[X]
|
Quarterly
Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934 for the quarterly period ended September 30, 2009,
or
|
[ ]
|
Transition
Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934 for the transition period from ______________ to
_____________.
|
Nevada | 20-2559624 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
Page | |||||
PART I - FINANCIAL INFORMATION | |||||
Item
1.
|
Financial Statements (Unaudited) | ||||
Condensed
Consolidated Balance Sheets – As of September 30, 2009 and December 31,
2008
|
3 | ||||
Condensed
Consolidated Statements of Operations for the Three and Nine Months
Ended
|
|||||
September
30, 2009 and 2008
|
4 | ||||
Condensed
Consolidated Statements of Cash Flows for the Nine Months
Ended
|
|||||
September
30, 2009 and 2008
|
5 | ||||
Notes
to Condensed Consolidated Financial Statements
|
7 | ||||
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
14 | |||
Item
3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
20 | |||
Item
4T.
|
Controls
and Procedures
|
20 | |||
PART
II - OTHER INFORMATION
|
|||||
Item
1.
|
Legal
Proceedings
|
21 | |||
Item
1A.
|
Risk
Factors
|
21 | |||
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
21 | |||
Item
3.
|
Defaults
Upon Senior Securities
|
22 | |||
Item
4.
|
Submission
of Matters to a Vote of Security Holders
|
22 | |||
Item
5.
|
Other
Information
|
22 | |||
Item
6.
|
Exhibits
|
23 |
September
30,
|
December
31,
|
|||||||
2009
|
2008
|
|||||||
ASSETS
|
||||||||
Current
assets
|
||||||||
Cash
|
$ | 2,102,779 | $ | 1,065,652 | ||||
Accounts
receivable, net
|
5,878,412 | 3,593,887 | ||||||
Inventories
|
3,488,350 | 1,913,297 | ||||||
Prepaid
expenses and other current assets
|
2,854,625 | 676,077 | ||||||
Notes
receivable
|
513,000 | 513,000 | ||||||
Convertible
bridge loan
|
1,151,000 | - | ||||||
Deferred
income tax assets
|
- | 81,663 | ||||||
Total
current assets
|
15,988,166 | 7,843,576 | ||||||
Property
and equipment, net
|
808,459 | 549,370 | ||||||
Deferred
income tax assets
|
- | 4,937 | ||||||
Deposits
and other assets
|
9,688 | 9,688 | ||||||
Intangible
assets, net
|
97,773 | 47,344 | ||||||
Total
assets
|
$ | 16,904,086 | $ | 8,454,915 | ||||
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
||||||||
Current
liabilities
|
||||||||
Notes
payable
|
$ | - | $ | 20,223 | ||||
Accounts
payable
|
2,473,835 | 1,626,390 | ||||||
Accrued
liabilities
|
136,645 | 212,754 | ||||||
Accrued
wages and wage related expenses
|
151,086 | 121,112 | ||||||
Deferred
revenue
|
269,737 | 366,590 | ||||||
Deferred
income tax liability
|
1,235,948 | - | ||||||
Sales
returns liability
|
335,574 | 291,119 | ||||||
Total
current liabilities
|
4,602,825 | 2,638,188 | ||||||
Total
liabilities
|
4,602,825 | 2,638,188 | ||||||
Stockholders'
equity
|
||||||||
Common
stock, $0.001 par value; 50,000,000 shares authorized;
|
||||||||
21,690,195
and 19,163,995 shares issued and outstanding, respectively
|
21,691 | 19,165 | ||||||
Warrants
to purchase common stock
|
456,579 | 739,338 | ||||||
Additional
paid-in capital
|
7,470,076 | 3,808,280 | ||||||
Cumulative
translation adjustment
|
(133,894 | ) | (106,630 | ) | ||||
Retained
earnings
|
4,486,809 | 1,356,574 | ||||||
Total
stockholders' equity
|
12,301,261 | 5,816,727 | ||||||
Total
liabilities and stockholders' equity
|
$ | 16,904,086 | $ | 8,454,915 | ||||
Three
months ended
|
Nine
months ended
|
|||||||||||||||
September
30, 2009
|
September
30, 2008
|
September
30, 2009
|
September
30, 2008
|
|||||||||||||
Net
sales
|
$ | 9,728,528 | $ | 6,854,916 | $ | 26,964,159 | $ | 12,460,812 | ||||||||
Cost
of sales
|
4,521,555 | 2,416,988 | 11,055,903 | 3,920,003 | ||||||||||||
Gross
profit
|
5,206,973 | 4,437,928 | 15,908,256 | 8,540,809 | ||||||||||||
Operating
expenses:
|
||||||||||||||||
Advertising
and marketing
|
1,327,126 | 1,169,073 | 4,168,854 | 2,483,356 | ||||||||||||
Selling,
general and administrative
|
2,408,559 | 1,898,149 | 6,801,112 | 4,715,538 | ||||||||||||
Total
operating expenses
|
3,735,685 | 3,067,222 | 10,969,966 | 7,198,894 | ||||||||||||
Income
from operations
|
1,471,288 | 1,370,706 | 4,938,290 | 1,341,915 | ||||||||||||
Other
income (expense):
|
||||||||||||||||
Interest
expense
|
(62,034 | ) | (796 | ) | (64,654 | ) | (3,470 | ) | ||||||||
Interest
and other income
|
49,107 | 49,139 | 141,381 | 178,069 | ||||||||||||
Total
other (expense) income
|
(12,927 | ) | 48,343 | 76,727 | 174,599 | |||||||||||
Income
before provision for income taxes
|
1,458,361 | 1,419,049 | 5,015,017 | 1,516,514 | ||||||||||||
Income
tax provision
|
(550,280 | ) | (529,306 | ) | (1,884,432 | ) | (566,236 | ) | ||||||||
Net
income
|
$ | 908,081 | $ | 889,743 | $ | 3,130,585 | $ | 950,278 | ||||||||
Basic
net income per common share
|
$ | 0.04 | $ | 0.05 | $ | 0.15 | $ | 0.05 | ||||||||
Diluted
net income per common share
|
$ | 0.04 | $ | 0.05 | $ | 0.14 | $ | 0.05 | ||||||||
Weighted
average number of shares outstanding - basic
|
21,540,033 | 18,981,386 | 20,630,819 | 18,956,290 | ||||||||||||
Weighted
average number of shares outstanding - diluted
|
24,252,718 | 19,436,146 | 22,902,264 | 19,290,502 | ||||||||||||
For
the Nine Months Ended
September
30,
|
||||||||
2009
|
2008
|
|||||||
Cash
flows from operating activities
|
||||||||
Net
income
|
$ | 3,130,585 | $ | 950,278 | ||||
Adjustments
to reconcile net income to net cash
|
||||||||
used
in operating activities:
|
||||||||
Non-cash
expense related to stock-based compensation
|
498,781 | 211,510 | ||||||
Depreciation
and amortization
|
171,973 | 112,162 | ||||||
Deferred
income tax expense
|
- | 566,235 | ||||||
Bad
debt expense
|
86,921 | 56,170 | ||||||
Gain
on asset disposals
|
- | (12,215 | ) | |||||
Foreign
currency translation adjustment
|
(27,264 | ) | 18,361 | |||||
Changes
in assets and liabilities
|
||||||||
Accounts
receivable
|
(2,371,446 | ) | (2,410,546 | ) | ||||
Inventories
|
(1,575,053 | ) | (400,665 | ) | ||||
Prepaid
advertising
|
- | 58,247 | ||||||
Prepaid
expenses and other current assets
|
(2,178,548 | ) | (503,642 | ) | ||||
Accounts
payable
|
847,071 | 642,404 | ||||||
Accrued
liabilities
|
(76,109 | ) | (26,015 | ) | ||||
Accrued
wages and wage related expenses
|
29,974 | 9,445 | ||||||
Deferred
revenues
|
(96,853 | ) | 7,598 | |||||
Deferred
tax liabilities
|
1,322,548 | - | ||||||
Sales
return liability
|
44,455 | 206,174 | ||||||
Net
cash used in operating activities
|
(192,965 | ) | (514,499 | ) | ||||
Cash
flows from investing activities
|
||||||||
Payments
for intangible assets
|
(54,636 | ) | (1,800 | ) | ||||
Convetible
bridge loan
|
(1,151,000 | ) | - | |||||
Short-term
loans
|
- | (450,000 | ) | |||||
Proceeds
from disposal of equipment
|
- | 2,994 | ||||||
Purchase
of property and equipment
|
(426,831 | ) | (248,047 | ) | ||||
Net
cash used in investing activities
|
(1,632,467 | ) | (696,853 | ) | ||||
Cash
flows from financing activities
|
||||||||
Payments
on debt
|
(20,223 | ) | (18,030 | ) | ||||
Proceeds
from issuance of common stock and warrants
|
2,882,782 | 50,000 | ||||||
Net
cash provided by financing activities
|
2,862,559 | 31,970 | ||||||
Net
increase (decrease) in cash and cash equivalents
|
1,037,127 | (1,179,382 | ) | |||||
Cash
and cash equivalents at beginning of the period
|
1,065,652 | 2,129,215 | ||||||
Cash
and cash equivalents at end of the period
|
$ | 2,102,779 | $ | 949,833 | ||||
Supplemental
disclosure of cash flow information
|
||||||||
Cash
paid during the period for interest
|
$ | 62,034 | $ | 3,699 | ||||
Net
Income
|
Weighted
Average
Shares
|
Per Share
Amount
|
|||||||
Three
months ended September 30, 2009:
|
|||||||||
Basic
EPS
|
$
|
908,081
|
21,540,033
|
$
|
0.04
|
||||
Effect
of common stock equivalents
|
—
|
2,712,685
|
|||||||
Diluted
EPS
|
$
|
908,081
|
24,252,718
|
$
|
0.04
|
||||
Three
months ended September 30, 2008:
|
|||||||||
Basic
EPS
|
$
|
889,743
|
18,981,386
|
$
|
0.05
|
||||
Effect
of common stock equivalents
|
—
|
454,760
|
|||||||
Diluted
EPS
|
$
|
889,743
|
19,436,146
|
$
|
0.05
|
Net
Income
|
Weighted
Average
Shares
|
Per Share
Amount
|
|||||||
Nine
months ended September 30, 2009:
|
|||||||||
Basic
EPS
|
$
|
3,130,585
|
20,630,676
|
$
|
0.15
|
||||
Effect
of common stock equivalents
|
—
|
2,271,445
|
|||||||
Diluted
EPS
|
$
|
3,130,585
|
22,902,121
|
$
|
0.14
|
||||
Nine
months ended September 30, 2008:
|
|||||||||
Basic
EPS
|
$
|
950,278
|
18,956,290
|
$
|
0.05
|
||||
Effect
of common stock equivalents
|
—
|
334,212
|
|||||||
Diluted
EPS
|
$
|
950,278
|
19,290,502
|
$
|
0.05
|
September 30, 2009
|
December 31, 2008
|
|||||||
Accounts
receivable
|
$ | 6,184,268 | $ | 3,812,823 | ||||
Less:
Allowance for doubtful accounts
|
(305,856 | ) | (218,936 | ) | ||||
Accounts
receivable, net
|
$ | 5,878,412 | $ | 3,593,887 |
September 30, 2009
|
December 31, 2008
|
|||||||
Finished
goods
|
$ | 957,172 | $ | 204,766 | ||||
Raw
materials
|
2,531,178 | 1,708,531 | ||||||
Total
inventory
|
$ | 3,488,350 | $ | 1,913,297 |
Useful Lives
|
September 30, 2009
|
December 31, 2008
|
|||||||
Computer
equipment and software
|
3
to 5 years
|
$ | 394,096 | $ | 271,287 | ||||
Equipment
|
3
to7 years
|
432,109 | 314,412 | ||||||
Furniture
and fixtures
|
7
years
|
76,169 | 56,021 | ||||||
Automobiles
|
5
years
|
93,002 | 84,955 | ||||||
Leasehold
improvements
|
1
to 2.75 years
|
250,853 | 103,821 | ||||||
Total
property and equipment
|
1,257,327 | 830,496 | |||||||
Less:
accumulated depreciation
|
(448,868 | ) | (281,126 | ) | |||||
Total
property and equipment, net
|
$ | 808,459 | $ | 549,370 |
Description
|
Balance
|
|||
Interest
and other receivables
|
$ | 333,715 | ||
Inventory
deposits
|
2,364,800 | |||
Other
|
156,110 | |||
Total
|
$ | 2,854,625 |
Useful Life
|
September 30, 2009
|
December 31, 2008
|
|||||||
Internet
addresses
|
10
years
|
$ | 99,606 | $ | 44,968 | ||||
Patents
|
Finite
|
11,040 | 11,040 | ||||||
Less:
accumulated amortization
|
(12,873 | ) | (8,664 | ) | |||||
Total
intangible assets, net
|
$ | 97,773 | $ | 47,344 |
Options Granted
|
Exercise Price
|
Price at Grant Date
|
Expected Life
|
Volatility*
|
Discount Rate
|
Value
|
850,000
|
$1.23
|
$1.23
|
5
years
|
59%
|
0.19%
|
$513,719
|
25,000
|
$2.53
|
$2.53
|
5
years
|
62%
|
0.04%
|
$32,376
|
3,000
|
$2.93
|
$2.93
|
5
years
|
62%
|
0.08%
|
$4,503
|
5,000
|
$4.11
|
$4.11
|
2.5
years
|
65%
|
0.08%
|
$8,048
|
1,000
|
$6.40
|
$6.40
|
2.5
years
|
67%
|
0.08%
|
$2,579
|
1,500
|
$5.28
|
$5.28
|
2.5
years
|
67%
|
0.08%
|
$3,188
|
220,000
|
$5.05
|
$5.05
|
2.5
years
|
67%
|
0.08%
|
$447,249
|
* Volatility is
calculated using historical volatility to provide an implied volatility as
the Company’s options do not trade
|
ITEM
2.
|
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
·
|
For
the quarter ended September 30, 2009, salaries and related taxes increased
by $310,798 to $1,077,390 from $766,592 for the quarter ended September
30, 2008. The increase is due to the increase in our staff as
we continue to build the people infrastructure to meet the demand for our
product and continue to develop new products and offerings and
compensation expense related to our stock based compensation plan of
$190,632.
|
·
|
For
the quarter ended September 30, 2009, marketing, advertising and promotion
expenses were $1,327,126, an increase of $158,053 as compared to
$1,169,073 for the quarter ended September 30, 2008. We
continue to invest heavily in the development of the invisibleSHIELD brand
through internet key word advertising and through traditional print media,
television and radio advertising and through the use of
coupons. 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 adverting and promotion of our products
as well as sales training. During the fiscal year 2009, we
intend to continue to expand our marketing efforts related to our
products.
|
·
|
For the quarter ended September
30, 2009, other selling, general and administrative expenses, net of
salaries and related taxes described above, were $1,331,169 as compared to
$1,131,557 for the quarter ended September 30, 2008. The changes by
category are summarized in the table
below:
|
Three
Months Ended September 30,
2009
|
Three
Months Ended September 30,
2008
|
|||||||
Professional
fees
|
$ | 162,801 | $ | 42,441 | ||||
Rent
|
150,764 | 97,028 | ||||||
Credit
card and bank fees
|
130,495 | 113,063 | ||||||
Commissions
|
297,915 | 157,676 | ||||||
Other
|
589,194 | 721,349 | ||||||
Total
|
$ | 1,331,169 | $ | 1,131,557 |
·
|
For
the nine months ended September 30, 2009, salaries and related taxes
increased by $550,714 to $2,998,223 from $2,136,712 for the nine months
ended September 30, 2008. The increase is due to the increase
in our staff as we continue to build the people infrastructure to meet the
demand for our product and continue to develop new products and offerings
and compensation expense related to our stock based compensation plan of
$498,781.
|
·
|
For
the nine months ended September 30, 2009, marketing, advertising and
promotion expenses were $4,168,854, an increase of $1,685,498 as compared
to $2,483,356 for the nine months ended September 30, 2008. We
continue to invest heavily in the development of the invisibleSHIELD brand
through internet key word advertising and through traditional print media,
television and radio advertising and through the use of
coupons. 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 adverting and promotion of our products
as well as sales training. During the fiscal year 2009, we
intend to continue to expand our marketing efforts related to our
products.
|
·
|
For the nine months ended
September 30, 2009, other selling, general and administrative expenses,
net of salaries and related taxes described above, were $3,802,889 as
compared to $2,578,826 for the nine months ended September 30, 2008. The
changes by category are summarized in the table
below:
|
Nine
Months Ended September 30,
2009
|
Nine
Months Ended September 30,
2008
|
|||||||
Professional
fees
|
$ | 385,499 | $ | 113,053 | ||||
Rent
|
373,018 | 277,574 | ||||||
Credit
card and bank fees
|
479,242 | 267,192 | ||||||
Commissions
|
719,352 | 204,263 | ||||||
Other
|
1,845,778 | 1,716,744 | ||||||
Total
|
$ | 3,802,889 | $ | 2,578,826 |
§
|
60,000
shares of common stock to employees valued at
$200,800;
|
§
|
stock
options for 850,000 common shares exercisable at $1.23 per share expiring
in 5 years and vesting 33% at 12 months, 33% at 24 months and 33% at 36
months. The options were valued at $513,719 or $0.60 per option using the
Black-Scholes option pricing method with the following assumptions: stock
price $1.23, expected life of 5 years, volatility of 59% (using historical
volatility to provide an implied volatility as the Company’s options to
not trade) and a discount rate of
0.19%;
|
§
|
stock
options to a legal consultant for 30,000 common shares exercisable at
$1.42 per share expiring in 5 years and vesting
immediately. The options were valued at $20,863 or $0.70 per
share using the Black-Scholes method with the following assumptions: stock
price $1.42, expected life of 5 years, volatility of 59% (using historical
volatility to provide an implied volatility as the Company’s options to
not trade) and a discount rate of
0.18%;
|
§
|
warrants
for consulting services for 20,000 common shares exercisable at $2.05 per
share expiring in 1 year and vesting immediately. The warrants
were valued at $21,155 using the Black-Scholes method with the following
assumptions: stock price $2.05, expected life of 5 years; volatility of
62% (using historical volatility to provide an implied volatility as the
Company’s options to not trade) and a discount rate of
0.13%.
|
§
|
warrants
for sales commissions to an independent third party for 175,000 common
shares exercisable at $6.40 per share expiring in 1 year and vesting
immediately. The warrants were valued at $115,356 using the
Black-Scholes method with the following assumptions: stock price $6.40,
expected life of .2 years, volatility of 66% (using historical volatility
to provide an implied volatility as the Company’s options to not trade)
and a discount rate of 0.14%.
|
§
|
stock
options for 25,000 common shares exercisable at $2.53 per share expiring
in 5 years and vesting over a three year schedule. The options
were valued at $32,376 using the Black-Scholes option pricing method with
the following assumptions: stock price $2.53, expected life of 5 years,
volatility of 62% (using historical volatility to provide an implied
volatility as the Company’s options to not trade) and a discount rate of
0.04%.
|
§
|
stock
options for 3,000 common shares exercisable at $2.93 per share expiring in
5 years and vesting over a three year schedule. The options
were valued at $4,503 using the Black-Scholes option pricing method with
the following assumptions: stock price $2.93, expected life of 5 years,
volatility of 62% (using historical volatility to provide an implied
volatility as the Company’s options to not trade) and a discount rate of
0.08%.
|
§
|
stock
options for 5,000 common shares exercisable at $4.11 per share expiring in
5 years and vesting over a 3 year schedule. The options were
valued at $8,048 using the Black-Scholes option pricing method with the
following assumptions: stock price $4.11, expected life of 2.5 years,
volatility of 65% (using historical volatility to provide an implied
volatility as the Company’s options to not trade) and a discount rate of
0.11%).
|
§
|
stock
options for 1,000 common shares exercisable at $6.40 per share expiring in
5 years and vesting over a 3 year schedule. The options were
valued at $2,579 using the Black-Scholes option pricing method with the
following assumptions: stock price $6.40, expected life of 2.5 years,
volatility of 67% (using historical volatility to provide an implied
volatility as the Company’s options to not trade) and a discount rate of
0.14%).
|
§
|
stock
options for 1,500 common shares exercisable at $5.28 per share expiring in
5 years and vesting over a 3 year schedule. The options were
valued at $3,188 using the Black-Scholes option pricing method with the
following assumptions: stock price $5.28, expected life of 2.5 years,
volatility of 67% (using historical volatility to provide an implied
volatility as the Company’s options to not trade) and a discount rate of
0.08%).
|
§
|
stock
options for 220,000 common shares exercisable at $5.05 per share expiring
in 5 years and vesting over a 3 year schedule. The options were
valued at $447,249 using the Black-Scholes option pricing method with the
following assumptions: stock price $5.05, expected life of 2.5 years,
volatility of 67% (using historical volatility to provide an implied
volatility as the Company’s options to not trade) and a discount rate of
0.08%).
|
§
|
632,632
shares of common stock in exercise of options to purchase 632,632
shares. We received proceeds of $467,644 related to the
exercise of the options; and
|
§
|
1,833,568
shares of common stock in exercise of warrants to purchase 1,833,568
shares. We received proceeds of $2,348,763 related to the
exercise of the warrants;
|
a.
|
Exhibits:
The following Exhibits are filed with this Form 10-Q pursuant to Item
601(a) of Regulation S-K:
|
Exhibit No. | Description of Exhibit |
31.1
|
Certification
of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
31.2
|
Certification
of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
32.1
|
Certification
of Chief Executive Officer pursuant to 18 U.S. C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
32.2
|
Certification
of Chief Financial Officer pursuant to 18 U.S. C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
ZAGG
INCORPORATED
|
|||
Date:
November 12, 2009
|
By:
|
/s/ Robert G. Pedersen II | |
Robert
G. Pedersen II,
|
|||
President
and Chief Executive Officer
|
|||
Date:
November 12, 2009
|
By:
|
/s/ Brandon T. O'Brien | |
Chief
Financial Officer
(Principal
financial officer)
|
|||