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  SeptemberJune 30, 2016,2017, 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)

 

Delaware 20-2559624
(State or other jurisdiction of
incorporation or organization)
 (I.R.S. Employer
Identification No.)

 

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, or emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”filer,” “smaller reporting company,” and “smaller reporting“emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large Accelerated FilerAccelerated Filer
  
Non-accelerated Filer (do not check if a smaller reporting company)Smaller Reporting Company
Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) 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:28,131,836 27,964,610 common shares as of October 31, 2016.August 1, 2017.

 

 

 

 

ZAGG INC AND SUBSIDIARIES

FORM 10-Q

 

TABLE OF CONTENTS

 

PART I - FINANCIAL INFORMATION

  Page
PART I - FINANCIAL INFORMATION
   
Item 1.Financial Statements (Unaudited)1
   
 Condensed Consolidated Balance Sheets – As of SeptemberJune 30, 20162017 and December 31, 201520161
   
 Condensed Consolidated Statements of Operations for the Three and NineSix Months EndedSeptember June 30, 20162017 and 201520162
   
 Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three and NineSix Months Ended SeptemberJune 30, 20162017 and 201520163
   
 Condensed Consolidated Statements of Cash Flows for the NineSix Months EndedSeptember June 30, 20162017 and 201520164 - 5
   
 Notes to Condensed Consolidated Financial Statements6
   
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations2719
   
Item 3.Quantitative and Qualitative Disclosures About Market Risk3526
   
Item 4.Controls and Procedures3626
   
PART II - OTHER INFORMATION
   
Item 1.Legal Proceedings3627
   
Item 1A.Risk Factors3627
   
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds3727
   
Item 3.Defaults Upon Senior Securities3727
   
Item 4.Mine Safety Disclosures3727
   
Item 5.Other Information3727
   
Item 6.Exhibits3727

 

 

PART I - FINANCIAL INFORMATION

 

Item 1.Financial Statements.

 

ZAGG INC AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except par value)

(Unaudited)

 September 30, December 31, 
 2016 2015  June 30, December 31, 
 (Unaudited)     2017  2016 
          
ASSETS     ASSETS   
          
Current assets        
Current assets:Current assets:   
Cash and cash equivalents $8,955  $13,002  $14,330  $11,604 
Accounts receivable, net of allowances of $537 in 2016 and $568 in 2015  83,086   57,647 
Accounts receivable, net of allowances of $784 in 2017 and $824 in 2016  72,956   83,835 
Inventories  66,204   45,912   65,376   72,769 
Prepaid expenses and other current assets  3,348   3,142   3,717   3,414 
Income tax receivable  446   1,158   1,193   2,814 
Deferred income tax assets  28,771   10,840 
Total current assets  190,810   131,701   157,572   174,436 
                
Property and equipment, net of accumulated depreciation at $16,079 in 2016 and $10,539 in 2015  18,799   8,309 
        
Property and equipment, net of accumulated depreciation of $21,856 in 2017 and $18,371 in 2016  15,631   17,755 
Goodwill  12,791   -   12,272   12,272 
        
Intangible assets, net of accumulated amortization at $51,792 in 2016 and $41,803 in 2015  56,868   23,045 
        
Intangible assets, net of accumulated amortization of $60,555 in 2017 and $55,298 in 2016  45,327   53,362 
Deferred income tax assets  22,617   15,386   49,331   50,363 
        
Other assets  2,480   1,100   1,541   2,541 
        
Total assets $304,365  $179,541  $281,674  $310,729 
                
LIABILITIES AND STOCKHOLDERS' EQUITY                
                
Current liabilities        
Current liabilities:        
Accounts payable $73,168  $33,846  $62,237  $85,022 
Accrued liabilities  10,725   5,085   22,798   22,216 
Contingent payments  12,139   - 
Sales returns liability  27,794   28,373 
Accrued wages and wage related expenses  4,838   2,244   5,635   6,169 
Sales returns liability  28,289   7,849 
Current portion of long-term debt, net of deferred loan costs of $65 in 2016  6,185   - 
Revolving line of credit  30,195   - 
Deferred revenue  209   273 
Line of credit  30,683   31,307 
Current portion of long-term debt, net of deferred loan costs of $65 in 2017 and 2016  6,185   10,484 
Total current liabilities  165,539   49,024   155,541   183,844 
                
Noncurrent portion of long-term debt, net of deferred loan costs of $157 in 2016  15,468   - 
Noncurrent portion of long-term debt, net of deferred loan costs of $108 in 2017 and $141 in 2016  10,829   9,623 
                
Other noncurrent liabilities  513   - 
Total liabilities  181,520   49,024   166,370   193,467 
                
Commitments and contingencies (Note 13)        
        
Stockholders' equity        
Common stock, $0.001 par value; 100,000 shares authorized; 33,825 and 33,219 shares issued in 2016 and 2015, respectively  34   33 
Stockholders' equity:        
Common stock, $0.001 par value; 100,000 shares authorized; 34,047 and 33,840 shares issued in 2017 and 2016, respectively $34  $34 
Additional paid-in capital  92,660   88,983   94,207   92,782 
Accumulated other comprehensive loss  (1,505)  (1,597)  (1,270)  (2,114)
Treasury stock, 5,679 common shares in 2016 and 2015, at cost  (35,194)  (35,194)
Treasury stock, 6,065 and 5,831 common shares in 2017 and 2016 respectively, at cost  (37,637)  (36,145)
Retained earnings  66,850   78,292   59,970   62,705 
                
Total stockholders' equity  122,845   130,517   115,304   117,262 
Total liabilities and stockholders' equity $304,365  $179,541  $281,674  $310,729 

 

See accompanying notes to condensed consolidated financial statements.

 

 1 

 

ZAGG INC AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except for per share amounts)

(Unaudited)

 

 Three Months Ended Nine Months Ended  Three Months Ended  Six Months Ended 
 September 30,
2016
  September 30,
2015
 September 30,
2016
  September 30,
2015
  June 30,
2017
  June 30,
2016
  June 30,
2017
  June 30,
2016
 
                  
Net sales $124,662  $66,774  $286,928  $190,679  $115,227  $99,833  $208,173  $162,266 
Cost of sales  81,516   41,903   189,180   117,894   79,403   68,960   143,743   107,664 
Gross profit  43,146   24,871   97,748   72,785   35,824   30,873   64,430   54,602 
                                
Operating expenses:                                
Advertising and marketing  3,389   2,759   8,578   7,450   2,070   2,275   5,076   5,189 
Selling, general and administrative  25,607   13,750   70,243   41,014   24,952   24,880   52,006   44,635 
Loss on disputed mophie purchase price  24,317   -   24,317   - 
Transaction costs  145   -   2,467   -   300   305   515   2,322 
Impairment of intangible asset  -   -   1,959   - 
Amortization of long-lived intangibles  2,398   2,134   9,909   6,403   3,005   4,765   6,026   7,511 
                
Total operating expenses  55,856   18,643   115,514   54,867   30,327   32,225   65,582   59,657 
                                
Income (loss) from operations  (12,710)  6,228   (17,766)  17,918   5,497   (1,352)  (1,152)  (5,055)
                                
Other expense:                
Other income (expense):                
Interest expense  (575)  (26)  (1,367)  (79)  (619)  (604)  (1,110)  (792)
Other expense  (81)  (76)  (272)  (53)
                
Total other expense, net  (656)  (102)  (1,639)  (132)
Other income (expense)  67   9   48   (191)
Total other expense  (552)  (595)  (1,062)  (983)
                                
Income (loss) before provision for income taxes  (13,366)  6,126   (19,405)  17,786   4,945   (1,947)  (2,214)  (6,038)
                                
Income tax benefit (provision)  6,261   (2,387)  7,963   (7,155)  (1,542)  901   (521)  1,703 
                                
Net (loss) income $(7,105) $3,739  $(11,442) $10,631 
Net income (loss) $3,403  $(1,046) $(2,735) $(4,335)
                                
Earnings (loss) per share:                
                
Earnings (Loss) per share:                
Basic earnings (loss) per share $(0.25) $0.13  $(0.41) $0.36  $0.12  $(0.04) $(0.10) $(0.16)
                
Diluted earnings (loss) per share $(0.25) $0.13  $(0.41) $0.36  $0.12  $(0.04) $(0.10) $(0.16)

 

See accompanying notes to condensed consolidated financial statements.

 

 2 

 

ZAGG INC AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)(LOSS)

(in thousands)

(Unaudited)

 

  Three Months Ended  Nine Months Ended 
  September 30,
2016
  September 30,
2015
  September 30,
2016
  September 30,
2015
 
             
Net (loss) income $(7,105) $3,739  $(11,442) $10,631 
                 
Other comprehensive (loss) income, net of tax:                
Foreign currency translation (loss) gain  57   156   92   (337)
                 
Total other comprehensive (loss) gain  57   156   92   (337)
                 
Comprehensive (loss) income $(7,048) $3,895  $(11,350) $10,294 
  Three Months Ended  Six Months Ended 
  June 30,
2017
  June 30,
2016
  June 30,
2017
  June 30,
2016
 
             
Net income (loss) $3,403  $(1,046) $(2,735) $(4,335)
                 
Other comprehensive income (loss), net of tax:                
Foreign currency translation (loss) gain  556   (284)  844   35 
                 
Total other comprehensive income (loss)  556   (284)  844   35 
                 
Comprehensive income (loss) $3,959  $(1,330) $(1,891) $(4,300)

 

See accompanying notes to condensed consolidated financial statements.

 

 3 

  

ZAGG INC AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)

 

  Six Months Ended 
  June 30,
2017
  June 30,
2016
 
Cash flows from operating activities   
Net loss $(2,735) $(4,335)
Adjustments to reconcile net loss to net cash used in operating activities:        
Stock-based compensation  1,636   2,291 
Excess tax benefits related to share-based payments  -   (566)
Depreciation and amortization  11,022   14,568 
Loss on disposal of property and equipment  13   - 
Deferred income taxes  1,040   (43)
Amortization of deferred loan costs  120   81 
Impairment of intangible asset  1,959   - 
Changes in operating assets and liabilities, net of acquisition:        
Accounts receivable, net  11,350   5,666 
Inventories  8,130   1,104 
Prepaid expenses and other current assets  (298)  1,859 
Other assets  912   (210)
Income taxes receivable  1,622   (1,095)
Accounts payable  (23,116)  (8,506)
Accrued liabilities  1,073   (202)
Accrued wages and wage related expenses  (1,083)  12 
Deferred revenue  (64)  69 
Sales returns liability  (625)  (7,274)
         
Net cash provided by operating activities  10,956   3,419 
         
Cash flows from investing activities        
Purchase of property and equipment (net of amounts acquired)  (3,065)  (4,700)
Proceeds from disposal of equipment  31   - 
Purchase of mophie, net of cash acquired  -   (74,743)
         
Net cash used in investing activities  (3,034)  (79,443)
         
Cash flows from financing activities        
Payment of debt issuance costs  -   (1,144)
Proceeds from revolving credit facility  205,897   142,477 
Payments on revolving credit facility  (206,521)  (92,471)
Proceeds from term loan facility  -   25,000 
Payments on term loan facility  (3,125)  (1,563)
Purchase of treasury stock  (1,492)  - 
Payment of withholdings on restricted stock units  (240)  (621)
Proceeds from exercise of warrants and options  29   54 
Excess tax benefits related to share-based payments  -   566 
         
Net cash provided by (used in) financing activities  (5,452)  72,298 
         
Effect of foreign currency exchange rates on cash equivalents  256   (26)
         
Net increase (decrease) in cash and cash equivalents  2,726   (3,752)
         
Cash and cash equivalents at beginning of the period  11,604   13,002 
         
Cash and cash equivalents at end of the period $14,330  $9,250 
         
Supplemental disclosure of cash flow information        
Cash paid during the period for interest $953  $566 
Cash paid (refunded) during the period for taxes, net $(2,322) $834 

  Nine Months Ended 
  September 30,
2016
  September 30,
2015
 
Cash flows from operating activities      
Net (loss) income $(11,442) $10,631 
Adjustments to reconcile net (loss) income to net cash provided by operating activities:        
Stock-based compensation  3,675   2,708 
Excess tax benefits related to share-based payments  (569)  (199)
Depreciation and amortization  19,108   9,551 
Reversal of reserve on note receivable      (639)
Deferred income taxes  (9,512)  (913)
Amortization of deferred loan costs  141   49 
Loss on disputed mophie purchase price  24,317   - 
Changes in operating assets and liabilities, net of acquisition        
Accounts receivable, net  (10,496)  22,476 
Inventories  2,132   2,730 
Prepaid expenses and other current assets  500   (563)
Income tax receivable  12,899   (6,189)
Other assets  (227)  60 
Accounts payable  1,981   (11,919)
Accrued liabilities  1,759   (1,589)
Accrued wages and wage related expenses  802   (424)
Sales returns liability  (9,152)  (3,494)
Net cash provided by operating activities  25,916   22,276 
         
Cash flows from investing activities        
Purchase of property and equipment  (6,135)  (3,009)
Purchase of mophie, net of cash acquired  (74,743)  - 
Net cash used in investing activities  (80,878)  (3,009)
         
Cash flows from financing activities        
Payment of debt issuance costs  (1,144)  - 
Proceeds from revolving credit facility  230,117   9,871 
Payments on revolving credit facility  (199,922)  (9,871)
Proceeds from term loan facility  25,000   - 
Payments on term loan facility  (3,125)  - 
Purchase of treasury stock  -   (13,331)
Payment of withholdings on restricted stock units  (621)  (718)
Proceeds from exercise of warrants and options  54   206 
Excess tax benefits related to share-based payments  569   199 
Net cash provided by (used in) financing activities  50,928   (13,644)
         
Effect of foreign currency exchange rates on cash and cash equivalents  (13)  (127)
         
Net (decrease) increase in cash and cash equivalents  (4,047)  5,496 
         
Cash and cash equivalents at beginning of the period  13,002   9,461 
         
Cash and cash equivalents at end of the period $8,955  $14,957 
         
Supplemental disclosure of cash flow information        
Cash paid during the period for interest $1,106  $37 
Cash paid (refunded) during the period for ZAGG taxes, net  (597)  14,171 
Cash (refunded) during the period for mophie taxes, net  (11,021)  - 

 

See accompanying notes to condensed consolidated financial statements.

 

 4 

 

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 NineSix Months Ended SeptemberJune 30, 2016:2017:

 

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

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

For the Nine 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).

Purchase of $763$560 in fixed assets financed through accounts payable.

 

For the Six Months Ended June 30, 2016:

Purchase of $563$1,234 in treasury stockfixed assets financed through accounts payable.

See accompanying notes to condensed consolidated financial statements.

 

 5 

  

ZAGG INC AND SUBSIDIARIES

Notes to Condensed Consolidated Financial StatementsNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

(Unaudited)

 

(1)NATURE OF OPERATIONS AND BASIS OF PRESENTATION

 

ZAGGZAGG® 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, cases, and social techcases sold under the ZAGG, InvisibleShield®, mophie®, and iFrogz®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 (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. 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 20152016 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 23 and 1413 for additional details on the acquisition and the Company's reportable 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; ZAGG Netherlands B.V.; ZAGG Mobile Accessories Australia Pty Ltd; mophie inc.; mophie LLC,LLC; mophie Technology Development Co., Ltd; mophie Netherlands Coöperatie 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 14.2016.

 

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.

6

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.

GoodwillAt 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. 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 (amounts in thousands)

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-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 currently anticipates adopting the standard using the modified retrospective approach with the cumulative effect of adoption recorded at the date of initial application. The Company is currently evaluating the impact thesethe ASU will have on its consolidated financial statements, including the method of adoption that will be utilized.statements.

6

 

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 has concluded that this ASU willdid not have a significantmaterial impact on our financial position or results of operations.

7

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. TheDuring the year ended December 31, 2016, the Company has determined that it will adoptadopted the ASU using the retrospective approach and has concluded that the adoption of this ASU will resultresulting in recording deferred tax assets as non-current for current and willprior periods presented. This adoption does not impact our results of operations.

 

In February 2016, the FASB issued its new lease accounting standard, Topic 842,ASU No. 2016-02, “Leases (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 companiesbusiness entities 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, including whether to elect the practical expedients outlined in the new standard.

 

In March 2016, the FASB issued ASU No. 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. AmendmentsThe new standard contains several amendments that simplify the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures, statutory tax withholding requirements, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The changes in the ASU related tonew standard eliminate the timing of whenaccounting for excess tax benefits areto be recognized minimum statutory withholding requirements, forfeitures,in additional paid-in capital and intrinsic value should be applied using a modified retrospective transition method by means of a cumulative-effect adjustment to equitytax deficiencies recognized either in the income tax provision or in additional paid-in capital. The Company has adopted ASU 2016-09 as of the beginning of the period in whichquarter ended March 31, 2017. During the guidance is adopted. Amendments relatedquarter ended March 31, 2017, the Company applied the amendment relating 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 deficiencies on a prospective basis and, accordingly, has recognized all excess tax benefits and tax deficiencies as income tax expense or benefit as discrete items resulting in the recognition of income statement should be applied prospectively.tax expense of $171 for the six months ended June 30, 2017. The amendmentsCompany has not recorded a cumulative-effect adjustment to retained earnings as of the beginning of the year because all tax benefits had previously been recognized when the tax deductions related to stock compensation were utilized to reduce taxes payable. The Company has elected to apply the amendment related to the presentation of cash flows for excess tax benefits on the statement of cash flows may be applied using either a prospective basis and no prior periods have been adjusted. The Company’s financial position or retrospective transition method.results of operations were not impacted by amendments related to the statutory tax withholding requirement and, accordingly, no adjustment has been recorded. The Company is currently evaluatingwill continue to classify cash remitted to the tax authorities as a financing activity as now required by the amendments in the ASU. The ASU permits a policy election to either record forfeitures as they occur or estimate forfeitures consistent with historical U.S. GAAP. The Company has elected to record forfeitures as they occur, which did not have a material impact this ASU will have on its consolidatedour financial statements, including, where applicable, determining the methodposition or results of adoption.operations.

7

 

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 companiesbusiness entities 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.

 

In October 2016, the FASB issued ASU 2016-16, “Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory,” which requires entities to recognize at the transaction date the income tax consequences of intercompany asset transfers other than inventory. This ASU is effective for public business entities for annual and interim periods in fiscal years beginning after December 15, 2017. The Company is currently evaluating the impact this ASU will have on its consolidated financial statements.

In November 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash,” which requires companies to include cash and cash equivalents that have restrictions on withdrawal or use in total cash and cash equivalents on the statement of cash flows. This ASU is effective for public business entities for annual and interim periods in fiscal years beginning after December 15, 2017. The Company is currently evaluating the impact this ASU will have on its consolidated financial statements.

In January 2017, the FASB issued ASU 2017-04, “Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment,” which requires an entity to no longer perform a hypothetical purchase price allocation to measure goodwill impairment. Instead, impairment will be measured using the difference between the carrying amount and the fair value of the reporting unit. The ASU is effective for annual and interim periods in fiscal years beginning after December 15, 2019. All entities may early adopt the standard for goodwill impairment tests with measurement dates after January 1, 2017. The Company performs an annual goodwill impairment assessment and will elect to early adopt this standard in the current year when the assessment is performed. The Company is currently evaluating the impact this ASU will have on its consolidated financial statements.

In May 2017, the FASB issued ASU 2017-09, “Compensation – Stock Compensation (Topic 718),” which clarifies what constitutes a modification of a share-based payment award. This ASU is effective for all entities for annual and interim periods in fiscal years beginning after December 15, 2017. Early adoption is permitted as of the beginning of an annual period for which financial statements (interim or annual) have not been issued or made available for issuance. The Company is currently evaluating the impact this ASU will have on its consolidated financial statements.

 8 

 

(2)INVENTORIES

ZAGG INC AND SUBSIDIARIES

Notes to Condensed Consolidated Financial StatementsAt June 30, 2017, and December 31, 2016, inventories consisted of the following:

(Dollars, units

  June 30,
2017
  December 31, 2016 
Finished goods $65,084  $72,490 
Raw materials  292   279 
Total inventories $65,376  $72,769 

Included in prepaid expenses and shares in thousands, except per share data)

(Unaudited)other current assets were inventory deposits with third-party manufacturers at June 30, 2017 and December 31, 2016 of $957 and $437, respectively.

 

(2)(3)ACQUISITION OF MOPHIE INC.

 

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 an adjustment based on the estimated and actual net working capital 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, 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 Merger Agreement identifies three other contingent payments to be remitted to the Principal Shareholders upon receipt of such funds by ZAGG after the Acquisition Date, subject to any applicable offset rights of ZAGG under the Merger Agreement:

Federal and state tax refunds due to the Company related to 2012 and 2013 tax years;
Customs and duties refunds for pre-closing overpayments of customs and duties amounts to governmental agencies; and
Proceeds from the sale of real property located in Kalamazoo, Michigan.

$2,000 of the cash consideration paid to the Principal Shareholders was placed in an escrow account to cover any net working capital shortfall and indemnification claims of ZAGG. ZAGG and 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 the 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 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.

9

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 as of March 3, 2016:

     Adjustments to    
  Preliminary Allocation  Working
Capital
  Revised Allocation 
  March 3,
2016
  and
Fair Value
  March 3,
2016
 
Cash consideration $100,000  $-  $100,000 
Negative working capital at Acquisition Date  (23,478)  -   (23,478)
Additional negative working capital deficit  -   (26,317)  (26,317)
Contingent payments  11,283   856   12,139 
Total purchase price $87,805  $(25,461) $62,344 

The total purchase price of $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 because 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 and (2) the 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 completed its final analysis related to the calculation of the additional negative working capital as of the Acquisition Date and contingent payments, as these items relate to purchase accounting under U.S. GAAP. The Company 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 dispute between the Company and the Principal Shareholders, the Company has recorded a net charge of $24,317 during the quarter ended September 30, 2016. The final resolution of these items could result in a material adjustment the allocation of purchase price to identifiable assets acquired and liabilities assumed.

The following table summarizes the revised estimates of the fair values of the identifiable assets acquired and liabilities assumed as of the Acquisition Date. The revised 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 values presented below, when management’s estimates with respect to intangible assets and amounts recorded for income taxes are finalized:

Cash and cash equivalents $1,779 
Trade receivables (gross contractual receivables of $12,824)  12,823 
Inventories  24,911 
Prepaid expenses and other assets  1,073 
Income tax receivable  11,814 
Deferred tax assets  15,649 
Property and equipment  10,191 
Land held for sale  325 
Amortizable identifiable intangible assets  43,812 
Goodwill  12,791 
Accounts payable  (37,359)
Income tax payable  (196)
Accrued liabilities  (5,163)
Deferred revenue  (9)
Sales returns liability  (29,584)
Other noncurrent liabilities  (513)
Total $62,344 

10

ZAGG INC AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

(Unaudited)

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

  Preliminary Purchase  Adjustments to  Revised Purchase 
  Price
Allocation
  Working
Capital
  Price
Allocation
 
  March 3,
2016
  and
Fair Value
  March 3,
2016
 
Cash and cash equivalents $1,779  $-  $1,779 
Trade receivables  13,483   (660)  12,823 
Inventories  32,335   (10,011)  22,325 
Inventory step-up  6,937   (4,351)  2,586 
Prepaid expenses  485   215   700 
Other assets  200   173   373 
Income tax receivable  10,958   856   11,814 
Deferred tax assets  24,925   (9,276)  15,649 
Property and equipment  10,191   -   10,191 
Land held for sale  325   -   325 
Amortizable identifiable intangible assets  45,463   (1,651)  43,812 
Goodwill  14,092   (1,301)  12,791 
Accounts payable  (34,228)  (3,131)  (37,359)
Income tax payable  (196)  -   (196)
Accrued liabilities  (5,185)  22   (5,163)
Deferred revenue  (800)  791   (9)
Sales returns liability  (14,468)  (15,116)  (29,584)
Deferred tax liabilities  (17,978)  17,978   - 
Other noncurrent liabilities  (513)  -   (513)
Total $87,805  $(25,461) $62,344 

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 and amounts 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 one year from the date of acquisition (March 3, 2017). The Company is analyzing information to verify assets acquired and liabilities 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 nine months ended September 30, 2016 were $145 and $2,467, respectively, which are included as a component of operating expenses on the condensed consolidated statements of operations.

11

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:

  Intangible asset class  Weighted-average amortization period 
       
Tradenames $18,348   10.0 years 
Patents and technology  15,225   7.5 years 
Customer relationships  8,200   5.0 years 
Non-compete agreements  1,796   5.0 years 
Backlog  243   0.3 years 
Total $43,812     

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 Septemberperiod March 3, 2016, through June 30, 2016, mophie generated net sales of $39,731$39,659 and had a net loss before tax of $3,305. For the period March 3, 2016, through September 30, 2016, mophie generated net sales of $79,390 and had a net loss before tax of $17,030.$13,727.

Pro forma Results from Operations

 

The following unaudited pro-forma results of operations for the threesix months ended SeptemberJune 30, 2016 and 2015 and the nine months ended September 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,at the beginning of the period presented, 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.

  3 Months Ended 
  September 30,
2015
 
Net sales $108,614 
Net loss $(8,592)
Basic earnings per share $(0.30)
Diluted earnings per share $(0.30)

12

ZAGG INC AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

(Unaudited)

 9 Months Ended 
 September 30,
2016
 September 30,
2015
  

Six months ended

June 30,
2016

 
Net sales $304,254  $343,675  $179,592 
Net loss $(15,432) $(9,002) $(7,155)
Basic loss per share $(0.55) $(0.31) $(0.25)
Diluted loss per share $(0.55) $(0.31) $(0.25)

 

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.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 threesix months ended SeptemberJune 30, 2015,2016, pro forma net loss includes pro formaprojected amortization expense of $1,818.$4,412. In addition, the Company included interest from the new credit facility and amortization of debt issuance costs for the threesix months ended SeptemberJune 30, 20152016 of $536.$1,007. Material non-recurring adjustments excluded from the pro forma financial information above consists of the $2,586$6,937 step up of mophie inventory to its fair value, which has beenwas recorded as an unfavorable adjustment to cost of goods sold during the six months following the acquisition date.

 

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

9

 

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.

 

(3)DEBT AND LETTERS OF CREDIT

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.

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%.

13

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:

Maximum Leverage Ratio: Defined as the ratio of total funded indebtedness to Consolidated EBITDA (as defined in the Credit and Security Agreement), which cannot be more than 3.50 on a trailing four quarter basis.
Minimum Fixed Charge Coverage Ratio: Defined as the ratio of Consolidated EBITDA minus taxes, capital distributions and unfunded capital expenditures divided by the sum of interest payments, principal payments, and capital lease payments; the minimum allowed under the Credit and Security Agreement is 1.10 on a trailing four quarter basis.

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 nine months ended September 30, 2016, the Company amortized $60 and $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 nine months ended September 30, 2015, the Company amortized $16 and $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 nine months ended September 30, 2016, $18 and $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 nine months ended September 30, 2015, $10 and $28, respectively, in unused line fees were incurred and included as a component of interest expense in the condensed consolidated statements of operations.

At September 30, 2016, the weighted average interest rate on all outstanding borrowings under the revolving line of credit was 2.03%. At September 30, 2016, the effective interest rate on the Term Loan was 3.05%.

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

   Line of Credit  Term Loan  Total 
           
Remaining 2016  $  $1,563  $1,563 
2017      6,250   6,250 
2018      6,250   6,250 
2019      6,250   6,250 
2020      1,562   1,562 
Thereafter   30,195      30,195 
Total  $30,195  $21,875  $52,070 

14

ZAGG INC AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

(Unaudited)

(4)GOODWILL AND INTANGIBLE ASSETS

 

Amortizable intangiblesGoodwill

There were no additions to nor impairment of goodwill for the quarter-ended June 30, 2017. The balance of goodwill as of SeptemberJune 30, 2016,2017 was $12,272.

Long-lived Intangible Assets

The following table summarizes the changes in gross long-lived intangible assets:

Gross balance at December 31, 2016 $108,659 
Impairment loss on patent  (2,777)
Gross balance at June 30, 2017 $105,882 

On April 11, 2017, the Company received a final court order stating that the claims of one of its patents were either unpatentable or cancelled. Accordingly, management determined that the patent’s carrying value was not recoverable through future cash flows and was impaired as of March 31, 2017. Consequently, for the six months period ended June 30, 2017, the Company recorded an impairment loss consisting of a reduction of gross carrying amount of $2,777, accumulated amortization of $818, and net carrying value of $1,959 to reduce the net carrying value of the cancelled patent to $0.

Long-lived intangible assets, net of amortization as of June 30, 2017 and December 31, 2015,2016, were as follows:

 

  As of September 30, 2016 
  Gross Carrying Amount  Acquisitions  Accumulated Amortization  Net Carrying Amount  Weighted Average Amortization Period 
                
Customer relationships $41,500  $8,200  $(33,535) $16,165   7.5 years 
Tradenames  12,921   18,348   (8,790)  22,479   9.8 years 
Patents and technology  6,003   15,225   (4,615)  16,613   8.8 years 
Non-compete agreements  4,100   1,796   (4,310)  1,586   4.9 years 
Other  324   243   (542)  25   2.4 years 
Total amortizable assets $64,848  $43,812  $(51,792) $56,868   8.2 years 

  As of December 31, 2015 
  Gross Carrying Amount  Acquisitions  Accumulated Amortization  Net Carrying Amount  Weighted Average Amortization Period 
                
Customer relationships $41,500  $  $(29,150) $12,350   8.0 years 
Tradenames  12,921      (6,253)  6,668   9.5 years 
Patents and technology  5,805   198   (2,381)  3,622   11.9 years 
Non-compete agreements  4,100      (3,729)  371   4.8 years 
Other  324      (290)  34   4.1 years 
Total amortizable assets $64,650  $198  $(41,803) $23,045   8.4 years 

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 nine months ended September 30, 2016, amortization expense was $2,426 and $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 nine months ended September 30, 2016, of $28 and $80, respectively, is recorded as a component of cost of sales.

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

Estimated future amortization expense is as follows:

Remaining 2016 $3,506 
2017  12,387 
2018  11,351 
2019  9,267 
2020  6,653 
Thereafter  13,704 
Total $56,868 

15

ZAGG INC AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

(Unaudited)

  June 30,
2017
  December 31,
2016
 
       
Customer relationships $11,935  $14,612 
Tradenames  19,680   21,506 
Patents and technology  12,377   15,727 
Non-compete agreements  1,317   1,497 
Other  18   20 
Total amortizable intangible assets $45,327  $53,362 

 

(5)INVENTORIES

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

  September 30,
2016
  December 31,
2015
 
       
Finished goods $64,925  $44,764 
Raw materials  1,279   1,148 
Total inventories $66,204  $45,912 

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

(6)STOCK-BASED COMPENSATION

During the three and nine months ended September 30, 2016, the Company granted 163 and 876 restricted stock units, respectively. During the three and nine months ended September 30, 2015, the Company granted 24 and 569 restricted stock units, respectively. The restricted stock units granted during the three and nine months ended September 30, 2016, were estimated to have a weighted-average fair value per share of $6.41 and $8.17, respectively. The restricted stock units 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 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 876 and 569 grants discussed above, during the first nine months of 2016 and 2015, the Company granted 575 and 289 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 September 30, 2016 the Company believes it is probable that it will achieve the targets for 497 shares of restricted stock granted in the first nine months of 2016. Of the 289 restricted stock units granted in 2015, 244 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 records 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 nine months ended September 30, 2016, the Company recorded equity-based compensation expense related to restricted stock units of $1,384 and $3,675, respectively, which is included as a component of selling, general and administrative expense. During the three and nine months ended September 30, 2015, the Company recorded equity-based compensation expense related to restricted stock units of $898 and $2,708, respectively, which is included as a component of selling, general and administrative expense.

During the nine months ended September 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 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.

16

ZAGG INC AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

(Unaudited)

(7)INCOME TAXES

 

DuringFor interim periods, the three and nine months ended September 30, 2016,tax provision is determined utilizing an estimate of the Company’s annual effective tax rate adjusted for discrete items, if any. The Company’s effective tax rate for the three months ended June 30, 2017 and 2016, was 47%31.2% and 41%46.3%, respectively. During the three and nine months ended September 30, 2015, theThe Company’s effective tax ratefor the six months ended June 30, 2017 and 2016, was 39%(23.5%) and 40%28.2%, respectively. The change in the effective tax rate for three- and nine-month periodsthe three-month period ended SeptemberJune 30, 2016, is2017 was primarily due to income in lower rate foreign jurisdictions in which the company has losses in the prior year. The change in the effective tax rate for the six months ended June 30, 2017, was primarily due to a decrease indiscrete expense recognized during the domestic manufacturing deduction, and permanent differencesperiod related to the acquisitiontrue up of mophie.a deferred amount for stock compensation and close to break-even pre-tax book loss in the current year. 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.

 

(8)EARNINGS PER SHARE

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 reflects 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 nine months ended September 30, 2016 and 2015:

  Three months ended 
  September 30,
2016
  September 30,
2015
 
Net (loss) income $(7,105) $3,739 
Weighted average shares outstanding:        
Basic  28,125   28,734 
Dilutive effect of stock options, restricted stock units, and warrants     196 
Diluted  28,125   28,930 
Earnings (loss) per share:        
Basic $(0.25) $0.13 
Diluted $(0.25) $0.13 

  Nine months ended 
  September 30,
2016
  September 30,
2015
 
Net (loss) income $(11,442) $10,631 
Weighted average shares outstanding:        
Basic  27,987   29,209 
Dilutive effect of stock options, restricted stock units, and warrants     242 
Diluted  27,987   29,451 
Earnings (loss) per share:        
Basic $(0.41) $0.36 
Diluted $(0.41) $0.36 

17

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 September 30, 2016 1,001 restricted stock units and 50 warrants to purchase 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 September 30, 2015, warrants and restricted stock units to purchase 443 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 September 30, 2015 were 452 restricted stock units granted that were not yet vested as the performance conditions were not met (see further discussion in Note 6).

For the nine months ended September 30, 2016 1,001 restricted stock units and 50 warrants to purchase shares of common stock were not considered in calculating diluted earnings per share as their effect would have been anti-dilutive.

For the nine months ended September 30, 2015 warrants and restricted stock units 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 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 nine months ended September 30, 2015 were 452 restricted stock units granted that were not yet vested as the performance conditions were not met (see further discussion in Note 6).

(9)TREASURY STOCK

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 nine months ended September 30, 2016, no purchases of treasury stock occurred.

For the three and nine months ended September 30, 2015 the Company purchased 1,844 and 1,886, respectively, shares of ZAGG Inc common 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 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.

(10)NOTE RECEIVABLE

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.

18

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:

Mr. Harmer, Teleportall, and certain of their affiliates delivered a promissory note (the “Note”) dated March 23, 2011, to the Company in the original principal amount of $4,126 which accrued interest at the rate of LIBOR plus 4% per annum (adjusted quarterly) payable as follows: (i) interest only payments (a) on September 23, 2011, and (b) thereafter on or before the last day of each calendar quarter, (ii) 50% of the net profits of each ZAGGbox sale by Teleportall and its affiliates, and (iii) the unpaid balance of principal and interest due in full on March 23, 2013. The Note was secured by certain real property, interests in entities that own real property and restricted and free-trading securities.
In exchange for a license fee to the Company, Teleportall and the Company entered into a License Agreement under which the Company licensed to Teleportall the use of certain ZAGG names and trademarks to sell and distribute the ZAGGbox product.
In exchange for commissions to be paid by the Company, Teleportall and ZAGG entered into a non-exclusive, two-year Commission Agreement on March 23, 2011, under which Teleportall could make introductions of many ZAGG products in all countries where ZAGG did not then have exclusive dealing agreements in respect of the marketing, distribution or sale of its products.

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.

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, its then CEO and CFO and KPMG LLP (ZAGG’s independent registered public accounting firm). KPMG LLP and the former CEO and CFO 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.

19

ZAGG INC AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

(Unaudited)

On June 29, 2015, the Company foreclosed on certain real property securing the Note, 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 previously collateralized by the foreclosed real property and included in other assets, and $298 of the Note 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 was $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 excess in value of the common stock over the book value of the Note was recorded by the Company as a recovery of a previously established reserve in selling, general and administrative expense in the consolidated statement of operations, which is the same financial statement line item in which the Company previously recorded write-downs of the Note.

As of 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, 2016 and December 31, 2015, the entire unpaid balance 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 $5,158 and $4,836, respectively. The increase to the reserve during the nine months ended September 30, 2016 consisted of accrued interest of $324.

(11)(6)FAIR VALUE MEASURES

 

Fair Value of Financial Instruments

 

At SeptemberJune 30, 2016,2017, the Company’s financial instruments included cash and cash equivalents, accounts receivable, accounts payable, a line of credit, and a term loan. The carrying amounts of cash and cash equivalents, accounts receivable and accounts payable approximateapproximates 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.rates.

10

 

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 unitCompany to develop its own assumptions.

 

20

ZAGG INC AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

(Unaudited)

At SeptemberJune 30, 2016,2017, and December 31, 2015,2016, the following assets were measured at fair value on a recurring basis using the level of inputs shown:

 

     Fair Value Measurements Using: 
  September 30,
2016
  Level 1 Inputs  Level 2 Inputs  Level 3 Inputs 
Money market funds included in cash equivalents $5  $5       
                 
     Fair Value Measurements Using: 
  December 31,
2015
  Level 1 Inputs  Level 2 Inputs  Level 3 Inputs 
Money market funds included in cash equivalents $375  $375       
     Fair Value Measurements Using: 
  June 30,
2017
  Level 1
Inputs
  Level 2 Inputs  Level 3 Inputs 
Money market funds included in cash equivalents $5  $5       

     Fair Value Measurements Using: 
  December 31,
2016
  Level 1
Inputs
  Level 2 Inputs  Level 3 Inputs 
Money market funds included in cash equivalents $5  $5       

(7)DEBT AND LINE OF CREDIT

Long-term debt, net as of June 30, 2017 and December 31, 2016, was as follows:

  June 30,
2017
  December 31, 2016 
Line of credit $30,683  $31,307 
Term loan  17,014   20,107 
Total debt outstanding  47,697   51,514 
Less current portion  36,868   41,791 
Total long-term debt outstanding $10,829  $9,623 

(8)STOCK-BASED COMPENSATION

During the three and six months ended June 30, 2017, the Company granted 123 and 434 restricted stock units, respectively. During the three and six months ended June 30, 2016, the Company granted 380 and 713 restricted stock units, respectively. The restricted stock units granted during the three and six months ended June 30, 2017 were estimated to have a weighted-average fair value per share of $6.35 and $6.57, respectively. The restricted stock units granted during the three and six months ended June 30, 2016 were estimated to have a weighted-average fair value per share of $5.40 and $7.33, 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.

As part of the 434 and 713 grants discussed above, during the first six months of 2017 and 2016, the Company granted 372 and 418 restricted stock units, respectively, to certain executives and employees of the Company where vesting is linked to specific performance criterion. The restricted stock units granted in 2017 and 2016 only vest upon the Company’s achievement of specified thresholds of net sales, Adjusted EBITDA, or specific goals for the individual executive. As of June 30, 2017, the Company believes it is probable that it will achieve the targets for all restricted stock units granted in the first six months of 2017. Of the 418 restricted stock units granted in 2016, 29 shares vested and 150 shares were forfeited, and 239 have not yet vested or been forfeited.

11

The estimated fair value of the 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 six months ended June 30, 2017, the Company recorded stock-based compensation expense related to restricted stock units of $966 and $1,636, respectively, which is included as a component of selling, general, and administrative expense. During the three and six months ended June 30, 2016, the Company recorded stock-based compensation expense related to restricted stock units of $957 and $2,291, respectively, which is included as a component of selling, general, and administrative expense

During the six months ended June 30, 2017 and 2016, certain ZAGG employees elected to receive a net amount of shares upon the vesting of restricted stock unit grants in exchange for the Company paying up to the maximum 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 $240 and $621, respectively, which is reflected as a reduction of additional paid-in capital. We also recognized an increase of additional paid-in capital related to the employee stock purchase plan of $29 for the six months ended June 30, 2017. There was an immaterial impact to additional paid-in capital related to the employee stock purchase plan for the six months ended June 30, 2016.

(9)EARNINGS (LOSS) PER SHARE

Basic earnings (loss) per common share excludes dilution and is computed by dividing net earnings (loss) by the weighted average number of shares of common stock outstanding during the period. Diluted earnings (loss) per common share reflects 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 (loss) per share and diluted earnings (loss) per share for the three and six months ended June 30, 2017 and 2016:

  Three months ended 
  June 30,
2017
  June 30,
2016
 
Net income (loss) $3,403  $(1,046)
Weighted average shares outstanding:        
Basic  27,963   28,126 
Dilutive effect of restricted stock units and warrants  250   --- 
Diluted  28,213   28,126 
Earnings (loss) per share:        
Basic $0.12  $(0.04)
Diluted $0.12  $(0.04)

  Six months ended 
  June 30,
2017
  June 30,
2016
 
Net loss $(2,735) $(4,335)
Weighted average shares outstanding:        
Basic  28,010   27,918 
Dilutive effect of restricted stock units and warrants      
Diluted  28,010   27,918 
Earnings (loss) per share:        
Basic $(0.10) $(0.16)
Diluted $(0.10) $(0.16)

For the three months ended June 30, 2017, there were no warrants or restricted stock units excluded from the calculation of diluted earnings per share. For the three months ended June 30, 2016, warrants and restricted stock units to purchase shares of common stock totaling 895 were not considered in calculating the diluted earnings per share as their effect would have been anti-dilutive.

For the six months ended June 30, 2017 and 2016, warrants and restricted stock units to purchase shares of common stock totaling 980 and 895, respectively, were not considered in calculating diluted earnings per share as their effect would have been anti-dilutive.

12

(10)TREASURY STOCK

For the three and six months endedJune 30, 2017, the Company purchased 0 and 234 shares of ZAGG Inc common stock, respectively. Cash consideration paid for the purchase of ZAGG Inc common stock for the six months ended June 30, 2017 was $1,492, which included commissions paid to brokers of $9. For the six months ended June 30, 2017 the weighted average price per share was $6.32. The consideration paid has been recorded within stockholders’ equity in the condensed consolidated balance sheet.

For the three and six months ended June 30, 2016, no purchases of treasury stock occurred.

(11)COMMITMENTS AND CONTINGENCIES

Operating leases

The Company leases office and warehouse space, office equipment, and mall cart locations under operating leases that expire through 2023. Future minimum rental payments required under the operating leases at June 30, 2017 were as follows:

Remaining 2017 $1,457 
2018  2,177 
2019  1,714 
2020  1,529 
2021  1,455 
Thereafter  2,584 
Total $10,916 

For the three months ended June 30, 2017 and 2016, rent expense was $758 and $939, respectively, and was included in selling, general and administrative expense in the condensed consolidated statement of operations. Rent expense is recognized on a basis which approximates straight-line over the lease term and was recorded as a component of selling, general and administrative expense on the condensed consolidated statement of operations.

For the six months ended June 30, 2017 and 2016, rent expense was $1,443 and $1,656, respectively, and was included in selling, general and administrative expense in the condensed consolidated statement of operations. Rent expense is recognized on a basis which approximates straight-line over the lease term and was recorded as a component of selling, general and administrative expense on the condensed consolidated statement of operations.

Commercial Litigation

Daniel Huang, individually and as shareholder representative v. ZAGG Inc, Court of Chancery of the State of Delaware, C.A. No. 12842. On October 21, 2016, Daniel Huang, as the representative of the mophie, inc. shareholders, under the Merger Agreement dated February 2, 2016, by and among the Company, ZM Acquisition, Inc. and mophie, inc., filed a lawsuit against the Company alleging that the Company breached the Merger Agreement by failing to pay certain contingent payments (the “Contingent Payments”) related to tax refunds and customs duty recoveries and seeking damages in an amount no less than $11,420. On December 16, 2016, the Company filed an Answer and Counterclaims in the lawsuit. In its Answer, the Company acknowledges its obligation under the Merger Agreement to make the Contingent Payments under certain circumstances, but avers that this obligation is subject to rights of offset and recoupment, each of which applies to Huang’s claims. In its Answer, the Company denies that any payments are due at this time or that it is in breach of any provision of the Merger Agreement. Regarding the Counterclaims, after the closing of the merger, ZAGG discovered breaches of certain representations, warranties and covenants made by Huang and mophie that have resulted in damages exceeding $22,000. In addition to these breaches, the Company has also discovered that mophie fraudulently misrepresented or omitted facts related to (i) a certain product return program, resulting in a substantial overstatement of the value of mophie’s inventory and understatement of mophie’s sales return reserve, (ii) breaches of contracts by Huang and certain other former employees of pre-merger mophie, and (iii) certain intellectual property belonging to mophie that was misappropriated by Huang and other former employees of pre-merger mophie. In its Counterclaims, the Company asserts claims based on these facts against Huang and certain other indemnitors for breaches of representations, warranties and covenants in the Merger Agreement, fraudulent concealment and declaratory judgment. On February 6, 2017, Huang filed a Motion to Dismiss the Counterclaims. On March 28, 2017, ZAGG filed its Answer in Opposition to Huang’s Motion to Dismiss. On July 18, 2017, Huang filed a Motion for Summary Judgement. The Court of Chancery will schedule a hearing in the future on Huang’s Motion to Dismiss and Motion for Summary Judgment. The Company recorded a liability based on its estimate of the Contingent Payments as part of purchase accounting. The Company will accrue for future Contingent Payments, including tax refunds, proceeds received on the land held for sale, and customs duty recoveries as they are collected. This matter is not expected to have a material adverse effect on the Company’s financial position, results of operations, or liquidity.

13

ZAGG Inc et al. v. Daniel Huang et al., Orange County Superior Court, State of California, Civil No. 30-2016-00892767-CU-BC-CJC. On December 15, 2016, the Company and mophie filed a complaint against Daniel Huang and Immotor, LLC (“Immotor”). The complaint alleges that Huang and the company he founded, Immotor, misappropriated confidential information belonging to mophie while Huang was serving as an officer and director of mophie. Based on these allegations, mophie asserts claims for breach of contract, trade secret misappropriation in violation of California Civil Code § 3426 et seq., breach of fiduciary duty, and conversion, and the Company asserts claims against Huang for breaches of his employment agreement, inventions agreement, separation agreement and consulting agreement. On February 28, 2017, Huang and Immotor filed a Demurrer to the Complaint filed by ZAGG and mophie. ZAGG and mophie opposed the Demurrer, and on June 13, 2017 the Orange County Superior Court entered an order overruling the Demurrer in its entirety. On June 22, 2017, Huang and Immotor filed an Answer to the Complaint asserting a general denial of all allegations.  ZAGG and mophie served Huang and Immotor with a trade secret disclosure on July 19, 2017, as is required of a plaintiff in a trade secret case under California’s civil rules.  ZAGG and mophie also served discovery requests on this date.  Huang and Immotor’s responses to those requests are due on August 24, 2017.  This matter is not expected to have a material adverse effect on the Company’s financial position, results of operations, or liquidity.

Peter Kravitz v. ZAGG Inc., U.S. Bankruptcy Court, District of Delaware, Adv. Pro. No. 15-51558(BLS).On October 29, 2015, Kravitz, as Liquidating Trustee (the “Trustee”) of the RSH Liquidating Trust (formerly 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 case was settled by the Company in April 2017. The settlement amount was not considered material to the Company’s financial position, results of operations, or liquidity.

Eric Stotz and Alan Charles v. mophie inc., U.S. District Court, Central District of California, Civil Action No. 2:16-cv-08898-GW-FFM. On January 13, 2017, Eric Stotz and Alan Charles, individually and on behalf of a purported class, filed a first amended class action complaint alleging that they purchased certain external battery packs and that the battery packs did not extend the life of the phones’ internal batteries as advertised and adversely affected the phones’ internal battery life. Plaintiffs allege violations of California’s unfair competition law, California’s Consumer Legal Remedies Act, New York’s unlawful deceptive acts and practices statute, and New York’s false advertising law. The Company has denied all liability and will defend the claims and otherwise respond to the allegations. This matter is not expected to have a material adverse effect on the Company’s financial position, results of operations, or liquidity. 

MobileExp, LLC v. mophie inc., U.S. District Court, Eastern District of Texas, Civil Action No. 2:16-cv-1340.On November 30, 2016, MobileExp, LLC filed a lawsuit alleging that Mophie Space Pack for the iPhone 5S, 5, 6, 6 Plus, and iPad Mini infringed on certain claims of U.S. Patent No. 8,879,246. The Company has denied all liability and filed a counterclaim alleging that the claims of U.S. Patent No. 8,879,246 are invalid. On February 23, 2017, Civil Action No. 2:16-cv-1340 was consolidated with 2:16-cv-1339, the latter being the lead case. On June 9, 2017, the claims and counterclaims between MobileExp, LLC and the Company were dismissed with prejudice.

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 an 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 former Chief Executive Officer Robert Pedersen’s pledge and subsequent sale of Company shares and the fact that such pledges and sales were not disclosed in the Company’s 2011 10-K filed on March 15, 2012, or 2012 Proxy filed on April 27, 2012. The Company responded to these requests and is cooperating with the staff although there has been no resolution to 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 probable 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 June 30, 2017, 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.

14

 

(12)CONCENTRATIONS

 

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 SeptemberJune 30, 2016.2017.

 

At SeptemberJune 30, 20162017, the balance of accounts receivable from threetwo separate customers exceeded 10%: Superior Communications, Inc. (“Superior”) and Best Buy Co., Inc. (“Best Buy”). AtGENCO Distribution Systems, Inc. (“GENCO”) exceeded 10% of accounts receivable as of December 31, 2015,2016, but not as of June 30, 2017. At June 30, 2017, the balance of accounts receivable from two separate customers exceeded 10%:

 

  September 30,
2016
  December 31,
2015
 
Customer A  14%  29%
Customer B  38%  31%
Customer C  11%  5%
  June 30,
2017
  December 31, 2016 
Superior  38%  32%
Best Buy  14%  22%
GENCO  8%  10%

 

No other customer account balances were more than 10% of accounts receivable at SeptemberJune 30, 20162017, or December 31, 2015.2016. 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.

 

Concentration of suppliersuppliers

 

We do not directly manufacture any of our products,products; rather, we employ various third party manufacturing partners in the United States and Asia to perform these services on our behalf. The services employed by these third parties include the selection of sub-suppliers that provide raw materials and other components used in the manufacturing process. We have endeavored to use common components and readily available raw materials in the design of our products that can be sourced from multiple sub-suppliers. However, raw film used in our InvisibleShield film and InvisibleShield On-Demand (“ISOD”) products has been produced by a single supplier for the last nine years. Our film supplier has contractually agreed to not sell the raw materials to any of our competitors. If any

Below is a high-level summary by product category of our supplier relationships are terminated or interrupted, we could experience an immediate or long-term supply shortage, which could have a material adverse effect on our business.the manufacturing sources used by the Company:

 

Screen Protection – Our screen product line is comprised of sales of InvisibleShield glass products, InvisibleShield film products, and ISOD film blanks. InvisibleShield glass products are sourced from factories in Asia with protective glass expertise, each of which uses a number of sub-suppliers for raw materials and other components. Our InvisibleShield film and ISOD products are sourced through our third-party logistics partner, who purchases the raw film inventory from a single supplier (as discussed above).
Battery Cases and Power Management – Our battery case and power management product lines consists of power products that are designed to provide on-the-go power for tablets, smartphones, MP3 players, cameras, and virtually all other electronic mobile devices. Our power products are sourced from factories in Asia with battery expertise, each of which uses a number of sub-suppliers for raw materials and other components.
Keyboards– Our keyboard product line consists of (1) device-specific keyboards designed to fit individual tablets produced by original equipment manufacturers and (2) keyboards that are designed to be device agnostic and can be used on virtually any mobile device. Our keyboard products are sourced from factories in Asia with keyboard expertise, each of which uses a number of sub-suppliers for raw materials and other components.
Audio– Our audio product line consists of earbuds and headphones that are designed to be compatible with virtually all electronic mobile devices. Our audio products are sourced from factories in Asia with audio expertise, each of which uses a number of sub-suppliers for raw materials and other components.

Our product and operations teams work closely with suppliers from initial product development and throughout the manufacturing process to ensure that (1) the supplier understands and will build according to product specifications, (2) appropriate quality is maintained for the finished goods and for all sub-components, and (3) the supplier can meet our supply needs.

 2115 

ZAGG INC AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

(Unaudited)

 

Concentration of net sales

 

For each of the three months ended SeptemberJune 30, 2017 and 2016, and 2015, Superior Communications (“Superior”) and Best Buy individuallywas our largest customer which accounted for over 10% of the quarterly revenues in each respective quarter:

  Three months ended September 30,
2016
  Three months ended September 30,
2015
 
Superior Communications  30%  17%
Best Buy  10%  18%

For each of the three months ended September 30, 2016 and 2015 one other customernet sales; GENCO also accounted for more than 10% of the quarterly revenues in each respective quarter. Other than Superior and Best Buy, those customers with over 10% of net sales in a given period tend to change from year-to-year.for the three months ended June 30, 2016, as follows:

 

  

Three months ended

June 30,
2017

  Three months ended June 30,
2016
 
Superior  31%  27%
GENCO  8%  12%

For the ZAGG segment,six months ended June 30, 2017 and 2016, Superior is a pass-through distributor through which products are sold to Verizon (noand GENCO were our largest customers with each accounting for over 10% of net sales; Best Buy also accounted for over 10% of net sales for the six months ended June 30, 2016, as follows:

  

Six months ended

June 30,
2017

  Six months ended June 30,
2016
 
Superior  29%  24%
GENCO  10%  11%
Best Buy  8%  10%

During 2017 and 2016 no other customers purchase through Superior). For the mophie segment, several retailers, including Best Buy, purchase mophie products through Superior.accounted for greater than 10% of net sales.

 

Although we have contracts in place governing our relationships with customers, the contracts are not long-term and all of our retailers generally purchase from us on a purchase order basis. As a result, these retailers generally may, with little or no notice or penalty, cease ordering and selling our products, or materially reduce their orders. If any of these retailers cease selling our products, slow their rate of purchase of our products, or decrease the number of products they purchase, our results of operations could be adversely affected.

 

For each of the nine months ended September 30, 2016 and 2015, Superior and Best Buy individually accounted for over 10% of the quarterly revenues in each respective period:

  Nine months ended September 30,
2016
  Nine months ended September 30,
2015
 
Superior Communications  27%  13%
Best Buy  10%  20%

For each of the nine months ended September 30, 2016 and 2015 one other customer accounted for more than 10% of the quarterly revenues in each respective quarter. Other than Superior and Best Buy, those customers with over 10% of net sales in a given period tend to change from year-to-year.

The percentage of net sales by geographic region for the three months ended SeptemberJune 30, 20162017 and 2015,2016, was approximately:

 

 Three months ended September 30,
2016
 Three months ended September 30,
2015
  2017  2016 
United States  87%  89%  87%  90%
Europe  8%  9%  8%  6%
Other  5%  2%  5%  4%

 

The percentage of net sales by geographic region for the ninesix months ended SeptemberJune 30, 20162017 and 2015,2016, was approximately:

 

  Nine months ended September 30,
2016
  Nine months ended September 30,
2015
 
United States  89%  91%
Europe  7%  8%
Other  4%  1%

22

ZAGG INC AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

(Unaudited)

(13)COMMITMENTS AND CONTINGENCIES

Operating leases

The Company leases office and warehouse space, office equipment, and mall cart locations under operating leases that expire through 2023. Future minimum rental payments required under the operating leases at September 30, 2016 are as follows:

Remaining 2016 $623 
2017  2,661 
2018  1,890 
2019  1,453 
2020  1,484 
Thereafter  4,030 
Total $12,141 

For the three months ended September 30, 2016 and 2015, rent expense was $793 and $391, respectively, and is included in selling, general and administrative expense in the condensed consolidated statements of operations.

For the nine months ended September 30, 2016 and 2015, rent expense was $2,450 and $1,182, respectively, and is included in selling, general and administrative expense in the condensed consolidated statements of operations.

Commercial Litigation

Daniel Huang, individually and as shareholder representative v. ZAGG INC, Court of Chancery of the State of Delaware, C.A. No. 12842.On October 21, 2016, Daniel Huang as the representative of the shareholders of mophie, inc. under the Merger Agreement dated February 2, 2016, by and among the Company, ZM Acquisition, Inc. and mophie, inc., filed a lawsuit against the Company alleging that the Company breached the Merger Agreement by failing to pay certain contingent payments related to tax refunds and customs duty recoveries and seeks damages in an amount no less than $11,420. The Company will respond in due course and will defend the claims and otherwise enforce its rights and remedies under the Merger Agreement. The Company recorded a liability based on its estimate of the contingent payments as part of purchase accounting. The Company will accrue for future tax refunds, proceeds received on the land held for sale, and customs duty recoveries as they are collected. This matter is not expected to have a material adverse effect on the Company’s financial position, results of operations, or liquidity.

Lorence A. Harmer, et al. v. ZAGG Inc et 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. In October 2012, the Company filed a counterclaim and third-party complaint against Harmer, 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. On May 21, 2015, the court 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. On October 2, 2015, the court 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. All of the Harmer Parties’ claims against the Company and others have been dismissed with prejudice. The Company is moving forward with collection efforts pursuant to the final judgment. This matter is not expected to have a material adverse effect on the Company’s financial position, results of operations, or liquidity.

23

ZAGG INC AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

(Unaudited)

Peter Kravitz v. ZAGG Inc., U.S. Bankruptcy Court, District of Delaware, Adv. Pro. No. 15-51558(BLS).On October 29, 2015, Kravitz, as Liquidating Trustee (the “Trustee”) of the RSH Liquidating Trust (formerly 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 its answer to the complaint stating, among other things, that the Company has a full and complete defense to the Trustee’s allegations in that all payments were received by the Company in the ordinary course of business and all payments received by the Company were paid pursuant to ordinary business terms. The Company also asserted the defense that the Company provided subsequent new value to RadioShack and that the payments are otherwise not recoverable by the Trustee. The case is currently in the discovery phase and with trial to be held in 2017. This matter is not expected to have a material adverse effect on the Company’s financial position, results of operations, or liquidity.

Patent/Trademark Litigation

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. Patent 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 has appealed the PTAB’s decision to the Federal Circuit Court of Appeals. While under appeal, the patent remains in force. At September 30, 2016, unamortized book value of $2,027 remained on the Company’s books for acquisition costs related to this patent, which is included in the balance of intangible assets on the consolidated balance sheet. The Company will continue to evaluate the recorded book value and useful life of the intellectual property subject to the patent and will reflect any changes in estimates that result from this matter prospectively.

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 an 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 former-Chief Executive Officer Robert Pedersen’s pledge and subsequent sale of Company shares and the fact that such pledges and sales were not disclosed in the Company’s 2011 10-K filed on March 15, 2012 or 2012 Proxy filed on April 27, 2012. The Company responded to these requests and is cooperating with the staff although there has been no resolution to 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 records a liability when a particular contingency is probable and estimable. Other than those discussed above, the Company has not accrued for any loss at September 30, 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.

  2017  

2016

 
United States  86%  89%
Europe  8%  7%
Other  6%  4%

 

(14)(13)SEGMENT REPORTING

 

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 regularly reviews to analyze performance and allocate resources. The results of operations of mophie are included in the Company’s results of operations beginning on March 3, 2016.

 

 2416 

ZAGG INC AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

(Unaudited)

 

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, cases, and cables under the mophie brand. Worldwide operations are headquartered in Tustin, California.California, while international operations are directed from Shannon, Ireland.

 

The Company measures the results of its segments using, among other measures, each segment'ssegment’s net sales, gross profit, and operating income (loss).

 

Net sales by segment arewere as follows:

 

 Three months ended September 30,
2016
  Three months ended September 30,
2015
  Three months ended June 30,
2017
  Three months ended June 30,
2016
 
          
ZAGG segment $84,931  $66,774  $74,259  $67,810 
mophie segment  39,731      40,968   32,023 
Net sales $124,662  $66,774  $115,227  $99,833 

 

 Nine months ended September 30,
2016
  Nine months ended September 30,
2015
  Six months ended June 30,
2017
  Six months ended June 30,
2016
 
          
ZAGG segment $207,538  $190,679  $131,424  $122,607 
mophie segment  79,390      76,749   39,659 
Net sales $286,928  $190,679  $208,173  $162,266 

 

Gross profit by segment iswere as follows:

 

 Three months ended September 30,
2016
  Three months ended September 30,
2015
  Three months ended June 30,
2017
  Three months ended June 30,
2016
 
          
ZAGG segment $35,420  $24,871  $27,790  $26,645 
mophie segment  7,726      8,034   4,228 
Gross profit $43,146  $24,871  $35,824  $30,873 

 

  Nine months ended September 30,
2016
  Nine months ended September 30,
2015
 
       
ZAGG segment $84,885  $72,785 
mophie segment  12,863    
Gross profit $97,748  $72,785 

25

ZAGG INC AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

(Unaudited)

  Six months ended June 30,
2017
  Six months ended June 30,
2016
 
       
ZAGG segment $52,093  $49,465 
mophie segment  12,337   5,137 
Gross profit $64,430  $54,602 

 

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

 

 Three months ended September 30,
2016
  Three months ended September 30,
2015
  Three months ended
June 30,
2017
  Three months ended
June 30,
2016
 
          
ZAGG segment $(9,405) $6,228  $9,177  $8,288 
mophie segment  (3,305)     (3,680)  (9,640)
Income (loss) from operations $(12,710) $6,228  $5,497  $(1,352)

 

  Nine months ended September 30,
2016
  Nine months ended September 30,
2015
 
       
ZAGG segment $(704) $17,918 
mophie segment  (17,062)   
Income (loss) from operations $(17,766) $17,918 

17

  Six months ended June 30,
2017
  Six months ended June 30,
2016
 
       
ZAGG segment $10,216  $8,701 
mophie segment  (11,368)  (13,756)
Loss from operations $(1,152) $(5,055)

 

Total assets by segment arewere as follows:

 

  

September 30,
2016

  

December 31,
2015

 
       
ZAGG segment $154,018  $179,541 
mophie segment  150,347    
Total assets $304,365  $179,541 

  

June 30,
2017

  

December 31,
2016

 
       
ZAGG segment $141,192  $156,123 
mophie segment  140,482   154,606 
Total assets $281,674  $310,729 

 

(15)(14)SUBSEQUENT EVENTS

 

As is described above in Notes 2On July 17, 2017, ZAGG Inc, KeyBank National Association (“KeyBank”), ZB, N.A. dba Zions First National Bank (“Zions Bank”), and 13, on October 21, 2016, Daniel HuangJPMorgan Chase Bank, N.A. (collectively, the “Lenders”), and KeyBank, as the representative ofadministrative agent for the shareholders of mophie, inc. underLenders, entered into a Third Amendment Agreement (“Amendment”), which amends the Mergeroriginal Credit and Security Agreement dated February 2,as of March 3, 2016 by and among the Company, ZM Acquisition,KeyBank, KeyBanc Capital Markets Inc., Zions Bank, and mophie, inc.the other lenders party thereto, as amended by that certain First Amendment Agreement dated as of May 31, 2016 and that certain Second Amendment Agreement dated as of March 8, 2017 (collectively, the “Credit Agreement”), filed a lawsuit againstto:

Increase the Maximum Revolving Amount, as defined in the Credit Agreement, from $85,000 to:
$135,000 from July 17, 2017 to December 31, 2017;
$110,000 million from January 1, 2018 to May 31, 2018; and
$100,000 from June 1, 2018 forward.
Expand Permitted Foreign Subsidiary Loans, Guaranties and Investments, as defined in the Credit Agreement, to include:
A $2,000 loan dated April 5, 2017 from the Company to ZAGG International Distribution Limited; and
Any other loan or investment by the Company or any domestic subsidiary of the Company in or to, or guaranty of indebtedness of, any foreign subsidiary of the Company for the period July 17, 2017 to March 31, 2018, in an aggregate amount not to exceed $8,000.
Increase the Letter of Credit Commitment, as defined in the Credit Agreement, from $7,500 to an aggregate amount of $40,000.
Increase the Borrowing Base, as defined in the Credit Agreement, on a seasonal basis between August 1, 2017 and September 30, 2017 by $15,000.

In connection with the Amendment, the Company alleging thatalso entered into replacement revolving credit notes with each of the Lenders. As consideration for entering into the Amendment, the Company breached the Merger Agreement by failingagreed to pay certain contingent payments relatedthe administrative agent and Lenders total amendment and arrangement fees of $145, pursuant to tax refundsthe terms of an administrative agent fee letter and customs duty recoveries and seeks damages in an amount no less than $11,420.a closing fee letter entered into with KeyBank. The Company will respond in due course and will defendchanges to the claims and otherwise enforce its rights and remedies under the Merger Agreement. The Company recorded a liability based on its estimate of the contingent payments as part of purchase accounting. The Company will accrue for future tax refunds, proceeds received on the land held for sale, and customs duty recoveries as they are collected. This matter is not expectedCredit Agreement described above were made to have a material adverse effect on the Company’s financial position, results of operations, or liquidity.support core-business opportunities.

 

 2618 

 

ITEM 2.MANAGEMENT'SMANAGEMENT’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 effectaffect 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 and our ability to successfully manage the integration of the mophie business.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

 

ZAGG® Inc (“we,” “us,” “our,” “ZAGG,” or the “Company”)ZAGG is an innovation leader in mobile tech accessories for smartphones and tablets. For over 10 years,The Company’s commitment is to enhance every aspect of performance, productivity and durability in mobile devices with creative product solutions. ZAGG was created from the concept of applying a clear film originally designed to protect military-helicopter blades in harsh desert conditions to protect consumers’ mobile devices. Mobile devices are essential to modern living and ZAGG’s mission is to ensure better performance in the real world.

In addition to its home-grown brands, ZAGG has developed creative product solutionscreated a platform to combine category-creating and innovative brands that enhance and protectaddress specific consumer needs to empower a mobile devices for consumers around the world.lifestyle. The Company has an award-winning product portfolio that includes screen protection, power cases, power management, personal audio, mobile keyboards, cases and social techcases sold under the ZAGG, InvisibleShield®, mophie®,InvisibleShield, mophie, and IFROGZ®IFROGZ brands.

Headquartered in Midvale, Utah, ZAGG has operations in the United States, Ireland, the Netherlands, and China, and has over 500 employees.

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

Corporate ObjectivesCore Values
The Preferred BrandIntegrity
Creative Product SolutionsOwnership
Targeted Global DistributionCare for People
Operational ExcellencePassion
Continuous Improvement
Performance
Sense of Urgency

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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, achieving operational excellence and being the preferred brand for its customers.

 

We maintain our corporate headquarters at 910 West Legacy Center Drive, Suite 500, Midvale, UT, 84047. The telephone number of the Company is 801-263-0699. Our website addresses arewww.ZAGG.com andwww.mophie.com. The URLs are included here as inactive textual references. Information contained on, or accessible through, our websitewebsites is not a part of, and is not incorporated by reference into this report.

 

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The Company has established four corporate objectives and seven core values to act as a foundation for and guide ZAGG daily:

Our Brands

Corporate ObjectivesCore Values
The Preferred BrandIntegrity
Creative Product SolutionsOwnership
Targeted Global DistributionCare for People
Operational ExcellencePassion
Continuous Improvement
Performance
Sense of Urgency

The corporate objectives are intended to align the Company’s functional teams’ goals and execution. Every ZAGG employee is trained to understand her or his role in executing to these objectives. Each core value acts as a key component in working toward ZAGG’s corporate objectives of providing creative product solutions, executing targeted global distribution, achieving operational excellence, and being the preferred brand for its customers.

 

Our Products

ZAGG: Empowering people to live their lives unleashed

InvisibleShield Products

 

The ZAGG brand empowers peopleInvisibleShield products are designed to live their lives unleashed.provide premium, lifetime protection for mobile device screens against shattering or scratching through military-grade solutions. Our products are designed to feature cutting-edge designprovide peace of mind by enabling consumers to fearlessly enjoy their mobile devices and innovation to provide portability, style, and productivity that can keep up with evennever experience the most active mobile users. We believe that with the right mobile accessories, no one ever has to feel tethered or held back.

ZAGG keyboards are designed to offer our customers an enhanced and innovative productivity experience. Since entering this category in 2010, ZAGG has continually reinvented its lineinconvenience 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.

InvisibleShield: Leader in screen protectionshattered screen.

 

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

 

Our films were originally developed to protect the leading edge of rotary blades on military helicopters. Through constant innovation, we continue to formulate new films that are designed to offer the highest standards in self-healing scratch and impact protection. We also continue to drive innovation around simplifying the customer application experience like we’ve done with our EZ Apply® tabs.tabs, which are designed to help users align and apply InvisibleShield products. We also providesprovide custom-fit screen protection for thousands of device types through our automated InvisibleShield On Demand (“ISOD”) solution. With On Demand,ISOD, retailers can supply customersconsumers with screen protection for nearly any device model, all without ever having to hold excess inventory.

 

We launched InvisibleShield GlassLaunched during the first quarter of 2014.2014, InvisibleShield Glass is designed to provide premium screen protection and clarity, along with a superior feel and universally compatible touch sensitivity. In the third quarter of 2016 we announced InvisibleShield Glass+, designed to provide additional scratch resistance and impact protection over InvisibleShield Glass. Additionally, we launched InvisibleShield Sapphire Defense during the third quarter of 2016, which is a hybrid glass screen protector infused with sapphire crystals designed to provide premium screen protection.

 

ZAGG has the leading market share in screen protection, and has maintained that leading position by consistently delivering innovative products to the market.

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The InvisibleShield brand also offers mobile device cases, like the popular Orbit case, to complement our screen protection and provide a full device protection solution. As a market leader, we work to anticipate our customers’ needs in premium screen protection by constantly evaluating and staying ahead of market trends.

mophie: Leader in mobile powermophie Products

 

mophie is a leading battery case and mobile power manufacturerbrand with award-winning designproducts designed to liberate mobile users from the limitations of mobile devices by providing more time to rock, talk, watch, surf, save, and manufacturing that empowers the mobile world tostay powerful. Widely acclaimed for innovative mobile solutions, mophie is the proud developer ofsend. Notably, the original juice pack®. is designed to provide device-specific protection as well as additional battery power to many of the most popular mobile phones. mophie products are recognized for style and engineered for performance, providing a seamless integration of hardware, software, and design.

 

The mophie has created an ecosystem of mobile accessories thatis designed to provide both power and protection for virtually any mobile device. From itsWith groundbreaking battery cases, including with extra data storage options, to universal batteries, cables, adapters, and docks, mophie’s product linesmophie products represent innovation at the forefront of design and development.

 

IFROGZ: Active lifestyle productsIFROGZ Products

 

IFROGZ isproducts are strategically designed and positioned to bring personal audio to the value space by providing a product assortment that represents outstanding performance, active lifestyles, and dual-purpose designs that are on trend with consumers’ needs. IFROGZ refines today’s newest audio technology to deliver the features consumers want, while eliminating those that needlessly increase costs, so that everyone can participate in our increasingly mobile world.

 

In 2007, the IFROGZ released its first audio products under the EarPollution™ product line.line was released. The eclectic selection of earbuds and headphones specifically targeted a younger demographic while still appealing to a wide spectrum of consumers. IFROGZ continuesWe continue to innovate and expand itsour headphone and earbud productsproduct lines under the IFROGZ name to include offerings for all ages under both the EarPollution and IFROGZ brands. In 2013, IFROGZwe began offering IFROGZ portable Bluetooth speakers for music lovers on the move that combine impressive audio quality, clever functionality, and eye-catching design. In the third quarter of 2016, IFROGZwe introduced a new family of wireless Bluetooth audio products designed to combine outstanding sound with a lightweight listening experience by alleviating bulky earbuds and heavy control modules.

 

IFROGZ rounds outZAGG Products

Products under the ZAGG brand are designed to empower people to live their lives unleashed. Mobility is changing everything and ZAGG is driving the mobile lifestyle forward with products that allow consumers to be productive and connected at work, at play and at rest. ZAGG products which include keyboards, cases, power management and social tech are designed to free consumers from the confines of the traditional workplace. We believe “getting away” shouldn’t mean being disconnected. We support the communicators, commuters, creators and closers who live a mobile lifestyle.

Our products are designed to feature cutting-edge design and innovation to provide portability, style, and productivity that can keep up with even the most active mobile users. We believe that with the right mobile accessories, no one ever has to feel tethered or held back.

ZAGG keyboards are designed to offer consumers an enhanced and innovative productivity experience. Since entering this category in 2010, ZAGG has continually reinvented its product selection with cases and power. It began manufacturing cases in 2006, initially for the Apple iPod. These unique cases were well received by the market due to their blendline of fashion, quality, and design. IFROGZ cases have expanded to include a wide array of sleek and stylish optionskeyboards while also providing timely, curated solutions for new generations ofdevices released by Apple, iPod, iPhone, iPad,Microsoft, and Samsung, Galaxy smartphonesas well as other leading mobile device manufacturers. In addition to device-specific keyboards and tablets. IFROGZ power products consistfolio keyboard cases, ZAGG’s line of colorful chargers, power banks,universal full-size Bluetooth® keyboards are designed to be compatible with virtually any device and cables, offering tremendous value for a wide consumer demographic.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.

 

Critical Accounting Policies and Estimates

 

The preparation of our financial statements requires that we make estimates and judgments. We base these on historical experience and on other assumptions that we believe to be reasonable. Our critical accounting policies are discussed in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the year ended December 31, 2015.2016. There have been no material changes to the critical accounting policies previously disclosed in that report.

The Company had a material change in accounting estimates due to the acquisition of mophie as described in Note 2. These estimates are preliminary as described in Note 2.

 

Recent Accounting Pronouncements

 

Information regarding recent accounting pronouncements is contained in Note 1 “Nature of Operations and Basis of Presentation” of the Notes to Condensed Consolidated Financial Statements, which is incorporated herein by reference.

 

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Results of Operations

 

THREE MONTHS ENDED SEPTEMBERJune 30, 2017 AND 2016 AND 2015(amounts(amounts in thousands, except per share data)

 

Net sales

 

Net sales for the quarterthree months ended SeptemberJune 30, 2016,2017, were $124,662 as$115,227 compared to net sales of $66,774$99,833 for the quarterthree months ended SeptemberJune 30, 2015,2016, an increase of $57,888$15,394, or 87%15%. The increase in net sales comparing the quartersix months ended SeptemberJune 30, 2017 to 2016 to 2015 was primarily relatedattributed to (1) mophie sales of $39,731 (acquisition date of March 3, 2016), and (2) increased sales of screen protection and power management products throughin key wireless retailers. These increases were partially offset by a declineand retail accounts, particularly in keyboard sales due to overall softness in the tablet market compared to the prior year period.international markets.

 

The percentage of net sales related to our key product lines for the three months ended SeptemberJune 30, 20162017 and 2015,2016, was approximately:

 

 2016  2015  2017  2016 
Screen Protection  52%  72%  51%  48%
Power Cases  19%  23%
Power Management  22%  2%  17%  12%
Power Cases  12%  - 
Keyboards  6%  15%  5%  10%
Audio  6%  9%  7%  6%
Other  2%  2%  1%  1%

 

The percentage of net sales related to our key distribution channels for the three months ended SeptemberJune 30, 20162017 and 2015,2016, was approximately:

 

 2016  2015  2017  2016 
Indirect channel  90%  88%  89%  87%
Website  7%  6%  7%  9%
Mall cart and kiosk program  3%  6%  4%  4%

 

The percentage of net sales by geographic region for the three months ended SeptemberJune 30, 20162017 and 2015,2016, was approximately:

 

 2016  2015  2017  2016 
United States  87%  89%  87%  90%
Europe  8%  9%  8%  6%
Other  5%  2%  5%  4%

 

Gross profit

 

Gross profit for the quarterthree months ended SeptemberJune 30, 2016,2017, was $43,146$35,824, or approximately 35%31% of net sales, as compared to $24,871$30,873, or approximately 37%31% of net sales for the quarterthree months ended SeptemberJune 30, 2015. The decrease in2016. Typically, the Company experiences higher gross profit percentagemargin in periods when the mix of screen protection products increases. Although the mix of screen protection products increased during the second quarter of 2017 to 51% of sales compared to 48% of net sales in 2016, sales of curved glass for the Samsung Galaxy S8 occurred at lower gross margins than our other screen protection products, resulting in lower margins than we would otherwise see in periods of increased mix of screen protection sales. The margin impact from sales of curved glass was due to the impact ofoffset by improved mophie gross profit margins which were lower thanincreased year-over-year driven primarily by amortization expense from the Company’s historical gross profit margins. These decreases were partially offset by improved ZAGG (excluding mophie) gross margin percentage,acquisition-related fair value inventory write-up in 2016, which increased to 42% compared to 37%did not recur in the prior year quarter.2017.

 

Operating expenses

 

Total operating expenses for the quarterthree months ended SeptemberJune 30, 2016,2017, were $55,856 an increase$30,327, a decrease of $37,213,$1,898, or 200%6%, from total operating expenses for the quarterthree months ended SeptemberJune 30, 2015,2016, of $18,643.$32,225. The $37,213 increase$1,898 decrease was primarily attributable to (1) synergies realized from cost reduction initiatives, (2) a loss recorded on the disputed mophie purchase pricereduction in advertising and marketing spend, and (3) reduced amortization expense related to long-lived intangibles in the current periodyear, which is based on estimated cash flows of $24,317 and (2) mophie operating expenses of $11,031 (acquisition date of March 3, 2016), which included $740 in amortization of acquired intangibles and $138 in restructuring charges.the associated intangible assets.

 

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Income (loss) from operations

 

We reported income from operations of $5,497 for the three months ended June 30, 2017, compared to a loss from operations of ($12,710)1,352) for the quarterthree months ended SeptemberJune 30, 2016, compared to income from operationsan increase of $6,228 for the quarter ended September 30, 2015, a decrease of $18,938.$6,849. The decreaseincrease in income from operations was due primarily attributed to (1) a loss recorded on the disputed mophie purchase priceincreases in net sales and the current periodreduction of ($24,317) and (2) the mophie loss from operations of ($3,305). The mophie losses were impacted by (1) $740 in amortization of acquired intangibles and (2) $138 in restructuring charges. Since the date of acquisition, we continue to implement processes and procedures to optimize the mophie supply chain and improve operating results. These decreases were partially offset by improved profit margins from the ZAGG segment, excluding the loss recorded on the disputed mophie purchase price.expense items noted above.

Other expense net

 

For the quarterthree months ended SeptemberJune 30, 2016,2017, total other expense, net was $656$552 compared to $102 for the quarter ended September 30, 2015. The increase in other expense, net was due primarily to interest expense incurred underof $595 for the Credit and Security Agreement.three months ended June 30, 2016.

 

Income taxes

 

We recognized income tax expense of $1,542 for the three months ended June 30, 2017, compared to an income tax benefit of $6,261$901 for the three months ended SeptemberJune 30, 2016, compared to income2016. Our effective tax expense of $2,387rate was 31.2% and 46.3% for the three months ended SeptemberJune 30, 2015. Our effective tax rate was 47%2017 and 39% for the three months ended September 30, 2016, and 2015, respectively. The changedecrease in the effective tax rate for three-month period ended September 30, 2016, is primarilywas due to a decreaseincome in lower rate foreign jurisdictions in which the company experienced losses in the domestic manufacturing deduction, and permanent differences related to the acquisition of mophie.prior year. 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.

Net (loss) income

As a result of these factors, we reported a net loss of ($7,105) or ($0.25) per share on a fully diluted basis for the quarter ended September 30, 2016 compared to net income of $3,739 or $0.13 per share on a fully diluted basis for the quarter ended September 30, 2015.

Segment Information

ZAGG segment net sales for the three months ended September 30, 2016, were $84,931 compared to net sales of $66,774 for the three months ended September 30, 2015, an increase of $18,157 or 27%. The increase in net sales was largely due to an increase in screen protection sales to our wireless carrier customers partially off-set by a decline in keyboard sales due to overall softness in the tablet market compared to the prior year period. Net sales for the mophie segment totaled $39,731.

ZAGG loss from operations totaled ($9,405) for the three months ended September 30, 2016 compared to income from operations of $6,228 for the three months ended September 30, 2015, a decrease of $15,633. The decrease in income from operations was due primarily to a loss recorded on the disputed mophie purchase price in the current period of $24,317, which is partially offset by increased screen protection sales, which is our highest margin product category, as described above. The loss from operations for the mophie segment totaled ($3,305).

NINE MONTHS ENDED SEPTEMBER 30, 2016 AND 2015(amounts in thousands, except per share data)

Net sales

Net sales for the nine months ended September 30, 2016, were $286,928 as compared to net sales of $190,679 for the nine months ended September 30, 2015, an increase of $96,249 or 50%. The increase in sales comparing the nine months ended September 30, 2016 to 2015 was primarily related to (1) mophie sales of $79,390 (acquisition date of March 3, 2016), and (2) increased sales of screen protection products through wireless retailers. These increases were partially offset by a decline in keyboard sales due to overall softness in the tablet market compared to the prior year period.

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The percentage of sales related to our key product lines for the nine months ended September 30, 2016 and 2015, was approximately:

  2016  2015 
Screen Protection  53%  67%
Power Management  15%  2%
Power Cases  15%  - 
Keyboards  9%  19%
Audio  7%  9%
Other  1%  3%

The percentage of sales related to our key distribution channels for the nine months ended September 30, 2016 and 2015, was approximately:

  2016  2015 
Indirect channel  88%  89%
Website  8%  5%
Mall cart and kiosk program  4%  6%

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

  2016  2015 
United States  88%  91%
Europe  7%  8%
Other  5%  1%

Gross profit

Gross profit for the nine months ended September 30, 2016, was $97,748 or approximately 34% of net sales, compared to $72,785 or approximately 38% of net sales for the nine months ended September 30, 2015. The decrease in gross profit percentage was due to the impact of mophie gross profit margins, which were lower than the Company’s historical gross profit margins. These decreases were partially offset by improved ZAGG (excluding mophie) gross margin percentage, which increased to 41% compared to 38% in the prior year period.

Operating expenses

Total operating expenses for the nine months ended September 30, 2016, were $115,514 an increase of $60,647, or 111%, from total operating expenses for the nine months ended September 30, 2015, of $54,867. The $60,647 increase was primarily attributable to (1) a loss recorded on the disputed mophie purchase price in the current period of $24,317 and (2) mophie operating expenses of $29,924 (acquisition date of March 3, 2016), which included $4,485 in amortization of acquired intangibles and $1,153 in restructuring charges.

Income (loss) from operations

We reported a loss from operations of ($17,766) for the nine months ended September 30, 2016 compared to income from operations of $17,918 for the nine months ended September 30, 2015, a decrease of $35,684. The decrease in income from operations was due primarily to (1) a loss recorded on the disputed mophie purchase price in the current period of ($24,317) and (2) the mophie loss from operations of ($17,062). The mophie losses were impacted by (1) $4,485 in amortization of acquired intangibles, (2) $1,153 in restructuring charges, and (3) time and resources needed during the quarter to re-start the mophie supply chain and to ensure customer demand is met. Since the date of acquisition, we continue to implement processes and procedures to optimize the mophie supply chain and improve operating results. These decreases were partially offset by improved profit margins from the ZAGG segment, excluding loss recorded on purchase price.

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Other expense, net

For the nine months ended September 30, 2016, total other expense, net was $1,639 compared to $132 for the nine months ended September 30, 2015. The increase in other expense, net was due primarily to interest expense incurred under the Credit and Security Agreement.

Income taxes

We recognized an income tax benefit of $7,963 for the nine months ended September 30, 2016, compared to income tax expense of $7,155 for the nine months ended September 30, 2015. Our effective tax rate was 41% and 40% for the nine months ended September 30, 2016 and 2015, respectively. The change in the effective tax rate for the nine months ended September 30, 2016 was primarily due to a decrease in the domestic manufacturing deduction, and permanent differences related to the acquisition of 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.

 

Net income (loss)

 

As a result of these factors, we reported net income of $3,403, or $0.12 per share, for the quarter ended June 30, 2017, compared to a net loss of ($11,442)1,046), or ($0.41)0.04) per share, on a fully diluted basis for the nine monthsquarter ended SeptemberJune 30, 2016 compared to net income of $10,631 or $0.36 per share on a fully diluted basis for the nine months ended September 30, 2015.2016.

 

Segment Information

 

ZAGG segment net sales for the ninethree months ended SeptemberJune 30, 2016,2017, were $207,538$74,259 compared to net sales of $190,679$67,810 for the ninethree months ended SeptemberJune 30, 2015,2016, an increase of $16,859$6,449, or 9%10%. The increase in net sales was largely due to an increase in screen protection and audio sales to our wireless carrier customerswhich were partially off-setoffset by a decline in keyboard sales due to overall softness in the tablet market compared to the prior year period. Net

mophie segment net sales for the mophie segment totaled $79,390.three months ended June 30, 2017, were $40,968 compared to net sales of $32,023 for the three months ended June 30, 2016, an increase of $8,945, or 28%. The increase in net sales was largely due to an increase in power management sales during the quarter.

 

ZAGG lossnet income from operations totaled ($704)$9,177 for the ninethree months ended SeptemberJune 30, 2016,2017, compared to income from operations of $17,918$8,288 for the ninethree months ended SeptemberJune 30, 2015, a decrease2016, an increase of $18,622.$889. The decreaseincrease in income from operations for the ZAGG segment was due primarily to a loss recorded on the disputed mophie purchase priceincreases in the current period of ($24,317), which is partially offsetsales primarily driven by increased screen protection sales, which is our highest margin product category, as described above. protection.

The net loss from operations for the mophie segment totaled ($17,062).3,680) for the three months ended June 30, 2017, compared to net loss from operations of ($9,640) for the three months ended June 30, 2016. The decreased loss in the mophie segment was primarily driven by strong sales of our power management products in 2017, a reduction in amortization expense from the acquisition-related fair value inventory write-up in 2016, which did not recur in 2017, and a reduction in expenses related to salaries and professional fees.

SIX MONTHS ENDED JUNE 30, 2017 AND 2016 (amounts in thousands, except per share data)

Net sales

 

Net sales for the six months ended June 30, 2017, were $208,173 compared to net sales of $162,266 for the six months ended June 30, 2016, an increase of $45,907, or 28%. The increase in net sales comparing the six months ended June 30, 2017 to 2016 was attributed to increased sales related to screen protection for new device releases during the current year as well has higher sales of power management products. In addition, 2017 results include six months of mophie sales compared with four months in 2016.

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The percentage of net sales related to our key product lines for the six months ended June 30, 2017 and 2016, was approximately:

  2017  2016 
Screen Protection  49%  54%
Power Cases  21%  17%
Power Management  17%  10%
Keyboards  6%  11%
Audio  6%  7%
Other  1%  1%

The percentage of net sales related to our key distribution channels for the six months ended June 30, 2017 and 2016, was approximately:

  2017  2016 
Indirect channel  88%  86%
Website  9%  9%
Mall cart and kiosk program  3%  5%

The percentage of net sales by geographic region for the six months ended June 30, 2017 and 2016, was approximately:

  2017  2016 
United States  86%  89%
Europe  8%  7%
Other  6%  4%

Gross profit

Gross profit for the six months ended June 30, 2017, was $64,430, or approximately 31% of net sales, as compared to $54,602, or approximately 34% of net sales for the six months ended June 30, 2016. The decrease in gross profit margin was primarily due to (1) a full six months of mophie operations in 2017, which are at lower gross profit margins than the corporate average, (2) lower gross profit margin on curved glass for the Samsung Galaxy S8, compared to historical gross margins on non-curved glass products and (3) these items were offset by amortization expense from the acquisition-related fair value inventory write-up in 2016, which did not recur in 2017.

Operating expenses

Total operating expenses for the six months ended June 30, 2017, were $65,582, an increase of $5,925, or 10%, from total operating expenses for the six months ended June 30, 2016, of $59,657. The $5,925 increase was primarily attributable to (1) the inclusion of six months of mophie-related expenses for 2017 compared with four months in 2016, (2) the impairment of intangible asset related to an invalidated patent totaling $1,959, and (3) increased legal and travel expense. These increases were partially offset by the following reductions in operating expense: (1) synergies realized from cost reduction initiatives, (2) a reduction in transaction-related costs, (3) a reduction in advertising and marketing spend, and (4) an overall reduction in amortization expense.

Income (loss) from operations

We reported a loss from operations of ($1,152) for the six months ended June 30, 2017, compared to a loss from operations of ($5,055) for the six months ended June 30, 2016, a decrease of $3,903. The decrease in loss from operations was due primarily to a reduction of the mophie segment loss from operations from ($13,756) to ($11,368) and the other operating expense items discussed above. The decrease was also due to the increase in net sales and gross profit, offset by an increase in operating expenses as noted above.

Other expense

For the six months ended June 30, 2017, total other expense, net was ($1,062) compared to other expense, net of ($983) for the three months ended June 30, 2016. The increase in expense was primarily related to interest expense incurred on the higher debt levels compared to the prior period.

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Income taxes

We recognized income tax expense of $521 for the six months ended June 30, 2017, compared to an income tax benefit of $1,703 for the six months ended June 30, 2016. Our effective tax rate was (23.5%) and 28.2% for the six months ended June 30, 2017 and 2016, respectively. The negative tax rate for the six-month period ended June 30, 2017, was due to a discrete expense recognized during the first quarter related to the true-up of a deferred amount for stock compensation and close to break-even pre-tax book loss for the six months ended June 30, 2017. The rate was also affected by income in foreign jurisdictions that had losses in prior years. The Company’s effective tax rate will generally differ from the U.S. Federal statutory rate of 35%, due to state taxes, permanent items, and the Company’s global tax strategy.

Net loss

As a result of these factors, we reported a net loss of ($2,735), or ($0.10) per share, for the six months ended June 30, 2017, compared to a net loss of ($4,335), or ($0.16) per share, for the six months ended June 30, 2016.

Segment Information

ZAGG segment net sales for the six months ended June 30, 2017, were $131,424 compared to net sales of $122,607 for the six months ended June 30, 2016, an increase of $8,817, or 7%. The increase in net sales was largely due to an increase in screen protection and audio sales which were partially offset by a decline in keyboard sales due to overall softness in the tablet market compared to the prior year period.

Net sales for the mophie segment for the six months ended June 30, 2017 were $76,749 compared to net sales of $39,659 for the six months ended June 30, 2016, an increase of 37,090, or 94%. The increase in net sales was driven by strong sales of our power management products in 2017 and the inclusion of six months of results for the period ended June 30, 2017, compared to four months of sales for the period ended June 30, 2016.

ZAGG net income from operations totaled $10,216 for the six months ended June 30, 2017, compared to income from operations of $8,701 for the six months ended June 30, 2016, an increase of $1,515. The increase in income from operations for the ZAGG segment was due primarily to increases in sales primarily driven by screen protection.

The net loss from operations for the mophie segment totaled ($11,368) for the period ended June 30, 2017, compared to net loss from operations of $(13,756) for the period ended June 30, 2016. The decreased loss in the mophie segment was primarily driven by strong sales of our power management products in 2017, a reduction in amortization expense from the acquisition-related fair value inventory write-up in 2016, which did not recur in 2017, and a reduction in expenses related to salaries and professional fees.

Liquidity and Capital Resources (in thousands)

 

At SeptemberJune 30, 2016,2017, our principal sources of liquidity arewere cash provided by operations, cash on-hand,on hand and the term loan, and a revolving line of credit.credit facility. Our principal uses of cash have been cash used to reduce accounts payable balances, purchase of property and make payments on the acquisition of mophieterm and the funding of working capital requirements.revolving credit facilities.

 

Cash and cash equivalents on-hand decreasedincreased to $8,955$14,330 on SeptemberJune 30, 2016,2017, from $13,002$11,604 on December 31, 2015, a decrease2016, an increase of $4,047.$2,726. The decreaseincrease in cash was largely the result of cash used for the purchase of mophie, for working capital requirements at mophie,provided by operations from collections on accounts receivable balances and purchases of fixed assets; this decrease wasa reduction in inventory; these increases were partially offset by cash collectionspaydowns of outstanding accounts payable balances, purchases of property plant and borrowings under the Creditequipment and Security Agreement during the nine months ended September 30, 2016.paydowns of debt outstanding. Earnings from foreign operations are considered permanently re-invested and of the $8,955$14,330 cash balance on SeptemberJune 30, 2016,2017, cash from foreign entities totaled $3,827,$6,186, which constitutes 43% of the total cash and cash equivalents balance.

 

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Accounts receivable, net of allowances, increaseddecreased to $83,086$72,956 on SeptemberJune 30, 2016,2017, from $57,647$83,835 on December 31, 2015, an increase2016, a decrease of $25,439.$10,879. The increasedecrease was primarily attributabledue to the mophie acquisition and related accounts receivable, which totaled $19,933 at September 30, 2016. ZAGG accounts receivable, net of allowances, increased to $63,153 on September 30, 2016, from $57,647 on December 31, 2015, an increase of $5,506. The increase was attributable to increased sales of $18,157 for the three-month period ended September 30, 2016, compared to the three-month period ended September 30, 2015. The increased sales are partially off-set bystrong cash collections during the period ended September 30, 2016.first six months of 2017.

 

Inventories increaseddecreased to $66,204$65,376 on SeptemberJune 30, 2016,2017, from $45,912$72,769 on December 31, 2015, an increase2016, a decrease of $20,292.$7,393. The increasenet decrease was due to the acquisition of mophie and related inventories, which totaled $35,226 at September 30, 2016. ZAGG inventories decreased to $30,978 on September 30, 2016, from $45,912 on December 31, 2015, a decrease of $14,934. The decrease in ZAGG inventory is due primarily to (1) continued focus and improvements in the Company’s planning and forecasting processes, and (2) seasonal increasesreduction in inventory each year-end to ensure the Company has sufficient inventory to fulfill orderson hand, primarily driven by a reduction in anticipation of Chinese New Year, which occurs in the first quarter and during which many factories cease operations for several weeks.mophie-branded inventory.

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Accounts payable increaseddecreased to $73,168$62,237 on SeptemberJune 30, 2016,2017, from $33,846$85,022 on December 31, 2015, an increase2016, a decrease of $39,322.$22,785. The increasedecrease was due to the acquisitiontiming of mophie and related payables, which totaled $35,277 at September 30, 2016. ZAGG accounts payable increasedpayments to $37,891 on September 30,suppliers to support fourth quarter 2016 from $33,846 on December 31, 2015, an increase of $4,045. The increase in ZAGG accounts payable is due primarily to products purchased from suppliers during the three-months ended September 30, 2016 to fulfill orders received from customers for the launch of the Apple iPhone 7 and iPhone 7 Plus, which was partially offset by payments made during the nine-month period ending September 30, 2016.sales.

 

At SeptemberJune 30, 2016, we2017, the Company had working capital of $25,271$2,031 compared to $82,677negative working capital of ($9,408) as of December 31, 2015, a decrease of $57,406.2016. The decreaseincrease in the working capital position was primarily related to a reduction in accounts payable and the current liability classificationportion of long-term debt; the lineimpact of credit under US GAAP, although the maturity date is not until March 3, 2021. Despite the maturity datethese items were partially offset by a reduction in 2021, U.S. GAAP requires that the line of credit be classified as a current liability due the existence of a lockbox arrangement with the bank whereby cash collections are automatically swept against the line of credit. The decrease in working capital is also due to contingent payments recorded within current liabilities, which totaled $12,139 at September 30, 2016,accounts receivable and the sales reserve recorded for mophie which totaled $20,298 at September 30, 2016.inventories.

 

Based on the current level of operations, we believe that cash provided byto be generated from operations, cash on hand, and available borrowings under existing credit arrangements will be adequate to fund expected capital expenditures and working capital needs for the next 12 months.

 

Segment Information

ZAGG segment cash and cash equivalents decreased to $8,187 on September 30, 2016, from $13,002 on December 31, 2015, a decrease of $4,815. The decrease in cash is largely the result of cash from operations of $52,338, offset by cash used for the purchase of mophie and purchases of fixed assets. mophie segment cash and cash equivalents totaled $768 and mophie was a user of cash from operations of ($26,422) due to working capital requirements.

Debt and Letters of Credit

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.

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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:

Maximum Leverage Ratio: Defined as the ratio of total funded indebtedness to Consolidated EBITDA (as defined in the Credit and Security Agreement), which cannot be more than 3.50 on a trailing four quarter basis.
Minimum Fixed Charge Coverage Ratio: Defined as the ratio of Consolidated EBITDA (as defined in the Credit and Security Agreement) minus taxes, capital distributions and unfunded capital expenditures divided by the sum of interest payments, principal payments, and capital lease payments; the minimum allowed under the Credit and Security Agreement is 1.10 on a trailing four quarter basis.

Contractual Obligations and Commitments

The following table provides information on our contractual obligations as of September 30, 2016:

  Payments due by period 
Contractual Obligations Total  Less Than 1 Year  1 - 3 years  3 - 5 years  More than 5 years 
Term Loan payments $21,875  $1,563  $12,500  $7,812  $ 
Line of Credit payments  30,195            30,195 
Interest on Term Loan and Line of Credit  3,704   194   1,976   1,379   155 
Operating lease obligations  12,141   623   6,004   4,361   1,153 
Total $67,915  $2,380  $20,480  $13,552  $31,503 

Unrecognized uncertain tax benefits of $2,120 are not included in the table above as we are not sure when the amount will be paid.

Item 3.Quantitative and Qualitative Disclosures About Market Risk

 

We are exposed to certain market risks in the ordinary course of our business. These risks result primarily from changes in foreign currency exchange rates and interest rates. In addition, our international operations are subject to risks related to differing economic conditions, changes in political climate, differing tax structures, and other regulations and restrictions.

 

To date we have not utilized derivative financial instruments or derivative commodity instruments. Cash is investedWe do not expect to employ these or other strategies to hedge market risk in the foreseeable future. We invest our cash in money market funds, which are subject to minimal credit and market risk. We believe that the market risks associated with these financial instruments are immaterial, although there can be no guarantee that these market risks will be immaterial to us.

 

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Item 4.Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

Our management,Under the supervision and with the participation of theour management, including our principal executive officer and principal financial officer, evaluated the effectiveness of the design and operationwe conducted an evaluation of our disclosure controls and procedures, pursuant toas such term is defined under Rule 13a-15b13a-15(e) promulgated under the Securities Exchange Act, of 1934 as of the end of the period covered by this Report. June 30, 2017.Based on this evaluation, theour principal executive officer and principal financial officer concluded that as of the end of the period covered by this Report, our disclosure controls and procedures wereare not effective and were designeddue to provide reasonable assurance that information required to be included in the reports filed or submitted under the Exchange Act of 1934 is recorded, processed, summarized, and reported as specified in the SEC’s rules and forms.material weaknesses described below.

 

Changes in Internal Control over Financial Reporting

 

The acquisitionAs a result of mophie on March 3, 2016, representsthe material weakness related to a material changeoverstatement of net sales and accounts receivable as of and for the year ended December 31, 2016, which was corrected by management prior to issuance of the 2016 consolidated financial statements in the Company’s Annual Report on Form 10-K, management has initiated the following changes to its internal control over financial reporting since management’s last assessmentcontrols during the six months ended June 30, 2017:

Conduct training regarding the design and operation of controls with those responsible for performing and reviewing the process level control activities over revenue, accounts receivable and in transit inventory.
Task the ZAGG operations team to identify information technology solutions that streamline the process for tracking and reporting orders shipped from China directly to customers.
Enhance the risk assessment process to consider significant changes in the business operations and the associated impact on financial reporting and internal controls

Although management believes our internal control over financial reporting which was completed as of December 31, 2015. The mophie business utilizes separate informationhas been, or is reasonably likely to be, materially and accounting systems and processes. We intend to excludepositively affected by the operations of mophie from the scope ofchanges described above, a material weakness in our Sarbanes-Oxley Section 404 report on internal control over financial reporting for the year ended December 31, 2016.continues to exist as of June 30, 2017. We are in the process of implementing our internal control structure overand evaluating these changes to remediate the acquired mophie operations and expect that this effort will be completed in 2016. We intend to extend our Sarbanes-Oxley Section 404 compliance program to include the mophie business beginning in 2017.

Other than the acquisition of mophie, there were no changes in the Company's internal control over financial reporting during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. The process for evaluating controls and procedures is continuous and encompasses constant improvement of the design and effectiveness of established controls and procedures and the remediation of any deficiencies which may be identified during this process.material weakness.

 

Limitations on the Effectiveness of Internal Controls

 

AnOur disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives. Nevertheless, an internal control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflectreflects the fact that there are resource constraints, and the benefits of controls must beare considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple errorserror or mistakes.mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the internal control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate.deteriorate.

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PART II - OTHER INFORMATION

 

Item 1.Legal Proceedings

 

Certain of the legal proceedings in which we are involved are discussed in Note 13, "Commitments11, “Commitments and Contingencies,” and in Note 15, “Subsequent Events,” to our Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q, and are hereby incorporated by reference.

 

Item 1A.Risk Factors

 

In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the factors discussed in Part I, Item 1A. Risk Factors, in our Annual Report on Form 10-K for the year ended December 31, 20152016 (the “2015“2016 Form 10-K”), which could materially affect our business, financial condition or future results. These risk factors should be read carefully in connection with evaluating our business and in connection with the forward-looking statements contained in this Quarterly Report on Form 10-Q. Any of the risks described in the 20152016 Form 10-K could materially adversely affect our business, financial condition or future results and the actual outcome of matters as to which forward-looking statements are made. These are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition, and/or operating results.

 

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Item 2.Unregistered Sales of Equity Securities and Use of Proceeds(dollars and shares in thousands)

 

None.

 

Item 3.Defaults Upon Senior Securities

 

None.

 

Item 4.Mine Safety Disclosures

 

Not applicable.

 

Item 5.Other Information

 

None.

 

Item 6.Exhibits

 

a.Exhibits: The following Exhibits are filed with this Form 10-Q pursuant to Item 601(a) of Regulation S-K:

a.Exhibits: The following Exhibits are filed with this Form 10-Q pursuant to Item 601(a) of Regulation S-K:

 

Exhibit No. Description of Exhibit
31.1 Certification of Chief Executive Officer pursuant to Rules 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, as Amended.
31.2 Certification of Chief Financial Officer pursuant to Rules 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, as Amended.
32.1 Certification of Chief Executive Officer pursuant to 18 U.S. C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer pursuant to 18 U.S. C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
EX-101.INS XBRL Instance Document
EX-101.SCH XBRL Taxonomy Extension Schema Document
EX-101.CAL XBRL Taxonomy Extension Calculation Linkbase
EX-101.DEF XBRL Taxonomy Extension Definition Linkbase
EX-101.LAB XBRL Taxonomy Extension Labels Linkbase
EX-101.PRE XBRL Taxonomy Extension Presentation Linkbase

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

 

 

ZAGG INC

  
Date: November 2, 2016August 3, 2017/s/ RANDALL L. HALES
 Randall L. Hales,
 Chief Executive Officer, President, & Director
 (Principal executive officer)

Date: November 2, 2016August 3, 2017/s/ BRADLEY J. HOLIDAY
 Bradley J. Holiday,
 Chief Financial Officer
 (Principal financial officer)

 

 

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