Unassociated Document
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-QSB
(Mark
one)
x
|
Quarterly
Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of
1934 for the quarterly period ended June 30, 2007,
or
|
o
|
Transition
Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of
1934 for the transition period from ______________ to
_____________.
|
Commission
File No. 000-52211
ZAGG
INCORPORATED
(Exact
name of registrant as specified in its charter)
Nevada
|
20-2559624
|
(State
or other jurisdiction of incorporation or organization)
|
(I.R.S.
Employer Identification No.)
|
3855
South 500 West, Suite J
Salt
Lake City, Utah 84115
(Address
of principal executive offices with zip code)
(801)
263-0699
(Registrant's
telephone number, including area code)
Check
whether the issuer (1) has filed all reports required to be filed by Section
13
or 15(d) of the Securities Exchange Act of 1934 during the preceding 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
x Noo.
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-25 of the Exchange Act).
Yes
o No x
State
the
number of shares outstanding of each of the issuer’s classes of common equity,
as of the latest practicable date: 17,943,995
common shares as of August 7, 2007.
ZAGG
INCORPORATED
FORM
10-QSB
TABLE
OF CONTENTS
PART
I - FINANCIAL INFORMATION
|
|
Page
|
Item
1.
|
Financial
Statements (Unaudited)
|
|
|
|
|
|
Condensed
Balance Sheets - As of June 30, 2007 and December 31, 2006
|
3
|
|
|
|
|
Condensed
Statements of Operations for the Three and Six Months
Ended
|
|
|
June
30, 2007 and 2006
|
4
|
|
|
|
|
Condensed
Statements of Cash Flows for the Six Months Ended
|
|
|
June
30, 2007 and 2006
|
5
|
|
|
|
|
Notes
to Condensed Financial Statements
|
7
|
|
|
|
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
13
|
|
|
|
Item
3.
|
Controls
and Procedures
|
19
|
|
|
|
|
|
|
PART
II - OTHER INFORMATION
|
|
|
|
Item
1.
|
Legal
Proceedings
|
20
|
|
|
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
20
|
|
|
|
Item
3.
|
Defaults
Upon Senior Securities
|
23
|
|
|
|
Item
4.
|
Submission
of Matters to a Vote of Security Holders
|
23
|
|
|
|
Item
5.
|
Other
Information
|
23
|
|
|
|
Item
6.
|
Exhibits
|
23
|
ZAGG
INCORPORATED
CONDENSED
BALANCE SHEETS
(Unaudited)
|
|
June
30,
|
|
December
31,
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
Current
assets
|
|
|
|
|
|
|
|
Cash
|
|
$
|
993,380
|
|
$
|
468,382
|
|
Accounts
receivable, net
|
|
|
64,427
|
|
|
121,149
|
|
Inventories
|
|
|
152,922
|
|
|
102,522
|
|
Prepaid
income taxes
|
|
|
44,361
|
|
|
44,361
|
|
Prepaid
advertising
|
|
|
124,076
|
|
|
-
|
|
Prepaid
expenses and other current assets
|
|
|
182,811
|
|
|
31,724
|
|
Deferred
income tax assets
|
|
|
16,796
|
|
|
19,468
|
|
Due
from employees
|
|
|
-
|
|
|
3,714
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
1,578,773
|
|
|
791,320
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
226,629
|
|
|
221,474
|
|
|
|
|
|
|
|
|
|
Deposits
and other assets
|
|
|
37,119
|
|
|
12,119
|
|
|
|
|
|
|
|
|
|
Intangible
assets
|
|
|
50,054
|
|
|
2,340
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
1,892,575
|
|
$
|
1,027,253
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
|
Convertible
note payable
|
|
$
|
-
|
|
$
|
250,000
|
|
Convertible
note payable - officer
|
|
|
-
|
|
|
100,000
|
|
Notes
payable
|
|
|
250,000
|
|
|
-
|
|
Advance
on financing transaction
|
|
|
800,000
|
|
|
-
|
|
Accounts
payable
|
|
|
268,994
|
|
|
246,691
|
|
Accrued
liabilities
|
|
|
9,164
|
|
|
33,573
|
|
Accrued
wages and wage related expenses
|
|
|
68,272
|
|
|
121,728
|
|
Deferred
licensing revenue
|
|
|
99,300
|
|
|
86,801
|
|
Sales
returns liability
|
|
|
15,483
|
|
|
32,000
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
1,511,213
|
|
|
870,793
|
|
|
|
|
|
|
|
|
|
Long-term
liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current
deferred income tax liablility, net
|
|
|
12,361
|
|
|
12,087
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
1,523,574
|
|
|
882,880
|
|
|
|
|
|
|
|
|
|
Stockholders'
equity
|
|
|
|
|
|
|
|
Common
stock, $0.001 par value; 50,000,000 shares authorized;
|
|
|
|
|
|
|
|
15,168,995
and 10,175,000 shares issued and outstanding, respectively
|
|
|
15,170
|
|
|
10,175
|
|
Additional
paid-in capital
|
|
|
655,189
|
|
|
117,075
|
|
Retained
(deficit) earnings
|
|
|
(301,358
|
)
|
|
17,123
|
|
|
|
|
|
|
|
|
|
Total
stockholders' equity
|
|
|
369,001
|
|
|
144,373
|
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders' equity
|
|
$
|
1,892,575
|
|
$
|
1,027,253
|
|
See
accompanying notes to condensed financial statements.
ZAGG
INCORPORATED
CONDENSED
STATEMENTS OF OPERATIONS
(Unaudited)
|
|
Three
Months Ended
|
|
Three
Months Ended
|
|
Six
Months Ended
|
|
Six
Months Ended
|
|
|
|
June
30, 2007
|
|
June
30, 2006
|
|
June
30, 2007
|
|
June
30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
804,458
|
|
$
|
638,253
|
|
$
|
1,597,306
|
|
$
|
1,162,511
|
|
Cost
of sales
|
|
|
203,672
|
|
|
182,623
|
|
|
390,831
|
|
|
344,222
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
600,786
|
|
|
455,630
|
|
|
1,206,475
|
|
|
818,289
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
and related taxes
|
|
|
346,035
|
|
|
223,615
|
|
|
654,443
|
|
|
406,351
|
|
Consulting
|
|
|
2,000
|
|
|
-
|
|
|
38,500
|
|
|
73,750
|
|
Advertising
and marketing
|
|
|
78,651
|
|
|
73,760
|
|
|
239,786
|
|
|
161,301
|
|
Other
selling, general and administrative
|
|
|
206,539
|
|
|
126,898
|
|
|
568,287
|
|
|
196,150
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
operating expenses
|
|
|
633,225
|
|
|
424,273
|
|
|
1,501,016
|
|
|
837,552
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)
income from operations
|
|
|
(32,439
|
)
|
|
31,357
|
|
|
(294,541
|
)
|
|
(19,263
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
(expense) income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(20,231
|
)
|
|
-
|
|
|
(26,099
|
)
|
|
-
|
|
Interest
and other income
|
|
|
3,969
|
|
|
6,819
|
|
|
4,085
|
|
|
6,960
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
other (expense) income
|
|
|
(16,262
|
)
|
|
6,819
|
|
|
(22,014
|
)
|
|
6,960
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)
ncome before benefit (provision) for income taxes
|
|
|
(48,701
|
)
|
|
38,176
|
|
|
(316,555
|
)
|
|
(12,303
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax benefit (expense)
|
|
|
408
|
|
|
-
|
|
|
(2,310
|
)
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) income
|
|
|
(48,293
|
)
|
|
38,176
|
|
|
(318,865
|
)
|
|
(12,303
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted net (loss) income per common share
|
|
$
|
(0.00
|
)
|
$
|
0.00
|
|
$
|
(0.02
|
)
|
$
|
(0.00
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of shares outstanding - basic and
diluted
|
|
|
15,168,995
|
|
|
10,000,000
|
|
|
14,596,739
|
|
|
10,000,000
|
|
See
accompanying notes to condensed financial statements.
ZAGG
INCORPORATED
CONDENSED
STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
Six
Months Ended
|
|
Six
Months Ended
|
|
|
|
June
30, 2007
|
|
June
30, 2006
|
|
Cash
flows from operating activities
|
|
|
|
|
|
Net
loss
|
|
$
|
(318,865
|
)
|
$
|
(12,303
|
)
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
Depreciation
|
|
|
36,976
|
|
|
1,750
|
|
Deferred
income tax (benefit) expense
|
|
|
2,946
|
|
|
57,730
|
|
Changes
in assets and liabilities
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
56,722
|
|
|
87,955
|
|
Inventory
|
|
|
(50,400
|
)
|
|
(30,299
|
)
|
Due
from employees
|
|
|
3,714
|
|
|
(33,138
|
)
|
Prepaid
advertising
|
|
|
(124,076
|
)
|
|
-
|
|
Prepaid
expenses and other current assets
|
|
|
(101,087
|
)
|
|
(2,507
|
)
|
Other
assets
|
|
|
(25,000
|
)
|
|
(1,645
|
)
|
Accounts
payable
|
|
|
(24,947
|
)
|
|
56,148
|
|
Accrued
liabilities
|
|
|
(8,716
|
)
|
|
59,136
|
|
Accrued
wages and wage related expenses
|
|
|
(53,456
|
)
|
|
-
|
|
Deferred
licensing revenues
|
|
|
12,499
|
|
|
-
|
|
Sales
return liability
|
|
|
(16,517
|
)
|
|
-
|
|
|
|
|
|
|
|
|
|
Net
cash (used in) provided by operating activities
|
|
|
(610,207
|
)
|
|
182,827
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities
|
|
|
|
|
|
|
|
Payments
for intangible assets
|
|
|
(47,714
|
)
|
|
(123,466
|
)
|
Purchase
of property and equipment
|
|
|
(42,131
|
)
|
|
-
|
|
|
|
|
|
|
|
|
|
Net
cash used in investing activities
|
|
|
(89,845
|
)
|
|
(123,466
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities
|
|
|
|
|
|
|
|
Repayments
on equipment financing payable
|
|
|
-
|
|
|
(7,376
|
)
|
Proceeds
from advance on financing transaction
|
|
|
800,000
|
|
|
-
|
|
Proceeds
from related party notes payable
|
|
|
-
|
|
|
30,063
|
|
Proceeds
from notes payable
|
|
|
200,000
|
|
|
-
|
|
Payments
on convertible note payable - officer
|
|
|
(50,000
|
)
|
|
-
|
|
Capital
contribution
|
|
|
-
|
|
|
25,000
|
|
Proceeds
from sale of common stock
|
|
|
275,050
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Net
cash provided by financing activities
|
|
|
1,225,050
|
|
|
47,687
|
|
|
|
|
|
|
|
|
|
Net
(decrease) increase in cash and cash equivalents
|
|
|
524,998
|
|
|
107,048
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at beginning of the period
|
|
|
468,382
|
|
|
25,661
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at end of the period
|
|
$
|
993,380
|
|
$
|
132,709
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of cash flow information
|
|
|
|
|
|
|
|
Cash
paid during the period for interest
|
|
$
|
12,605
|
|
$
|
-
|
|
Cash
paid during the period for income taxes
|
|
$
|
-
|
|
$
|
8,796
|
|
See
accompanying notes to condensed financial statements.
ZAGG
INCORPORATED
CONDENSED
STATEMENTS OF CASH FLOWS (Continued)
(Unaudited)
Supplemental
schedule of noncash investing and financing activities
For
the Six Months Ended June 30, 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.
For
the Six Months Ended June 30, 2006:
Capital
contribution of $25,000.
See
accompanying notes to condensed financial statements.
ZAGG
INCORPORATED
Notes
to Condensed Financial Statements
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of Presentation
- The
accompanying unaudited condensed financial statements of ZAGG
Incorporated (collectively, the “Company” or “ZAGG”) have been prepared by the
Company pursuant to the rules and regulations of the Securities and Exchange
Commission (the “SEC”). Certain information and footnote disclosures normally
included in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been
condensed or omitted pursuant to such rules and regulations, although the
Company believes that the following disclosures are adequate to make the
information presented not misleading. The Company suggests that these condensed
financial statements be read in conjunction with the financial statements and
the notes thereto included in the Company’s 2006 Annual Report on Form
10-KSB.
These
condensed financial statements reflect all adjustments (consisting only of
normal recurring adjustments) that, in the opinion of management, are necessary
to present fairly the financial position and results of operations of the
Company for the periods presented.
Operating
results for the six months ended June 30, are not necessarily indicative of
the
results that may be expected for the year ending December 31, 2007.
Nature
of Operations
- ZAGG
Incorporated was incorporated in the State of Utah on March 24, 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 we were 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, we redomesticated our
operating subsidiary by reincorporating it in the State of Nevada and on that
same date we merged that subsidiary into Amerasia Khan Enterprises Ltd, the
parent, who was the surviving entity. In connection with the merger we
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 trade name.
The
Company has developed and sells, through the Internet and wholesale distribution
channels, patent-pending protective shields under the name of the invisibleSHIELD™
for electronic devices and other electronics accessories.
Business
Condition -
For the
three months ended June 30, 2007 and 2006, the Company generated revenues of
$804,458 and $638,253, respectively and incurred a net loss of ($48,293) and
net
income of $38,176, respectively. For the six months ended June 30, 2007 and
2006, the Company generated revenues of $1,597,306 and $1,162,511, respectively
and incurred net losses of ($318,865) and ($12,303), respectively, and had
negative cash flow from operating activities of ($610,207) for the six months
ended June 30, 2007 and positive cash flow from operating activities of $182,827
for the six months ended June 30, 2006. As of June 30, 2007, the Company had
stockholders’ equity of $369,001, an accumulated deficit of ($301,358), working
capital of $67,560, advance on financing transaction of $800,000, accounts
payable of $268,994, notes payable of $250,000, deferred licensing revenue
of
$99,300, accrued wages of $68,272, sales returns liability of $15,483 and
accrued liabilities of $9,164. Management believes that existing cash, along
with cash generated from the collection of accounts receivable, the sale of
products and proceeds from the short-term financing will be sufficient to meet
the Company’s cash requirements during the next twelve months.
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
delivery 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 retailers, resellers and end consumers
and from the sale of distributor license fees. 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 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. 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 June
30, 2007 the sales return liability was $15,483.
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 three and six months ended June 30, 2007 and
2006,
warranty expense and the reserve for warranty liability, respectively, was
not
material.
Shipping
and Handling Costs
Amounts
invoiced to customers for shipping and handling are included in sales and were
$118,198 for the six months ended June 30, 2007 and $113,869 for the six months
ended June 30, 2006. Actual shipping and handling costs to ship products to
our
customers are included in cost of sales and were $160,165 for the six months
ended June 30, 2007 and $124,186 for the six months ended June 30,
2006.
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 or 2006, there was no
financial effect to the Company upon implementation of SFAS No.
123R.
Prior
to
January 1, 2006, the Company accounted for stock-based employee compensation
plans (including shares issued under its stock option plans) in accordance
with
APB Opinion No. 25 and followed the pro forma net income, pro forma income
per
share, and stock-based compensation plan disclosure requirements set forth
in
the Statement of Financial Accounting Standards No. 123, Accounting
for Stock-Based Compensation
(“SFAS
No. 123”).
Advertising
General
advertising is expensed as incurred. Advertising expenses for the six months
ended June 30, 2007 were $239,786 and for the six months ended June 30, 2006
were $161,301. The Company capitalizes expenses related to its direct marketing
campaign under the guidance of Statement of Position 93-7 Reporting
on Advertising Costs (“SOP
93-7”). The company has capitalized $124,076 as prepaid advertising related to
the direct marketing campaign, these costs relate to the production of an
infomercial spotlighting the invisibleSHIELD product line. The Company plans
to
begin the direct marketing campaign during the third quarter of 2007, at which
time the Company will begin to amortize these prepaid advertising costs as
prescribed by SOP 93-7.
Reclassifications
Certain
amounts in the 2006 financial statements have been reclassified to conform
to
the 2007 presentation.
Recent
accounting pronouncements
In
February, 2007, the FASB issued SFAS No. 159, “The
Fair Value Option for Financial Assets and Financial Liabilities”
(“SFAS
No. 159”). This Statement provides companies with an option to report selected
measurement attributes for different assets and liabilities that can create
artificial volatility in earnings. The Statement’s objective is to reduce both
complexity in accounting for financial instruments and the volatility in
earnings caused by measuring related assets and liabilities differently. SFAS
No. 159 is effective for the Company beginning January 1, 2009. The Company
is
currently evaluating the impact of this standard.
The
Company has reviewed all other recently issued, but not yet adopted, accounting
standards in order to determine their effects, if any, on its results of
operation, financial position or cash flows. Based on that review, the Company
believes that none of these pronouncements will have a significant material
effect on its current or future earnings or operations.
Net
(Loss) Income Per Common Share
Basic
net
(loss) income per share is computed by dividing net (loss) income by weighted
average number of shares of common stock outstanding during each period. Diluted
net (loss) income per share is computed by dividing net (loss) income by the
weighted average number of shares of common stock, common stock equivalents
and
potentially dilutive securities outstanding during each period. As of June
30,
2007 and 2006, the Company did not have any dilutive securities.
The
following is a reconciliation of the numerator and denominator used to calculate
Basic and Diluted EPS for the three and six months ended June 30, 2007 and
2006:
|
|
Net
Loss
|
|
Weighted
Average
Shares
|
|
Per Share
Amount
|
|
Three
months ended June 30, 2007:
|
|
|
|
|
|
|
|
Basic
EPS
|
|
$
|
(48,293
|
)
|
|
15,168,995
|
|
$
|
(0.00
|
)
|
Effect
of common stock equivalents
|
|
|
—
|
|
|
—
|
|
|
|
|
Diluted
EPS
|
|
$
|
(48,293
|
)
|
|
15,168,995
|
|
$
|
(0.00
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Three
months ended June 30, 2006:
|
|
|
|
|
|
|
|
|
|
|
Basic
EPS
|
|
$
|
38,176
|
|
|
10,000,000
|
|
$
|
0.00
|
|
Effect
of common stock equivalents
|
|
|
—
|
|
|
—
|
|
|
|
|
Diluted
EPS
|
|
$
|
38,176
|
|
|
10,000,000
|
|
$
|
0.00
|
|
|
|
Net
Loss
|
|
Weighted
Average
Shares
|
|
Per Share
Amount
|
|
Six
months ended June 30, 2007:
|
|
|
|
|
|
|
|
Basic
EPS
|
|
$
|
(318,865
|
)
|
|
14,596,739
|
|
$
|
(0.02
|
)
|
Effect
of common stock equivalents
|
|
|
—
|
|
|
—
|
|
|
|
|
Diluted
EPS
|
|
$
|
(318,865
|
)
|
|
14,596,739
|
|
$
|
(0.02
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Six
months ended June 30, 2006:
|
|
|
|
|
|
|
|
|
|
|
Basic
EPS
|
|
$
|
(12,303
|
)
|
|
10,000,000
|
|
$
|
(0.00
|
)
|
Effect
of common stock equivalents
|
|
|
—
|
|
|
—
|
|
|
|
|
Diluted
EPS
|
|
$
|
(12,303
|
)
|
|
10,000,000
|
|
$
|
(0.00
|
)
|
The
calculation above for the three and six months ended June 30, 2007, excludes
the
exercise of the 152,500 outstanding warrants as the exercise of these warrants
would have an anti-dilutive effect on earnings per share. There were no
anti-dilutive instruments outstanding for the three or six months ended June
30,
2006.
NOTE
2 - RECAPITALIZATION
On
February 8, 2007 (the “recapitalization date”), we 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 $275,000 ($0.35 per share) and
conversion of a $250,000 convertible promissory note for 714,286 common shares.
The Company also issued warrants in conjunction with the sale of the 785,856
common shares and the raise and conversion of the $250,000 convertible
promissory note. The Company issued warrants as a fee to purchase 52,500 shares
of our 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 have 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.
NOTE
3
-
ACCOUNTS RECEIVABLE, NET
Accounts
Receivable at June 30, 2007 and December 31, 2006 was as follows:
|
|
June
30, 2007
|
|
December
31, 2006
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
$
|
84,620
|
|
$
|
141,342
|
|
Less:
Allowance for doubtful accounts
|
|
|
(20,193
|
)
|
|
(20,193
|
)
|
Accounts
Receivable, net
|
|
$
|
64,427
|
|
$
|
121,149
|
|
Bad
debt expense for the six months ended June 30, 2007 was $0.
NOTE
4
-
INVENTORIES
At
June 30, 2007 and December 31, 2006 inventories consisted of the
following:
|
|
June
30, 2007
|
|
December
31, 2006
|
|
|
|
|
|
|
|
Finished
Goods
|
|
$
|
44,823
|
|
$
|
67,257
|
|
Raw
Materials
|
|
|
108,099
|
|
|
35,265
|
|
|
|
$
|
152,922
|
|
$
|
102,522
|
|
NOTE
5 - PROPERTY AND EQUIPMENT
At
June
30, 2007 and December 31, 2006, property and equipment consisted of the
following:
|
|
Useful
Lives
|
|
June
30, 2007
|
|
December
31, 2006
|
|
Computer
Equipment and Software
|
|
|
3
to 5 years
|
|
$
|
84,623
|
|
$
|
58,790
|
|
Office
Equipment
|
|
|
3
to7 years
|
|
|
62,606
|
|
|
58,407
|
|
Furniture
and Fixtures
|
|
|
7
years
|
|
|
21,504
|
|
|
9,405
|
|
Automobiles
|
|
|
5
years
|
|
|
47,063
|
|
|
47,063
|
|
Leasehold
improvements
|
|
|
1
to 3.13 years
|
|
|
91,637
|
|
|
91,637
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
307,433
|
|
|
265,302
|
|
Less
Accumulated Depreciation
|
|
|
|
|
|
(80,804
|
)
|
|
(43,828
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
226,629
|
|
$
|
221,474
|
|
Depreciation
expense was $36,976 for the six months ended June 30, 2007 and $1,750 for the
six months ended June 30, 2006.
NOTE
6 - INTANGIBLE ASSETS
At
June
30, 2007, intangible assets consist of legal fees paid in connection with the
Company’s patent application of $7,935 and the purchase of the Company’s website
address of $42,119. As of June 30, 2007, 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. The Company has determined that the intangible asset related to
the
website address is an indefinite lived intangible and no amortization has been
recognized.
NOTE
7 - STOCKHOLDERS’ EQUITY
During
the six months ended June 30, 2007, the Company issued 785,856 shares of its
common stock in a private placement wherein the Company received $275,050 and
paid fees of $47,250, 714,286 shares of its common stock in conversion of a
note
payable with a face amount of $250,000 and 147,853 shares of its common stock
in
conversion of a notes payable in the amount of $50,000.
The
Company currently does not have any outstanding stock options, a stock option
plan or an incentive plan. The Board of Directors has reserved 800,000 shares
of
common stock for use in such a plan to be established in 2007.
NOTE
8 - 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. The common
shares underlying the note have piggy back registration rights. 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.
NOTE
9 - 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
10 - 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 bears interest at an annual
percentage rate of 18% and is due and payable on August 15, 2007. The Company
is
required to make interest only payments on the first of each month beginning
June 1, 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. The discount has been amortized as additional
interest expense in the accompanying statements.
NOTE
11 - COMMITMENTS AND CONTINGENCIES
From
time
to time we 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
12 - SUBSEQUENT EVENTS
Effective
July 10, 2007, the Company sold 1,975,000 shares of its common stock and issued
987,500 warrants with an exercise price of $1.30 to accredited investors for
aggregate proceeds of $1,975,000, less fees of $177,750. The warrants expire
on
July 10, 2012 and are exercisable any time at the option of the warrant holder.
Pursuant to a registration rights agreement, the Company agreed to file a
registration statement covering the resale of the common stock and the shares
of
common stock underlying the warrants no later than 30 days from the closing
of
the offering. The Company also issued an additional 197,500 warrants with an
exercise price of $1.30 to the placement agent and its designees as a placement
fee. The Company received $800,000 of these funds prior to June 30, 2007 and
has
reflected the receipt of the funds in the accompanying financial statements
as
an advance on financing transaction.
On
July
24, 2007, the Company issued 800,000 shares of its common stock to employees
and
affiliates of the Company under its Stock Option and Stock Grant plan. These
shares were valued at $1.00 per share and recognized as compensation
expense.
ITEM
2. 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 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.
Overview
Recent
Merger Transactions
On
February 8, 2007, Amerasia Khan Enterprises Ltd. (“AKE”) a Nevada corporation
(the “Registrant”) (nka ZAGG Incorporated) executed an Agreement and Plan of
Merger (the “Merger Agreement”) by and between the Registrant and its wholly
owned subsidiary, SZC Acquisition, Inc., a Nevada corporation (“Subsidiary”) on
the one hand and ShieldZone Corporation, a Utah corporation (“ShieldZone” or
“Target”) 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.
For
purposes of the following discussion and analysis, references to ‘‘we’’,
‘‘our’’, ‘‘us’’ refers to ZAGG
Incorporated.
Our
Business
We
custom-design, market and sell a form of protective covering for consumer
electronic and hand held devices. Our key product “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.
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
February, 2007, the FASB issued SFAS No. 159, “The
Fair Value Option for Financial Assets and Financial Liabilities”
(“SFAS
No. 159”). This Statement provides companies with an option to report selected
measurement attributes for different assets and liabilities that can create
artificial volatility in earnings. The Statement’s objective is to reduce both
complexity in accounting for financial instruments and the volatility in
earnings caused by measuring related assets and liabilities differently. SFAS
No. 159 is effective for us beginning January 1, 2009. We are currently
evaluating the impact of this standard.
We
have
reviewed all other recently issued, but not yet adopted, accounting standards
in
order to determine their effects, if any, on our results of operation, financial
position or cash flows. Based on that review, we believe that none of these
pronouncements will have a significant material effect on our current or future
earnings or operations.
Results
of Operations
THREE
MONTHS ENDED JUNE 30, 2007 AND 2006
Net
sales
Net
sales
for the quarter ended June 30, 2007 were $804,458 as compared to net sales
of
$638,253 for the quarter ended June 30, 2006, an increase of $166,205 or 26%.
The
significant increase in product sales is mainly attributed to continued strong
sales of our invisibleSHIELD
product with approximately 57% of our product being sold through our website
to
retail customers, 24% being sold through mall carts, 13% to wholesale
distributors and 6% from shipping and handling charges.
Cost
of sales
Cost
of
sales includes raw materials, packing materials and shipping costs. For the
quarter ended June 30, 2007, cost of sales amounted to $203,672 or approximately
25% of net sales as compared to cost of sales of $182,623 or 28% of net sales
for quarter ended June 30, 2007. The decrease in cost of sales as a percentage
of net revenues for the quarter ended June 30, 2007 as compared to the quarter
ended June 30, 2006 is attributable to better overall pricing on raw materials
purchases and decreased packaging costs.
Gross
profit
Gross
profit for the quarter ended June 30, 2007 was $600,786 or approximately 75%
of
net sales as compared to $455,630 or approximately 72% of net sales for the
quarter ended June 30, 2006. The increase in gross profit percentage was
attributable to decreased costs associated with raw materials and packaging
and
changes in sales mix from distributor sales to retail and cart sales. There
are
no assurances that we will continue to recognize similar gross profit margin
in
the future.
Operating
expenses
Total
operating expenses for the quarter ended June 30, 2007 were $633,225, an
increase of $208,952 from total operating expenses for the quarter ended June
30, 2006 of $424,273. The increases are primarily attributable to the
following:
|
·
|
For
the quarter ended June 30, 2007, salaries and related taxes increased
by
$122,420 to $346,035 from $223,615 for the quarter ended June 30,
2006 due
to the hiring of additional staff to implement our business
plan.
|
|
·
|
For
the quarter ended June 30, 2007, consulting expense was $2,000, an
increase of $2,000 from the quarter ended June 30, 2006. The increase
relates to consulting expenses paid to a consultant who assisted
us in
opening additional mall carts during the quarter ended June 30,
2007.
|
|
·
|
For
the quarter ended June 30, 2007, marketing and advertising expenses
were
$78,651, an increase of $4,891 as compared to $73,760 for the quarter
ended June 30, 2006. This increase is attributable to an increase
in our
marketing efforts as we roll out product and implement our business
plan.
The primary marketing expenditures continue to be in web advertising
and
search engine optimization. We also spent approximately $19,000 during
the
quarter to redesign our consumer packaging. We expect our marketing
and
advertising expenses to increase as our revenues increase and expect
to
spend increased funds on adverting and promotion of our products
as well
as sales training. During fiscal 2007, we intend to significantly
expand
our marketing efforts related to our
products.
|
|
·
|
For
the quarter ended June 30, 2007, other selling, general and administrative
expenses were $206,539 as compared to $126,898 for the quarter ended
June
30, 2006, an increase of $79,641. The increase was attributable to
the
increase in operations as we implement our business plan and is summarized
below:
|
|
|
Three
Months
Ended
June
30, 2007
|
|
Three
Months
Ended
June
30, 2006
|
|
Professional
fees
|
|
$
|
14,669
|
|
$
|
3,512
|
|
Contract
labor
|
|
|
19,732
|
|
|
12,510
|
|
Insurance
|
|
|
15,188
|
|
|
6,985
|
|
Depreciation
|
|
|
19,010
|
|
|
750
|
|
Rent
|
|
|
33,871
|
|
|
12,399
|
|
Travel
and entertainment
|
|
|
23,689
|
|
|
7,350
|
|
Telephone
and utilities
|
|
|
10,468
|
|
|
7,154
|
|
Printing
expenses
|
|
|
9,952
|
|
|
11,769
|
|
Office
supplies
|
|
|
10,122
|
|
|
17,290
|
|
Credit
card and bank fees
|
|
|
20,123
|
|
|
8,452
|
|
Promotion
|
|
|
537
|
|
|
27,676
|
|
Other
|
|
|
29,178
|
|
|
11,051
|
|
Total
|
|
$
|
206,539
|
|
$
|
126,898
|
|
(Loss)
income from operations
We
reported loss from operations of ($32,439) for the quarter ended June 30, 2007
as compared to income from operations of $31,357 for the quarter ended June
30,
2006, a decrease of $63,796. The loss from operations for the quarter ended
June
30, 2007 as compared to income from operations the quarter ended June 30, 2006
is primarily attributable to overall cost increases associated with executing
our business plan including increased salaries and related taxes of $122,420,
increased rent expense of $21,472, increased travel and entertainment expense
of
$16,339 and increased professional fees of $11,157, partially offset by
decreased promotion expense of $27,159 and decreased office supplies expense
of
$7,168.
Other
income (expense)
For
the
quarter ended June 30, 2007, total other expense was ($16,262) compared to
other
income of $6,819 for the quarter ended June 30, 2006. The decrease is primarily
attributed to interest expense related to the notes payable of ($5,200),
amortization of the discount on notes payable of ($15,031) and reduced interest
income.
Net
(loss) income
As
a
result of these factors, we reported a net loss of ($48,293) or ($0.00) per
share for the quarter ended June 30, 2007 as compared to net income of $38,176
or $0.00 per share for the quarter ended June 30, 2006.
SIX
MONTHS ENDED JUNE 30, 2007 AND 2006
Net
sales
Net
sales
for the six months ended June 30, 2007 were $1,597,306 as compared to net sales
of $1,162,511 for the six months ended June 30, 2006, an increase of $434,795
or
37%.
The
significant increase in product sales is mainly attributed to continued strong
sales of our invisibleSHIELD
product with approximately 59% of our product being sold through our website
to
retail customers, 20% being sold through mall carts, 14% to wholesale
distributors and 7% from shipping and handling charges.
Cost
of sales
Cost
of
sales includes raw materials, packing materials and shipping costs. For the
six
months ended June 30, 2007, cost of sales amounted to $390,831 or approximately
24% of net sales as compared to cost of sales of $344,222 or 29% of net sales
for six months ended June 30, 2007. The decrease in cost of sales as a
percentage of net revenues for the quarter ended June 30, 2007 as compared
to
the quarter ended June 30, 2006 is attributable to better overall pricing on
raw
materials purchases and decreased packaging costs.
Gross
profit
Gross
profit for the six months ended June 30, 2007 was $1,206,475 or approximately
76% of net sales as compared to $818,289 or approximately 71% of net sales
for
the six months ended June 30, 2006. The increase in gross profit percentage
was
attributable to decreased costs associated with raw materials and packaging
and
changes in sales mix from distributor sales to retail and cart sales. There
are
no assurances that we will continue to recognize similar gross profit margin
in
the future.
Operating
expenses
Total
operating expenses for the six months ended June 30, 2007 were $1,501,016,
an
increase of $663,464 from total operating expenses for the six months ended
June
30, 2006 of $837,552. The increases are primarily attributable to the
following:
|
·
|
For
the six months ended June 30, 2007, salaries and related taxes increased
by $248,092 to $654,443 from $406,351 for the six months ended June
30,
2006 due to the hiring of key management personnel and additional
staff to
implement our business plan.
|
|
·
|
For
the six months ended June 30, 2007, consulting expense was $38,500,
a
decrease of $35,250 from the expense recognized for the six months
ended
June 30, 2006 of $73,750. The decrease is primarily due to approximately
$63,000 that was paid to a consultant who then became our president
in
2006, partially offset by expenses incurred related to the hiring
of key
personnel during the six months ended June 30, 2007 of $24,000 and
payments to a consulting firm for website optimization of
$10,000.
|
|
·
|
For
the six months ended June 30, 2007, marketing and advertising expenses
were $239,786, an increase of $78,485 as compared to $161,301 for
the six
months ended June 30, 2007. This increase is attributable to an increase
in our marketing efforts as we roll out product and implement our
business
plan. The primary marketing expenditures continue to be in web advertising
and search engine optimization. We also spent approximately $28,000
on
television advertising and $19,000 during the quarter to redesign
our
consumer packaging. We expect our marketing and advertising expenses
to
increase as our revenues increase and expect to spend increased funds
on
adverting and promotion of our products as well as sales training.
During
fiscal 2007, we intend to significantly expand our marketing efforts
related to our products.
|
|
·
|
For
the six months ended June 30, 2007, other selling, general and
administrative expenses were $568,287 as compared to $196,150 for
the six
months ended June 30, 2006. The increase was attributable to the
increase
in operations as we implement our business plan and is summarized
below:
|
|
|
Six
Months
Ended
June
30, 2007
|
|
Six
Months
Ended
June
30, 2006
|
|
Professional
fees
|
|
$
|
222,445
|
|
$
|
4,887
|
|
Contract
labor
|
|
|
40,230
|
|
|
7,801
|
|
Insurance
|
|
|
28,162
|
|
|
10,293
|
|
Depreciation
|
|
|
36,975
|
|
|
1,750
|
|
Rent
|
|
|
54,992
|
|
|
22,842
|
|
Travel
and entertainment
|
|
|
39,048
|
|
|
15,162
|
|
Telephone
and utilities
|
|
|
23,267
|
|
|
14,576
|
|
Printing
expenses
|
|
|
19,651
|
|
|
17,525
|
|
Office
supplies
|
|
|
24,140
|
|
|
25,484
|
|
Credit
card and bank fees
|
|
|
36,013
|
|
|
23,443
|
|
Promotion
|
|
|
14,445
|
|
|
28,168
|
|
Other
|
|
|
28,919
|
|
|
24,219
|
|
Total
|
|
$
|
568,287
|
|
$
|
196,150
|
|
(Loss)
income from operations
We
reported loss from operations of ($294,541) for the six months ended June 30,
2007 as compared to loss from operations of ($19,263) for the six months ended
June 30, 2006, a decrease of $275,278. The increased loss from operations in
for
the six months ended June 30, 2007 as compared to the six months ended June
30,
2006 primarily attributable to overall cost increases associated with executing
our business plan and professional fees incurred as a result of the
recapitalization transaction of $217,558.
Other
income (expense)
For
the
six months ended June 30, 2007, total other expense was ($22,014) compared
to
other income of $6,960 for the six months ended June 30, 2006. The decrease
is
primarily attributed to interest expense related to the convertible debt of
($5,868), interest on notes payable of ($5,200) and accretion of the discount
on
notes payable of ($15,031).
Net
(loss) income
As
a
result of these factors, we reported a net loss of ($318,865) or ($0.02) per
share for the six months ended June 30, 2007 as compared to a net loss of
($12,303) or ($0.00) per share for the six months ended June 30, 2006.
Liquidity
and Capital Resources
Liquidity
is the ability of a company to generate funds to support its current and future
operations, satisfy its liabilities and otherwise operate on an ongoing basis.
At
June
30, 2007, we had a cash balance of $993,380.
Our
working capital position increased by $147,033 to working capital of $67,560
at
June 30, 2007 from a working capital deficit of ($79,473) at December 31, 2006.
This increase in working capital is primarily attributable to the overall
increased current assets including cash of $524,998, prepaid expenses of
$151,087, increased prepaid advertising of $124,076 and increased inventories
of
$50,400 partially offset by decreased accounts payable of $56,722 and deferred
income tax assets of $2,762 combined with the overall increase in current
liabilities of $640,420 primarily attributable to the advance on financing
transaction of $800,000 and increased notes payable of $250,000 partially offset
by decreased note payable of $250,000, decreased convertible note payable -
officer of $100,000 and decreased wages payable of $53,456.
Net
cash
used in operating activities for the six months ended June 30, 2007 was
($610,207) as compared to cash provided by operating activities of $182,827
for
the six months ended June 30, 2006. For the six months ended June 30, 2007,
net
cash used in operating activities was attributable primarily to our net loss
of
($318,865), increased prepaid advertising of $124,076, increased prepaid
expenses and other current assets of $101,087, decreased accrued wages and
wage
related expenses of $53,456, increased inventory of $50,400, increased other
assets of $25,000, decreased accounts payable of $24,947, decreased sales
returns liability of $16,517 and decreased accrued liabilities of $8,716,
partially offset by collection of accounts receivable of $56,722, non-cash
depreciation expense of $36,976 and increased deferred licensing revenues of
$12,499.
Net
cash
used in investing activities for the six months ended June 30, 2007 was
($89,845) attributable to the purchase of property and equipment of $42,131
and
payments for intangible assets of $47,714
Net
cash
provided by financing activities was $1,225,050 for the six months ended June
30, 2007. Net cash provided by financing activities for the six months ended
June 30, 2007 was attributable to the advance on financing transaction of
$800,000, proceeds from the sale of common stock of $275,050 and proceeds from
notes payable of $200,000, partially offset by repayments of convertible debt
-
officer of $50,000.
We
reported a net increase in cash for the six months ended June 30, 2007 of
$524,998.
We
currently have no material commitments for capital expenditures. Other than
working capital and loans, we presently have no other alternative source of
working capital. We want to build an additional manufacturing line and upgrade
our manufacturing facilities and technologies, in order to expand our products.
We do not have sufficient working capital to fund the additional line and
upgrade our manufacturing facilities and technologies as well as providing
working capital necessary for our ongoing operations and obligations. We will
need to raise additional working capital to complete this project. We may seek
to raise additional capital through the sale of equity securities. No assurances
can be given that we will be successful in obtaining additional capital, or
that
such capital will be available in terms acceptable to our company.
On
July
10, 1007, we completed a private placement offering wherein we raised $1,975,000
less fees of $177,750. We issued 1,975,000 shares of our common stock and
987,500 warrants to purchase our common stock at an exercise price of $1.30
per
share. These warrants are exercisable at the warrant holder’s option any time up
through July 10, 2012.
Off
Balance Sheet Arrangements
As
of
July 30, 2007, there were no off balance sheet arrangements.
Item
3.
Controls and Procedures
We
carried out an evaluation of the effectiveness of the design and operation
of
our disclosure controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e)) as of June 30, 2007. This evaluation was carried out
under the supervision and with the participation of our Chief Executive Officer,
Mr. Robert G. Pedersen II, and Chief Financial Officer, Mr. Brandon T. O’Brien.
Based upon that evaluation, our Chief Executive Officer and Chief Financial
Officer concluded that, as of June 30, 2007, our disclosure controls and
procedures are effective. There have been no changes in our internal controls
over financial reporting during the quarter ended June 30, 2007.
Disclosure
controls and procedures are controls and other procedures that are designed
to
ensure that information required to be disclosed in our reports filed or
submitted under the Exchange Act are recorded, processed, summarized and
reported, within the time periods specified in the SEC's rules and forms.
Disclosure controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed in
our
reports filed under the Exchange Act is accumulated and communicated to
management, including our Chief Executive Officer and Chief Financial Officer,
to allow timely decisions regarding required disclosure.
Limitations
on the Effectiveness of Internal Controls
Our
management does not expect that our disclosure controls and procedures or our
internal control over financial reporting will necessarily prevent all fraud
and
material error. Our disclosure controls and procedures are designed to provide
reasonable assurance of achieving our objectives and our Chief Executive Officer
and Chief Financial Officer concluded that our disclosure controls and
procedures are effective at that reasonable assurance level. Further, the design
of a control system must reflect the fact that there are resource constraints,
and the benefits of controls must be considered relative to their costs. Because
of the inherent limitations in all control systems, no evaluation of controls
can provide absolute assurance that all control issues and instances of fraud,
if any, within the Company have been detected. These inherent limitations
include the realities that judgments in decision-making can be faulty, and
that
breakdowns can occur because of simple error or mistake. Additionally, controls
can be circumvented by the individual acts of some persons, by collusion of
two
or more people, or by management override of the internal control. The design
of
any system of controls also is based in part upon 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.
Over time, control may become inadequate because of changes in conditions,
or
the degree of compliance with the policies or procedures may deteriorate.
PART
II - OTHER INFORMATION
Item
1. Legal
Proceedings
The
Company is 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
2. Unregistered
Sales of Equity Securities and Use of Proceeds
We
have
sold or issued the following securities not registered under the Securities
Act
by reason of the exemption afforded under Section 4(2) of the Securities Act
of
1933 (the “Act”), during the last three years. Except as stated below, no
underwriting discounts or commissions were payable with respect to any of the
following transactions. The offer and sale of the following securities was
exempt from the registration requirements of the Securities Act under Rule
506
insofar as (1) except as stated below, each of the investors was accredited
within the meaning of Rule 501(a); (2) the transfer of the securities were
restricted by the company in accordance with Rule 502(d); (3) there were no
more
than 35 non-accredited investors in any transaction within the meaning of Rule
506(b), after taking into consideration all prior investors under Section 4(2)
of the Securities Act within the twelve months preceding the transaction; and
(4) none of the offers and sales were effected through any general solicitation
or general advertising within the meaning of Rule 502(c).
At
March
24, 2005 (inception), ShieldZone issued 10,000,000 shares of common stock to
its
founder for $1,000.
ShieldZone
entered into a distribution agreement with a distributor (the “Distributor”) in
March 2006. On December 12, 2006, under a settlement type purchase agreement
the
Company agreed to issue to the Distributor 75,000 of its common shares, $13,000
cash plus portion of payment due from a customer for which the Distributor
was
the Company’s distributor in order to early cancel the distribution agreement.
The shares were valued and expensed at $26,250 or $0.35 per share which was
a
contemporaneous sale price in a private transaction where a former officer
sold
a portion of his common shares of the Company.
In
July
2006, ShieldZone sold 100,000 common shares for $75,000 or $0.75 per share.
The
shares were issued pursuant to an exemption from registration provided by Rule
506 of Regulation D, as they were issued without any form of general
solicitation or general advertising and the purchaser qualified as an accredited
investor and accepted the shares for his personal account and not with a view
towards distribution.
On
December 27, 2006, ShieldZone issued a Secured Convertible Promissory Note
in
the principal amount of $250,000 to an accredited investor. The Note is
convertible into shares of the Company’s common stock at a conversion price per
share of $0.35. The Note was issued pursuant to an exemption from registration
provided by Rule 506 of Regulation D, as it was issued without any form of
general solicitation or general advertising and the purchaser qualified as
an
accredited investor and accepted the Note and underlying shares for its personal
account and not with a view towards distribution. The holders of the note
converted the outstanding principal balance into 714,286 shares of the Company’s
common stock on February 8, 2007. These shares have piggyback registration
rights.
Empire
Financial Group (“Empire”) acted as placement agent with respect to the offering
and Empire or its designees will receive a cash fee equal to $47,250 and
warrants to purchase 52,500 shares of the Company’s common stock at an exercise
price of $0.35 per share. The warrant shares are subject to equitable adjustment
for stock splits, stock dividends and similar events, and have “piggyback”
registration rights.
On
February 8, 2007, the Company issued and sold 785,856 shares of Common Stock
to
accredited investors. The shares were sold at a price per share of $0.35. These
shares have piggy back registration rights. The shares were issued pursuant
to
an exemption form registration provided by Rule 506 of Regulation D, as they
were issued without any form of general solicitation or general advertising
and
the purchases qualified as accredited investors and accepted the shares for
their personal accounts and not with a view towards distribution.
On
February 8, 2007, the Company and Amerasia Khan Enterprises Ltd. a Nevada
corporation (“AKE”) (nka Zagg Incorporated), a publicly held entity, executed an
Agreement and Plan of Merger (the “Merger Agreement”) by and between AKE and its
wholly owned subsidiary, SZC Acquisition Corp., a Nevada corporation
(“Subsidiary”) on the one hand and ShieldZone Corporation, a Utah corporation on
the other hand. Pursuant to the Merger Agreement ShieldZone merged with the
Subsidiary, with ShieldZone Corporation surviving the merger (the “Merger”). In
consideration, the shareholders of ShieldZone were issued 10,175,000 shares
of
the common stock of AKE. Shareholders holding 3,941,765 of these shares claim
to
have piggyback registration rights in AKE. The issuance of the shares in
connection with the Merger was made pursuant to an exemption form registration
provided by Rule 506 of Regulation D, as they were issued without any form
of
general solicitation or general advertising and the purchasers qualified as
accredited investors and accepted the shares for their personal accounts and
not
with a view towards distribution.
During
the quarter ended March 31, 2007, the Company repaid $50,000 of the principal
balance of a $100,000 note issued in November 2006 to an affiliate of the
Company’s Chief Executive Officer, and the remaining $50,000 of principal plus
accrued interest of $1,749 was converted into 147,853 shares of Common Stock.
These shares have piggy back registration rights. The shares were issued
pursuant to an exemption form registration provided by Rule 506 of Regulation
D,
as they were issued without any form of general solicitation or general
advertising and the purchases qualified as accredited investors and accepted
the
shares for their personal accounts and not with a view towards
distribution.
On
July
10, 2007, the Company sold (i) 1,975,000 shares of our common stock, and (ii)
five-year warrants to purchase 987,500 shares of common stock at an exercise
price of $1.30 per share, pursuant to a Securities Purchase Agreement among
our
company and certain institutional investors (the “Purchasers”) signatory
thereto. We received aggregate gross proceeds of approximately $1,975,000 from
the sale of the common stock and warrants. The common stock and warrants were
offered solely to “accredited investors” in reliance on the exemption from
registration afforded by Section 4(2) of the Securities Act of 1933, as amended,
and/or Rule 506 of Regulation D promulgated thereunder.
Under
the
applicable agreements, the Purchasers are entitled to certain contractual
benefits, which are summarized as follows:
|
1.
|
The
right to participate in any subsequent financing of the Company in
the
next twelve months;
|
|
2.
|
Except
for certain exempt issuances, restrictions on the Company’s ability to
issue securities 90 days following an effective registration statement
on
behalf of the
Purchasers.
|
|
3.
|
For
as long as any Purchaser holds Company securities, restrictions on
the
Company’s ability to issue securities that are convertible into common
stock at some future or variable price;
|
|
4.
|
For
twelve months, restrictions on the Company’s ability to undertake a
reverse or forward stock split of its common stock;
|
|
5.
|
For
two years and except for certain exempt issuances, the right to certain
anti-dilution provisions;
|
|
6.
|
The
right to rescind in the event the Company fails to meet certain deadlines.
|
Further
under the Securities Purchase Agreement, the Company is permitted to issue
common shares that are exempt from the above restrictions in certain instances,
including issuances to employees, officers or directors of the Company pursuant
to any stock or option plan, and a general allowance of common stock and
warrants equal to $2 million in the aggregate, raised no later than August
9,
2007.
Empire
Financial Group (“Empire”) acted as placement agent with respect to the offering
and will receive a cash fee equal to $177,750 and warrants to purchase 197,500
shares of the Company’s common stock at an exercise price of $1.30 per share.
The warrant shares are subject to equitable adjustment for stock splits, stock
dividends and similar events, and have “piggyback” registration rights.
Pursuant
to a Registration Rights Agreement, the Company agreed to file an initial
registration statement covering the resale of the common stock and the shares
of
common stock underlying the warrants no later than 30 days from the closing
of
the offering and to have such registration statement declared effective no
later
than 120 days from the closing of the offering. If the Company does not timely
file the registration statement or cause it to be declared effective by the
required dates, then each investor in the offering shall be entitled to
liquidated damages equal to 2% of the aggregate purchase price paid by such
investor for the securities, and an additional 2% for each month that the
Company does not file the registration statement or cause it to be declared
effective. The Company is also subject to the same penalties for failure to
perform the following acts in their respective timeframes:
|
1.
|
File
with the Securities and Exchange Commission (the “Commission”) a
pre-effective amendment within ten trading days after the receipt
of
comments from the Commission;
|
|
2.
|
File
with the Commission a request for acceleration with five trading
days of
the date the Commission notifies the Company orally or in writing
that the
registration statement will not be reviewed or subject to further
review;
|
|
3.
|
Fail
to notify the Purchasers within one trading day of when the Company
requests effectiveness of the registration statement;
|
|
4.
|
Fail
to file a final prospectus within one trading day after effectiveness;
|
|
5.
|
Fail
to maintain an effective registration statement for more than ten
consecutive calendar days or more than an aggregate of fifteen calendar
days in a twelve month period; and
|
|
6.
|
Fail
to register all of the common stock and the shares of common stock
underlying the warrants pursuant to one or more registration statements
on
or before December 28, 2007.
|
On
July
24, 2005, the Company issued 800,000 shares of common stock to employees and
affiliates under its Stock Option and Stock Grant plan.
Item
3. Defaults
Upon Senior Securities
None.
Item
4. Submission
of Matters to a Vote of Security Holders
No
matters have been submitted to our security holders for a vote, through the
solicitation of proxies or otherwise, during the six months ended June 30,
2007.
Item
5. Other
Information
None.
Item
6. Exhibits
a.
|
Exhibits:
The following Exhibits are filed with this Form 10-QSB 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.
|
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant
has
duly caused this report to be signed on its behalf by the undersigned hereunto
duly authorized.
|
|
ZAGG
INCORPORATED |
|
|
|
|
|
Date: August
7, 2007 |
|
/s/ Robert
G. Pedersen II |
|
Robert
G. Pedersen II, |
|
President
and Chief Executive Officer |
|
|
|
|
|
|
Date: August
7, 2007 |
|
/s/ Brandon
T. O’Brien |
|
Brandon
T. O’Brien, |
|
Chief
Financial Officer
(Principal
Financial Officer)
|