x
|
Quarterly
Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of
1934 for the quarterly period ended September 30, 2008,
or
|
o
|
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
|
||||
Item
1.
|
Financial
Statements (Unaudited)
|
|||
Condensed
Consolidated Balance Sheets - As of September 30, 2008 and December
31,
2007
|
3
|
|||
Condensed
Consolidated Statements of Operations for the Three and Nine Months
Ended
|
||||
September
30, 2008 and 2007
|
4
|
|||
Condensed
Consolidated Statements of Cash Flows for the Nine Months Ended
|
||||
September
30, 2008 and 2007
|
5
|
|||
Notes
to Condensed Consolidated Financial Statements
|
7
|
|||
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
13
|
||
Item
3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
19
|
||
Item
4T.
|
Controls
and Procedures
|
19
|
||
PART
II - OTHER
INFORMATION
|
||||
Item
1.
|
Legal
Proceedings
|
20
|
||
Item
1A.
|
Risk
Factors
|
20
|
||
|
||||
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
20
|
||
Item
3.
|
Defaults
Upon Senior Securities
|
20
|
||
Item
4.
|
Submission
of Matters to a Vote of Security Holders
|
21
|
||
Item
5.
|
Other
Information
|
21
|
||
|
||||
Item
6.
|
Exhibits
|
21
|
September
30,
|
|
December
31,
|
|||||
2008
|
|
2007
|
|||||
ASSETS
|
|||||||
Current
assets
|
|||||||
Cash
|
$
|
949,833
|
$
|
2,129,215
|
|||
Accounts
receivable, net
|
2,756,822
|
402,446
|
|||||
Inventories
|
847,709
|
447,044
|
|||||
Prepaid
advertising
|
146,729
|
204,976
|
|||||
Prepaid
expenses and other current assets
|
1,060,177
|
122,107
|
|||||
Deferred
income tax assets
|
12,829
|
12,829
|
|||||
Total
current assets
|
5,774,099
|
3,318,617
|
|||||
Property
and equipment, net
|
464,297
|
328,077
|
|||||
Deferred
income tax assets
|
-
|
444,118
|
|||||
Deposits
and other assets
|
58,334
|
30,547
|
|||||
Intangible
assets, net
|
45,365
|
46,894
|
|||||
Total
assets
|
$
|
6,342,095
|
$
|
4,168,253
|
|||
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|||||||
Current
liabilities
|
|||||||
Notes
payable
|
$
|
24,060
|
$
|
42,090
|
|||
Accounts
payable
|
1,147,982
|
505,575
|
|||||
Accrued
liabilities
|
9,799
|
35,814
|
|||||
Accrued
wages and wage related expenses
|
104,982
|
95,537
|
|||||
Deferred
licensing revenue
|
108,509
|
100,911
|
|||||
Deferred
income tax liability
|
122,117
|
-
|
|||||
Sales
returns liability
|
230,035
|
23,861
|
|||||
Total
current liabilities
|
1,747,484
|
803,788
|
|||||
Total
liabilities
|
1,747,484
|
803,788
|
|||||
Stockholders'
equity
|
|||||||
Common
stock, $0.001 par value; 50,000,000 shares authorized;
|
|||||||
19,093,995
and 18,853,995 shares issued and outstanding, respectively
|
19,095
|
18,855
|
|||||
Warrants
to purchase common stock
|
739,338
|
750,476
|
|||||
Additional
paid-in capital
|
3,613,796
|
3,341,388
|
|||||
Cumulative
translation adjustment
|
14,495
|
(3,866
|
)
|
||||
Retained
earnings (deficit)
|
207,887
|
(742,388
|
)
|
||||
Total
stockholders' equity
|
4,594,611
|
3,364,465
|
|||||
Total
liabilities and stockholders' equity
|
$
|
6,342,095
|
$
|
4,168,253
|
Three
Months Ended
|
Nine
Months Ended
|
||||||||||||
September
30, 2008
|
|
September
30, 2007
|
September
30, 2008
|
September
30, 2007
|
|||||||||
Net
sales
|
$
|
6,854,916
|
$
|
1,437,408
|
$
|
12,460,812
|
$
|
3,034,714
|
|||||
Cost
of sales
|
2,416,988
|
299,027
|
3,920,003
|
689,858
|
|||||||||
Gross
profit
|
4,437,928
|
1,138,381
|
8,540,809
|
2,344,856
|
|||||||||
Operating
expenses:
|
|||||||||||||
Advertising
and marketing
|
1,169,073
|
227,624
|
2,483,356
|
467,410
|
|||||||||
Selling,
general and administrative
|
1,898,149
|
1,660,722
|
4,715,538
|
2,921,952
|
|||||||||
Total
operating expenses
|
3,067,222
|
1,888,346
|
7,198,894
|
3,389,362
|
|||||||||
Income
(loss) from operations
|
1,370,706
|
(749,965
|
)
|
1,341,915
|
(1,044,506
|
)
|
|||||||
Other
income (expense):
|
|||||||||||||
Interest
expense
|
(796
|
)
|
(4,132
|
)
|
(3,470
|
)
|
(30,231
|
)
|
|||||
Interest
and other income
|
49,139
|
20,903
|
178,069
|
24,988
|
|||||||||
Total
other income (expense)
|
48,343
|
16,771
|
174,599
|
(5,243
|
)
|
||||||||
Income
(loss) before benefit (provision) for income
taxes
|
1,419,049
|
(733,194
|
)
|
1,516,514
|
(1,049,749
|
)
|
|||||||
Income
tax benefit (provision)
|
(529,306
|
)
|
(234
|
)
|
(566,236
|
)
|
(2,544
|
)
|
|||||
Net
income (loss)
|
$
|
889,743
|
$
|
(733,428
|
)
|
$
|
950,278
|
$
|
(1,052,293
|
)
|
|||
Basic
net income (loss) per common share
|
$
|
0.05
|
$
|
(0.04
|
)
|
$
|
0.05
|
$
|
(0.07
|
)
|
|||
Diluted
net income (loss) per common share
|
$
|
0.05
|
$
|
(0.04
|
)
|
$
|
0.05
|
$
|
(0.07
|
)
|
|||
Weighted
average number of shares outstanding - basic
|
18,981,386
|
17,631,495
|
18,956,290
|
16,131,123
|
|||||||||
Weighted
average number of shares outstanding - diluted
|
19,436,146
|
17,631,495
|
19,290,502
|
16,131,123
|
For
the Nine Months Ended
|
|||||||
September
30, 2008
|
|
September
30, 2007
|
|||||
Cash
flows from operating activities
|
|||||||
Net
income (loss)
|
$
|
950,278
|
$
|
(1,052,293
|
)
|
||
Adjustments
to reconcile net income (loss) to net cash
|
|||||||
used
in operating activities:
|
|||||||
Non-cash
expense related to stock-based compensation
|
211,510
|
800,000
|
|||||
Depreciation
and amortization
|
112,162
|
58,430
|
|||||
Deferred
income tax expense
|
566,235
|
2,950
|
|||||
Bad
debt expense
|
56,170
|
-
|
|||||
Gain
on asset disposals
|
(12,215
|
)
|
-
|
||||
Currency
exchange loss (gain)
|
18,361
|
(54
|
)
|
||||
Changes
in assets and liabilities
|
|||||||
Accounts
receivable
|
(2,410,546
|
)
|
(74,518
|
)
|
|||
Inventories
|
(400,665
|
)
|
(226,403
|
)
|
|||
Due
from employees
|
-
|
3,714
|
|||||
Prepaid
advertising
|
58,247
|
(205,782
|
)
|
||||
Prepaid
expenses and other current assets
|
(475,855
|
)
|
(108,487
|
)
|
|||
Other
assets
|
(27,787
|
)
|
(18,593
|
)
|
|||
Accounts
payable
|
642,404
|
21,280
|
|||||
Accrued
liabilities
|
(26,015
|
)
|
(1,288
|
)
|
|||
Accrued
wages and wage related expenses
|
9,445
|
(48,766
|
)
|
||||
Deferred
licensing revenues
|
7,598
|
8,152
|
|||||
Sales
return liability
|
206,174
|
(15,401
|
)
|
||||
Net
cash used in operating activities
|
(514,499
|
)
|
(857,059
|
)
|
|||
Cash
flows from investing activities
|
|||||||
Payments
for intangible assets
|
(1,800
|
)
|
(48,764
|
)
|
|||
Short-term
loans
|
(450,000
|
)
|
-
|
||||
Proceeds
from disposal of equipment
|
2,994
|
-
|
|||||
Purchase
of property and equipment
|
(248,047
|
)
|
(114,356
|
)
|
|||
Net
cash used in investing activities
|
(696,853
|
)
|
(163,120
|
)
|
|||
Cash
flows from financing activities
|
|||||||
Payments
on debt
|
(18,030
|
)
|
(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
|
31,970
|
2,698,550
|
|||||
Net
(decrease) increase in cash and cash equivalents
|
(1,179,382
|
)
|
1,678,371
|
||||
Cash
and cash equivalents at beginning of the period
|
2,129,215
|
468,382
|
|||||
Cash
and cash equivalents at end of the period
|
$
|
949,833
|
$
|
2,146,753
|
|||
Supplemental
disclosure of cash flow information
|
|||||||
Cash
paid during the period for interest
|
$
|
3,699
|
$
|
16,736
|
Net
Income
(Loss)
|
Weighted
Average
Shares
|
Per Share
Amount
|
||||||||
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
|
|||||
Three
months ended September 30, 2007:
|
||||||||||
Basic
EPS
|
$
|
(733,428
|
)
|
17,631,495
|
$
|
(0.04
|
)
|
|||
Effect
of common stock equivalents
|
—
|
—
|
||||||||
Diluted
EPS
|
$
|
(733,428
|
)
|
17,631,495
|
$
|
(0.04
|
)
|
Net
Income
(Loss)
|
Weighted
Average
Shares
|
Per Share
Amount
|
||||||||
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
|
|||||
Nine
months ended September 30, 2007:
|
||||||||||
Basic
EPS
|
$
|
(1,052,293
|
)
|
16,131,123
|
$
|
(0.07
|
)
|
|||
Effect
of common stock equivalents
|
—
|
—
|
||||||||
Diluted
EPS
|
$
|
(1,052,293
|
)
|
16,131,123
|
$
|
(0.07
|
)
|
September
30, 2008
|
December
31, 2007
|
||||||
Accounts
receivable
|
$
|
2,879,989
|
$
|
436,839
|
|||
Less:
Allowance for doubtful accounts
|
(123,167
|
)
|
(34,393
|
)
|
|||
Accounts
receivable, net
|
$
|
2,756,822
|
$
|
402,446
|
September
30, 2008
|
December
31, 2007
|
||||||
Finished
goods
|
$
|
401,257
|
$
|
230,937
|
|||
Raw
materials
|
446,452
|
216,107
|
|||||
$
|
847,709
|
$
|
447,044
|
Useful
Lives
|
September
30, 2008
|
December
31, 2007
|
||||||||
Computer
equipment and software
|
3
to 5 years
|
$
|
222,598
|
$
|
155,603
|
|||||
Office
equipment
|
3
to7 years
|
264,339
|
144,343
|
|||||||
Furniture
and fixtures
|
7
years
|
40,163
|
15,209
|
|||||||
Automobiles
|
5
years
|
68,995
|
47,063
|
|||||||
Leasehold
improvements
|
1
to 3.13 years
|
102,346
|
91,637
|
|||||||
698,441
|
453,855
|
|||||||||
Less:
accumulated depreciation
|
(234,144
|
)
|
(125,778
|
)
|
||||||
$
|
464,297
|
$
|
328,077
|
Useful
Life
|
September
30, 2008
|
December
31, 2007
|
||||||||
Internet
addresses
|
10
years
|
$
|
44,969
|
$
|
43,169
|
|||||
Less:
accumulated amortization
|
(7,539
|
)
|
(4,210
|
)
|
||||||
$
|
37,430
|
$
|
38,959
|
ITEM 2. |
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
· |
For
the quarter ended September 30, 2008, salaries and related taxes
decreased
by $484,484 to $766,592 from $1,251,076 for the quarter ended September
30, 2008. The decrease is due to the non-cash expense recognized
in 2007
for stock-based compensation when we issued 800,000 shares of our
common
stock to employees and consultants of $800,000 partially offset by
increased wage expenses incurred due to the addition of staff as
we
continue to build the people infrastructure to meet the demand for
our
product and non-cash expense related to equity based compensation
of
$80,821.
|
· |
For
the quarter ended September 30, 2008, marketing, advertising and
promotion
expenses were $1,169,073, an increase of $941,449 as compared to
$227,624
for the quarter ended September 30, 2007. We continue to invest heavily
in
the development of the invisibleSHIELD brand through internet key
word
advertising, traditional print media 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 fiscal 2008, we intend to continue
to
expand our marketing efforts related to our
products.
|
· |
For
the quarter ended September 30, 2008, other selling, general and
administrative expenses, net of salaries and related taxes described
above, were $1,131,557 as compared to $409,646 for the quarter ended
September 30, 2007. The increase was attributable to the increase
in
operations as we implement our business plan and is summarized
below:
|
Three
Months Ended September
30, 2008
|
Three
Months Ended September
30, 2007
|
||||||
Professional
fees
|
$
|
42,441
|
$
|
25,795
|
|||
Contract
labor
|
183,805
|
80,421
|
|||||
Insurance
|
34,468
|
24,327
|
|||||
Depreciation
and amortization
|
42,069
|
21,455
|
|||||
Rent
|
97,028
|
59,547
|
|||||
Travel
and entertainment
|
46,493
|
29,518
|
|||||
Telephone
and utilities
|
33,393
|
20,586
|
|||||
Printing
expenses
|
34,845
|
12,068
|
|||||
Office
supplies
|
18,536
|
17,636
|
|||||
Credit
card and bank fees
|
113,063
|
37,434
|
|||||
Investor
relations
|
103,521
|
48,185
|
|||||
Commissions
|
157,676
|
2,533
|
|||||
Consulting
|
30,000
|
--
|
|||||
Other
|
194,219
|
30,141
|
|||||
Total
|
$
|
1,131,557
|
$
|
409,646
|
· |
For
the nine months ended September 30, 2008, salaries and related taxes
increased by $231,193 to $2,136,712 from $1,905,519 for the nine
months
ended September 30, 2007. The 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 $157,110,
partially offset by the non-cash expense recognized for the nine
months
ended September 30, 2007 of $800,000 related to the 800,000 shares
of our
common stock issued to employees and
consultants.
|
· |
For
the nine months ended September 30, 2008, marketing, advertising
and
promotion expenses were $2,483,356, an increase of $2,015,946 as
compared
to $467,410 for the nine months ended September 30, 2007. We continue
to
invest heavily in the development of the invisibleSHIELD brand through
internet key word advertising and through traditional print media
and
radio advertising. During the nine months ended September 30, 2008,
we
have 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 ran for specific
time
frames with expiration dates and the redemption of the coupons of
$915,113
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 adverting and promotion of our products as well as sales training.
During fiscal 2008, we intend to continue to expand our marketing
efforts
related to our products.
|
· |
For
the nine months ended September 30, 2008, other selling, general
and
administrative expenses net of salaries and related taxes described
above,
were $2,578,826 as compared to $978,203 for the nine months ended
September 30, 2007. The increase was attributable to the increase
in
operations as we implement our business plan and is summarized
below:
|
Nine
Months Ended September
30, 2008
|
Nine
Months Ended September
30, 2007
|
||||||
Professional
fees
|
$
|
113,053
|
$
|
248,240
|
|||
Contract
labor
|
480,443
|
120,650
|
|||||
Insurance
|
148,650
|
52,536
|
|||||
Depreciation
and amortization
|
111,413
|
58,430
|
|||||
Rent
|
277,574
|
114,538
|
|||||
Travel
and entertainment
|
139,394
|
68,565
|
|||||
Telephone
and utilities
|
95,469
|
44,893
|
|||||
Printing
expenses
|
54,157
|
31,719
|
|||||
Office
supplies
|
53,023
|
41,776
|
|||||
Credit
card and bank fees
|
267,192
|
73,447
|
|||||
Investor
relations
|
235,708
|
52,584
|
|||||
Commissions
|
204,263
|
5,399
|
|||||
Consulting
|
71,500
|
38,500
|
|||||
Other
|
326,987
|
65,156
|
|||||
Total
|
$
|
2,578,826
|
$
|
1,016,433
|
Item 3. |
Quantitative
and Qualitative Disclosures About Market
Risk
|
Item 4T. |
Controls
and Procedures
|
Item 1. |
Legal
Proceedings
|
Item 1A: |
Risk
Factors
|
Item 2. |
Unregistered
Sales of Equity Securities and Use of
Proceeds
|
Item 3. |
Defaults
Upon Senior Securities
|
Item 4. |
Submission
of Matters to a Vote of Security
Holders
|
Item 5. |
Other
Information
|
Item 6. |
Exhibits
|
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 14, 2008 | /s/ ROBERT G. PEDERSEN II | |
Robert G. Pedersen II, |
||
President and Chief Executive Officer |
Date: November 14, 2008 | /s/ BRANDON T. O’BRIEN | |
Brandon T. O’Brien, |
||
Chief Financial Officer | ||
(Principal financial officer) |