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 JuneSeptember 30, 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)

910 West Legacy Center Drive, Suite 500

Midvale, Utah 84047

(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 ☒ 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 ☒ 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 ☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:28,123,29228,131,836common shares as of August 1,October 31, 2016.

ZAGG INC AND SUBSIDIARIES

FORM 10-Q

TABLE OF CONTENTS

ZAGG INC AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except par value)

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 COMPREHENSIVE INCOME (LOSS)

(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 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 COMPREHENSIVE INCOME (LOSS)

(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 SixNine Months Ended JuneSeptember 30, 2016:

Purchase of mophie financed through contingent payments of $12,139.

Purchase of $1,234$1,342 in fixed assets financed through accounts payable and accrued liabilities.

For the SixNine Months Ended JuneSeptember 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).

Purchase of $476$763 in fixed assets financed through accounts payable.

Purchase of $323$563 in treasury stock financed through accounts payable.

ZAGG INC AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

(Unaudited)

ZAGG Inc and its subsidiaries (“we,” “us,” “our,” “ZAGG,” or the “Company”) are innovation leaders in mobile tech accessories for smartphones and tablets. For over 10 years, ZAGG has developed creative product solutions that enhance and protect mobile devices for consumers around the world. The Company has an award-winning product portfolio that includes screen protection, power cases, power management, personal audio, mobile keyboards, power management, cases, and social tech and personal audio sold under the ZAGG, InvisibleShield®, mophie®, and 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. GAAP”) have been condensed or omitted pursuant to such rules and regulations. These condensed consolidated financial statements reflect all 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. These consist of normal recurring adjustments and adjustments related to the acquisition disclosed in Note 2. 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 2015 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, subject to a preliminary working capital adjustment of $23,478. Upon completion of procedures to determine the final working capital adjustment, the Company concluded that the final working capital adjustment should have been $49,795. The results of operations of mophie 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 reportable 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; mophie inc.; mophie LLC, mophie Technology Development Co., Ltd; mophie Netherlands CooperatieCoöperatie U.A.; and mophie Limited. All intercompany transactions and balances have been eliminated in consolidation.

Significant Accounting Policies

The Company’s significant accounting policies are described in Note 1 to the Company’s Annual Report on Form 10-K for the year ended December 31, 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 certain 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.

ZAGG INC AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

(Unaudited)

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, andnecessary. We 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 in exchange for those goods or services. The ASU 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. The ASU may be adopted utilizing one of two methods. The first method is to adopt the ASU by recording the effect of the guidance in the ASU retrospectively to each prior period presented in the period of adoption. The second method is to adopt the ASU by recording the effect of the guidance in the ASU retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application. On July 9, 2015, the FASB voted to approve a one yearone-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. In May 2016, the FASB issued ASU No. 2016-12, “Revenue from Contracts with Customers (Topic 606) – Narrow-Scope Improvements and Practical Expedients”. The amendments and practical expedients presented in the ASU aim to simplify the transition to the new standard, to provide practical expedients for transition and sales taxes, and to clarify certain aspects of the standard. The Company is currently evaluating the impact these ASU will have on its consolidated financial statements.statements, including the method of adoption that will be utilized.

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 annual and interim periods beginning after December 15, 2016 for public business entities. The Company is currently evaluating the impacthas concluded that this ASU will not have a significant impact on its consolidatedour financial statements.position or results of operations.

ZAGG INC AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

(Unaudited)

In November 2015, the FASB issued ASU No. 2015-17, “Balance Sheet Classification of Deferred Taxes,” which requires entities with a classified balance sheet to present all deferred tax assets and liabilities as noncurrent. The amendments in the ASU may be applied either prospectively to all deferred tax liabilities and assets or retrospectively to all periods presented. 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 evaluatinghas determined that it will adopt the impactASU using the retrospective approach and has concluded that the adoption of this ASU will have on its consolidated financial statements.result in recording deferred tax assets as non-current and will not impact our results of operations.

In February 2016, the FASB issued its new lease accounting standard, Topic 842, which requires lessees to recognize most leases, including operating leases, on-balance sheet via a right of use asset and lease liability. Lessees are allowed to account for short-term leases (i.e., leases with a 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 requirements of the new standard for leases shall be recognized and measured at the beginning of the earliest comparative period presented. When adopted, the Company will be required to adjust equity at the beginning of the earliest comparative period presented, and the other comparative amounts disclosed for each prior period presented in the financial statements, as if the requirements of the new standard had always been applied. The new standard also contains practical expedients which the Company may elect to follow. 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 will have on its consolidated financial statements.statements, including whether to elect the practical expedients outlined in the new standard.

In AprilMarch 2016, the FASB issued ASU No. 2016-11,2016-09, “Improvements to Employee Share-Based Payment Accounting,” 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. Amendments in the ASU related to the timing of when excess tax benefits are recognized, minimum statutory withholding requirements, forfeitures, and intrinsic value should be applied using a modified retrospective transition method by means of a cumulative-effect adjustment to equity as of the beginning of the period in which the guidance is adopted. Amendments related to the presentation of employee taxes paid on the statement of cash flows when an employer withholds shares should be applied retrospectively. Amendments requiring the recognition of excess tax benefits and tax deficiencies in the income statement should be applied prospectively. The amendments related to the presentation of excess tax benefits on the statement of cash flows may be applied using either a prospective or retrospective transition method. The Company is currently evaluating the impact this ASU will have on its consolidated financial statements.statements, including, where applicable, determining the method of adoption.

In August 2016, the FASB issued ASU No. 2016-15, “Classification of Certain Cash Receipts and Cash Payments,” which addresses eight classification issues related to the statement of cash flows: (1) debt prepayment or debt extinguishment costs; (2) settlement of zero-coupon bonds; (3) contingent consideration payments made after a business combination; (4) proceeds from the settlement of insurance claims; (5) proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies; (6) distributions received from equity method investees; (7) beneficial interests in securitization transactions; and (8) separately identifiable cash flows and application of the predominance principle. The ASU is effective for public companies for fiscal years beginning after December 15, 2017. Early adoption is permitted, including adoption in an interim period. The amendments in the ASU should be applied using a retrospective transition method to each period presented. If it is impracticable for the amendments to be applied retrospectively for some of the issues, the amendments for those issues may be applied prospectively as of the earliest date practicable. The Company is currently evaluating the impact this ASU will have on its consolidated financial statements, including the method of adoption.

ZAGG INC AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

(Unaudited)

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 agreed to merge with and into mophie, with mophie continuing as the surviving 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 aan adjustment based on the estimated and actual net working capital adjustment.of mophie as of the Acquisition Date. The Merger Agreement includes an earn-out provision whereby additional consideration could 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 (the “Earnout Period”) exceeds $20,000.$20,000, subject to certain tax adjustment as provided in the Merger Agreement. 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”)., subject to certain tax adjustment as provided in the Merger Agreement, and the deposit of 10% of the Earnout Consideration into an indemnity escrow account. 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 cashMerger Agreement identifies three other contingent payments to be remitted to the Principal Shareholders onceupon receipt of such funds by ZAGG after the following contingent items relatedAcquisition Date, subject to pre-acquisition operations have been resolved:any applicable offset rights of ZAGG under the Merger Agreement:

In addition, $2,000$2,000 of the cash consideration paid to the Principal Shareholders was placed in an escrow account to cover potential tax, legal, or other contingencies that could arise relating to pre-acquisition events for whichany net working capital shortfall and indemnification claims of ZAGG. ZAGG is indemnified. If charges exceed $2,000, ZAGG may recover these amounts throughand the Principal Shareholders also jointly purchased a $10,000 insurance policy covering breaches by mophie and the Principal Shareholders of representations and warranties set forth in the Merger Agreement.

At the Acquisition Date, mophie’s estimated closing balance sheet reflected negative working capital of $23,478. Upon completion of the procedures to evaluate the working capital account, ZAGG has determined that the closing balance sheet reflected actual closing negative working capital of $49,795, resulting in an additional actual closing working capital deficit of $26,317. ZAGG has submitted to the Principal Shareholders a closing adjustment statement seeking the release to ZAGG of the $2,000 placed in escrow based on the portion of the overall net working capital deficit that ZAGG has determined to be recoverable under Section 2.16 of the Merger Agreement. Mr. Huang, as the Representative of the Shareholders, submitted a dispute notice in which he, on behalf of all Shareholders, disputed ZAGG’s closing adjustment statement, asserted that there is no working capital deficit, and demanded release of the $2,000 escrow fund to the Principal Shareholders. The Company is continuing to pursue its claims related to representationsthe net working capital deficit, which efforts may require the Company to resort to the independent accountant dispute resolution mechanism provided in the Merger Agreement in order to obtain the $2,000 placed in escrow.

ZAGG has engaged in discussions with the Principal Shareholders and warranties.Mr. Huang to seek recovery against the contingent payments described above and otherwise to be made whole with respect to such balance of the working capital deficit. However, as of September 30, 2016, there had been no resolution of either of such amounts and a total of $26,317 was in dispute between the parties. Thus, the Company has recorded a loss on the mophie purchase price of $24,317 during the three and nine months ended September 30, 2016, representing the disputed $26,317 partially offset by the $2,000 cash consideration placed in escrow, the recovery of which the Company believes to be likely.

ZAGG INC AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

(Unaudited)

The Company is exploring all options to recover the amounts related to the aggregate net working capital deficit including (1) pursuing collection of the $2,000 escrow amount, (2) submitting claims under the $10,000 representation and warranty insurance policy put in place at the Acquisition Date, and (3) pursuing any and all offset rights granted under the Merger Agreement with respect to the contingent payments that would have been paid to the Principal Shareholders.

On October 21, 2016, Mr. Huang, on behalf of the mophie Shareholders and himself filed a lawsuit in the Chancery Court of the State of Delaware alleging that the Company has breached the Merger Agreement by failing to pay certain of the contingent payments described above related to tax refunds and customs duties and claims damages in the amount of no less than $11,420.

The following summarizes the components of the purchase consideration:consideration as of March 3, 2016:

ZAGG INC AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

(Unaudited)

The total purchase price of $84,912$62,344 has been preliminarily allocated to identifiable assets acquired and liabilities assumed based on their respective preliminary fair values. The total preliminary purchase price has been adjusted in the current period as a resultbecause of (1) additional information related to the working capital reflected in the closing balance sheet and estimate of fair value of the assets acquired and liabilities assumed. This adjustment was recorded as an adjustment to goodwill duringassumed and (2) the second quarter.determination that the fair value of the Earnout Consideration is insignificant. The excess of the purchase price over the fair value of tangible and intangible assets acquired and liabilities assumed is recorded as goodwill. The allocation of goodwill to reportable segments has not yet been completed. The Company has performed preliminary analysescompleted its final analysis related to the calculation of the additional negative working capital adjustmentas of the Acquisition Date and contingent payments, as these items relate to purchase accounting under U.S. GAAP. The working capital adjustmentCompany is still evaluating the preliminary amounts assigned to intangible assets and amounts recorded for income taxes, as these valuations have not yet been completed. Because of the contingent payments are currently under review bydispute between the Company and the Principal Shareholders, and the final determination of the working capital adjustment and contingent payments is still pending receipt of information in order to determine the appropriate amounts and these balances are yet to be agreed upon by the Company andhas recorded a net charge of $24,317 during the Principal Shareholders.quarter ended September 30, 2016. The final determination and resolution of these items could result in a material adjustment to preliminary purchase price, including the preliminary allocation of purchase price to identifiable assets acquired and liabilities assumed, and could result in a material adjustment to the Company’s results of operations. assumed.

The following table summarizes the preliminaryrevised estimates of the fair values of the identifiable assets acquired and liabilities assumed as of the Acquisition Date. The preliminaryrevised 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 with respect to intangible assets and amounts recorded for income taxes are finalized:

The following table summarizes the change in preliminary estimates that were recorded during the second quarter:

ZAGG INC AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

(Unaudited)

(Unaudited)

The following table summarizes the purchase price allocation as of March 3, 2016:

The adjustments to working capital represented in the table above consist of (1) the additional actual closing working capital deficit of $26,317 and (2) adjustments to fair value of $856.

Because the acquisition of mophie occurred in an interim period and in light of the magnitude of the transaction and existing uncertainties, the Company’s fair value estimates for the purchase price, intangible assets acquired, and liabilities assumedamounts recorded for income taxes 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.assumed, specifically the fair value of the acquired intangible assets and the tax accounts related to purchase accounting.

As part of the acquisition of mophie, the Company incurred legal, accounting, investment banking and other due diligence fees that were expensed when incurred. Total fees incurred related to the acquisition of mophie for the three and sixnine months ended JuneSeptember 30, 2016 were $305$145 and $2,322,$2,467, respectively, which are included as a component of operating expenses on the condensed consolidated statementstatements of operations.

ZAGG INC AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

(Unaudited)

Identifiable Intangible Assets

Classes of acquired intangible assets include tradenames, patents and 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. For the three months ended JuneSeptember 30, 2016, mophie generated net sales of $32,023$39,731 and had a net loss before tax of $9,613.$3,305. For the period March 3, 2016, through JuneSeptember 30, 2016, mophie generated net sales of $39,659$79,390 and had a net loss before tax of $13,727.$17,030.

Pro forma Results from Operations

The following unaudited pro-forma results of operations for the three months ended JuneSeptember 30, 2016 and 2015 and the sixnine months ended JuneSeptember 30, 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 date of purchase.

ZAGG INC AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

(Unaudited)

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 as of January 1, 2015. 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 JuneSeptember 30, 2015, pro forma net incomeloss includes pro forma amortization expense of $2,609.$1,818. In addition, the Company included interest from the new credit facility and amortization of debt issuance costs for the three months ended JuneSeptember 30, 2015 of $538, respectively.$536. Material non-recurring adjustments excluded from the pro forma financial information above consists of the $4,988$2,586 step up of mophie inventory to its fair value, which is expected to behas been recorded as an unfavorable adjustment to cost of goods sold during the six months following the acquisition date.

For the sixnine months ended JuneSeptember 30, 2016 and 2015, pro forma net loss includes projected amortization expense of $4,412$5,076 and $5,418,$5,698, respectively. In addition, the Company included interest from the new credit facility and amortization of debt issuance costs for the sixnine months ended JuneSeptember 30, 2016 and 2015 of $1,007$1,508 and $1,081,$1,622, respectively.

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 Company expects to incur in connection with the Merger, including, but not limited to, additional professional fees, employee integration, retention and severance costs, or product rationalization charges.

Concurrent with the close of the 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.

ZAGG INC AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

(Unaudited)

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%.

ZAGG INC AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

(Unaudited)

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 is 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 financial debt covenants that are measured on a quarterly basis starting with the quarter-ended June 30, 2016:

In connection with the establishment of the Credit and Security Agreement, the Company incurred and capitalized $1,144 of direct costs; $884 of the costs are related to the line of credit and as such are reflected as a component of other assets, and $260 was reflected as an offset to long-term debt in the condensed consolidated balance sheet. For the three and sixnine months ended JuneSeptember 30, 2016, the Company amortized $60 and $81,$141, respectively, of these loan costs, which are included as a component of interest expense in the condensed consolidated statements of operations. For the three and sixnine months ended JuneSeptember 30, 2015, the Company amortized $17$16 and $33,$49, respectively, 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 fully amortized at December 31, 2015.

For the three and sixnine months ended JuneSeptember 30, 2016, $14$18 and $22,$40, respectively, in unused line fees were incurred and included as a component of interest expense in the condensed consolidated statements of operations. For the three and sixnine months ended JuneSeptember 30, 2015, $9$10 and $18,$28, respectively, in unused line fees were incurred and included as a component of interest expense in the condensed consolidated statements of operations.

At JuneSeptember 30, 2016, and 2015, the weighted average interest rate on all outstanding borrowings under the revolving line of credit was 1.98% and 1.13%, respectively.2.03%. At JuneSeptember 30, 2016, the effective interest rate on the Term Loan was 3.02%3.05%.

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

ZAGG INC AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

(Unaudited)

Amortizable intangibles as of JuneSeptember 30, 2016, and December 31, 2015, were as follows:

Customer relationships, 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 amortizable intangible assets are amortized using the straight-line method over their estimated useful life. For the three and sixnine months ended JuneSeptember 30, 2016, amortization expense was $4,795$2,426 and $7,562,$9,989, respectively. Amortization expense is primarily recorded as a component of operating expense. However, amortization expense related to acquired technology for the three and sixnine months ended JuneSeptember 30, 2016, of $30$28 and $52,$80, respectively, is recorded as a component of cost of sales.

For the three and sixnine months ended JuneSeptember 30, 2016 amortization expense included $740 and $4,485, respectively, of amortization expense recognized for the preliminary amounts assigned to the acquired mophie intangible assets as described in Note 2. As further described in Note 2, there was an adjustment to the preliminary amounts allocated for working capital and fair value. As a result of the adjustment to the preliminary amounts, a reduction in amortization expense and accumulated amortization of $1,078 relating to the previous quarter was recognized during the three months ended September 30, 2016.

For the three and nine months ended September 30, 2015, amortization expense was $2,163$2,160 and $4,318,$6,478, respectively. Amortization expense related to acquired technology for the three and sixnine months ended JuneSeptember 30, 2015, of $29$26 and $50,$75, respectively, was recorded as a component of cost of sales.

Estimated future amortization expense is as follows:

ZAGG INC AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

(Unaudited)

At JuneSeptember 30, 2016, and December 31, 2015, inventories consisted of the following:

In addition, included in prepaid expenses and other current assets were inventory deposits with third-party manufacturers at JuneSeptember 30, 2016 and December 31, 2015 of $218$736 and $813, respectively.

During the three and sixnine months ended JuneSeptember 30, 2016, the Company granted 380163 and 713876 restricted stock units, respectively. During the three and sixnine months ended JuneSeptember 30, 2015, the Company granted zero24 and 545569 restricted stock units, respectively. The restricted stock units granted during the three and sixnine months ended JuneSeptember 30, 2016, were estimated to have a weighted-average fair value per share of $5.40$6.41 and $7.33,$8.17, respectively. The restricted stock units granted during the sixthree and nine months ended JuneSeptember 30, 2015, were estimated to have a weighted-average fair value per share of $6.51.$8.24 and $6.58, respectively. The fair value of 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.

As part of the 713876 and 545569 grants discussed above, during the first sixnine months of 2016 and 2015, the Company granted 418575 and 268289 restricted stock units, respectively, to certain executives and employees of the Company where vesting is linked to specific performance criteria. The shares of restricted stock units granted in 2016 only vest upon the Company’s achievement of specified thresholds of net sales, Adjusted EBITDA (as defined in the grant), or specific goals for the individual executive. The shares of restricted stock units granted in 2015 only vested upon the achievement of specified thresholds of net sales, Adjusted EBITDA, and earnings per share. As of JuneSeptember 30, 2016 the Company believes it is probable that it will achieve the targets for 418497 shares of restricted stock granted in the first sixnine months of 2016. Of the 268289 restricted stock units granted in 2015, 224244 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.

As part of the 569 shares of restricted stock units 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. Of the 213 shares of restricted stock units granted to the chief executive officer, 213 shares vested.

The Company recordedrecords share-based compensation expense only for those restricted stock units that are expected to vest. The estimated fair value of restricted stock units 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 sixnine months ended JuneSeptember 30, 2016, the Company recorded equity-based compensation expense related to restricted stock units of $957$1,384 and $2,291,$3,675, respectively, which is included as a component of selling, general and administrative expense. During the three and sixnine months ended JuneSeptember 30, 2015, the Company recorded equity-based compensation expense related to restricted stock units of $934$898 and $1,810,$2,708, respectively, which is included as a component of selling, general and administrative expense.

During the sixnine months ended JuneSeptember 30, 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 threenine months ended JuneSeptember 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.

ZAGG INC AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

(Unaudited)

During the three and sixnine months ended JuneSeptember 30, 2016, the Company’s effective tax rate was 46%47% and 28%41%, respectively. During the three and sixnine months ended JuneSeptember 30, 2015, the Company’s effective tax rate was 40%39% and 41%40%, respectively. The change in the effective tax rate for three month periodthree- and nine-month periods ended JuneSeptember 30, 2016, is primarily due to an increase in acquisition costs and other permanent items. The decrease in the effective tax rate for the six months ended June 30, 2016 compared to the six months ended June 30, 2015 was primarily due to (1) a decrease in the state rate used for deferred taxes caused bydomestic manufacturing deduction, and permanent differences related to the acquisition of mophie and the resulting change in the mix of state apportionment factors, which resulted in a discrete item being recognized during Q1 2016, and (2) reduced losses from foreign jurisdictions that are taxed at a 0% rate.mophie. The Company’s effective tax rate will generally differ from the U.S. Federal Statutory 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 reflectreflects the potential dilution that could occur if stock options and restricted stock, or other common stock equivalents were exercised or converted into common stock. The dilutive effect of stock options or other common stock equivalents is calculated using the treasury stock method.

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 sixnine months ended JuneSeptember 30, 2016 and 2015:

ZAGG INC AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

(Unaudited)

For the three months ended JuneSeptember 30, 2016 warrants and1,001 restricted stock units and 50 warrants to purchase 895 shares of common stock were not considered in calculating diluted earnings per share as their effect would have been anti-dilutive.

For the three months ended JuneSeptember 30, 2015, warrants and restricted stock units to purchase 100443 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 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 JuneSeptember 30, 2015 were 466452 restricted stock units granted that were not yet vested as the performance conditions were not met (see further discussion in Note 6).

For the sixnine months ended JuneSeptember 30, 2016 warrants and1,001 restricted stock units and 50 warrants to purchase 895 shares of common stock were not considered in calculating diluted earnings per share as their effect would have been anti-dilutive.

For the sixnine months ended JuneSeptember 30, 2015 warrants and restricted stock units to purchase 270328 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 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 sixnine months ended JuneSeptember 30, 2015 were 466452 restricted stock units granted that were not yet vested as the performance conditions were not met (see further discussion in Note 6).

During the fourth quarter of 2015, the Company’s board of directors authorized the repurchase of up to $20,000 of the Company’s outstanding common 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 sixnine months ended JuneSeptember 30, 2016, no purchases of treasury stock occurred.

For the three and sixnine months ended JuneSeptember 30, 2015 the Company purchased 421,844 and 1,886, respectively, shares of ZAGG Inc common stock for consideration of $323,$13,570 and $13,894, respectively, which included commissions paid to brokers of $1.$55 and $56, respectively. Stock purchased in the three and sixnine months ended JuneSeptember 30, 2015 had a weighted average price per share of $7.68.$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 10. 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.

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 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.

ZAGG INC AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

(Unaudited)

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: