years
|
314,412 | 144,343 | ||||||
|
Furniture
and fixtures
|
7
years
|
56,021 | 15,209 | ||||||
|
Automobiles
|
5
years
|
84,955 | 47,063 | ||||||
|
Leasehold
improvements
|
1
to 3.13 years
|
103,821 | 91,637 | ||||||
| 830,496 | 453,855 | ||||||||
|
Less
accumulated depreciation
|
(281,126 | ) | (125,778 | ) | |||||
|
Net
property and equipment
|
$ | 549,370 | $ | 328,077 | |||||
For the
years ended December 31, 2008 and 2007, depreciation expense was $156,090 and
$81,950, respectively.
NOTE
6 – INTANGIBLE ASSETS
At
December 31, 2007, intangible assets consist of legal fees paid in connection
with the Company’s patent application of $7,935 and amounts paid to secure the
Company’s Internet addresses. The costs relating to the
definite-lived intangible assets are amortized over their estimated useful lives
using straight-line amortization. The useful life for Internet
addresses is 10 years. As of December 31, 2008, the patent had not
been granted. Accordingly, the Company has not begun to amortize the
patent costs and will begin amortizing the patent over the legal life of the
patent, when the patent is granted.
F-14
ZAGG
INCORPORATED AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
The
Company has contractual rights customary in the industry to use its Internet
addresses. However, the Company does not have and cannot acquire any
property rights to the internet addresses. The Company does not
expect to lose its rights to use the Internet addresses; however, there can be
no assurance in this regard and such loss could have a material adverse effect
on the Company’s financial position and results of operations.
The
Company’s definite-lived intangible assets are summarized in the table
below:
|
December
31, 2008
|
Gross
Carrying
Amount
|
Accumulated
Amortization
|
Net
Carrying
Amount
|
|||||||||
|
Internet
addresses
|
$ | 56,008 | $ | (8,664 | ) | $ | 47,344 | |||||
NOTE
7 - INCOME TAXES
The
following table shows the Company’s deferred and current income tax (benefit)
expense for the years ended December 31, 2008 and 2007, as follows:
|
2008
|
2007
|
|||||||
|
Deferred
income tax (benefit) expense
|
$ | 501,188 | $ | (448,820 | ) | |||
|
Current
income tax (benefit) expense
|
-- | -- | ||||||
| $ | 501,188 | $ | (448,820 | ) | ||||
The
following is a reconciliation of the income taxes computed using the federal
statutory rate to the provision for income taxes:
|
2008
|
2007
|
|||||||
|
Tax
at statutory rate (34%)
|
$ | 884,051 | $ | (412,089 | ) | |||
|
Non-deductible
expense and other
|
6,582 | 3,266 | ||||||
|
Utilization
of NOL carryforward
|
(475,250 | ) | -- | |||||
|
State
tax, net of federal tax rate
|
85,805 | (39,997 | ) | |||||
| $ | 501,188 | $ | (448,820 | ) | ||||
F-15
ZAGG
INCORPORATED AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
The tax
effects of temporary differences that gave rise to significant portions of
deferred tax assets and liabilities at December 31, 2008 and 2007 are as
follows:
|
2008
|
2007
|
|||||||
|
Deferred
tax assets:
|
||||||||
|
Net operating loss
carryforward
|
$ | -- | $ | 481,322 | ||||
|
Allowance
for doubtful accounts
|
81,663 | 12,829 | ||||||
|
Charitable
contributions
|
1,209 | 811 | ||||||
|
Sales
returns accrual
|
108,587 | 8,900 | ||||||
|
Total
gross deferred tax assets
|
191,459 | 503,862 | ||||||
|
Less
valuation allowance
|
-- | -- | ||||||
|
Net
deferred tax assets
|
$ | 191,459 | $ | 503,862 | ||||
|
Deferred
tax liabilities:
|
||||||||
|
Property
and equipment
|
$ | 104,859 | $ | 46,915 | ||||
|
Total
gross deferred tax liabilities
|
104,859 | 46,915 | ||||||
|
Net
deferred tax assets
|
$ | 86,600 | $ | 456,947 | ||||
|
Deferred
tax assets, net – current
|
$ | 81,663 | $ | 12,829 | ||||
|
Deferred
tax assets, net – non-current
|
4,937 | 444,118 | ||||||
|
Net
deferred tax assets
|
$ | 86,600 | $ | 456,947 |
There was
no valuation allowance at December 31, 2008 as management believes it is more
likely than not that it can realize its deferred tax assets.
At
December 31, 2008, the Company had no remaining net operating loss
carryforward balances.
F-16
ZAGG
INCORPORATED AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
8 – COMMON STOCK
Change
in Authorized Shares
On
January 30, 2006, the Company amended its articles of incorporation and
increased the numbers of authorized shares of the Company to 10,000,000, of
which 4,000,000 shares, no par value, shall be common stock and 6,000,000 shares
of no par value shall be preferred stock with such designations, rights and
preferences as may be determined from time to time by the Board of
Directors. In November 2006, the Company amended its articles of
incorporation to cancel the preferred shares previously authorized and increase
the number of authorized common shares to 10,500,000. In February 2007 the
Company recapitalized with a public shell and authorized shares became
50,000,000 at $0.001 par value (See Note 2). The new authorized
shares are reflected retroactively in the accompanying balance
sheet.
Common
Stock
During
2007, the Company issued 8,618,995 shares of its common stock. Of
such shares 714,286 were issued in conversion of a convertible note payable with
a principal balance of $250,000, 3,346,995 shares of common stock in conjunction
with the reverse merger transaction (see Note 2), 785,856 were issued in a
private placement wherein the Company received $275,050 and paid fees of $47,250
and fee warrants to purchase 52,500 shares of the Company’s common stock at a
strike price of $0.35, 147,853 were issued in conversion of a note payable of
$50,000 plus accrued interest of $1,749, 1,975,000 were issued along with
warrants to purchase 987,500 shares of its common stock at a strike price of
$1.30 in a PIPE transaction wherein the Company received $1,975,000 and paid
fees of $177,750 and fee warrants to purchase 197,500 shares of the Company’s
common stock at a strike price of $1.30, 860,000 shares to employees and
affiliates and recorded as compensation expense in the accompanying financial
statements, 850,000 were issued along with warrants to purchase 425,000 shares
of its common stock at a strike price of $1.30 in a private placement wherein
the Company received $850,000 and paid fees of $76,500 and fee warrants to
purchase 85,000 shares of the Company’s common stock at a strike price of
$1.30.
During
2008, the Company issued 310,000 shares of its common stock. Of such
shares, 210,000 were issued to employees and consultants and 100,000 were issued
in connection of the exercise of a warrant to purchase 100,000 shares of the
Company’s common stock. The Company received proceeds of $50,000 in
connection with the exercise of the warrants.
NOTE
9 – STOCK OPTIONS AND WARRANTS
Common Stock
Options - In 2007, the Company’s board of directors adopted and in 2008
the shareholders approved the 2007 Stock Incentive Plan wherein the Company may
issue an aggregate of 2,000,000 options to purchase shares of the Company’s
common stock or shares of the Company’s common stock. No options or
shares were issued under the plan as of December 31, 2007. As of
December 31, 2008, there were 315,000 shares available for grant under this
plan.
A summary
of options granted under the Company’s various stock option plans for the year
ended December 31, 2008:
|
Stock
Options
|
Weighted
Average
Exercise
Price
|
Aggregate
Intrinsic
Value
|
||||||||||
|
Outstanding
at beginning of the year
|
— | $ | 0.00 | $ | — | |||||||
|
Granted
|
1,713,000 | 0.65 | 1,113,450 1,713,000 | |||||||||
|
Exercised
|
— | — | — | |||||||||
|
Forfeited
|
(78,000 | ) | 0.65 | (50,700 | ) | |||||||
|
Outstanding
at end of the year
|
1,635,000 | 0.65 | 1,062,750 | |||||||||
|
Exercisable
at the end of the year
|
200,000 | $ | 0.90 | $ | 180,000 | |||||||
F-17
ZAGG
INCORPORATED AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
There
were no stock options issued for the year ended December 31, 2007.
A summary
of options outstanding and options exercisable under the Company’s stock option
plans at December 31, 2008 is presented below:
|
Options
Outstanding
|
Options
Exercisable
|
||||||||||||||||||
|
Range
of Exercise Prices
|
Number
Outstanding
|
Weighted
Average
Remaining
Contractual
Life
|
Weighted
Average
Exercise
Price
|
Number
Exercisable
|
Weighted
Average
Exercise
Price
|
||||||||||||||
| $ | 0.60 – 1.13 | 1,635,000 |
4.4
years
|
$ | 0.65 | 200,000 | $ | 0.90 | |||||||||||
The
weighted average fair value of options granted during the year ended December
31, 2008 was $0.65. There were no options granted for the year ended
December 31, 2007.
F-18
ZAGG
INCORPORATED AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
The fair
value of options and warrants is estimated on the date granted using the
Black-Scholes option pricing model with the following weighted-average
assumptions used for grants during 2008:
|
2008
|
||||
|
Risk-free
interest rate
|
1.54 | % | ||
|
Expected
dividend yield
|
0.0 | % | ||
|
Expected
exercise lives
|
5
years
|
|||
|
Expected
volatility
|
55.8 | % | ||
The
estimated fair value of options granted is subject to the assumptions made, and
if the assumptions were to change the estimated fair value amounts could be
significantly different.
Warrants -
A summary of warrants granted by the Company during the years ended December 31,
2008 and 2007 is presented below:
|
2008
|
2007
|
|||||
|
Shares
|
Weighted
Average Exercise Price
|
Shares
|
Weighted
Average Exercise Price
|
|||
|
Outstanding
at beginning of the year
|
4,299,453
|
$ 1.27
|
—
|
$ —
|
||
|
Granted
|
—
|
—
|
4,299,453
|
1.27
|
||
|
Exercised
|
(100,000)
|
0.50
|
—
|
—
|
||
|
Forfeited
|
—
|
—
|
—
|
—
|
||
|
Outstanding
at end of the year
|
4,199,453
|
1.29
|
4,299,453
|
1.27
|
||
|
Exercisable
at end of the year
|
4,199,453
|
$ 1.29
|
4,299,453
|
$ 1.27
|
||
During
2007, the Company issued warrants to purchase 4,299,453 shares of its common
stock. Of such warrants, 52,500 were issued with a strike price of
$0.35 as fee warrants related to the private placement of 785,286 shares,
100,000 were issued with a strike price of $0.50 in connection with short-term
financing; 1,412,500 were issued with a strike price of $1.30 in connection with
the sale of 2,825,000 shares in the PIPE and private placement transactions,
282,500 were issued with a strike price of $1.30 as fee warrants related to the
PIPE and private placement transactions, 50,000 were issued with a strike price
of $1.30 for consulting services and 2,401,953 were issued with a strike price
of $1.30 to certain investors holding 4,803,905 shares of the Company’s common
stock that were not included with certain institutional investors in a
registration statement that went effective on August 30, 2007.
NOTE
10 – NOTES RECEIVABLE
On March
11, 2008 ZAGG Incorporated entered into an agreement to fund a bridge loan (the
“Bridge Loan”) of up to $500,000 to Brighton Partners, LLC. The purpose of the
secured loan is to fund the development of a superhero series created by Stan
Lee and POW! Entertainment, Inc. in partnership with Brighton Partners, LLC,
with the hope that ZAGG will benefit from the marketing exposure and any
intellectual property created using ZAGG’s trademarks.
In
consideration of the bridge loan, Brighton Partners, LLC executed a secured
promissory note with a 3% origination fee and bearing 10% interest for the 90
day term of the note. As of December 31, 2008 the note had not yet been repaid
and the Company had not declared Brighton Partners in default under the
promissory note. The loan is collateralized by 100% of the
ownership of Brighton until the loan is repaid in full. As part of the
transaction, ZAGG entered into a cross-license agreement with Brighton and Pow!
Entertainment pursuant to which ZAGG agreed to license its trademarks in
exchange for marketing and promotion rights to any property developed under the
superhero series that bears ZAGG’s intellectual property. Further under the
transaction, the Company acquired 10% of the membership interest in Brighton.
ZAGG will share in the development of the superhero series as a partner of
Brighton. Through December 31, 2008, the Company had advanced
$438,000 to Brighton under the promissory note and has included this amount in
prepaid expenses and other current assets in the accompanying consolidated
financials. Accrued interest of $141,371 on the promissory note is
included in prepaid expenses and other current assets in the accompanying
consolidated financial statements.
F-19
ZAGG
INCORPORATED AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
11 – CONVERTIBLE NOTE PAYABLE - OFFICER
In
November 2006, the Company entered into a convertible note with an affiliate of
the Company’s Chief Executive Officer in the original principal amount of
$100,000. The note was convertible at the holder's option any time up to
maturity at a conversion price equal to $0.35 per common share. The note was due
on May 15, 2007, bore interest at 20% per year and was unsecured. In
March 2007, the Company repaid $50,000 of the principal balance of the
note. In addition, on March 31, 2007, the remaining $50,000 of
principal plus accrued interest of $1,749 was converted into 147,853 shares of
the Company’s common stock.
The note
was a conventional convertible instrument and the Company evaluated the
conversion feature and determined that there was not a separate derivative
instrument associated with the note and no derivative liability was
recognized. The Company determined that there was no beneficial
conversion feature associated with the note as the conversion price was equal to
the deemed market value on the date of grant.
NOTE
12 – CONVERTIBLE NOTE PAYABLE
On
December 27, 2006, the Company entered into a Secured Convertible Note Purchase
Agreement (the “Convertible Note Agreement”). Pursuant to the Convertible Note
Agreement, the Company issued a convertible note to an unrelated investor in the
original principal amount of $250,000. The note was convertible at the holder's
option any time up to maturity at a conversion price equal to $0.35 per common
share. The note was due on March 1, 2007, bore interest at 4% per year, and was
secured by substantially all of the assets of the Company. Interest
was payable at maturity and was computed on the basis of a 360-day
year. In February 2007, the note holder converted the principal
balance of the note into 714,286 shares of the Company’s common
stock.
The note
was a conventional convertible instrument and the Company evaluated the
conversion feature and determined that there was not a separate derivative
instrument associated with the note and no derivative liability was
recognized. The Company determined that there was no beneficial
conversion feature associated with the note as the conversion price was equal to
the deemed market value on the date of grant.
The
weighted average interest rate for the two notes discussed above was
8.57%.
NOTE
13 – NOTES PAYABLE
On May 8,
2007, the Company entered into a promissory note agreement with an unrelated
third party in the amount of $200,000. The note bore interest at an
annual percentage rate of 18% and was due and payable on August 15,
2007. The Company also issued 100,000 warrants with an exercise price
of $0.50. The warrants expire on May 30, 2012 and are exercisable any
time at the option of the warrant holder. The Company recorded a
discount on the note payable of $15,031 as that was the value of the warrants as
calculated using the Black-Scholes valuation model using the following
assumptions: volatility of 10%, risk free rate of return of 4.65%, estimated
life of 5 years and an estimated dividend of $0. The discount was
amortized as additional interest expense in the accompanying
statements. The note was paid in full on August 15,
2007.
On
September 27, 2007, the Company entered into a promissory note and loan
agreement with an unrelated third party in the amount of $45,498. The
note bears interest at 11.45% and requires monthly installment payments of
$2,130. The note relates to the purchase of certain computer hardware
and software products. For the year ended December 31, 2008, the
Company paid interest of $3,695 related to the note. For the year
ended December 31, 2007, the Company paid interest of $852. At
December 31, 2008, the balance remaining on the note was $20,223.
F-20
ZAGG
INCORPORATED AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
14 – COMMITMENTS AND CONTINGENCIES
Operating
Leases
The
Company leases office and warehouse space, office equipment and mall cart
locations under operating leases that expire through December
2012. Future minimum rental payments required under the operating
leases at December 31, 2008 are as follows:
|
2009
|
$ | 296,732 | ||
|
2010
|
22,468 | |||
|
2011
|
5,238 | |||
|
2012
|
1,188 | |||
|
Total
|
$ | 325,626 |
For the
years ended December 31, 2008 and 2007, rent expense was $427,288 and $194,612,
respectively.
From time
to time the Company may become subject to proceedings, lawsuits and other claims
in the ordinary course of business, including proceedings related to
environmental and other matters. Such matters are subject to many
uncertainties, and outcomes are not predictable with assurance.
NOTE
15 – 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 such
accounts through December 31, 2008.
Concentration
of supplier
The
Company purchases its raw materials related to the invisibleSHIELD product line
primarily from one source. Management is aware of similar raw
materials that would be available from other sources if required and has current
plans to immediately engage such resources if necessary.
Concentration
of accounts receivable
At
December 31, 2008, approximately 57% of the balance of accounts receivable was
due from two customers.
NOTE
16 – SEGMENTS
For the
years ended December 31, 2008 and 2007, the Company operated in one
segment. The percentage of sales by geographic region for the years
ended December 31, 2008 and 2007 were approximately:
|
2008
|
2007
|
|||||||
|
United
States
|
83 | % | 88 | % | ||||
|
Europe
|
10 | % | 6 | % | ||||
|
Other
|
7 | % | 6 | % | ||||
For the
year ended December 31, 2008, one customer accounted for 12% of the Company’s
sales. No single customer accounted for more than 10% of the
Company’s sales for the year ended December 31, 2007.
F-21