UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark one)

☒   Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

for the quarterly period ended September 30, 2015,March 31, 2016, or

☐   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 INC

(Exact name of registrant as specified in its charter)

3855 South910 West Legacy Center Drive, Suite 500 West, Suite J

Salt Lake City,Midvale, Utah 8411584047

(Address of principal executive offices with zip code)

(801) 263-0699

(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (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 ☒Yes☒    No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes ☒Yes☒    No☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-25 of the Exchange Act).Yes☐    No☒

Yes ☐    No ☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:27,663,686common 28,115,656common shares as of October 30, 2015May 1, 2016.

ZAGG INC AND SUBSIDIARIES

FORM 10-Q

TABLE OF CONTENTS

PART I - FINANCIAL INFORMATION

ZAGG INC AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except par value)

(Unaudited)

See accompanying notes to condensed consolidated financial statements.

ZAGG INC AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except for per share amounts)

(Unaudited)

See accompanying notes to condensed consolidated financial statements.

ZAGG INC AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONSCOMPREHENSIVE INCOME

(in thousands, except per share amounts)thousands)

(Unaudited)

See accompanying notes to condensed consolidated financial statements.

ZAGG INC AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)CASH FLOWS

(in thousands)

(Unaudited)

See accompanying notes to condensed consolidated financial statements.

ZAGG INC AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)

See accompanying notes to condensed consolidated financial statements.

ZAGG INC AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(Dollars and shares in thousands)

(Unaudited)

Supplemental schedule of noncash investing and financing activities

For the NineThree Months Ended September 30, 2015:

Foreclosure on real property valued at $1,099 that served as collateral to the note receivable (recorded as a component of other assets in the condensed consolidated balance sheet).

Foreclosure on the Company’s common stock valued at $688 that served as collateral to the note receivable (recorded as treasury stock in the condensed consolidated balance sheet).March 31, 2016:

Purchase of $763$1,480 in fixed assets financed through accounts payable.

Purchase of $563$106 in treasury stockdebt issuance costs financed through accounts payable.

For the NineThree Months Ended September 30, 2014:March 31, 2015:

NonePurchase of $117 in fixed assets financed through accounts payable.

ZAGG INC AND SUBSIDIARIES

Notes to Condensed Consolidated Financial StatementsNOTES TO CONSENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars, units, and& shares in thousands, except per share data)

(Unaudited)

ZAGG Inc and its subsidiaries (“ZAGG”we,” “us,” “our,” “ZAGG,” or the “Company”) design, produce,is an innovation leader in mobile tech accessories for smartphones and distribute professional and premiumtablets. For over 10 years, ZAGG has developed creative product solutions such as InvisibleShield^®that enhance and protect mobile devices for consumers around the world. The Company has an award-winning product portfolio that includes screen protection, mobile keyboards, for tablet computerspower management, cases, social tech, and mobile devices, keyboard cases, mobile power solutions, earbuds, headphones, Bluetooth^®speakers, cases,personal audio sold under the ZAGG, InvisibleShield®, mophie®, and cables.iFrogz® brands.

The accompanying unaudited condensed consolidated financial statements 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 (“U.S.US GAAP”) have been condensed or omitted pursuant to such rules and regulations. These condensed consolidated 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, the results of operations, and cash flows of the Company for the periods presented. The Company suggests that these condensed consolidated financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s 20142015 Annual Report on Form 10-K. Operating results for the interim periods are not necessarily indicative of the results that may be expected for the full year.

The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

On March 3, 2016 the Company acquired mophie inc. ("mophie") for gross up-front cash consideration of $100,000. The results of operations of mopie are included in the Company's results of operations beginning on March 3, 2016. Based on the manner in which the Company manages, evaluates, and internally reports its operations, the Company determined that mophie will be reported as a separate operating segment. See Notes 2 and 14 for additional details on the acquisition and the Company's segments.

The condensed consolidated financial statements include the accounts of ZAGG Inc and its wholly owned subsidiaries ZAGG International Distribution Limited (“ZAGG International”); Patriot Corporation; ZAGG Intellectual Property Holding Co, Inc. (“ZAGG IP”); ZAGG Retail, Inc.Inc; mophie inc.; mophie LLC, mophie Technology Development Co., Ltd; mophie Netherlands Cooperatie U.A.; and iFrogz, Inc.mophie Limited. All intercompany transactions and balances have been eliminated in consolidation.

Significant Accounting Policies

There have been no significant changes to theThe Company’s significant accounting policies asare described in Note 1 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.2015.In addition to these policies, the Company has adopted a significant accounting policy relating to business combinations and accounting for goodwill as a result of the acquisition of mophie, as described below. Also, in connection with the acquisition of mophie, the Company changed its operating segments, as described in Note 14.

Business Combinations – We allocate the purchase price of acquired companies to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values. The excess of the purchase price over these fair values is recorded as goodwill. We engaged an independent third-party valuation firm to assist us in determining the fair values of assets acquired and liabilities assumed. Such valuations require management to make significant estimates and assumptions, especially with respect to intangible assets. The significant purchased classes of intangible assets recorded by us include tradenames, technology, customer relationships, non-compete agreements, and backlog. The fair values assigned to the identified intangible assets are discussed in Note 2 to the condensed consolidated financial statements.

Significant estimates in valuing certain intangible assets include but are not limited to: future expected cash flows related to each individual asset, market position of the tradenames, as well as assumptions about cash flow savings from the tradenames, determination of useful lives, and discount rates. Management’s estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates.

Goodwill–At least annually and when events and circumstances warrant an evaluation, we perform our impairment assessment of goodwill. This assessment initially permits an entity to make a qualitative assessment of whether it is more likely than not that a reporting unit’s fair value is less than its carrying amount before applying the two-step goodwill impairment test. If an entity can support the conclusion that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, it would not need to perform the two-step impairment test for the reporting unit.

However, if it is determined that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, the two step analysis is performed, which incorporates a fair-value based approach. We determine the fair value of our reporting unit based on discounted cash flows and market approach analyses as considered necessary, and consider factors such as the economy, reduced expectations for future cash flows coupled with a decline in the market price of our stock and market capitalization for a sustained period as indicators for potential goodwill impairment. If the reporting unit’s carrying amount exceeds its estimated fair value, a second step must be performed to measure the amount of the goodwill impairment loss, if any. The second step compares the implied fair value of the reporting unit’s goodwill, determined in the same manner as the amount of goodwill recognized in a business combination, with the carrying amount of such goodwill. If the carrying amount of the reporting unit’s goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued an Accounting Standard Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers (Topic 606).” This ASU includes a five-step process by which entities will recognize revenue to depict the transfer of goods or services to customers in amounts that reflect the consideration to which an entity expects to be entitled to in exchange for those goods or services. The standardASU also will require enhanced disclosures to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. On July 9, 2015, the FASB voted to approve a one year deferral of the effective date of this ASU. This deferral was issued by the FASB in ASU No. 2015-14, “Revenue from Contracts with Customers (Topic 606) – Deferral of the Effective Date”. As a result of ASU No. 2015-14 the Company expects that it will apply the new revenue standard to annual and interim reporting periods beginning after December 15, 2017. The Company is currently evaluating the impact this ASU will have on its consolidated financial statements.

In June 2014, the FASB issued ASU No. 2014-12, “Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period”. This ASU requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. The ASU states that a reporting entity should apply existing guidance in Topic 718, “Compensation – Stock Compensation”,to awards with performance conditions that affect vesting. The ASU is effective for annual and interim reporting periods beginning after December 15, 2015. This ASU is not expected to have a significant impact on the Company’s consolidated financial statements.

ZAGG INC AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Dollars, units and shares in thousands, except per share data)

(Unaudited)

In August 2014, the FASB issued ASU No. 2014-15, “Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern.” This ASU describes how an entity should assess its ability to meet obligations and sets disclosure requirements for how this information should be disclosed in the financial statements. The standard provides accounting guidance that will be used with existing auditing standards. The ASU applies to all entities for the first annual period ending after December 15, 2016, and interim periods thereafter. This ASU is not expected to have a significant impact on the Company’s consolidated financial statements.

In February 2015, the FASB issued ASU No. 2015-02, “Amendments to the Consolidation Analysis”, to improve targeted areas of the consolidation guidance and reduce the number of consolidation models. The new consolidation standard changes the way reporting enterprises evaluate whether (a) they should consolidate limited partnerships and similar entities, (b) fees paid to a decision maker or service provider are variable interests in a variable interest entity (VIE), and (c) variable interests in a VIE held by related parties of the reporting enterprise require the reporting enterprise to consolidate the VIE. It also eliminates the VIE consolidation model based on majority exposure to variability that applied to certain investment companies and similar entities. This ASU is effective for annual and interim reporting periods beginning after December 15, 2015, with early adoption permitted. This ASU is not expected to have a significant impact on the Company’s consolidated financial statements.

In April 2015, the FASB issued ASU No. 2015-03, “Interest – Imputation“Interest-Imputation of Interest:Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs.” Previously, debt issuance costs were recorded as assets on the balance sheet. This ASUupdate requires that debt issuance costs related to a recognized debt liability be presented inon the balance sheet as a direct deduction from the carrying amount of thatthe debt liability, consistent with debt discounts. The ASU is effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. This ASU is not expected to have a significant impact onCompany adopted this standard during the Company’s consolidated financial statements.first quarter of 2016.

In July 2015, the FASB issued ASU No. 2015-11, “Simplifying the Measurement of Inventory.” This ASU provides guidance to entities that measure inventory using a method other than last-in, first-out (LIFO) or the retail inventory method. For entities using first-in, first-out (FIFO) or average cost, the measurement principle for their inventory changes from the lower of cost or market to lower of cost and net realizable value. Current U.S. GAAP requires, at each financial statement date, that entities measure inventory at the lower of cost or market. The measurement of market is commonly the current replacement cost. However, entities also need to consider net realizable value and net realizable value less an approximately normal profit margin in their measurement. For entities using a method other than LIFO or the retail inventory method, the ASU replaces market with net realizable value. This ASU requires prospective adoption for inventory measurement for fiscal yearsannual and interim periods beginning after December 15, 2016 and interim periods within those years for public business entities. The Company is currently evaluating the impact this ASU will have on its consolidated financial statements.

In AugustSeptember 2015, the FASB issued ASU No. 2015-15, “Interest – Imputation2015-16, “Simplifying the Accounting for Measurement-Period Adjustments,” which eliminates the requirement for an acquirer to retrospectively adjust the financial statements for measurement-period adjustments that occur in periods after a business combination is consummated. The ASU is effective for public business entities for annual periods, including interim periods within those annual periods, beginning after December 15, 2015. The Company adopted this standard during the first quarter 2016.

In November 2015, the FASB issued ASU No. 2015-17, “Balance Sheet Classification of Interest (Subtopic 835-30) – PresentationDeferred Taxes,” which requires entities with a classified balance sheet to present all deferred tax assets and Subsequent Measurementliabilities as noncurrent. The ASU is effective for public business entities for interim and annual periods in fiscal years beginning after December 15, 2016. The Company is currently evaluating the impact this ASU will have on its consolidated financial statements.

In February 2016, the FASB issued its new lease accounting standard, which requires lessees to recognize most leases, including operating leases, on-balance sheet via a right of Debt Issuance Costs Associateduse asset and lease liability. Lessees are allowed to account for short-term leases (i.e., leases with Line-of-Credit Arrangements.” Thisa term of 12 months or less) off-balance sheet, consistent with current operating lease accounting. A number of other significant changes to lease accounting have been effected through the issuance of this standard. The new standard is effective for public companies for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is currently evaluating the impact this ASU adds SEC paragraphs to Subtopic 835-30will have on its consolidated financial statements.

In April 2016, the FASB issued ASU No. 2016-11, which simplified accounting for share-based payments. The ASU is effective for fiscal years beginning after December 15, 2016, and interim periods within those years for public business entities. Early adoption is permitted in any interim or annual period provided that the entire ASU is adopted. The Company is currently evaluating the impact this ASU will have on its consolidated financial statements.

On February 2, 2016, ZAGG and ZM Acquisition, Inc. (“Merger Sub”), a Delaware corporation and wholly-owned subsidiary of the Company, entered into an Agreement and Plan of Merger (the “Merger Agreement”) with mophie, a California corporation, the principal shareholders of mophie named therein (the “Principal Shareholders”), and Daniel Huang as representative of the mophie shareholders, warrant holders, and option holders, pursuant to which Merger Sub merged with and into mophie, with mophie continuing as the SEC Staff Announcementsurviving corporation (the “Merger”). On March 3, 2016 (the “Acquisition Date”), the Company completed the Merger. The combination of ZAGG and mophie creates a diversified market leader in multiple mobile accessories categories.

The Company purchased mophie for total gross up-front consideration of $100,000 in cash, subject to a working capital adjustment. The Merger Agreement includes an earn-out provision whereby additional consideration would be paid based on whether mophie’s 12-month Adjusted EBITDA (as defined in the Merger Agreement) from April 1, 2016 to March 31, 2017 (“Earnout Period”) exceeds $20,000. For every dollar in Adjusted EBITDA generated during the Earnout Period that exceeds $20,000, the Company will pay additional consideration at a five times multiple (“Earnout Consideration”). Any Earnout Consideration will initially be paid by the issuance of up to $5,000 in shares of the Company’s common stock valued as of February 2, 2016 (the day prior to the public announcement of the definitive agreement on February 3, 2016).

In addition to the Earnout Consideration, the Company will also remit cash to the Principal Shareholders once the following contingent items related to pre-acquisition operations have been resolved:

In addition, $2,000 of the cash consideration paid to the Principal Shareholders was placed in an escrow account to cover any potential tax, legal, or other contingencies that could potentially arise relating to pre-acquisition events for which ZAGG is indemnified. If charges exceed $2,000, ZAGG may recover these amounts through a $10,000 insurance policy related to representations and warranties. Currently, the Company is not aware of any such contingencies or potential indemnity claims.

The following summarizes the components of the purchase consideration:

The total purchase price of $80,114 has been preliminarily allocated to identifiable assets acquired and liabilities assumed based on their respective preliminary fair values. The excess of the purchase price over the fair value of tangible and intangible assets acquired and liabilities assumed was recorded as goodwill. The allocation of goodwill to reportable segments has not yet been completed.

The following table summarizes the preliminary estimates of the fair values of the identifiable assets acquired and liabilities assumed as of the Acquisition Date. The preliminary estimates of the fair value of identifiable assets acquired and liabilities assumed are based on estimates and assumptions and are subject to revisions, which may result in adjustments to the preliminary values presented below, when management’s estimates are finalized:

Due to the fact that the acquisition of mophie occurred in the current interim period and in light of the magnitude of the transaction, the Company’s fair value estimates for the purchase price, assets acquired, and liabilities assumed are preliminary and may change during the allowable measurement period. The allowable measurement period continues to the date the Company obtains and analyzes all relevant information that existed as of the date of the acquisition necessary to determine the fair values of the assets acquired and liabilities assumed, but in no case is to exceed more than one year from the date of acquisition (March 3, 2017). The Company is analyzing information to verify assets acquired and liabilities assumed.

As part of the acquisition of mophie, the Company incurred legal, accounting, and other due diligence fees that were expensed when incurred. Total fees incurred related to the acquisition of mophie for the three months ended March 31, 2016 were $2,017, which are included as a component of selling, general, and administrative expenses on the condensed consolidated statement of operations.

Identifiable Intangible Assets

Classes of acquired intangible assets include tradenames, technology, customer relationships, non-compete agreements, and backlog. The fair value of the identifiable intangible assets was determined using various valuation methods, including the income and market approaches. For assets valued under the income approach, the estimate of the present value of expected future cash flows for each identifiable asset was based on discount rates which incorporate a risk premium to take into account the risks inherent in those expected cash flows. The expected cash flows were estimated using available historical data adjusted based on the Company’s historical experience and the expectations of market participants. The market approach was utilized to determine appropriate royalty rates applied to the valuation of the trademarks and technology. The preliminary amounts assigned to each class of intangible asset and the related preliminary weighted average amortization periods are as follows:

Goodwill

Goodwill represents the excess of the mophie purchase price over the fair value of the assets acquired and liabilities assumed.

The Company believes that the primary factors supporting the amount of goodwill recognized are the significant growth opportunities and expected synergies of the combined entity.

Results of Operations

The results of operations of mophie are included in the Company’s results of operations beginning on March 3, 2016. From March 3, 2016 through March 31, 2016, mophie generated net sales of $7,636 and had a net loss of $4,115.

Pro forma Results from Operations

The following unaudited pro-forma results of operations for the three months ended March 31, 2016 and 2015 give pro forma effect as if the acquisition and borrowings used to finance the acquisition had occurred on January 1, 2015, after giving effect to certain adjustments including the amortization of intangible assets, interest expense, tax adjustments, specific transaction related expenses incurred prior to the execution date, and assumes the purchase price was allocated to the assets purchased and liabilities assumed based on their fair market values at the June 18,date of purchase.

The unaudited pro forma information is presented for illustrative purposes only and is not necessarily indicative of the operating results that would have occurred had the transaction been consummated for the dates indicated. Furthermore, such unaudited pro forma information is not necessarily indicative of future operating results of the combined companies, due to changes in operating activities following the purchase, and should not be construed as representative of the operating results of the combined companies for any future dates or periods.

For the three months ended March 31, 2016 and 2015, Emerging Issues Task Force (EITF) meeting aboutpro forma net income includes projected amortization expense of $2,392 and $1,924, respectively. In addition, the presentationCompany included interest from the new credit facility and subsequent measurementamortization of debt issuance costs associated with line-of-credit (LOC) arrangements. Specifically,for the ASU statesthree months ended March 31, 2016 and 2015 of $493 and $523, respectively. Material non-recurring adjustments excluded from the pro forma financial information above consists of the $6,937 step up of mophie inventory to its fair value, which is expected to be recorded as an unfavorable adjustment to cost of goods sold during the six months following the acquisition date.

The unaudited pro forma results do not reflect events that either have occurred or may occur after the Merger, including, but not limited to, the anticipated realization of ongoing savings from operating synergies in subsequent periods. They also do not give effect to certain charges that the SEC staff wouldCompany expects to incur in connection with the Merger, including, but not objectlimited to, an entity deferringadditional professional fees, employee integration, retention and presenting debt issuanceseverance costs, as an asset and subsequently amortizing deferred debt issuance costs ratably over the term of the LOC arrangement, regardless of whether there are outstanding borrowings under that LOC arrangement. This ASU is effective on adoption of ASU 2015-03 and is not expected to have a significant impact on the Company’s consolidated financial statements.

ZAGG INC AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Dollars, units and shares in thousands, except per share data)

(Unaudited)or product rationalization charges.

At September 30, 2015, and December 31, 2014, inventories consistedConcurrent with the close of the following:Merger on March 3, 2016, the Company entered into a Credit and Security Agreement with KeyBank National Association (“KeyBank”), acting as administrative agent and swing line lender; KeyBanc Capital Markets Inc., acting as joint lead arranger and sole book runner; Zions Bank (“Zions”), as joint lead arranger; and JP Morgan Chase, as a member of the bank syndicate (“Credit and Security Agreement”). The Credit and Security Agreement replaces the prior credit agreement with Wells Fargo, which was terminated upon signing the Credit and Security Agreement.

The Credit and Security Agreement provides an $85,000 revolving credit commitment (“Line of Credit”).Borrowings and repayments under the Line of Credit may occur from time to time in the Company’s ordinary course of business through the maturity date of March 2, 2021, at which time any amounts outstanding are to be paid in full (60-month term). All borrowings under the Line of Credit are subject to a borrowing base limit, which is calculated from outstanding accounts receivable and inventory, and reported to the administrative agent monthly. Interest on the Line of Credit will accrue at the base rate plus 0.50% or LIBOR plus 1.50%. The Line of Credit is subject to an unused line fee calculated as 0.20% multiplied by the average unused amount of the Line of Credit.

The Credit and Security Agreement also provides a $25,000 term loan commitment (“Term Loan”). Principal and interest payments on the Term Loan are to be made in consecutive monthly installments of $521 commencing on April 1, 2016 and continuing until the Term Loan is paid in full on March 2, 2020 (48-month term).Interest on the Term Loan will accrue at the base rate plus 1.0% or at a rate of LIBOR plus 2.0%.

The Credit and Security Agreement also provides for letters of credit with a fronting fee of 0.125% (paid per annum) for all issued and outstanding letters of credit.

The Credit and Security Agreement provides for a lockbox and cash collateral account that will be maintained with KeyBank. The Credit and Security Agreement is collateralized by substantially all of the assets of the Company. The Credit and Security Agreement establishes two debt covenants that are measured on a quarterly basis starting with the quarter-ended June 30, 2016:

In addition, included inconnection with the establishment of the Credit and Security Agreement, the Company incurred and capitalized $1,128 of direct costs; $872 of the costs are related to the line of credit and as such are reflected as a component of prepaid expensesexpense and other current assets, and $256 was reflected as an offset to long-term debt in the condensed consolidated balance sheet. For the three months ended March 31, 2016, the Company amortized $20 of these loan costs, which are included as a component of interest expense in the condensed consolidated statements of operations. For the three months ended March 31, 2015, the Company amortized $16 of capitalized costs related to the Wells Fargo credit agreement, which are included as a component of interest expense in the condensed consolidated statements of operations. All costs capitalized associated with the Wells Fargo credit agreement were inventory deposits with third-party manufacturersfully amortized at September 30, 2015 and December 31, 20142015.

For the three months ended March 31, 2016 and 2015, $8 and $9, respectively, in unused line fees were incurred and included as a component of $1,402interest expense in the condensed consolidated statements of operations.

At March 31, 2016 and $1,425,2015, the weighted average interest rate on all outstanding borrowings under the revolving lines of credit was 3.21% and 1.13%, respectively. At March 31, 2016, the effective interest rate on the Term Loan was 2.96%.

Contractual future payments under the Credit and Security Agreement are as follows:

Definite-livedAmortizable intangibles as of September 30, 2015,March 31, 2016, and December 31, 2014,2015, were as follows:

Customer relationships, trademarks,tradenames, and other intangibles are amortized on an accelerated basis consistent with their expected future cash flows over their estimated useful life, which results in accelerated amortization. The remaining definite-livedamortizable intangible assets are amortized using the straight line method over their estimated useful life. For the three and nine months ended September 30,March 31, 2016 and 2015, amortization expense was $2,160$2,768 and $6,478,$2,155, respectively. Amortization expense wasis primarily recorded as a component of operating expense. However, amortization expense related to acquired technology for the three and nine months ended September 30,March 31, 2016 and 2015, of $26$22 and $75,$21, respectively, wasis recorded as a component of cost of sales.

For the three and nine months ended September 30, 2014, amortization expense was $2,447 and $7,347, respectively. Amortization expense related to acquired technology for the three and nine months ended September 30, 2014, of $20 and $65, respectively, was recorded as a component of cost of sales.

ZAGG INC AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Dollars, units and shares in thousands, except per share data)

(Unaudited)

Estimated future amortization expense is as follows:

OnAt March 31, 2016, and December 23, 2014,31, 2015, inventories consisted of the Company and Wells Fargo Bank, National Association (“Wells Fargo”), entered into the Third Amendment to Credit Agreement (“Third Amendment”), which modified the original Credit Agreement (the “Credit Agreement”) entered into between the Company and Wells Fargo on December 7, 2012 and all subsequent amendments to the Credit Agreement (First Amendment to the Credit Agreement entered into on December 20, 2013 and Second Amendment to the Credit Agreement entered into on November 4, 2014). The Third Amendment provided a $25,000 line of credit and extended the maturity date from December 1, 2015 to December 1, 2016. Theline of credit available under the Credit Agreement includes a letter of credit sub-feature that allows the Company to issue standby commercial letters of credit against the line of credit, not to exceed at any time an aggregate of $5,000. During the three and nine months ending September 30, 2015 and 2014, the Company did not issue any standby commercial letters of credit.following:

On August 24, 2015, the Company and Wells Fargo, entered into the Fourth Amendment to Credit Agreement (“Fourth Amendment”), which modified the original Credit Agreement entered into between the Company and Wells Fargo on December 7, 2012 and all subsequent amendments to the Credit Agreement. The Fourth Amendment modified a debt covenant to allow the Company to purchase up to $15.0 million of ZAGG Inc common stock during each calendar year, including the 2015 calendar year, rather than during consecutive twelve month periods, as was documented in the Credit Agreement prior to the Fourth Amendment.

Any outstanding principal balance under the line of credit bears interest at a fluctuating rate per annum determined to be the sum of the (1) LIBOR margin established under the Credit Agreement (with the initial LIBOR margin being set at 1.25%) and (2) Daily Three Month LIBOR (as defined in the Credit Agreement) in effect from time to time.  Each change in the rate of interest will become effective on each business day on which a change in daily three month LIBOR is announced by Wells Fargo.

In addition, the Company pays Wells Fargo a quarterly fee based on the average unused amount of the line of credit depending on the Company’s leverage ratio (as this term is definedincluded in the Credit Agreement).

For the threeprepaid expenses and nine months ended September 30, 2015, $10 and $28, respectively, in unused line feesother current assets were incurred and are included as a component of interest expense in the condensed consolidated statements of operations. For the three and nine months ended September 30, 2014, $23 and $67, respectively, in unused line fees were incurred and are included as a component of interest expense in the condensed consolidated statements of operations.

The Company originally incurred and capitalized $238 of direct costs related to the establishment of the Credit Agreement. The Company amortizes deferred loan costs under the straight-line method. The carrying value of deferred loan costsinventory deposits with third-party manufacturers at September 30, 2015March 31, 2016 and December 31, 2014, was $112015 of $360 and $60, respectively, and is included as a component of noncurrent other assets in the condensed consolidated balance sheets.

For the three and nine months ended September 30, 2015, the Company amortized $16 and $49, respectively, of the deferred loan costs, which are included as a component of interest expense in the condensed consolidated statements of operations. For the three and nine months ended September 30, 2014, the Company amortized $17 and $49, respectively, of these loan costs, which are included as a component of interest expense in the condensed consolidated statements of operations.

ZAGG INC AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Dollars, units and shares in thousands, except per share data)

(Unaudited)

The Company is also subject to a number of financial and non-financial debt covenants under the Credit Agreement. At September 30, 2015, the Company was in compliance with all covenants associated with the Credit Agreement.

Payment in full under the Credit Agreement is due on December 1, 2016. At September 30, 2015 and 2014, the balance outstanding on the line of credit was zero.$813, respectively.

Common Stock OptionsThe Company granted 529 and 545 restricted stock units during the three months ended March 31, 2016 and 2015, respectively. The restricted stock units granted during the three months ended March 31, 2016 and 2015, were estimated to have a weighted-average fair value per share of $9.87 and $6.51, respectively. The fair value of the restricted stock units granted is based on the closing share price of the Company’s common stock on the date of grant. The restricted stock units vest annually on a straight-line basis over a nine-month (annual board of directors’ grant) to three-year vesting term, depending on the terms of the individual grant.

ForAs part of the 529 and 545 shares of restricted stock granted as discussed above, during the first three months of 2016 and nine months ended September 30, 2015, and 2014, the Company granted no373 and 269 shares of restricted stock, option awards.respectively, to certain executives of the Company where vesting is linked to specific performance criterion. The shares of restricted stock granted in 2016 only vest upon the Company’s achievement of specified thresholds of net sales, Adjusted EBITDA, or specific goals for the individual executive. The shares of restricted stock granted in 2015 only vested upon the achievement of specified thresholds of net sales, Adjusted EBITDA, and earnings per share. As of March 31, 2016, the Company believes it is probable that it will achieve the targets for 321 shares of restricted stock granted in the first three months of 2016. Of the 269 shares of restricted stock granted in 2015, 224 shares vested (including 7 shares granted in excess of the original grant due to the Company exceeding the operating thresholds) and 52 shares were forfeited.

The Company recorded share-based compensation expense only for those optionsrestricted stock units that are expected to vest. The estimated fair value of the restricted stock optionsunits is recognized on a straight-line basis over the requisite service period of the award, which is generally the vesting term of the award. During the three and nine months ended September 30, 2015, the Company recorded stock-based compensation expense related to stock options of $0 as all stock option awards that have been granted are vested. During the threeMarch 31, 2016 and nine months ended September 30, 2014, the Company recorded stock-based compensation expense related to stock options of $0 and $28, respectively, which is included as a component of selling, general, and administrative expense.

Restricted Stock

During the three and nine months ended September 30, 2015, the Company granted 24 and 569 shares of restricted stock, respectively. During the three and nine months ended September 30, 2014, the Company granted 36 and 507 shares of restricted stock, respectively. The shares of restricted stock granted during the three and nine months ended September 30, 2015, were estimated to have a weighted-average fair value per share of $8.24 and $6.58, respectively. The shares of restricted stock granted during the three and nine months ended September 30, 2014, were estimated to have a weighted-average fair value per share of $5.75 and $4.68, respectively. The fair value of the shares of restricted stock granted is based on the closing share price of the Company’s common stock on the date of grant. The shares of restricted stock vest annually over a 12-month to three-year vesting term, depending on the terms of the individual grant.

As part of the 569 and 507 shares of restricted stock granted as discussed above, during the first nine months of 2015 and 2014, the Company granted 289 and 113 shares of restricted stock, respectively, to certain executives of the Company. These shares of restricted stock granted in 2015 and 2014 only vest upon the Company’s achievement of specified thresholds of net sales, Adjusted EBITDA, and earnings per share for fiscal year 2015 and 2014, respectively. If the Company achieves the target amount of net sales, Adjusted EBTIDA, and earnings per share for the applicable performance period, all of the shares of restricted stock granted will vest under the terms of the respective grants. If the Company achieves less than 100% of the targets for the applicable performance period, but above a predetermined floor, the number of shares of restricted stock vested will decrease proportionately. However, if the Company’s performance for the applicable performance period is below the predetermined floor, all of the shares of restricted stock granted will be forfeited. If the Company achieves more than 100% of the target for the applicable performance period, the number of shares of restricted stock vested will increase proportionately up to, but will not exceed, 115% of the target 289 and 113 shares of restricted stock granted for 2015 and 2014, respectively. As of September 30, 2015, the Company believes it is probable that it will achieve 100% of the targets for the shares of restricted stock granted in the first nine months of 2015. Of the 113 shares of restricted stock granted in 2014, 81 shares vested and 32 shares were forfeited.

As part of the 569 shares of restricted stock granted during the first nine months of 2015, the Company granted 213 shares of restricted stock to its chief executive officer. These restricted stock units only vest upon the following performance conditions being met for the year 2015: (1) the Company’s achievement of a gross profit margin equal to or in excess of 31.9%, (2) the Company’s achievement of certain cost savings initiatives within cost of sales specified by the compensation committee of the board of directors, and (3) the chief executive officer’s continued employment. As of September 30, 2015, the Company believes it is probable that the performance conditions will be met and that the restricted stock units granted will vest.

ZAGG INC AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Dollars, units and shares in thousands, except per share data)

(Unaudited)

The Company recorded stock-based compensation expense only for those shares of restricted stock that are expected to vest. The estimated fair value of the restricted stock is recognized on a straight-line basis over the requisite service period of the award, which is generally the vesting term of the award. During the three and nine months ended September 30, 2015, the Company recorded stock-based compensation expense related to restricted stock units of $898$1,336 and $2,708, respectively, which is included as a component of selling, general, and administrative expense. During the three and nine months ended September 30, 2014, the Company recorded stock-based compensation expense related to restricted stock of $506 and $1,644,$876, respectively, which is included as a component of selling, general, and administrative expense.

During the ninethree months ended September 30,March 31, 2016 and 2015, certain ZAGG employees elected to receive a net amount of shares upon the vesting of a restricted stock unit grant in exchange for the Company paying the minimum statutory withholding amount of the employees’ tax liabilities for the fair value of the award on the vesting date. This resulted in the Company paying $621 and $718, respectively, which is reflected as a reduction of additional paid-in capital.

During the nine months ended September 30, 2014, a ZAGG employee elected to receive a net amount of shares upon the vesting of restricted stock unit grants in exchange for the Company incurring the tax liability for the fair value of the award on the vesting date. This resulted in the Company recording $33 in compensation expense, with the offset being originally recorded to accrued wages and wage related expenses rather than to additional paid-in capital.

During the nine months ended September 30, 2015, the Company incurred incremental expense related to the departure of its former chief financial officer. Expenses incurred during the period include separation pay of $117 related to the acceleration of vesting on 15 restricted stock units that were previously scheduled to vest during the first quarter of 2016.

During the three and nine months ended September 30, 2015, theThe Company’s effective tax rate was 39%19.6% and 40%, respectively. During41.7% for the three and nine months ended September 30, 2014, the Company’s effective tax rate was 34%March 31, 2016 and 16%,2015, respectively. The increasedecrease in the effective tax rate is attributablewas primarily due to return-to-provision true-ups(1) a decrease in the state rate used for deferred taxes caused by the acquisition of mophie and the adjustment to deferred taxes for aresulting change in ourthe mix of state effective rate in the prior year, and the increased impact of a lossapportionment factors, which resulted in a discrete item being recognized during 2016, and (2) reduced losses from foreign tax jurisdiction due to lower net income/(loss) during the three and nine months ended September 30,2014.jurisdictions that are taxed at a 0% rate. The Company’s effective tax rate will generally differ from the U.S. Federal Statutorystatutory rate of 35%, due to foreign and state taxes, permanent items, and the Company’s global tax strategy.

Basic earnings per common share excludes dilution and is computed by dividing net income by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per common share reflectsreflect the potential dilution that could occur if stock options and restricted stock units, or other common stock equivalents were exercised or converted into common stock. The dilutive effect of restricted stock optionsunits or other common stock equivalents is calculated using the treasury stock method.

ZAGG INC AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Dollars, units and shares in thousands, except per share data)

(Unaudited)

The following is a reconciliation of the numerator and denominator used to calculate basic earnings per share and diluted earnings per share for the three and nine months ended September 30, 2015March 31, 2016 and 2014:2015:

For the three months ended September 30,March 31, 2015, warrants and restricted stock and stock optionsunits to purchase 443442 shares of common stockwere not considered in calculating diluted earnings per share because the warrant or stock option exercise prices or the total expected proceeds under the treasury stock method for the warrants, restricted stock units, or stock options was greater than the average market price of common shares during the period and, therefore, the effect would be anti-dilutive. Also excluded from the calculation of diluted earnings per share for the three months ended September 30, 2015 were 452 shares of restricted stock granted that were not yet vested as the performance conditions were not met (see further discussion in Note 5).

For the nine months ended September 30, 2015, warrants, restricted stock, and stock options to purchase 328 shares of common stock,were not considered in calculating diluted earnings per share because the warrant or stock option exercise prices or the total expected proceeds under the treasury stock method for the warrants, restricted stock, or stock options was greater than the average market price of common shares during the period and, therefore, the effect would be anti-dilutive. Also excluded from the calculation of diluted earnings per share for the nine months ended September 30, 2015, were 452 shares of restricted stock granted that were not yet vested as the performance conditions were not met (see further discussion in Note 5).

As the Company was in a net loss position for three and nine months ended September 30, 2014, all warrants, restricted stock, and stock optionswere not considered in calculating diluted earnings per share because the effect would be anti-dilutive. For the three and nine months ended September 30, 2014, the number of antidilutive equity awards totaled 870 and 836, respectively.

In fiscal yearDuring the fourth quarter of 2015, and 2014, the Company’s board of directors authorized the repurchase of up to $15,000 and $10,000, respectively,$20,000 of the Company’s outstanding common stock.stock with no expiration date. The Company’s board of directors also authorized the Company to enter into a Rule 10b5-1 plan when appropriate.

For the three and nine months ended September 30,March 31, 2016 and 2015, the Company purchased 1,844 and 1,886, respectively, sharesno purchases of ZAGG Inc commontreasury stock for consideration of $13,570 and $13,894, respectively, which included commissions paid to brokers of $55 and $56, respectively. Stock purchased in the three and nine months ended September 30, 2015 had a weighted average price per share of $7.32 and $7.33, respectively. The consideration paid has been recorded within stockholders’ equity in the condensed consolidated balance sheets. In addition, during the third quarter of 2015, the Company foreclosed on 80 shares of ZAGG Inc common stock linked to the full recourse note receivable described in Note 9. The Company foreclosed on these shares at a price per share of $8.59 and a total value of $688. These shares are currently being held by the Company as treasury stock.

ZAGG INC AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Dollars, units and shares in thousands, except per share data)

(Unaudited)

For the three and nine months ended September 30, 2014 the Company purchased zero and 556 shares, respectively, of ZAGG Inc common stock. Cash consideration paid for the purchase of ZAGG Inc common stock for the nine months ended September 30, 2014 was $2,488. Cash consideration for the nine months ended September 30, 2014 included commissions paid to brokers of $16. Stock purchased during the nine months ended September 30, 2014 had a weighted average price per share of $4.45. The consideration paid has been recorded within stockholders’ equity in the condensed consolidated balance sheets.occurred.

In June 2008, Lorence Harmer became a member of the Company’s board of directors and in December 2009, was appointed as the chairman of the audit committee. Mr. Harmer introduced the Company to a consumer electronics product, which became known as the ZAGGbox. The Company subsequently entered into negotiations with Teleportall, LLC (“Teleportall”), the owner of the technology used in the ZAGGbox, regarding production and distribution of the ZAGGbox. In 2009 and 2010 the Company entered into various agreements with Teleportal,Teleportall, including agreements appointing the Company as the exclusive distributor for the ZAGGbox in North America, issued purchase orders for ZAGGbox units in the aggregate amount of $3,500 and advanced to Teleportall a total of $3,900 against the total purchase price for the units ordered by the Company. Additionally, in May 2010, the Company entered into an agreement with Harmer Holdings, LLC (“Holdings”), an affiliate of Mr. Harmer, under which Holdings agreed to repurchase unsold ZAGGboxes under certain circumstances.

In late 2010 the Company determined that the ZAGGbox product would not be ready to market and sell during the 2010 Christmas season and the Company commenced discussions to restructure its agreements with Teleportall. As a result of the foregoing, the Company entered into an agreement with Teleportall, Mr. Harmer and several entities owned or controlled by Mr. Harmer (the “Harmer Agreement”), dated March 23, 2011, but subject to further negotiations and ratification through April 5, 2011. Pursuant to the Harmer Agreement, the parties agreed to terminate the prior agreements and convey all ZAGG rights in the ZAGGbox to Teleportall on the following terms:

No revenue has been recognized from Teleportall.

The Note was originally accounted for under the cost recovery method and was originally included in the consolidated balance sheet at $3,900 which was the value of the ZAGGbox inventory advances. The original face value of the Note of $4,126 was for reimbursement of the inventory advances and other costs associated with the ZAGGbox and approximated fair value at March 23, 2011, as the variable interest rate on the Note approximated market rates.

ZAGG INC AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Dollars, units and shares in thousands, except per share data)

(Unaudited)

On September 20, 2011, and prior to the due date of the first interest-only payment due on the Note, Mr. Harmer and two of his affiliates, Holdings and Teleportall, filed a lawsuit in Utah state court (the “Court”) against the Company, Robert G. Pedersen, II (ZAGG’s former CEO), Brandon T. O’Brien (ZAGG’s former CFO) and KPMG LLP (ZAGG’s independent registered public accounting firm). KPMG LLP and Messrs. Pedersen and O’Brien were subsequently dismissed from the lawsuit. In their lawsuit, the plaintiffs allege that the defendants defamed Mr. Harmer, breached the Harmer Agreement and interfered with other rights of the plaintiffs.

Mr. Harmer failed to make the required interest-only payment to the Company due on September 23, 2011. Thereafter, the Company filed counterclaims against Mr. Harmer, Holdings and Teleportall to collect the balance due under the Note. Also, ZAGG commenced foreclosure on the collateral securing the Note, which consisted of real property, interests in entities that own real property, and restricted and free-trading securities, which included shares of ZAGG Inc common stock.

On May 21, 2015, the Court issued a final judgment whereby all claims brought by Harmer were disposed of in favor of ZAGG and dismissed with prejudice. In addition, the Court granted summary judgment in favor of ZAGG on all counterclaims against Harmer, Holdings and Teleportall and ZAGG was awarded judgment in the amount of $4,735 with interest at 12% per annum until paid in full and reasonable attorney fees. Following the final judgment the Company began the foreclosure process on all remaining collateral securing the Note.

On June 29, 2015, the Company foreclosed on certain real property securing the Note. The certain real propertyNote, which was valued by an independent appraiser and determined to have a current fair value of $1,099. In conjunction with the foreclosure, the Company reclassified $801 of the Note receivable previously collateralized by the foreclosed real property and included in other assets, and $298 of the Note receivable collateralized by ZAGG Inc stock, as a $1,099 asset held for sale and presented it as a component of other assets in the condensed consolidated balance sheets. After this reclassification, the remaining balance of the Note receivable iswas $50.

On July 13, 2015, the Company foreclosed on 80 shares of ZAGG Inc common stock that were determined by the Company to have a fair value of $688 on the date of foreclosure. At the time of the foreclosure, the Note receivable balance totaled $50 and was reduced to $0. The $638$639 excess in value of the common stock over the book value of the Note receivable was recorded by the Company as a recovery of a previously established reserve in selling, general and administrative expense in the condensed consolidated financial statements,statement of operations, which is the same financial statement line item in which the Company previously recorded write-downs of the Note receivable.Note.

As of September 30,December 31, 2015, management determined that the estimated fair value of the remaining underlying collateral was between $135 and $270, consisting of real property investments.

Since the Note became collateral dependent in October 2011, management has (1) foreclosed on and sold 45 shares of ZAGG Inc common stock for $496 (December 2011); (2) foreclosed on real property valued at $250 (January 2012); (3) foreclosed on stock and warrants in a private company of $516 (May 2012); (4) foreclosed on real property valued at $1,099 as discussed above; and (5) foreclosed on 80 shares of ZAGG Inc common stock for $688. These foreclosures were recorded as a reduction to the Note in the period in which the foreclosure occurred. Management continues to actively pursue the foreclosure of all remaining collateral and execution on other assets of Harmer, Holdings, and Teleportall.

At September 30,March 31, 2016 and December 31, 2015, the entire unpaid balances on the note receivable was fully reserved. The total unpaid principal balance, including accrued interest, late fees, attorney fees, and costs incurred in collection, totaled $4,742.

ZAGG INC AND SUBSIDIARIES

Notes$4,939 and $4,836, respectively. The increase to Condensed Consolidated Financial Statements

(Dollars, units and shares in thousands, except per share data)

(Unaudited)the reserve during the three months ended March 31, 2016 consisted of accrued interest of $103.

Fair Value of Financial Instruments

At September 30, 2015 and DecemberMarch 31, 2014,2016, the Company’s financial instruments included cash and cash equivalents, accounts receivable, accounts payable, a line of credit, and a note receivable.term loan. The carrying amounts of cash and cash equivalents, accounts receivable and accounts payable approximate fair value due to the short-term maturities of these financial instruments.The carrying value of the debt balances approximate fair value because the variable interest rates reflect current market rates and terms.

Fair Value Measurements

The Company measures at fair value certain financial and non-financial assets by using a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, essentially an exit price, based on the highest and best use of the asset or liability. The levels of the fair value hierarchy are:

Level 1 — Quoted market prices in active markets for identical assets or liabilities;

Level 2 — Significant other observable inputs (e.g., quoted prices for similar items in active markets, quoted prices for identical or similar items in markets that are not active, inputs other than quoted prices that are observable such as interest rate and yield curves, and market-corroborated inputs); and

Level 3 — Unobservable inputs in which there is little or no market data, which require the reporting unit to develop its own assumptions.

At September 30, 2015,March 31, 2016, and December 31, 2014,2015, the following assets and liabilities were measured at fair value on a recurring basis using the level of inputs shown:

Concentration of credit risk

Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash and accounts receivable. The Company places its cash with high credit quality financial institutions. The Company maintains its cash in bank deposit accounts, which, at times, exceed federally insured limits. The Company has not experienced any losses in such accounts through September 30, 2015.March 31, 2016.

At September 30,March 31, 2016 and December 31, 2015, three customers hadthe balance of accounts receivable balances of approximately 25%, 23%, and 12%. from two separate customers exceeded 10%:

No other customer account balances were more than 10% of accounts receivable. Atreceivable at March 31, 2016 or December 31, 2014, two customers had accounts receivable balances of approximately 48% and 14%. No other customer account balances were more than 10% of accounts receivable.2015. If one or more of the Company’s significant customers were to become insolvent or were otherwise unable to pay for the products provided, it would have a material adverse effect on the Company’s financial condition and results of operations.

ZAGG INC AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Dollars, units and shares in thousands, except per share data)

(Unaudited)

Concentration of supplier

The Company’s logistics partners arrange for production of its raw materials related to the InvisibleShield film products primarily from one source. Management is aware of similar raw materials that would be available from other sources if required and has current plans to immediately engage such resources if necessary. A change in supplier, however, could cause a delay in manufacturing and a possible loss of sales, which could adversely affect operating results.

Concentration of sales

For the three months ended September 30,March 31, 2016 and 2015, three customers individually accounted for over 10% of the quarterly revenues at 18%, 17%, and 12%, respectively. in each respective quarter:

No other customers accounted for more than 10% of sales. Forsales for the three months ended September 30, 2014, two customers individually accounted for over 10% of the revenues at 32%March 31, 2016 and 14%, respectively. No other customers accounted for more than 10% of sales.2015. If the Company loses one or more of itsthe Company’s significant customers, it would have a material adverse effect on the Company’s financial condition and results of operations.

The percentage of sales by geographic region for the three months ended September 30,March 31, 2016 and 2015 and 2014, was approximately:

For the nine months ended September 30, 2015, three customers individually accounted for over 10% of the revenues at 20%, 13%, and 12%, respectively. No other customers accounted for more than 10% of sales. For the nine months ended September 30, 2014, two customers individually accounted for over 10% of the revenues at 28% and 15%, respectively. No other customers accounted for more than 10% of sales.If the Company loses one or more of its significant customers, it would have a material adverse effect on the Company’s financial condition and results of operations.

The percentage of sales by geographic region for the nine months ended September 30, 2015 and 2014, was approximately:

ZAGG INC AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Dollars, units and shares in thousands, except per share data)

(Unaudited)

Operating leases

The Company leases office and warehouse space, office equipment, and mall cart locations under operating leases that expire through 2018.2023. Future minimum rental payments required under the operating leases at September 30, 2015March 31, 2016 are as follows:

On December 5, 2014, the Company entered into a lease agreement for new office space in an under construction building located at 7200 South Bingham Junction Boulevard in Murray, Utah. The Company is expecting to rent the fourth and fifth floors of the building, which will become the new corporate office location. It is expected that the Company will begin constructing leasehold improvements during the fourth quarter of 2015 and move into the office space when the leasehold construction is complete. The initial lease term is for 90 months and straight line monthly rent is expected to be approximately $110, though the final rent will be determined based on the final rentable square feet. The lease term and monthly payments will not commence until the Company occupies the office space.

For the three months ended September 30,March 31, 2016 and 2015, and 2014, rent expense was $391$717 and $275,$394, respectively, netand is included in selling, general and administrative expense in the condensed consolidated statement of sublease income of $0 and $334, respectively.operations.

For the nine months ended September 30, 2015 and 2014, rent expense was $1,182 and $1,243, respectively, net of sublease income of $0 and $682, respectively.Commercial Litigation

Commercial Litigation

Lorence A. Harmer, et al v ZAGG Inc et al,al., Third Judicial District Court, Salt Lake County, State of Utah, Civil No. 110917687. On September 20, 2011, Lorence A. Harmer, a former director of ZAGG and two of his affiliates, Harmer Holdings, LLC, and Teleportall, LLC (the “Harmer Parties”), filed a lawsuit against the Company, Robert G. Pedersen II, Brandon T. O’Brien, and KPMG LLP. The plaintiffs alleged that the defendants defamed Mr. Harmer, breached the Settlement Agreement and other agreements between the plaintiffs and the Company (alleging claims for breach of contract, breach of the covenant of good faith, and fair dealing), and interfered with other rights of the plaintiffs. The defendants denied all of the material allegations made by the plaintiffs. KPMG LLP was dismissed from the lawsuit in January 2012. In October 2012, the Company filed a counterclaim and third-party complaint against Harmer, Holdings, Teleportall and third-party Global Industrial Services Limited asserting claims for breach of contract, deficiency, indemnity and attorneys’ fees, breach of the implied covenant of good faith and fair dealing, quasi contract, unjust enrichment, quantum meruit and declaratory judgment. In June 2013, the court dismissed the plaintiffs’ claims for defamation, negligence, tortious interference, and interference with prospective economic relations against the Company and all claims against Messrs. Pedersen and O’Brien. In November 2013, the court entered default judgment on the Company’s third-party complaint against Global Industrial Services Limited. On May 21, 2015, the Courtcourt granted summary judgment in the Company’s favor against the Harmer Parties, and thereafter entered a final judgment against the Harmer Parties in the amount of $4,735 with interest at 12% per annum until paid in full, and dismissed all of the Harmer Parties’ remaining claims against the Company with prejudice. On October 2, 2015, the Courtcourt entered an order adding the amount of $1,396 to the judgment for the attorney fees and costs incurred by the Company in the litigation. The Harmer Parties have filed a notice of appeal declaring their intention to seek review of the final judgment in the Utah appellate courts. The Harmer Parties have also filed a motion in the trial court asking it to reconsider and set aside the final judgment, which the Company will vigorously oppose. The Company is moving forward with collection efforts pursuant to the final judgment. The Company intends to vigorously defend against any appeals or other attempts to challenge the judgment in its favor. This matter is not expected to have a material adverse effect on the Company’s financial position, results of operations, or liquidity.

ZAGG INC AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Dollars, units and shares in thousands, except per share data)

(Unaudited)

Patent/Trademark Litigation

Peter Kravitz v. ZAGG Intellectual Property Holding Co. Inc. v. NLU Products et al,, U.S. DistrictBankruptcy Court, District of Utah, 2:11-cv-00517Delaware, Adv. Pro. No. 15-51558(BLS)..  On June 7, 2011,October 29, 2015, Kravitz, as Liquidating Trustee (the “Trustee”) of the RSH Liquidating Trust (formally known as RadioShack) filed a complaint against the Company, alleging, among other things, that the Company received preference payments for product the Company sold and delivered to RadioShack in the amount of $1,834 pursuant to Section 547 of the Bankruptcy Code and in the alternative pursuant to Section 548 of the Bankruptcy Code. The Company believes that the Trustee’s claims are without merit and is vigorously defending against them. On February 2, 2016, the Company filed a patent infringement lawsuit against NLU Products, LLC; Wrapsol, LLC; XO Skins, LLC; Fusion of Ideas, Inc.; Clear-Coat, LLC; Case-Ari, LLC; United SGP Corp.; Stealth Guards; Virtuosity Products, LLC; Skinomi LLC; Cellairis; Best Skins Ever; Headco, LLC; and Ghost Armor, LLCits answer to the complaint stating, among other things, that seeks to enforce rights under United States Patent No. 7,957,524. The defendants have raised defenses and, in some cases, asserted counterclaims against the Company has a full and complete defense to the Trustee’s allegations in that seek declarations of unenforceability or non-infringement of the patent. These counterclaims do not assert any claims for affirmative relief, including claims for damages, againstall payments were received by the Company apart from a request for an awardin the ordinary course of costsbusiness and attorneys’ fees to the prevailing party. NLU Products, LLC; Wrapsol, LLC; XO Skins, LLC; Fusion of Ideas, Inc.; Clear-Coat, LLC; Case-Ari, LLC; United SGP Corp.; Stealth Guards; and Vituorsity Products, LLC have settled with the Company. Litigation of this action was stayed pending a reexamination of United States Patent No. 7,957,524all payments received by the United States Patent and Trademark Office (“USPTO”). The reexamination ledCompany were paid pursuant to amendments to the claims of the patent, and the USPTO issued a reexamination certificate. This case was administratively closed with leave to reopen.ordinary business terms. The Company has sent offers to license toalso asserted the remaining defendants.

ZAGG v. TrekStor, Regional Court, Dusseldorf, Germany. In September 2011,defense that the Company brought suit in Dusseldorf, Germany against TrekStor for infringement of ZAGG design registrations forprovided subsequent new value to RadioShack and that the ZAGGmate keyboardpayments are otherwise not recoverable by the Trustee. The case and for unfair competition.  After the Company completed briefing of its claims against TrekStor and presented its case at oral argument, TrekStor filed a separate proceeding alleging that it is the owner of the ZAGGmate keyboard case design. The Company’s action against TrekStor was then stayed pending the resolution of TrekStor’s case against the Company. On July 23, 2013, TrekStor’s claims were dismissed and the Company was awarded its costs in that action. This dismissal was appealed and again decidedcurrently in the Company’s favor in a final decision by the appeals court. The oral hearing in the infringement matter was heard on July 1, 2014 during which the Court found in the Company’s favor and granted injunctive relief as well as damages and costs in an amountdiscovery phase with trial to be determined. The Companyheld in 2017. This matter is presently seeking entry of a judgment against Trekstor for its damages and costs. In the opinion of management, the ultimate disposition of TrekStor’s appeal will not expected to have a material adverse effect on the Company’s consolidated financial position, results of operations, or liquidity.

Patent/Trademark Litigation

ZAGG Intellectual Property Holding Co v. Tech21 et al., U.S. District Court, District of Utah, 2:14-cv-00113-BCW14-cv-00113-BCW.. On February 18, 2014, ZAGG IP filed a complaint against Tech21, Ltd. alleging, among other things, that the defendant makes, uses, sells, offers for sale, and/or imports into the United States a kit for protecting a surface of an electronic device that infringes at least one claim of ZAGG IP’s U.S. patent No. 8,567,596 entitled Electronic Device Protective Film Application Kit and Method (the “‘596 Patent”). The defendant has not filed any counterclaims and no material determinations have been made by the court in this matter. This litigation is stayed pending resolutionDuring the first quarter of Inter Partes Patent Review2016, a Notice of the ‘596 Patent,Voluntary Dismissal was filed in the USPTO.this case requesting that this action be dismissed without prejudice to any party.

ZAGG Intellectual Property Holding Co v. Superior Communications, Inc., U.S. District Court, District of Utah 2:14-cv-00121-TS14-cv-00121-TS.. On February 19, 2014, ZAGG IP filed a complaint against Superior Communications, Inc. alleging, among other things, that the defendant makes, uses, sells, offers for sale, and/or imports into the United States kits for protecting a surface of an electronic device that infringe at least one claim of the ‘596 Patent. The defendant has not filed any counterclaims and no material determinations have been made by the court in this matter. This litigation is stayed pending resolutionwas administratively closed on August 26, 2014. During the first quarter of Inter Partes Patent Review2016, a Notice of the ‘596 Patent,Voluntary Dismissal was filed in the USPTO.this case requesting that this action be dismissed without prejudice to any party.

Class Action Lawsuits

James H. Apple, et al. v. ZAGG Inc, et al.Inter Partes Review of Patent No. 8,567,596 B1 in the United States Patent and Trademark Office, Patent Trial and Appeal Board (“PTAB”), Case IPR2014-01262. On August 8, 2014, Tech 21 UK LTD. filed a Corrected Petition requesting inter partes review of claims 1-18 of U.S. DistrictPatent No. 8,567,596. Inter partes review was instituted on February 19, 2015. On January 27, 2016, the PTAB ordered that certain claims in the patent were unpatentable and other claims were canceled. The Company intends to appeal the PTAB’s decision in the Federal Circuit Court District of Utah, 2:12-cv-00852; Ryan Draayer, et al. v. Zagg Inc, et al., U.S. District Court, DistrictAppeals. While under appeal, the patent remains in force. At March 31, 2016, unamortized book value of Utah, 2:12-cv-00859.  On September 6 and 10, 2012, two putative class action lawsuits were filed by purported Company shareholders against the Company, Randall Hales, Brandon O’Brien, and Cheryl Larabee, as well as Robert G. Pedersen II,$2,163 remained on the Company’s former Chairman and CEO, and Edward Ekstrom and Shuichiro Ueyama, former membersbooks for acquisition costs related to this patent, which is included in the balance of intangible assets on the consolidated balance sheet. The Company will assess the impact to the book value of the patent acquisition costs upon resolution of the Company’s Board of Directors. These lawsuits were subsequently amended by a complaint filed on May 6, 2013. The plaintiffs seek certification of a class of purchasers ofappeal to the Company’s stock between October 15, 2010 and August 17, 2012. The plaintiffs claim that as a result of Mr. Pedersen's alleged December 2011 margin account sales, the defendants initiated a succession plan to replace Mr. Pedersen as the Company’s CEO with Mr. Hales, but failed to disclose either the succession plan or Mr. Pedersen's margin account sales, in violation of Sections 10(b), 14(a), and 20(a), and SEC Rules 10b-5 and 14a-9, under the Securities Exchange Act of 1934 (the “Exchange Act”). On March 7, 2013, the U.S. District Court for the District of Utah (the “Court”) consolidated the Apple and Draayer actions and assigned the caption In re: Zagg, Inc. Securities Litigation, and on May 6, 2013, plaintiffs filed a consolidated complaint. On July 5, 2013, the defendants moved to dismiss the consolidated complaint. On February 7, 2014, the Court entered an order granting the Company’s motion to dismiss the consolidated complaint. On February 25, 2014, plaintiffs filed a notice of appeal with the U.S.Federal Circuit Court of Appeals, Tenth Circuit. On June 17, 2014, plaintiffs filed their opening appellate brief appealing the Courts decision with respect to some of their claims. The Tenth Circuit heard oral argument on the appeal on January 22, 2015, and issued a decision affirming the dismissal of all claims on August 18, 2015Appeals.

.

Derivative Lawsuits

ZAGG INC AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Dollars, units and shares in thousands, except per share data)

(Unaudited)

Arthur Morganstern v. Robert G. Pedersen II et al., Third Judicial District Court, Salt Lake County, State of Utah, Civil No. 120908452;Albert Pikk v. Robert G. Pedersen II, et al., U.S. District Court, District of Utah, Case No. 2:12-cv-118812-cv-01188;Rosenberg v. Robert G. Pedersen II, et al., U.S. District Court, District of Utah, Case No. 2:12-cv-121612-cv-01216.  On December 14,19 and 28, 2012, the first of threetwo shareholder derivative complaints were filed against several of the Company’s current and former officers and directors.directors in the United States District Court for the District of Utah.  These complaints make allegations similar to those presented in the consolidated class action lawsuits, but they also assertlawsuit, and allege various state law causes of action, including claims for breach of fiduciary duty, waste of corporate assets, unjust enrichment, and insider trading.  Each of these derivativeThese complaints seek unspecified damages on behalf of the Company, which is named solely as a nominal defendant against whom no recovery is sought.  On February 26, 2013, the District Court consolidated thePikkandRosenberg actions and assignedunder the captionIn re ZAGG Inc. Shareholder Derivative Litigation, and on June 5, 2013, plaintiffs filed a consolidated complaint.  On April 4, 2014, the defendants movedfiled a motion to dismiss the consolidated complaint. Oncomplaint, which the court granted on October 9, 2014, the Court entered an order granting dismissal of the consolidated complaint.2014. On January 8, 2015, plaintiffs filed a notice of appeal with the U.S. Court of Appeals, Tenth Circuit. On June 17, 2015, plaintiffs filed their opening appellate brief appealingBriefing for the dismissal of their claims. Defendants’ filed their response briefs on August 26, 2015. Plaintiffs filed their reply briefappeal was completed on October 1, 2015. Oral2015, and the Tenth Circuit heard oral argument on January 19, 2016. The Tenth Circuit has not yet issued a decision.

Arthur Morganstern, et al. v. Robert G. Pedersen II, et al., Third Judicial District Court, Salt Lake County, State of Utah, Civil No. 120908452. On December 14, 2012, a shareholder derivative complaint was filed against several of the Company’s current and former officers and directors in Utah state court. The complaint made allegations similar to be scheduled.those presented in the consolidated class action lawsuit and alleged claims for breach of fiduciary duty, waste of corporate assets, and unjust enrichment.  The plaintiff in this action sought damages on behalf of the Company, which is named as a nominal defendant against whom no recovery is sought. TheMorgansternaction was dismissed pursuant to a stipulated motion to dismiss on January 22, 2016.

SEC Investigation

In the fourth quarter of 2012, the Company received requests to provide documentation and information to the staff of the SEC in connection with a non-publican investigation being conducted by the SEC’s Salt Lake City office. The Company believes the investigation includes a review of the facts and circumstances surrounding some of the same issues raised by the plaintiffs in the above lawsuits; specifically,lawsuits, including whether the Company failed to disclose Mr. Pedersen’s margin account sales or the alleged existence of a plan to have Mr. Hales succeed Mr. Pedersen as the Company’s CEO.sales. The Company responded to these requests and is cooperating fully with the staff. The Companystaff although there has chosenbeen no resolution to disclose this non-public investigation due to the highly public nature of the lawsuits described above, which the Company intends to defend vigorously.date.

Other Litigation

The Company is not a party to any other material litigation or claims at this time. While the Company currently believes that the amount of any ultimate potential loss for known matters would not be material to the Company’s financial condition, the outcome of these actions is inherently difficult to predict. In the event of an adverse outcome, the ultimate potential loss could have a material adverse effect on the Company’s financial condition or results of operations in a particular period.

The Company establishes reserves when a particular contingency is probable and estimable. Other than those discussed above, the Company has not accrued for any loss at September 30, 2015March 31, 2016 in the condensed consolidated financial statements as the Company does not consider a loss to be probable or estimable. The Company faces contingencies that are reasonably possible to occur; however, the reasonably possible exposure to losses cannot currently be estimated.

The Company designs, produces, and distributes professional and premium creative product solutions in domestic and international markets. The Company’s operations are conducted in two reporting business segments: ZAGG and mophie. The Company defines its segments as those operations whose results its chief operating decision maker (“CODM”) regularly reviews to analyse performance and allocate resources. The results of operations of mophie are included in the Company’s results of operations beginning on March 3, 2016.

The ZAGG segment designs and distributes screen protection, keyboards for tablet computers and other mobile devices, earbuds, headphones, Bluetooth speakers, mobile power, cables, and cases under the ZAGG, InvisibleShield, and iFrogz brands. Domestic operations are headquartered in Midvale, Utah, while international operations are directed from Shannon, Ireland.

The mophie segment designs and distributes power cases, mobile power, and cables under the mophie brand. Domestic operations are headquartered in Tustin, California, while international operations are directed from Amsterdam, Netherlands.

The Company measures the results of its segments using, among other measures, each segment's net sales, gross profit, and operating income (loss). The Company may revise the measurement of each segment's operating income (loss) as determined by the information regularly reviewed by the CODM.

Net sales by segment are as follows:

Gross profit by segment is as follows:

Income (loss) from operations by segment is as follows:

Total assets by segment are as follows:

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,” “forecasts,” “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.

Our Business

ZAGGZAGG® Inc (“we,” “us,” “our,” “ZAGG,” or the“Company”the “Company”) is headquarteredan innovation leader in Salt Lake City, Utah,mobile tech accessories for smartphones and tablets. For over 10 years, ZAGG has an international office located in Shannon, Ireland. The Company designs, produces, and distributes professional and premiumdeveloped creative product solutions includingthat enhance and protect mobile devices for consumers around the world. The Company has an award-winning product portfolio that includes screen protection, mobile keyboards, for tablet computerspower management, cases, social tech, and mobile devices, keyboard cases, earbuds, mobile power solutions, cables, and casespersonal audio sold under the ZAGG, InvisibleShield®, mophie®, and InvisibleShield®iFrogz® brands. In addition, the Company designs, produces, and distributes earbuds, headphones, mobile power solutions, Bluetooth speakers, cases, and cables for mobile devices under the iFrogz brand

Headquartered in Midvale, Utah, ZAGG has operations in the fashionUnited States, Ireland, the Netherlands, and youth oriented lifestyle sector.China, and has over 500 employees.

Established to act as a foundation for the company, there are three corporate objectives and seven core values that guide ZAGG daily:

The corporate objectives align the functional teams’ goals and execution. Every ZAGG employee is trained to understand their role in executing to these objectives. Each core value acts as a key component in working toward ZAGG’s main objectives of providing creative product solutions, executing targeted global distribution, and being the preferred brand for its customers. While ZAGG is now a global leader in mobile accessories, it’s still at its core a scrappy, entrepreneurial company with a humble attitude wanting to earn its customers' trust every day.

We maintain our corporate headquarters at 3855 South 500910 West Legacy Center Drive, Suite J, Salt Lake City, Utah, 84115.500; Midvale, UT, 84047. The telephone number of the Company is 801-263-0699. Our website address is www.ZAGG.com.addresses arewww.ZAGG.com andwww.mophie.com. The URL isURLs are included here as an inactive textual reference.references. Information contained on, or accessible through, our website is not a part of, and is not incorporated by reference into this report.

Our ProductsBrands

ZAGG: Empowering people to live their lives unleashed

The ZAGG brand is focused on protectingempowers people to live their lives unleashed. Our products are designed to feature cutting-edge design and enhancinginnovation to provide portability, style, and productivity that can keep up with even the most mobile world. Asusers. We believe that with the right mobile devices have become our connectionsaccessories, no one ever has to work, home, and everything in between, ZAGG products provide protection, utility, power, and convenience to help users realize their full potential.

InvisibleShieldfeel tethered or held back.

ZAGG InvisibleShield^®keyboards are designed to offer our customers an enhanced and innovative productivity experience. Since entering this category in 2010, ZAGG has continually reinvented its line of keyboards while also providing timely, curated solutions for new devices released by Apple, Microsoft, and Samsung, as well as other leading mobile device manufacturers. In addition to device-specific keyboards and folio keyboard cases, ZAGG has produced a universal line of full-size Bluetooth® keyboards compatible with virtually any device and mobile operating system. We continue to innovate and expand our wireless keyboard product lines as end users’ requirements evolve in this rapidly changing market segment.

ZAGG mobile power is a top U.S. brand in portable chargers. At CES 2016, we debuted our award-winning mobile charging station, available for market in 2016.

InvisibleShield: Leader in screen protection offers

InvisibleShield is focused on producing industry-leading screen and device protection. From protective film and glass to cases, InvisibleShield products offer customers a wide array of protection types and features, from protective film to glass, all with a limited lifetime guarantee.warranty.

Our films were originally developed to protect the leading edge of rotary blades on military helicopters. Through constant innovation, we routinely delivercontinue to formulate new films that are designed to maintainoffer the highest standards in self-healing scratch protection, and impact protection. We also continue to create new, easierdrive innovation around simplifying the customer application methodsexperience like we’ve done with our patented EZ Apply^®Apply® tabs.

All of our films are designed to provide long-lasting InvisibleShield also provides custom-fit screen protection for the surface of any electronic device subject to normal wear and tear. We accommodate a custom fit for thousands of device types as well as offer anthrough our automated On Demand solution sosolution. With On Demand, retailers can supply customers with screen protection for both new and oldnearly any device modelsmodel, all without ever having to hold excess inventory.