Intermediate Accounting II Deferred Tax Case Summer 2022 ZAGG, "Zealous About Great Gadgets," began designing protective plastic shields for wristwatches in 2005. Today, the company is a market leader in mobile device accessories. ZAGG's patented invisibleSHIELD film protects tablet and smart phone screens around the world. Their product list also includes mobile keyboards, cases, headphones, and portable power. In 2016, ZAGG acquired iFrogz, a manufacturer of digital audio accessories in order to grow their product lines and expand distribution. ZAGG is currently traded on the NASDAQ. Learning Objectives Understand the concepts underlying deferred income tax accounting. Understand and interpret the three primary disclosures provided in the income tax footnote to the financial statements. Use deferred income tax asset and liability information to infer the magnitude of differences between book and tax income and asset values. Understand the purpose of a deferred income tax asset valuation allowance. Understand how changes in income tax rates impact deferred income tax assets and liabilities. Refer to the 2017 financial statements and footnote excerpts of ZAGG, Inc. at the end of this document. Concepts a. Describe what is meant by the term book income. Which number in ZAGG's statement of operation captures this notion for fiscal 2017? Describe how a company's book income differs from its taxable income. b. In your own words, define the following terms: a. Permanent tax differences (also provide an example) b. Temporary tax difference (also provide an example) c. Statutory tax rate d. Effective tax rate c. Explain in general terms why a company reports deferred income taxes as part of their total income tax expense. Why don't companies simply report their current tax bill as their income tax expense? d. Explain what deferred income tax assets and deferred income tax liabilities represent. Give an example of a d. According to the third table in Note 8-Income Taxes, ZAGG had a net deferred income tax asset balance of $13,508,000 at December 31, 2017. Explain where this amount appears on ZAGG's balance sheet. The third table in Note 8 discloses the details of ZAGG's deferred income tax assets and liabilities that arise from various temporary differences. Use the information in this table to answer questions g and h. Where necessary, you may assume that ZAGG's total statutory income tax rate is the sum of its federal statutory tax rate of 35% and a blended state statutory tax rate of 3%. g. The largest component of ZAGG's deferred income tax liability, labeled "Property and equipment," relates to differences between book and tax depreciation expense. a. As of December 31, 2017, which system recognized a greater expense over time relating to depreciation - book or tax? Describe what information you sued to make this assessment. b. Estimate the dollar magnitude of the cumulative difference in depreciation expense between the two systems as of December 31, 2017 using the chart below. Begin with step 1 and work backwards. Cumulative difference in book and Statutory income tax-Defensed income tax liability tax depreciation expense rate relating to property and equipment at 12/31/2017 Step 1 Step 3 Step 2 c. Using the information in the chart above, determine the balance in "Property and equipment, net" on the balance sheet at December 31, 2017 if tax depreciation had been used through the assets' lives instead of the reported method. h. One of ZAGG's deferred income tax asset components relates to the "Allowance for doubtful accounts." a. During the year ended December 31, 2017, did the book or the tax system recognize a greater expense for doubtful accounts? Describe what information you used to make this assessment. b. Estimate the dollar magnitude of the difference in bad debt expense between the book and tax system for the year ended December 31, 2017 using the chart below. Begin with step 1 and work backwards. Statutory income tax rate Current period difference in book and tax bad debt expense in 2017 Step 3 Step 2 Change in the deferred income tax asset relating to the allowance for doubtful accounts Step 1 i. What is the amount of the deferred income tax asset valuation allowanca at Danamhar 21 2017? Explain how i. What is the amount of the deferred income tax asset valuation allowance at December 31, 2017? Explain how ZAGG determined this amount and why they determined that a valuation allowance was necessary. Analysis j. Suppose that on the first day of the next fiscal year, the federal statutory tax rate changed from 35% to 21%. What journal entry related to the net deferred tax asset would ZAGG record? You may assume that the state statutory tax rate will not change. [Hint: when income tax rates change. companies must "re-value" their deferred income tax assets and liabilities.] k. On June 21, 2016, ZAAG acquired iFrogz for $96.2 million. The excess of the acquisition price over the fair value of iFrogz's net assets (ie, tangible assets and identifiable intangible assets, net of assumed liabilities) was $6.925 million, which was recorded as "Goodwill" at the time of the acquisition. a. For book purposes, goodwill is tested annually for impairment. In Note 7, ZAGG discloses that it conducted a goodwill impairment analysis during the fourth quarter of 2017. What was the amount of the impairment in goodwill that resulted from this analysis in 2017? b. For tax purposes, goodwill is amortized annually and is, therefore, a deductible expense on a company's tax return. ZAGG amortized goodwill over a period of 15 years. Note 8 reports a deferred income tax asset of $1,801,000 related to goodwill at December 31, 2017. Explain how goodwill created a deferred income tax asset for ZAGG. Show how ZAGG arrived at this number. You may assume a 35% federal statutory tax rate and a 3% blended state statutory tax rate and that ZAGG began amortizing goodwill for tax purposes starting in July, 2016. [Hint: determine the net (ie, after amortization) value of goodwill for tax purposes to compare to the net book value of goodwill.] ZAGG INC AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS in the sands, except par value) ASSETS Current assets 2017 2016 ASSETS Current assets Cash and cash equivalen Accounts receivable, net of allowances of $2,974 in 2017 and $2,070 in 2016 ZAGG INC AND SUBSIDIARIES aventories Prepaid expenses and other cuenta Deferred income tax assets CONSOLIDATED BALANCE SHEETS (in thousands, except par val Total current ach Investment in 10 Property and equipment Goodwill net of accumslated depreciation at $3,317 in 2017 and 51.857 in 2016 Intangible assets net of accumulated amortization at $13.790 in 2017 and 53,969 in 2016 Deferred income tax assets Other act Note receivable Total assets LIABILITIES AND EQUITY Current liabilities Accounts payable Income taxes payable Accrued liabiline Acersed wages and wage related expenses Deferred rev Current portion of note payable Sales returns liability Total current liabilities Revolving line of credit Noncurrent portion of note payable Total liabilities Stockholders' equity Common stock, 50.001 par salur 100,000 hures authorized 31,215 and 29,782 shares issued and outstanding, respectively Additional paid-in capital Cimalative translation atament 2017 2037526,433 54,561 39,988 9547 6912 131,185 2,013 4362 1,484 $7.905 6,596 383 1,457 19027 3,062 3,754 2,354 6,000 6,697 41,316 22,173 18,000 2016 81,989 31 77,234 (57 45,450 29.622 1993 5,132 108.250 4,87 206,085 5202328 4.162 6.925 114 82 1,349 3010 16.013 4294 3,886 1,468 320 2372 5,387 33,740 21,332 42.628 99,700 30 70.241 31.215 and 29,782 shares and outstanding, respectively Additional paid-in capital Cumulative translation Note receivable collateralized by stock Retained carmings Total stockholders' equity Noncontrolling interest Total equity Total liabilities and equity Net sales Cost of sales Gross profit Operating expenses Advertising and marketing Selling, general and administrative Impairment of goodwill and intangible Amortization of definite-lived imangibles Total operating expenses Income from operations Other income (expense Interest expense Los from equity method investment in 16/0 Gain on deconsolidation of 10 Other income and expense) 31 77.234 (57 Basic earnings per share Dilated earnings per share 47,454 124.09 124.09 0 ZAGG INC AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share amounts) 70,248 a 30 (566 32,949 102,628 206,085 202.328 102628 2017 2016 2015 $264,425 $179,125 $76,135 143,880 97,201 38,738 120.545 81.924 37.397 (406) 12.495 10,246 5,067 53,330 39,592 15.504 11,497 9,732 87054 53,787 20.583 33,491 28,137 16,814 (6321) (3,022) (243) (2866) 0.48 1,906 (19) Total other expense Income before provision for income tases Income tax provision Net income Net loss attributable to moncontrolling interest Net income attributable to stockholders $ 14,505 $ 18,248 5-9,963 Karnings per share attributable to stockholders: (9.593) (1.135) (236) 21,898 27002 16,578 (9.393) (9418) (6.650) 14.505 17.584 9,928 35 See accompanying notes to consolidated financial statements. ZAGG INC AND SUBSIDIARIES CONSOLIDATED Cash flows from operating activities Net income Deferal income taxes Amortization of deferred loan costs Adjustments to reconcile net income to cash provided by used in operating activitie Stock-based compensation Impairment of goodwill and intangibles Excess tax benefits related to share-based payments Depreciation and amotination STATEMENTS OF CASH FLOWS (in thousands) Write-off of deferred loan costs Expense related to ince of wants Expense related to ince of stock for conting Expense related to ince of stock for royalties Impairment on notes receivable Loss on disposal of property and equipment Loss on investment in equity method investment Gain on deconsolidation of HO Related party other Prepaid expenses and other reasses Other assets Accounts payable Income taxes payable Changes in operating assets and liabilities, net of acquisition Accounts receivable Inventories Accrued liabilities Accrued wages and wage related expenses Deferred Sales return liability Net cash provided by used in) operating activities Deposits on and purchase of intangible asset Purchase of property and equipment Deconsolidation of H2O, net of cash Proceeds from investment intervable Acquisition of fog, net of cash acquired Net cash and in investing activities Cash flows from financing activities Payment of debtance costs Proceeds from suance of term note Proceeds from nevelving crede facilities Payments on termote Payments on revolving credit facilities Proceeds from exercise of warrants and options Excess tax benefits related to share-based payments Cash paid for investment in 1) Net Heo proceeds from issuance of Series B Preferred Stock Not cash provided by used in financing activities Effect of foreign currency exchange rates on cash and cash For the Years Ended December 31. 2017 $ 14,505 5,707 11,497 (707 } 11.599 (829) 706 1.509 311 . 313 2,366 (9,093 ) ) (10,334 (7,600 (11 3,044 (656 ) (262 ) 681 403 1299 17,446 } (2.836 (72 ) (12,764) ) ) (238) 24,000 26.238 (45,000) 20.74 (27,396 } 895 707 5 17:384 59.928 3,258 (1670) 5,926 (3.908) 329 - 377 100 336 1,419 1/07 134 42 (72) (1906) (2208) (12.200 2,468 (14,251) (2,747) (1861) (54) 2811 2015 9,341 (2002) 6,802 3,369 (953 994 (2,538) 45,000 (620) 348 (1,482) (11,546) 2,467 1,670 291 (392) 7.131 (3,154) 5.335 (96) (2.117) (1590) (819) (4,277) 666 138 (47.532) (12.999 (2986) 32 1.517 619 09x11 3,440 Cash and cash equivalents at beginning of the period Cash and cash equivalents at end of the period Supplemental disclosure of cash flow information Cash paid during the period for interest Cash paid during the period for taxes Balance as of January 1 Gross goodwill See accompanying notes to consolidated financial statements. (7) GOODWILL & INTANGIBLE ASSETS Accumulated impairment losses Net goodwill as of January 1 Goodwill acquired during the year Impairment loss Impairment of Goodwill and Intangible Assets For the year ended December 31, 2017, the Company recorded an impairment of goodwill in the amount of $5,441 for its iFrogz reporting unit within the iFrogz operating segment when it was determined that the carrying value of goodwill exceeded its fair value, which was determined during an impairment analysis performed during the fourth quarter of 2017. In conjunction with the impairment test, the Company considered factors such as the overall decline in the market price of the company's stock and decline in market capitalization for a sustained period as indicators for potential goodwill impairment. In determining the amount of impairment within the analysis, we considered both the income approach, utilizing a discounted cash flow analysis, and market approach, which considers what other purchasers and sellers in the market have paid for companies reasonably similar to the reporting unit. Balance as of December 31 Gross goodwill The goodwill impairment of $5,441 is included as a component of impairment of goodwill and intangibles in the consolidated statement of operations. Accumulated impairment losses Net goodwill as of December 31 26,403 $ 20,177 The changes in the carrying amount of goodwill for the year ended December 31, 2017 and 2016, are as follows: 2017 2016 $ 6,925 $ 6,925 4,477 18.536 (5,441) 2,373 4,971 26,433 52373 6,925 2,602 13.095 6,925 6925 (5,441) $1,484 $6.925 243 710 Balance as of January 1 Gross goodwill Accumulated impairment losses Net goodwill as of January 1 Goodwill acquired during the year Impairment loss Balance as of December 31 Gross goodwill Accumulated impairment losses Net goodwill as of December 31 Current (provision Federal Stane 2017 2016 $ 6,925 S (8) INCOME TAXES The components of income tax (provision) benefit for the years ended December 31, 2017, 2016 and 2015, are: 6,925 Txat statutory rate (35%) State tax, net of fodral to benefit Gain on deconsolidation of He Non-deductible expense and other Domestic production activities deduction Return to provision adjustment Interest and penalties Federal 38% rate bracket surcharge Increase in valuation allowance Deferred txant Allowance for doubul accounts Defoed revenue Inventories Stock-bund compensation Sales et accrual 6,925 (5.441) 6,925 6,925 (5,441) $1,484 56,925 2017 2016 2015 (1546) S(1147) (758) (22.104) (1,767) (1074) (116) (1768) (13.326) 0.135) Foreign Totul curent Deferred (provision) benefi Federal Sute 7.209 3,402 1,283 1,004 506 199 8,293 3.908 1482 Total deferred Total (provision) benef (9393) (9.418 506.650) The following is a reconciliation of the income taxes computed using the federal statutory rate to the provision for income taxes for the years ended December 31, 2017, 2016 and 2015: Acquisition costs, net of amortization Intangible assets Condu 2017 2016 2015 S360 5451) 55,636) (663)(888) (556) 316 (341) (130) (198) 676 771 587 (49) (36) (437) (201) (209) (652) 59.393, 59,418) 506,650) The tax effects of temporary differences that gave rise to significant portions of deferred tax assets and liabilities at December 31, 2017 and 2016, are as follows: 2017 2016 $1,000 $ 791 12 23171636 1.420 507 2456 2,061 282 292 4372 307 Im Deferred $1.000 791 Allowance for didact Defend even Inventories 12 2.317 1436 1.420 597 Stock-based compution al Sales 2456 2061 Acquisition costs, net of motion 252 22 Goodwill Ho investment Reserve one receivable Other liabilne Deferred tax assets Valuation allowance Total defend taxat Deferred tax liabiti Property and equipment Investment in Ho 2017 2016 Deferred tatt-cum Deferred taxes, net-a Not deferred tax 4372 37 1.801 713 569 569 38 35 15.015 6,300 (713) $14,302 56.300 794 633 Goodwill Total gross deferred to fiabilities 794 1.086 Netdeferred t $6,912 55.132 6.596 $13.50 $5,214 At December 31, 2017, the Company recorded a full valuation allowance against a deferred tax asset generated by losses on its equity method investment in HzO. HO is a development stage enterprise and given current operations and uncertainty of future profitability, management has determined that it is more likely than not that the deferred tax asset will not be realizable. Given this, a full valuation allowance of $713 has been recorded against the deferred tax asset. The Company has not recorded a tax benefit at December 31, 2017 and 2016 for operating losses in France and the UK from operations of iFrogz Europe SAS (gross cumulative operating loss of $1,280). Operations for iFrogz Europe and ZAGG Europe have been transitioned to Ireland and therefore, we do not expect future taxable income within France and the UK to offset current net operating losses. For all other deferred tax assets, no valuation allowance has been recorded at December 31, 2017 and 2016, as management believes it is more likely than not that the results of future operations will generate sufficient taxable income to realize its deferred tax assets. The Company has not recognized a deferred tax liability for the undistributed gornings of its formign onorations that UK from operations of iFrogz Europe SAS (gross cumulative operating loss of $1,280). Operations for iFrogz Europe and ZAGG Europe have been transitioned to Ireland and therefore, we do not expect future taxable income within France and the UK to offset current net operating losses. For all other deferred tax assets, no valuation allowance has been recorded at December 31, 2017 and 2016, as management believes it is more likely than not that the results of future operations will generate sufficient taxable income to realize its deferred tax assets. The Company has not recognized a deferred tax liability for the undistributed earnings of its foreign operations that arose in 2017 and prior years as the Company considers these earnings to be indefinitely reinvested. Cash held by foreign entities that is considered permanently re-invested totaled $3,531 as of December 31, 2017. If this cash were repatriated to the United States, outside the settlement of intercompany payables, the Company would need to accrue and pay the related tax, however, the Company considers these funds permanently re-invested and has no plans to repatriate these funds. The Company recognizes the impact of a tax position in the financial statements if that position is more likely than not of being sustained on audit, based on the technical merits of the position. As of December 31, 2017 and 2016, the Company recorded a tax contingency of $61 and $61, respectively, related to foreign taxes at the iFrogz segment. For the years ended December 31, 2017, 2016, and 2015, the Company recorded $0, SO, and $201. respectively in interest and penalties, which were included as a component of income tax provision. The Company is currently not under examination by any federal or state tax authority, but remains subject to income tax examinations for each of its open tax years, which extend back to 2009 for federal income tax purposes and 2008 for state income tax purposes. Intermediate Accounting II Deferred Tax Case Summer 2022 ZAGG, "Zealous About Great Gadgets," began designing protective plastic shields for wristwatches in 2005. Today, the company is a market leader in mobile device accessories. ZAGG's patented invisibleSHIELD film protects tablet and smart phone screens around the world. Their product list also includes mobile keyboards, cases, headphones, and portable power. In 2016, ZAGG acquired iFrogz, a manufacturer of digital audio accessories in order to grow their product lines and expand distribution. ZAGG is currently traded on the NASDAQ. Learning Objectives Understand the concepts underlying deferred income tax accounting. Understand and interpret the three primary disclosures provided in the income tax footnote to the financial statements. Use deferred income tax asset and liability information to infer the magnitude of differences between book and tax income and asset values. Understand the purpose of a deferred income tax asset valuation allowance. Understand how changes in income tax rates impact deferred income tax assets and liabilities. Refer to the 2017 financial statements and footnote excerpts of ZAGG, Inc. at the end of this document. Concepts a. Describe what is meant by the term book income. Which number in ZAGG's statement of operation captures this notion for fiscal 2017? Describe how a company's book income differs from its taxable income. b. In your own words, define the following terms: a. Permanent tax differences (also provide an example) b. Temporary tax difference (also provide an example) c. Statutory tax rate d. Effective tax rate c. Explain in general terms why a company reports deferred income taxes as part of their total income tax expense. Why don't companies simply report their current tax bill as their income tax expense? d. Explain what deferred income tax assets and deferred income tax liabilities represent. Give an example of a d. According to the third table in Note 8-Income Taxes, ZAGG had a net deferred income tax asset balance of $13,508,000 at December 31, 2017. Explain where this amount appears on ZAGG's balance sheet. The third table in Note 8 discloses the details of ZAGG's deferred income tax assets and liabilities that arise from various temporary differences. Use the information in this table to answer questions g and h. Where necessary, you may assume that ZAGG's total statutory income tax rate is the sum of its federal statutory tax rate of 35% and a blended state statutory tax rate of 3%. g. The largest component of ZAGG's deferred income tax liability, labeled "Property and equipment," relates to differences between book and tax depreciation expense. a. As of December 31, 2017, which system recognized a greater expense over time relating to depreciation - book or tax? Describe what information you sued to make this assessment. b. Estimate the dollar magnitude of the cumulative difference in depreciation expense between the two systems as of December 31, 2017 using the chart below. Begin with step 1 and work backwards. Cumulative difference in book and Statutory income tax-Defensed income tax liability tax depreciation expense rate relating to property and equipment at 12/31/2017 Step 1 Step 3 Step 2 c. Using the information in the chart above, determine the balance in "Property and equipment, net" on the balance sheet at December 31, 2017 if tax depreciation had been used through the assets' lives instead of the reported method. h. One of ZAGG's deferred income tax asset components relates to the "Allowance for doubtful accounts." a. During the year ended December 31, 2017, did the book or the tax system recognize a greater expense for doubtful accounts? Describe what information you used to make this assessment. b. Estimate the dollar magnitude of the difference in bad debt expense between the book and tax system for the year ended December 31, 2017 using the chart below. Begin with step 1 and work backwards. Statutory income tax rate Current period difference in book and tax bad debt expense in 2017 Step 3 Step 2 Change in the deferred income tax asset relating to the allowance for doubtful accounts Step 1 i. What is the amount of the deferred income tax asset valuation allowanca at Danamhar 21 2017? Explain how i. What is the amount of the deferred income tax asset valuation allowance at December 31, 2017? Explain how ZAGG determined this amount and why they determined that a valuation allowance was necessary. Analysis j. Suppose that on the first day of the next fiscal year, the federal statutory tax rate changed from 35% to 21%. What journal entry related to the net deferred tax asset would ZAGG record? You may assume that the state statutory tax rate will not change. [Hint: when income tax rates change. companies must "re-value" their deferred income tax assets and liabilities.] k. On June 21, 2016, ZAAG acquired iFrogz for $96.2 million. The excess of the acquisition price over the fair value of iFrogz's net assets (ie, tangible assets and identifiable intangible assets, net of assumed liabilities) was $6.925 million, which was recorded as "Goodwill" at the time of the acquisition. a. For book purposes, goodwill is tested annually for impairment. In Note 7, ZAGG discloses that it conducted a goodwill impairment analysis during the fourth quarter of 2017. What was the amount of the impairment in goodwill that resulted from this analysis in 2017? b. For tax purposes, goodwill is amortized annually and is, therefore, a deductible expense on a company's tax return. ZAGG amortized goodwill over a period of 15 years. Note 8 reports a deferred income tax asset of $1,801,000 related to goodwill at December 31, 2017. Explain how goodwill created a deferred income tax asset for ZAGG. Show how ZAGG arrived at this number. You may assume a 35% federal statutory tax rate and a 3% blended state statutory tax rate and that ZAGG began amortizing goodwill for tax purposes starting in July, 2016. [Hint: determine the net (ie, after amortization) value of goodwill for tax purposes to compare to the net book value of goodwill.] ZAGG INC AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS in the sands, except par value) ASSETS Current assets 2017 2016 ASSETS Current assets Cash and cash equivalen Accounts receivable, net of allowances of $2,974 in 2017 and $2,070 in 2016 ZAGG INC AND SUBSIDIARIES aventories Prepaid expenses and other cuenta Deferred income tax assets CONSOLIDATED BALANCE SHEETS (in thousands, except par val Total current ach Investment in 10 Property and equipment Goodwill net of accumslated depreciation at $3,317 in 2017 and 51.857 in 2016 Intangible assets net of accumulated amortization at $13.790 in 2017 and 53,969 in 2016 Deferred income tax assets Other act Note receivable Total assets LIABILITIES AND EQUITY Current liabilities Accounts payable Income taxes payable Accrued liabiline Acersed wages and wage related expenses Deferred rev Current portion of note payable Sales returns liability Total current liabilities Revolving line of credit Noncurrent portion of note payable Total liabilities Stockholders' equity Common stock, 50.001 par salur 100,000 hures authorized 31,215 and 29,782 shares issued and outstanding, respectively Additional paid-in capital Cimalative translation atament 2017 2037526,433 54,561 39,988 9547 6912 131,185 2,013 4362 1,484 $7.905 6,596 383 1,457 19027 3,062 3,754 2,354 6,000 6,697 41,316 22,173 18,000 2016 81,989 31 77,234 (57 45,450 29.622 1993 5,132 108.250 4,87 206,085 5202328 4.162 6.925 114 82 1,349 3010 16.013 4294 3,886 1,468 320 2372 5,387 33,740 21,332 42.628 99,700 30 70.241 31.215 and 29,782 shares and outstanding, respectively Additional paid-in capital Cumulative translation Note receivable collateralized by stock Retained carmings Total stockholders' equity Noncontrolling interest Total equity Total liabilities and equity Net sales Cost of sales Gross profit Operating expenses Advertising and marketing Selling, general and administrative Impairment of goodwill and intangible Amortization of definite-lived imangibles Total operating expenses Income from operations Other income (expense Interest expense Los from equity method investment in 16/0 Gain on deconsolidation of 10 Other income and expense) 31 77.234 (57 Basic earnings per share Dilated earnings per share 47,454 124.09 124.09 0 ZAGG INC AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share amounts) 70,248 a 30 (566 32,949 102,628 206,085 202.328 102628 2017 2016 2015 $264,425 $179,125 $76,135 143,880 97,201 38,738 120.545 81.924 37.397 (406) 12.495 10,246 5,067 53,330 39,592 15.504 11,497 9,732 87054 53,787 20.583 33,491 28,137 16,814 (6321) (3,022) (243) (2866) 0.48 1,906 (19) Total other expense Income before provision for income tases Income tax provision Net income Net loss attributable to moncontrolling interest Net income attributable to stockholders $ 14,505 $ 18,248 5-9,963 Karnings per share attributable to stockholders: (9.593) (1.135) (236) 21,898 27002 16,578 (9.393) (9418) (6.650) 14.505 17.584 9,928 35 See accompanying notes to consolidated financial statements. ZAGG INC AND SUBSIDIARIES CONSOLIDATED Cash flows from operating activities Net income Deferal income taxes Amortization of deferred loan costs Adjustments to reconcile net income to cash provided by used in operating activitie Stock-based compensation Impairment of goodwill and intangibles Excess tax benefits related to share-based payments Depreciation and amotination STATEMENTS OF CASH FLOWS (in thousands) Write-off of deferred loan costs Expense related to ince of wants Expense related to ince of stock for conting Expense related to ince of stock for royalties Impairment on notes receivable Loss on disposal of property and equipment Loss on investment in equity method investment Gain on deconsolidation of HO Related party other Prepaid expenses and other reasses Other assets Accounts payable Income taxes payable Changes in operating assets and liabilities, net of acquisition Accounts receivable Inventories Accrued liabilities Accrued wages and wage related expenses Deferred Sales return liability Net cash provided by used in) operating activities Deposits on and purchase of intangible asset Purchase of property and equipment Deconsolidation of H2O, net of cash Proceeds from investment intervable Acquisition of fog, net of cash acquired Net cash and in investing activities Cash flows from financing activities Payment of debtance costs Proceeds from suance of term note Proceeds from nevelving crede facilities Payments on termote Payments on revolving credit facilities Proceeds from exercise of warrants and options Excess tax benefits related to share-based payments Cash paid for investment in 1) Net Heo proceeds from issuance of Series B Preferred Stock Not cash provided by used in financing activities Effect of foreign currency exchange rates on cash and cash For the Years Ended December 31. 2017 $ 14,505 5,707 11,497 (707 } 11.599 (829) 706 1.509 311 . 313 2,366 (9,093 ) ) (10,334 (7,600 (11 3,044 (656 ) (262 ) 681 403 1299 17,446 } (2.836 (72 ) (12,764) ) ) (238) 24,000 26.238 (45,000) 20.74 (27,396 } 895 707 5 17:384 59.928 3,258 (1670) 5,926 (3.908) 329 - 377 100 336 1,419 1/07 134 42 (72) (1906) (2208) (12.200 2,468 (14,251) (2,747) (1861) (54) 2811 2015 9,341 (2002) 6,802 3,369 (953 994 (2,538) 45,000 (620) 348 (1,482) (11,546) 2,467 1,670 291 (392) 7.131 (3,154) 5.335 (96) (2.117) (1590) (819) (4,277) 666 138 (47.532) (12.999 (2986) 32 1.517 619 09x11 3,440 Cash and cash equivalents at beginning of the period Cash and cash equivalents at end of the period Supplemental disclosure of cash flow information Cash paid during the period for interest Cash paid during the period for taxes Balance as of January 1 Gross goodwill See accompanying notes to consolidated financial statements. (7) GOODWILL & INTANGIBLE ASSETS Accumulated impairment losses Net goodwill as of January 1 Goodwill acquired during the year Impairment loss Impairment of Goodwill and Intangible Assets For the year ended December 31, 2017, the Company recorded an impairment of goodwill in the amount of $5,441 for its iFrogz reporting unit within the iFrogz operating segment when it was determined that the carrying value of goodwill exceeded its fair value, which was determined during an impairment analysis performed during the fourth quarter of 2017. In conjunction with the impairment test, the Company considered factors such as the overall decline in the market price of the company's stock and decline in market capitalization for a sustained period as indicators for potential goodwill impairment. In determining the amount of impairment within the analysis, we considered both the income approach, utilizing a discounted cash flow analysis, and market approach, which considers what other purchasers and sellers in the market have paid for companies reasonably similar to the reporting unit. Balance as of December 31 Gross goodwill The goodwill impairment of $5,441 is included as a component of impairment of goodwill and intangibles in the consolidated statement of operations. Accumulated impairment losses Net goodwill as of December 31 26,403 $ 20,177 The changes in the carrying amount of goodwill for the year ended December 31, 2017 and 2016, are as follows: 2017 2016 $ 6,925 $ 6,925 4,477 18.536 (5,441) 2,373 4,971 26,433 52373 6,925 2,602 13.095 6,925 6925 (5,441) $1,484 $6.925 243 710 Balance as of January 1 Gross goodwill Accumulated impairment losses Net goodwill as of January 1 Goodwill acquired during the year Impairment loss Balance as of December 31 Gross goodwill Accumulated impairment losses Net goodwill as of December 31 Current (provision Federal Stane 2017 2016 $ 6,925 S (8) INCOME TAXES The components of income tax (provision) benefit for the years ended December 31, 2017, 2016 and 2015, are: 6,925 Txat statutory rate (35%) State tax, net of fodral to benefit Gain on deconsolidation of He Non-deductible expense and other Domestic production activities deduction Return to provision adjustment Interest and penalties Federal 38% rate bracket surcharge Increase in valuation allowance Deferred txant Allowance for doubul accounts Defoed revenue Inventories Stock-bund compensation Sales et accrual 6,925 (5.441) 6,925 6,925 (5,441) $1,484 56,925 2017 2016 2015 (1546) S(1147) (758) (22.104) (1,767) (1074) (116) (1768) (13.326) 0.135) Foreign Totul curent Deferred (provision) benefi Federal Sute 7.209 3,402 1,283 1,004 506 199 8,293 3.908 1482 Total deferred Total (provision) benef (9393) (9.418 506.650) The following is a reconciliation of the income taxes computed using the federal statutory rate to the provision for income taxes for the years ended December 31, 2017, 2016 and 2015: Acquisition costs, net of amortization Intangible assets Condu 2017 2016 2015 S360 5451) 55,636) (663)(888) (556) 316 (341) (130) (198) 676 771 587 (49) (36) (437) (201) (209) (652) 59.393, 59,418) 506,650) The tax effects of temporary differences that gave rise to significant portions of deferred tax assets and liabilities at December 31, 2017 and 2016, are as follows: 2017 2016 $1,000 $ 791 12 23171636 1.420 507 2456 2,061 282 292 4372 307 Im Deferred $1.000 791 Allowance for didact Defend even Inventories 12 2.317 1436 1.420 597 Stock-based compution al Sales 2456 2061 Acquisition costs, net of motion 252 22 Goodwill Ho investment Reserve one receivable Other liabilne Deferred tax assets Valuation allowance Total defend taxat Deferred tax liabiti Property and equipment Investment in Ho 2017 2016 Deferred tatt-cum Deferred taxes, net-a Not deferred tax 4372 37 1.801 713 569 569 38 35 15.015 6,300 (713) $14,302 56.300 794 633 Goodwill Total gross deferred to fiabilities 794 1.086 Netdeferred t $6,912 55.132 6.596 $13.50 $5,214 At December 31, 2017, the Company recorded a full valuation allowance against a deferred tax asset generated by losses on its equity method investment in HzO. HO is a development stage enterprise and given current operations and uncertainty of future profitability, management has determined that it is more likely than not that the deferred tax asset will not be realizable. Given this, a full valuation allowance of $713 has been recorded against the deferred tax asset. The Company has not recorded a tax benefit at December 31, 2017 and 2016 for operating losses in France and the UK from operations of iFrogz Europe SAS (gross cumulative operating loss of $1,280). Operations for iFrogz Europe and ZAGG Europe have been transitioned to Ireland and therefore, we do not expect future taxable income within France and the UK to offset current net operating losses. For all other deferred tax assets, no valuation allowance has been recorded at December 31, 2017 and 2016, as management believes it is more likely than not that the results of future operations will generate sufficient taxable income to realize its deferred tax assets. The Company has not recognized a deferred tax liability for the undistributed gornings of its formign onorations that UK from operations of iFrogz Europe SAS (gross cumulative operating loss of $1,280). Operations for iFrogz Europe and ZAGG Europe have been transitioned to Ireland and therefore, we do not expect future taxable income within France and the UK to offset current net operating losses. For all other deferred tax assets, no valuation allowance has been recorded at December 31, 2017 and 2016, as management believes it is more likely than not that the results of future operations will generate sufficient taxable income to realize its deferred tax assets. The Company has not recognized a deferred tax liability for the undistributed earnings of its foreign operations that arose in 2017 and prior years as the Company considers these earnings to be indefinitely reinvested. Cash held by foreign entities that is considered permanently re-invested totaled $3,531 as of December 31, 2017. If this cash were repatriated to the United States, outside the settlement of intercompany payables, the Company would need to accrue and pay the related tax, however, the Company considers these funds permanently re-invested and has no plans to repatriate these funds. The Company recognizes the impact of a tax position in the financial statements if that position is more likely than not of being sustained on audit, based on the technical merits of the position. As of December 31, 2017 and 2016, the Company recorded a tax contingency of $61 and $61, respectively, related to foreign taxes at the iFrogz segment. For the years ended December 31, 2017, 2016, and 2015, the Company recorded $0, SO, and $201. respectively in interest and penalties, which were included as a component of income tax provision. The Company is currently not under examination by any federal or state tax authority, but remains subject to income tax examinations for each of its open tax years, which extend back to 2009 for federal income tax purposes and 2008 for state income tax purposes