UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington,

WASHINGTON, D.C. 20549

____________________

FORM 10-Q

(Mark one)

þQuarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended September 30, 2017,March 31, 2018, 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

001-34528
(Commission
File Number)
ZAGG INC

(Exact name of registrant as specified in its charter)

Delaware
Delaware20-2559624
(State or other jurisdiction of
incorporation or organization)
incorporation)(I.R.S. Employer
Identification No.)

910 West Legacy Center Drive, Suite 500

Midvale, Utah 84047

910 West Legacy Center Way, Suite 500 Midvale, Utah 84047
(Address of principal executive offices, withincluding zip code)

(801) 263-0699

(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 þ 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 þ No

¨

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

☐   
¨ Large Accelerated Filer
☒   
þ Accelerated 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

þ

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 27,975,21628,340,783 common shares as of November 1, 2017.

May 7, 2018.



ZAGG INC AND SUBSIDIARIES

FORM 10-Q

TABLE OF CONTENTS

PART I - FINANCIAL INFORMATION



 CONTENTSPagePAGE
   
   
 
Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2017, and 20162
   
 
   
 
   
 
   
18
   
25
   
25
   
   
26
   
26
   
26
   
26
   
26
   
26
   
26



PART I - FINANCIAL INFORMATION
Item 1.Financial Statements (Unaudited)


ZAGG INC AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except par value)

(Unaudited)

  September 30,  December 31, 
  2017  2016 
       
ASSETS      
       
Current assets:        
Cash and cash equivalents $11,394  $11,604 
Accounts receivable, net of allowances of $1,221 in 2017 and $824 in 2016  96,830   83,835 
Inventories  72,005   72,769 
Prepaid expenses and other current assets  3,531   3,414 
Income tax receivable  138   2,814 
Total current assets  183,898   174,436 
         
Property and equipment, net of accumulated depreciation of $20,950 in 2017 and $18,371 in 2016  15,066   17,755 
Goodwill  12,272   12,272 
Intangible assets, net of accumulated amortization of $63,596 in 2017 and $55,298 in 2016  42,286   53,362 
Deferred income tax assets  44,652   50,363 
Other assets  1,635   2,541 
Total assets $299,809  $310,729 
         
LIABILITIES AND STOCKHOLDERS’ EQUITY        
         
Current liabilities:        
Accounts payable $82,742  $85,022 
Accrued liabilities  23,825   22,216 
Sales returns liability  29,342   28,373 
Accrued wages and wage related expenses  5,649   6,169 
Deferred revenue  214   273 
Line of credit  16,264   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  164,221   183,844 
         
Noncurrent portion of long-term debt, net of deferred loan costs of $92 in 2017 and $141 in 2016  9,283   9,623 
         
Total liabilities  173,504   193,467 
         
Stockholders’ equity:        
Common stock, $0.001 par value; 100,000 shares authorized;        
34,057 and 33,840 shares issued in 2017 and 2016, respectively $34  $34 
Additional paid-in capital  95,106   92,782 
Accumulated other comprehensive loss  (944)  (2,114)
Treasury stock, 6,065 and 5,831 common shares in 2017 and 2016 respectively, at cost  (37,636)  (36,145)
Retained earnings  69,745   62,705 
         
Total stockholders’ equity  126,305   117,262 
Total liabilities and stockholders’ equity $299,809  $310,729 


  March 31, 2018 December 31, 2017
     
ASSETS   
Current assets:   
 Cash and cash equivalents$17,745
 $24,989
 Accounts receivable, net of allowances of $474 and $73473,894
 123,220
 Inventories78,891
 75,046
 Prepaid expenses and other current assets4,529
 4,547
Total current assets175,059
 227,802
     
Property and equipment, net of accumulated depreciation of $12,979 and $12,54012,794
 13,444
Goodwill12,272
 12,272
Intangible assets, net of accumulated amortization of $69,440 and $66,63936,443
 39,244
Deferred income tax assets24,084
 24,403
Other assets3,803
 3,426
Total assets$264,455
 $320,591
     
LIABILITIES AND STOCKHOLDERS' EQUITY   
Current liabilities:   
 Accounts payable$54,798
 $96,472
 Income tax payable2,291
 2,052
 Accrued liabilities9,214
 10,515
 Sales returns liability30,913
 32,189
 Accrued wages and wage related expenses7,775
 5,652
 Deferred revenue
 315
 Line of credit
 23,475
 Current portion of long-term debt, net of deferred loan costs of $141
 13,922
Total current liabilities104,991
 184,592
     
Line of credit22,038
 
Total liabilities127,029
 184,592
     
Stockholders' equity:   
 Common stock, $0.001 par value; 100,000 shares authorized; 34,416 and 34,104 shares issued34
 34
 Additional paid-in capital94,134
 96,145
 Accumulated other comprehensive loss(59) (348)
 Treasury stock, 6,065 and 6,065 common shares at cost(37,637) (37,637)
 Retained earnings80,954
 77,805
     
Total stockholders' equity137,426
 135,999
Total liabilities and stockholders' equity$264,455
 $320,591
See accompanying notes to condensed consolidated financial statements.

1

ZAGG INC AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

(Unaudited)

  Three Months Ended  Nine Months Ended 
  September 30,  September 30,  September 30,  September 30, 
  2017  2016  2017  2016 
             
Net sales $134,398  $124,662  $342,571  $286,928 
Cost of sales  86,006   81,516   229,749   189,180 
Gross profit  48,392   43,146   112,822   97,748 
                 
Operating expenses:                
Advertising and marketing  2,627   3,389   7,703   8,578 
Selling, general and administrative  26,720   25,607   78,727   70,243 
Loss on disputed mophie purchase price  -   24,317   -   24,317 
Transaction costs  96   145   611   2,467 
Impairment of intangible asset  -   -   1,959   - 
Amortization of long-lived intangibles  3,014   2,398   9,040   9,909 
Total operating expenses  32,457   55,856   98,040   115,514 
                 
Income (loss) from operations  15,935   (12,710)  14,782   (17,766)
                 
Other income (expense):                
Interest expense  (417)  (575)  (1,527)  (1,367)
Other income (expense)  18   (81)  67   (272)
Total other expense  (399)  (656)  (1,460)  (1,639)
                 
Income (loss) before provision for income taxes  15,536   (13,366)  13,322   (19,405)
                 
Income tax (provision) benefit  (5,760)  6,261   (6,281)  7,963 
                 
Net income (loss) $9,776  $(7,105) $7,041  $(11,442)
                 
Earnings (Loss) per share:                
Basic earnings (loss) per share $0.35  $(0.25) $0.25  $(0.41)
Diluted earnings (loss) per share $0.34  $(0.25) $0.25  $(0.41)


  Three Months Ended
  March 31, 2018 March 31, 2017
     
Net sales$112,066
 $92,946
Cost of sales74,474
 64,340
Gross profit37,592
 28,606
     
Operating expenses:   
 Advertising and marketing2,594
 3,006
 Selling, general and administrative24,307
 27,054
 Transaction costs
 215
 Impairment of intangible asset
 1,959
 Amortization of intangible assets2,772
 3,021
Total operating expenses29,673
 35,255
     
Income (loss) from operations7,919
 (6,649)
     
Other income (expense):   
 Interest expense(500) (490)
 Other income (expense)495
 (20)
Total other expense(5) (510)
     
Income (loss) before provision for income taxes7,914
 (7,159)
     
Income tax (provision) benefit(885) 1,021
     
Net income (loss)$7,029
 $(6,138)
     
Earnings (loss) per share attributable to stockholders:   
 Basic earnings (loss) per share$0.25
 $(0.22)
 Diluted earnings (loss) per share$0.24
 $(0.22)
See accompanying notes to condensed consolidated financial statements.

2

ZAGG INC AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in thousands)

(Unaudited)

  Three Months Ended  Nine Months Ended 
  September 30,  September 30,  September 30,  September 30, 
  2017  2016  2017  2016 
             
Net income (loss) $9,776  $(7,105) $7,041  $(11,442)
                 
Other comprehenseive income, net of tax:                
Foreign currency translation gain  326   57   1,171   92 
                 
Total other comprehensive income  326   57   1,171   92 
                 
Comprehensive income (loss) $10,102  $(7,048) $8,212  $(11,350)



  Three Months Ended
  March 31, 2018 March 31, 2017
     
Net income (loss)$7,029
 $(6,138)
     
Other comprehensive gain, net of tax:   
 Foreign currency translation gain289
 288
     
Total other comprehensive income289
 288
     
Total comprehensive income (loss)$7,318
 $(5,850)
See accompanying notes to condensed consolidated financial statements.

3

ZAGG INC AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)

  Nine Months Ended 
  September 30,  September 30, 
  2017  2016 
Cash flows from operating activities   
Net income (loss) $7,041  $(11,442)
Adjustments to reconcile net loss to net cash used in operating activities:        
Stock-based compensation  2,536   3,675 
Excess tax benefits related to share-based payments  -   (569)
Depreciation and amortization  16,508   19,108 
Loss on disposal of property and equipment  13   - 
Deferred income taxes  5,203   (9,512)
Amortization of deferred loan costs  192   141 
Impairment of intangible asset  1,959   - 
Loss on disputed mophie purchase price  -   24,317 
Changes in operating assets and liabilities, net of acquisition:        
Accounts receivable, net  (12,054)  (10,496)
Inventories  1,636   2,132 
Prepaid expenses and other current assets  (104)  500 
Income taxes receivable  3,195   12,899 
Other assets  918   (227)
Accounts payable  (3,526)  1,981 
Accrued liabilities  1,143   1,759 
Accrued wages and wage related expenses  (520)  802 
Deferred revenue  (59)  - 
Sales returns liability  907   (9,152)
Other  (416)  - 
Net cash provided by operating activities  24,572   25,916 
         
Cash flows from investing activities        
Purchase of property and equipment  (3,792)  (6,135)
Proceeds from disposal of equipment  28   - 
Purchase of mophie, net of cash acquired  -   (74,743)
Net cash used in investing activities  (3,764)  (80,878)
         
Cash flows from financing activities        
Payment of debt issuance costs  (157)  (1,144)
Proceeds from revolving credit facility  296,485   230,117 
Payments on revolving credit facility  (311,528)  (199,922)
Proceeds from term loan facility  -   25,000 
Payments on term loan facility  (4,687)  (3,125)
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  -   569 
Net cash (used in) provided by financing activities  (21,590)  50,928 
         
Effect of foreign currency exchange rates on cash equivalents  572   (13)
         
Net decrease in cash and cash equivalents  (210)  (4,047)
         
Cash and cash equivalents at beginning of the period  11,604   13,002 
Cash and cash equivalents at end of the period $11,394  $8,955 
         
Supplemental disclosure of cash flow information        
Cash paid during the period for interest $1,361  $1,106 
Cash (refunded) during the period for taxes, net  (2,317)  (597)
Cash refunded during the period for mophie taxes, net  -   (11,021)



    Three Months Ended
    March 31, 2018 March 31, 2017
       
Cash flows from operating activities:   
 Net income (loss)$7,029
 $(6,138)
 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities   
  Stock-based compensation601
 670
  Depreciation and amortization5,030
 5,781
  Deferred income taxes322
 (238)
  Loss on disposal of property and equipment10
 
  Amortization of deferred loan costs71
 60
  Impairment of intangible asset
 1,959
  Changes in operating assets and liabilities:   
   Accounts receivable, net50,036
 23,732
   Inventories(3,367) (2,828)
   Prepaid expenses and other current assets1,279
 153
   Income tax payable200
 (858)
   Other assets(385) 1,022
   Accounts payable(41,394) (33,279)
   Accrued liabilities(1,805) 1,318
   Sales returns liability(6,555) (2,710)
   Accrued wages and wage related expenses(497) (300)
   Deferred revenue
 (47)
   Other(847) 
Net cash provided by (used in) operating activities9,728
 (11,703)
       
Cash flows from investing activities:   
 Purchase of property and equipment(1,933) (1,820)
 Proceeds from disposal of equipment26
 
Net cash used in investing activities(1,907) (1,820)
       
Cash flows from financing activities:   
 Proceeds from revolving credit facility138,899
 122,557
 Payments on revolving credit facility(152,711) (113,233)
 Payments on term loan facility(1,563) (1,563)
 Purchase of treasury stock
 (1,492)
 Payment of withholdings on restricted stock units
 (240)
Net cash (used in) provided by financing activities(15,375) 6,029
       
Effect of foreign currency exchange rates on cash equivalents310
 193
       
Net decrease in cash and cash equivalents(7,244) (7,301)
       
Cash and cash equivalents at beginning of the period24,989
 11,604
Cash and cash equivalents at end of the period$17,745
 $4,303
See accompanying notes to condensed consolidated financial statements.

4

ZAGG INC AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(in thousands)

(Unaudited)

Supplemental schedule of noncash investing and financing activities

For the Nine Months Ended September 30, 2017:

Purchase of $1,719 in fixed assets financed through accounts payable.

For the Nine Months Ended September 30, 2016:

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

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

5

(Unaudited)



  Three Months Ended
  March 31, 2018 March 31, 2017
     
Supplemental disclosure of cash flow information:   
 Cash paid during the period for interest$478
 $417
 Cash paid during the period for taxes, net$324
 $76
     
Supplemental schedule of non-cash investing and financing activities:   
 Purchase of fixed assets financed through accounts payable$178
 $676
 Withholdings tax on restricted stock units recorded in accrued wages and wage related expenses$2,610
 $
See accompanying notes to condensed consolidated financial statements.
ZAGG INC AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

(Unaudited)




(1)
(1)NATURE OF OPERATIONS AND BASIS OF PRESENTATION

ZAGG®

ZAGG Inc and its subsidiaries (“we,” “us,” “our,” “ZAGG,” or the “Company”) are innovation leaders in mobile tech accessories for smartphones and tablets. For over 10 years, ZAGG has developed creative product solutions that enhance and protect mobile devices for consumers around the world. The Company has an award-winning product portfolio that includes screen protection, power cases, power management, wireless charging, personal audio, mobile keyboards, and cases, sold under the ZAGG®, InvisibleShield®, mophie®, and IFROGZ® brands.

The accompanying unaudited condensed consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been condensed or omitted pursuant to such rules and regulations. These condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments) that, in the opinion of management, are necessary to present fairly the financial position, the results of operations, and cash flows of the Company for the periods presented. The Company suggests that these condensed consolidated financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s 20162017 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"). The results of operations of mophie are included in the Company's results of operations beginning on March 3, 2016. See Note 3 for additional details on the acquisition.

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; ZAGG Hong Kong Ltd; ZAGG Japan G.K.; ZAGG Singapore Pte. Ltd.; mophie inc.; mophie 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, 2016.

6
2017. Except for the changes below, the Company has consistently applied the accounting policies to all periods presented in these consolidated financial statements.

Recent Accounting Pronouncements (amounts in thousands)

In May 2014, the Financial Accounting Standards Board (“FASB”) issued an Accounting Standard Update (“ASU”) No. 2014-09, “RevenueAdoption of ASC Topic 606, "Revenue from Contracts with Customers (Topic 606).” This ASU includesCustomers"

The Company adopted ASC Topic 606, "Revenue from Contracts with Customers" ("Topic 606") with 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 deferralapplication 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”.January 1, 2018. As a result of ASU No. 2015-14this adoption, the Company expects that it will apply the newhas changed its accounting policy for 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. recognition as detailed below.
The Company currently anticipates adopting the standardapplied Topic 606 on January 1, 2018, using the modified retrospective approach, with the cumulative effect of adopting the new standard being recognized in retained earnings at January 1, 2018. Therefore, the prior period comparative information has not been adjusted and continues to be reported under Topic 605. The adoption of Topic 606 resulted in an increase in accounts receivable of $115; an increase in prepaid expenses and other current assets of $1,255 for the recognition of the right of return assets; an increase in accrued liabilities of $314; an increase in sales return liability of $5,250 for the recognition of the sales return liability on a gross basis and for the change in estimating refund liabilities under Topic 606; a decrease in deferred revenue of $314; and a decrease of $3,880 in retained earnings as a cumulative effect of adoption. The largest driver of changes for the adoption of Topic 606 was the change in estimate for price concessions offered to end customers. Under Topic 605, price concessions to end customers were recognized when such incentives were explicitly offered to the end customer, whereas under Topic 606 such incentives are estimated and recorded at the datetime of initial application. the sale of products to the Company’s customers.


The accounts that changed under Topic 606 for the condensed consolidated balance sheet, and the condensed income statement as of and for the three months ended March 31, 2018 have been outlined as follows:
Condensed Consolidated Balance Sheet changesAs Reported Adjustments Balances without adoption of Topic 606
      
Accounts receivable, net of allowances$73,894
 $(145) $73,749
Prepaid expenses and other current assets4,529
 (719) 3,810
Accrued liabilities9,214
 (178) 9,036
Sales returns liability30,913
 (2,314) 28,599
Deferred revenue
 178
 178
Retained earnings80,954
 1,450
 82,404
Condensed Consolidated Statements of Operations changesAs Reported Adjustments Balances without adoption of Topic 606
      
Net sales$112,066
 $1,390
 $113,456
Cost of sales74,474
 (60) 74,414
Revenue recognition accounting policy
The Company’s revenue is derived from (1) sales of our products through our indirect channel, including retailers and distributors; (2) sales of our products through our direct channel, including www.ZAGG.com and www.mophie.com and our corporate-owned ZAGG-branded store; and (3) from franchise fees derived from the on-boarding of new franchisees. The Company’s revenue is measured based on the amount of consideration we expect to receive, reduced by estimates for sales returns, discounts, and other credits. The observable standalone selling prices of products sold are based on the prices charged to customers and are mutually agreed upon by both parties before any orders are authorized.
For substantially all of our sales, revenue is recognized at a point in time when control of the goods is transferred to the customer, which generally occurs upon delivery to the carrier or the customer. For franchise fees, revenue is derived from the sale of licenses, training, inventory and equipment and marketing, among other items. We recognize revenue for performance obligations on a straight-line basis over the franchise term.
Taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction, that are collected by the Company from a customer, are excluded from revenue.
Sales returns, discounts and other credits
The nature of our contracts gives rise to several types of variable consideration, including sales returns, discounts, and other credits. Certain customers receive credit-based incentives or credits, which are accounted for as variable consideration in the form of credit memos off future purchases from the Company. We estimate these amounts based on the expected amount to be provided to customers and reduce revenue accordingly on the invoice date.
We estimate a reserve for sales returns, discounts, and other credits, and record the respective estimated reserve amounts, including a right to return asset when a product is expected to be returned and resold. Historical experience, actual claims, and customer return rights are the key factors used in determining the estimated sales returns, discounts, and other credits.


Contract balances
The following table provides information about receivables, right of return assets, contract liabilities, and refund liabilities from contracts with customers for the three months ended March 31, 2018:
 March 31, 2018
  
Receivables, which comprises the balance in accounts receivable, net of allowances$73,894
Right of return assets, which are included in prepaid expenses and other current assets$719
Contract liabilities, which are included in accrued liabilities$178
Refund liabilities, which are included in sales return liability$26,978
Warranty liabilities, which are included in sales return liability$3,935
The current balance of the right of return assets is the expected amount of inventory to be returned that is expected to be resold. The current balance of contract liabilities primarily relates to the advance consideration received from customers for products for which transfer of control has not yet occurred, and therefore recognition of revenue is deferred until the transfer of control. The current balance refund liabilities is the expected amount of sales returns, discounts and other credits from sales that have occurred.
Practical expedients and policy elections
The Company applies the following practical expedients in its application of Topic 606:
The Company does not adjust the transaction price for significant financing components for periods less than one year.
The Company recognizes the incremental costs of obtaining contracts as an expense when incurred if the amortization period of the assets that the Company otherwise would have recognized is currently evaluatingone year or less. These costs are included in selling, general, and administrative expenses.
The Company recognizes the impactcost for shipping and handling as a fulfillment activity after control over products have transferred to the ASU will have on its consolidated financial statements.

In July 2015,customer. For product sales, our standard shipping terms are FOB shipping point, and we record revenue when the FASB issued ASU No. 2015-11, “Simplifyingproduct is shipped, net of estimated returns and discounts. Shipping and handling costs are included in cost of sales.

The Company does not disclose the Measurementvalue of Inventory.” This ASU provides guidance to entities that measure inventory using a method other than last-in, first-out (LIFO)unsatisfied performance obligations for (i) contracts with an original expected length of one year or the retail inventory method. For entities using first-in, first-out (FIFO) or average cost, the measurement principleless and (ii) contracts 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 inventorywhich we recognize revenue at the loweramount to which we have the right to invoice for services performed.
Disaggregation of cost or market. revenue from contracts with customers
In the following tables, revenue from contracts with customers are disaggregated by key product lines, key distribution channels, and key geographic regions. These are disclosed below.
The measurementpercentage of market is commonlynet sales related to our key product lines for the current replacement cost. However, entities also needthree months ended March 31, 2018 and 2017, was approximately:
 Three Months Ended
 March 31, 2018 March 31, 2017
    
Screen Protection50% 46%
Power Management33% 17%
Power Cases6% 24%
Audio5% 6%
Keyboards5% 6%
Other1% 1%
The percentage of net sales related to considerour key distribution channels for the three months ended March 31, 2018 and 2017, was approximately:


 Three Months Ended
 March 31, 2018 March 31, 2017
    
Indirect channel88% 85%
Website8% 11%
Franchisees4% 4%
The percentage of net realizable valuesales related to our key geographic regions for the three months ended March 31, 2018 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 did not have a material impact on our financial position or results of operations.

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. During the year ended December 31, 2017, the Company adopted the ASU using the retrospective approach resulting in recording deferred tax assets as non-current for current and prior periods presented. This adoption does not impact our results of operations.

was approximately:

 Three Months Ended
 March 31, 2018 March 31, 2017
    
United States82% 84%
Europe9% 10%
Other9% 6%
Recent Accounting Pronouncements
In February 2016, the FASB issued 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 business 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.

7

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. The 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 new standard eliminate the accounting for excess tax benefits to be recognized in additional paid-in capital and tax 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 quarter ended March 31, 2017. During the quarter ended March 31, 2017, the Company applied the amendment relating to 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 tax expense of $171 for the nine months ended September 30, 2017. The Company 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 a prospective basis and no prior periods have been adjusted. The Company’s financial position or results of operations were not impacted by amendments related to the statutory tax withholding requirement and, accordingly, no adjustment has been recorded. The Company will 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 on our financial position or results of operations.

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 business 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 has elected to early adopt this standard in the current quarter ended September 30, 2017, and will apply this standard to any classification issues that occur in future periods as none exist in the current reportable period.

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 will adopt this standard in the first quarter of 2018. The adoption of this standard is not expected to have a material impact on our financial position or results of operations.

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 has elected to early adopt this standard in the current quarter ended September 30, 2017, and if in future periods restricted cash exists at the Company, this standard will be applied as none exist in the current reportable period.

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 has elected to early adopt this standard and will perform its annual goodwill impairment assessment in the fourth quarter of 2017. The adoption of this standard is not expected to have a material impact to our financial position or results of operations.

8

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 has elected to early adopt this ASU in the current quarter ended September 30, 2017, and will apply any stock compensation modifications that occur in future periods as none exist in the current reportable period.

(2)INVENTORIES

At September 30, 2017,March 31, 2018 and December 31, 2016,2017, inventories consisted of the following:

  September 30, 2017  

December 31,

2016

 
Finished goods $71,557  $72,490 
Raw materials  448   279 
 Total inventories $72,005  $72,769 

 March 31, 2018 December 31, 2017
    
Finished goods$78,693
 $74,734
Raw materials198
 312
Total inventories$78,891
 $75,046
Included in prepaid expenses and other current assets were inventory deposits with third-party manufacturers at September 30, 2017,March 31, 2018 and December 31, 2016,2017, of $1,333$1,783 and $437,$1,906, respectively.



(3)ACQUISITION OF MOPHIE
(3)INTANGIBLE ASSETS

On February 2, 2016, ZAGG and ZM Acquisition, Inc., 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 ZM Acquisition, Inc. agreed to merge with and into mophie, with mophie continuing as the surviving corporation (the “Merger”). On March 3, 2016, the Company completed the Merger.

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 period of March 3, 2016, through September 30, 2016, mophie generated net sales of $79,390 and a net loss before tax of $17,030.

Pro forma Results from Operations

The following unaudited pro-forma results of operations for the nine months ended September 30, 2016, give pro forma effect as if the acquisition had occurred 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 values at the date of purchase.


  

Nine months ended

September 30, 2016

 
Net sales $304,254 
Net loss $(15,432)
Basic loss per share $(0.55)
Diluted loss per share $(0.55)

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

9

For the nine months ended September 30, 2016, pro forma net loss includes projected amortization expense of $5,076. 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, of $1,508. Material non-recurring adjustments excluded from the pro forma financial information above consists of the $2,586 step up of mophie inventory to its fair value, which was recorded as an unfavorable adjustment to cost of goods sold during the nine months following the acquisition date.

The unaudited pro forma results do not reflect events that either have occurred or may occur after the Merger, including, but not limited to, the anticipated realization of ongoing savings from operating synergies in subsequent periods.

(4)GOODWILL AND INTANGIBLE ASSETS

Goodwill

There were no additions to nor impairmentand no impairments of goodwilllong-lived intangible assets for the three or nine months ended September 30,March 31, 2018. Additionally, there were no additions to long-lived intangible assets for the three months ended March 31, 2017. The balance of goodwill as of September 30, 2017, was $12,272.

Long-lived Intangible Assets

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

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

assets for the three months ended March 31, 2017:

Gross balance at December 31, 2016$108,659
Impairment loss on patent(2,777)
Gross balance at March 31, 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 unpatentablenot patentable or cancelled.canceled. 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 ninethree months period ended September 30,March 31, 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 cancelledcanceled patent to $0.

Long-lived intangible assets, net of accumulated amortization as of September 30, 2017,March 31, 2018 and December 31, 2016,2017, were as follows:

  September 30,
2017
  

December 31,

2016

 
       
Customer relationships $10,597  $14,612 
Tradenames  18,767   21,506 
Patents and technology  11,680   15,727 
Non-compete agreements  1,227   1,497 
Other  15   20 
Total amortizable intangible assets $42,286  $53,362 

 March 31, 2018 December 31, 2017
    
Customer relationships$8,090
 $9,259
Trade names17,055
 17,854
Patents and technology10,239
 10,981
Non-compete agreements1,048
 1,137
Other11
 13
Total amortizable intangible assets$36,443
 $39,244
The total weighted average useful lives of amortizable long-lived intangible assets as of September 30, 2017,March 31, 2018 and December 31, 2016, is 8.22017, was 8.1 years.

10
(4)INCOME TAXES

(5)INCOME TAXES

For interim periods, the 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 was 11% and 14% for the three months ended September 30,March 31, 2018 and 2017, and 2016, was 37% and 47%, respectively. The Company’s effective tax for the nine months ended September 30, 2017, and 2016, was 47% and 41%, respectively. The changedecrease in the effective tax rate for the three months ended September 30, 2017, compared to the three months ended September 30, 2016, was primarily due to losses from foreign jurisdictions for which income tax benefits wereseveral factors including but not recognized as well the ratio of credits and other permanent differenceslimited to pre-tax book income and loss for respective periods. Thea change in the effective taxfederal statutory rate forfrom 35% to 21%, a change to book income in the nine months ended September 30, 2017,first quarter of 2018 compared to a book loss in the nine months ended September 30, 2016, was primarily duefirst quarter of 2017, and an increase to various discrete expenses recognized during the period related to the true up of a deferred amount for stock compensation and other discrete items related to the return to provision calculation.income in foreign jurisdictions. The Company’s effective tax rate will generally differ from the U.S. Federal statutory rate of 35%21%, due to state taxes, permanent items, and the Company’s global tax strategy.

(6)FAIR VALUE MEASURES

Fair Valuestrategy, and the inclusion of Financial Instruments

At September 30, 2017,global intangible low taxed income and 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 approximates 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.

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 Company to develop its own assumptions.

At September 30, 2017, and December 31, 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,

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       

corresponding foreign tax credit.
11


(7)
(5)DEBT AND LINE OF CREDIT

Long-term debt, net as of September 30, 2017,March 31, 2018 and December 31, 2016,2017, was as follows:

  September 30,
2017
  December 31,
2016
 
Line of credit $16,264  $31,307 
Term loan  15,468   20,107 
Total debt outstanding  31,732   51,414 
Less current portion  22,449   41,791 
Total long-term debt outstanding $9,283  $9,623 

 March 31, 2018 December 31, 2017
    
Line of credit$22,038
 $23,475
Long-term debt, net of deferred loan costs of $141
 13,922
Total debt outstanding22,038
 37,397
Current portion of line of credit and long-term debt, net of deferred loan costs of $141
 37,397
Total long-term debt outstanding$22,038
 $
On July 17, 2017, ZAGG Inc, KeyBank National Association (“KeyBank”), Zions First National Bank (“Zions Bank”), and JPMorgan Chase Bank, N.A. (collectively,April 12, 2018, the “Lenders”), and KeyBank, as the administrative agent for the Lenders,Company entered into a Third Amendment Agreement (“Amendment”), which amends the originalan Amended and Restated Credit and Security Agreement dated(the “New Credit Agreement”) with KeyBank National Association, as Administrative Agent, Swing Line Lender and Issuing Lender, KeyBanc Capital Markets Inc., as Sole Lead Arranger and Sole Book Runner, and other members of the lender group.
The New Credit Agreement consists of an $85,000 secured revolving credit facility (the “Revolver”), which is not subject to borrowing base limitations. Proceeds from the Revolver were used to fully retire the term loan (with the associated $125 of remaining deferred loan costs to be expensed as of March 3, 2016, bythe New Credit Agreement effective date) and amongthus the Company andRevolver is the Lenders. The Amendment includesonly credit instrument effective April 12, 2018. In addition, at the following revisionsCompany’s option, up to the original Credit Agreement:

Increased 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 from January 1, 2018, to May 31, 2018; and
$100,000 from June 1, 2018, forward.
Expanded 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.
Increased the Letter of Credit Commitment, as defined in the Credit Agreement, from $7,500 to an aggregate amount of $40,000.
Increased the Borrowing Base, as defined in the Credit Agreement, on a seasonal basis between August 1, 2017, and September 30, 2017, by $15,000, which seasonal increase to the Borrowing Base was subsequently extended by the Lenders to October 31, 2017.

In connection with the Amendment, the Company also entered into replacement revolving credit notes with each$40,000 of the Lenders. As considerationRevolver may be made available for entering into the Amendment, the Company agreed to pay the administrative agent and Lenders total amendment and arrangement feesissuance of $145, pursuant to the termsletters of an administrative agent fee letter and a closing fee letter entered into with KeyBank. credit.

The changes to the Credit Agreement described above were made to support core-business opportunities.

Effective September 4, 2017, the Company directed KeyBank to establish an irrevocable standby letter of credit (“Letter of Credit”) to support purchases of inventory from a key supplier. The Credit Agreement requires that the face value of the Letter of Credit reduce the Borrowing Base under the existing Line of Credit.

From September 4, 2017, through September 17, 2017, the face value amount of the Letter of Credit was $10,000. From September 18, 2017, through February 28, 2018 (the end of the contractual period), the face value was increased to $25,000. The Company agreed to payRevolver initially bears interest at an annual rate, at the Company’s option, of 1.625% calculated(i) the Base Rate (as defined in the Credit Agreement) plus a margin of 0.25% to 1.375% based on the face value amountprior quarter-end Leverage Ratio or (ii) the Eurodollar Rate (as defined in the Credit Agreement) plus a margin of 1.25% to 2.375% based on the prior quarter-end Leverage Ratio. The Revolver matures April 11, 2023, subject to early termination in the event of default.

In addition, the Company is required to pay a monthly Applicable Commitment Fee Rate (as defined in the New Credit Agreement) that can fluctuate between 0.175% and paid0.275% based on the Leverage Ratio (as defined in the New Credit Agreement). The commitment fee is calculated monthly using the Maximum Revolving Amount (as defined in the New Credit Agreement) at the end of each calendar month, minus the Revolving Credit Exposure (exclusive of the Swing Line Exposure) (each as defined in the New Credit Agreement) at the end of such day, multiplied by the Applicable Commitment Fee Rate in effect on such day divided by three hundred sixty (360). The monthly commitment fee is payable quarterly which interestin arrears, commencing on July 1, 2018 and continuing on each regularly scheduled payment date thereafter.
The New Credit Agreement contains customary representations and warranties and restrictive covenants. The New Credit Agreement also contains affirmative and negative covenants requiring, among other things, the Company to meet certain financial ratio tests and to provide certain information to the lenders. The New Credit Agreement also includes financial maintenance covenants that require compliance with a Leverage Ratio and a Fixed Charge Coverage Ratio (each as defined in the New Credit Agreement), tested at the end of each fiscal quarter commencing with the fiscal quarter ending June 30, 2018.
The New Credit Agreement also contains customary events of default. If an event of default occurs, the lenders under the Credit Agreement would be entitled to take various actions, including the acceleration of amounts due thereunder and all other actions permitted to be taken by a secured creditor.
As part of the New Credit Agreement, the lockbox arrangement requirement in the prior agreement was terminated and thus the Company now has full dominion of cash upon receipt from customers. Because of the lockbox arrangement in the prior agreement, amounts outstanding under the Revolver were classified as a current liability because cash receipts were required to be automatically swept against the Revolver. Because the current Credit Agreement does not have a lockbox arrangement and the Revolver does not mature until 2023, the Revolver is classified in interest expense on the condensed consolidated statement of operations. Fees incurred associated with the Letter of Credit as of September 30, 2017, are $157. No draws on the Letter of Credit occurred as of September 30, 2017.

a non-current liability.


(8)
(6)STOCK-BASED COMPENSATION

During the three and nine months ended September 30,March 31, 2018 and 2017 the Company granted 4581 and 479 restricted stock units, respectively. During the three and nine months ended September 30, 2016, the Company granted 163 and 876311 restricted stock units, respectively. The restricted stock units granted during the three and nine months ended September 30,March 31, 2018 and 2017 were estimated to have a weighted-average fair value per share of $8.65$14.50 and $6.77, 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,$6.66, 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.

12

As part of the 479 and 876 grants discussed above,311 restricted stock units granted during the ninethree months ended September 30,March 31, 2017, and 2016, the Company granted 372 and 575264 restricted stock units, respectively, to certain executives and employees of the Company where vesting is linked to specific performance criterion. TheThese performance-based restricted stock units granted in 2017 and 2016 only vest upon the (1) Company’s achievement of specified thresholds of net sales, Adjusted EBITDA, or specific goals for the individual executive. As of September 30, 2017,executive, and (2) continued employment through the Company believes it is probable that it will achieve the targets for all restricted stock units granted in the nine months ended September 30, 2017. Of the 575 restricted stock units granted in the nine months ending September 30, 2016, 42 shares vested and 307 shares were forfeited, and 226 have not yet vested or been forfeited.

applicable vesting date.

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 nine months ended September 30,March 31, 2018 and 2017, the Company recorded stock-based compensation expense related to restricted stock units of $899$601, and $2,536,$670, respectively, which is included as a component of selling, general, and administrative expense. expense on the condensed consolidated statement of operations.
During the three and nine months ended September 30, 2016, the Company recorded stock-based compensation expense related to restricted stock units of $1,384March 31, 2018 and $3,675, respectively, which is included as a component of selling, general, and administrative expense.

During the nine months ended September 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 recording $2,610 in accrued wages and wage related expenses and 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 and $54, respectively, for the nine months ended September 30, 2017, and 2016.

respectively.
(9)
(7)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 nine months ended September 30, 2017,March 31, 2018 and 2016:

  Three months ended 
  September 30, 2017  September 30, 2016 
Net income (loss) $9,776  $(7,105)
Weighted average shares outstanding:        
Basic  27,969   28,125 
Dilutive effect of restricted stock units and warrants  412    
Diluted  28,381   28,125 
Earnings (loss) per share:        
Basic $0.35  $(0.25)
Diluted $0.34  $(0.25)

  Nine months ended 
  September 30, 2017  September 30, 2016 
Net income (loss) $7,041  $(11,442)
Weighted average shares outstanding:        
Basic  27,996   27,987 
Dilutive effect of restricted stock units and warrants  233    
Diluted  28,229   27,987 
Earnings (loss) per share:        
Basic $0.25  $(0.41)
Diluted $0.25  $(0.41)

13
2017:

 Three Months Ended
 March 31, 2018 March 31, 2017
    
Net income (loss)$7,029
 $(6,138)
Weighted average shares outstanding:   
  Basic28,209
 28,059
  Dilutive effect of restricted stock units and warrants484
 
  Diluted28,693
 28,059
Earnings (loss) per share:   
  Basic$0.25
 $(0.22)
  Diluted$0.24
 $(0.22)
For the three and nine months ended September 30, 2017, there were noMarch 31, 2018, 114 restricted stock units excluded from the calculation of diluted earnings per share. For the three and nine months ended September 30, 2016, 1,001 restricted stock units and 50 warrantsused to purchase shares of common stock were not considered in calculating diluted earnings per share as their effect would have been anti-dilutive.

(10)TREASURY STOCK

For the three and nine months ended September 30,March 31, 2017, 860 restricted stock units were not considered in calculating diluted loss per share because the company was in a loss position and, therefore, the effect would have been anti-dilutive.



(8)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. As of March 31, 2018 and December 31, 2017, a total of $17,558 remained authorized under the stock repurchase program.
For the three months ended March 31, 2018, no share repurchases occurred.
For the three months ended March 31, 2017, the Company purchased 0 andrepurchased 234 shares of ZAGG Incthe Company's common stock, respectively.stock. Cash consideration paid for the purchase of ZAGG Inc common stock for the nine months ended September 30, 2017,noted share repurchases was $1,492, which included commissions paid to brokers of $9. For the ninethree months ended September 30,March 31, 2017, the weighted average price per share was $6.32.$6.35. The consideration paid has been recorded within stockholders’ equity in the condensed consolidated balance sheet.

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



(11)
(9)COMMITMENTS AND CONTINGENCIES

Operating leases

Leases

The Company leases office and warehouse space, office equipment, and mall cart locationsa retail store location under operating leases that expire through 2023.2025. Future minimum rental payments required under the operating leases at September 30, 2017,March 31, 2018, were as follows:

Remaining 2017 $722 
2018  2,058 
2019  1,588 
2020  1,532 
2021  1,458 
Thereafter  2,596 
Total $9,954 

Remaining 2018$2,158
20191,610
20201,541
20211,467
20221,498
Thereafter1,119
Total operating lease commitments$9,393
For the three months ended September 30,March 31, 2018 and 2017, and 2016, rent expense was $736$728 and $793, respectively. For the nine months ended September 30, 2017, and 2016, rent expense was $2,179 and $2,450,$685, respectively. Rent expense was 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 (the “Huang Delaware Lawsuit”). On October 21, 2016, Daniel Huang, as the representative of the former mophie inc. shareholders, under the Merger Agreement as disclosed in Note 3, filed the Huang Delaware Lawsuit 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 acknowledged its obligation under the Merger Agreement to make the Contingent Payments under certain circumstances, but averred that this obligation was subject to a right to withhold the tax refunds and customs duty recoveries received to date and, subject to the Court’s ruling on the Company’s Counterclaims, subsequently set-off its damages against the Contingent Payments. In its Answer, the Company denied that any payments were due at that time or that it was 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.

On October 31, 2017,Inc. v. Anker Technology Co. Ltd. and Fantasia Trading LLC, United States District Court for the Company and Daniel Huang as the representative of the former mophie inc. shareholders, entered into a settlement agreement (“Delaware Settlement Agreement”). The Delaware Settlement Agreement provides for a mutual general release of all claims asserted in Huang Delaware Lawsuit and that (1) the Company will receive the $2,000 in cash held in escrow in connection with the Merger Agreement, (2) the former mophie shareholders will receive $8,000 of the Contingent Payments in full settlement (“Settlement Amount”) of all claims asserted against the Company in the Huang Delaware Lawsuit, and (3) the Company will retain the remaining Contingent Payments. The difference between the Contingent Payments recorded in purchase accounting and Settlement Amount will be recorded as a gain on disputed mophie purchase price during the fourth quarter of 2017:

Contingent payments recorded in purchase accounting $12,139 
Cash collected from duty recoveries $2,828 
Total contingent payments in accrued liabilities $14,967 
Settlement amount $8,000 
Gain on disputed mophie purchase price $6,967 

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ZAGG Inc et al. v. Daniel Huang et al., Orange County Superior Court, StateCentral District of California, CivilCase No. 30-2016-00892767-CU-BC-CJC8:17-CV-2193-DOC-DFM (the “Huang California“Anker Lawsuit”).  On December 15, 2016,2017, ZAGG and mophie filed a complaint against Daniel Huangthe Anker Lawsuit alleging that Anker Technology Co. Ltd. (“Anker”) and Immotor,Fantasia Trading LLC (“Immotor”Fantasia”). The complaint alleged that Huang infringe U.S. Patent Nos. 8,971,039, 9,077,013, 9,088,028, 9,088,029, 9,172,070, and the company he founded, Immotor, misappropriated confidential information belonging to mophie while Huang was serving as an officer and director of mophie.

On October 31, 2017, the Company, mophie, Immotor and Daniel Huang entered into a settlement agreement (“California Settlement Agreement”). The California Settlement Agreement provides for a mutual general release of all claims asserted in the Huang California Lawsuit and of other claims asserted by Huang against the Company and mophie and that Huang would receive a non-exclusive license for certain power management technology for use solely9,406,913 in connection with two-wheeled vehicles.

protective battery cases for smartphones.  The Anker products accused of infringement include Anker’s Ultra Slim Extended Battery Case for iPhone 6 / 6s (4.7 inch) with 2850mAh capacity; Premium Extended Battery Case for iPhone 6 / 6s (4.7 inch) with 3100mAh Capacity; PowerCore Case for iPhone 7 (4.7 inch), 80% Extra Battery; and PowerCore Case for iPhone 7 (4.7 inch), 95% Extra Battery.  The complaint filed by ZAGG and mophie seeks monetary damages and an injunction against Anker.

On March 12, 2018, Anker and Fantasia filed answers and counterclaims in the lawsuit. In their answers, Anker and Fantasia denied infringement of any valid claim and asserted counterclaims for non-infringement and invalidity of the patents at issue. The Company continues to retain rights under a representations and warranties insurance policy obtained at the time of the acquisition of mophie to seek reimbursement for payments of third party claims or to recover losses relating to breaches of mophie’s representations and warranties, except in respect of the claims released in connection the dismissal of the Huang Delaware Lawsuit and the Huang California Lawsuit.

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 mophie 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 liabilitydisputes these contentions 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.

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’sSEC'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’sPedersen's pledge and subsequent sale of Company shares and the fact that such pledges and sales were not disclosed in the Company’sCompany'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, for any of the litigation or claims noted above, 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. The Company has not accrued for any loss at September 30, 2017,as of March 31, 2018, 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.



15
(10)CONCENTRATIONS

(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 cash accounts for the three and nine months ended September 30,March 31, 2018 and 2017.

At September 30, 2017,March 31, 2018 and December 31, 2016,2017, two separate customers exceeded 10% of the balance of accounts receivable, from two separate customers exceeded 10%: Superior Communications, Inc. (“Superior”) and Best Buy Co., Inc. (“Best Buy”). GENCO Distribution Systems, Inc. (“GENCO”) also exceeded 10% of accounts receivable as of December 31, 2016, but not as of September 30, 2017.

  September 30, 2017  December 31, 2016 
Superior  39%  32%
Best Buy  16%  22%
GENCO  7%  10%

follows:

 March 31, 2018 December 31, 2017
    
Superior Communications, Inc. (“Superior”)42% 31%
Best Buy Co., Inc. (“Best Buy”)14% 18%
No other customer account balances were more than 10% of accounts receivable at September 30, 2017,March 31, 2018 or December 31, 2016.2017. 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 suppliers

We do not directly manufacture any of our products;products, rather, we employ various third-partythird 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 ninemany years. Our film supplier has contractually agreed to not sell the raw materials to any of our competitors.

Below is a high-level summary by product category of the manufacturing sources used by the Company:

Screen Protection– Our screen product line consists of InvisibleShield glass products, InvisibleShield film products, and ISOD film blanks. Our 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 each consist 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.
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.
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.

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 and wireless charging for tablets, smartphones, laptops, 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, the 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.

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Concentration of net sales

For the three months ended September 30,March 31, 2018, Superior accounted for over 10% of net sales, and for the three months ended March 31, 2017, and 2016, Superior and Best Buy were our largest customers, each of which accounted for over 10% of net sales, as follows:

  

Three months ended

September 30, 2017

  Three months ended September 30, 2016 
Superior  32%  30%
Best Buy  12%  10%

 Three Months Ended
 March 31, 2018 March 31, 2017
    
Superior29% 27%
Best Buy8% 12%
For the ninethree months ended September 30,March 31, 2018 and 2017, and 2016, Superior and Best Buy were our largest customers, each of which accounted for over 10% of net sales, as follows:

  

Nine months ended

September 30, 2017

  Nine months ended September 30, 2016 
Superior  31%  27%
Best Buy  10%  10%

For the nine months ended September 30, 2017, and 2016, no other customers accounted for greater than 10% of net sales.

Although we have contracts in place governing our relationships with our retail distribution customers (“retailers”), the contracts are not long-term and all 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.

Concentration of region
The percentage of net sales by geographic region for the three months ended September 30,March 31, 2018 and 2017, and 2016, was approximately:

  

Three months ended

September 30, 2017

  Three months ended September 30, 2016 
United States  85%  87%
Europe  9%  8%
Other  6%  5%

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

  

Nine months ended

September 30, 2017

  Nine months ended September 30, 2016 
United States  86%  89%
Europe  8%  7%
Other  6%  4%

(13)SEGMENT REPORTING

As of June 30, 2017, the Company reported financial information on the following reportable segments: ZAGG and mophie. During the third quarter of 2017, management completed the consolidation of a number of ZAGG/mophie processes and functions, including the merging of the mophie enterprise resource planning (“ERP”) system into ZAGG’s ERP system. In addition, the executive team and related responsibilities were re-aligned such that global functional teams are directly managed by an executive from the corporate headquarters. These merged functional areas include the following: sales, marketing, product management, product development, operations, customer service, accounting, finance, legal, human resources, and IT.

In addition, as the Company has continued to evolve as a mobile lifestyle company, the information regularly reviewed by the chief operating decision maker is at the consolidated level, including sales and budget reviews.

Due to the changes described above, management reassessed its reportable segments during the third quarter of 2017, and concluded that the Company is a single reportable segment.

 Three Months Ended
 March 31, 2018 March 31, 2017
    
United States82% 84%
Europe9% 10%
Other9% 6%
(14)
(11)SUBSEQUENT EVENTS

Certain settlements around litigation occurred subsequent to September 30, 2017, involving

As described in Note 5, “Debt and Line of Credit”, the Huang Delaware Lawsuit andCompany entered into the Huang California Lawsuit. Refer to Note 11 above for information regarding these settlements.

New Credit Agreement on April 12, 2018.
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ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Certain statements, other than purely historical information, including estimates, projections, statements relating to our business plans, objectives, and expected operating results, and the assumptions upon which those statements are based, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements generally are identified by the words “believes,” “project,” “expects,” “anticipates,” “estimates,” “forecasts,” “intends,” “strategy,” “plan,” “may,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions. We intend such forward-looking statements to be covered by the safe-harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and are including this statement for purposes of complying with those safe-harbor provisions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. Our ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse affecteffect on our operations and future prospects include, but are not limited to: changes in economic conditions, legislative/regulatory changes, availability of capital, interest rates, competition, and generally accepted accounting principles. These risks and uncertainties should also be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise. Further information concerning our business, including additional factors that could materially affect our financial results, is included herein and in our other filings with the SEC.

Our Business

ZAGG is an innovation leader in mobile tech accessories for smartphones and tablets. The Company is committed 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 created a platform to combine category-creating and innovative brands that address specific consumer needs to empower a mobile lifestyle. The Company has an award-winning product portfolio that includes screen protection, power cases, power management, wireless charging, personal audio, mobile keyboards, and cases sold under the ZAGG, InvisibleShield, mophie,ZAGG®, InvisibleShield®, mophie®, and IFROGZIFROGZ® brands.

We maintain our corporate headquarters at 910 West Legacy Center Drive,Way, Suite 500 Midvale, UT, 84047.Utah 84047. The telephone number of the Company is 801-263-0699.(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 websites 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 ZAGG's corporate culture and guide ZAGG daily:

 

zagga02.jpg
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 his or her 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

InvisibleShield Products

InvisibleShield products are designed to provide premium, lifetime protection for mobile device screens against shattering or scratching through military-grade solutions. Our products are designed to provide peace of mind by enabling consumers to fearlessly enjoy their mobile devices and never experience the inconvenience of a shattered or scratched screen.

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

Our InvisibleShield 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, which are designed to help users align and apply InvisibleShield products. We also provide custom-fit screen protection for thousands of device types through our automated InvisibleShield On Demand (“ISOD”) solution. With ISOD, retailers can supply consumers with screen protection for nearly any device model, all without having to hold excess inventory.

Launched during the first quarter of 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.

19

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



mophie Products

mophie is a leading battery case, and mobile power, and wireless charging brand with award-winning products designed to liberate mobile users from the limitations of mobile devices by providing more time to rock, talk, watch, game, surf, save, and send. 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 ecosystem of mobile accessories is designed to provide both power and protection for virtually any mobile device. With groundbreaking battery cases, including extra data storage options, wireless charging, universal batteries, cables, adapters, and docks, mophie products represent innovation at the forefront of design and development.

During the third quarter of 2017, mophie launched an innovative new universal wireless charging pad that is designed to provide an optimized charging experience for the iPhone 8, iPhone 8 Plus and iPhone X; the mophie charging pad also includes latest Qi wireless charging technology for universal compatibility.

IFROGZ Products

IFROGZ products 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 EarPollution™ product line was released. The eclectic selection of earbuds and headphones specifically targeted a younger demographic while still appealing to a wide spectrum of consumers. We continue to innovate and expand our headphone and earbud product lines under the IFROGZ name to include offerings for all ages under both the EarPollution and IFROGZ brands. In 2013, we 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, we 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.

ZAGG 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 are designed to 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 ZAGG 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 line of keyboards while also providing timely, curated solutions for new devices released by Apple, Microsoft, and Samsung, as well as other leading mobile device manufacturers. In addition to device-specific keyboards and folio keyboard cases, ZAGG’s line of universal full-size Bluetooth® keyboards are designed to be 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.

20

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, 2016.2017. There have been no material changes to the critical accounting policies or estimates previously disclosed in that report.

report except for the implementation of certain estimates for revenue recognition under Topic 606 as disclosed below.



Revenue recognition
Topic 606 has required significant changes to how the Company's revenue is recognized. Updates to the Company's accounting policies have been made as part of adoption of this new standard. These changes to the Company's accounting policies and procedures under the new standard have most significantly impacted the estimates previously used to determine the company's sales returns, discounts and other credits. The new reserve calculations for these estimates apply assumptions allowable under Topic 606, which require judgment. In applying these new assumptions, and in the application of Topic 606, the Company has determined that the updated accounting policies to ensure compliance under Topic 606 continue to be critical accounting policies and estimates.
Revenue recognition accounting policy
The Company’s revenue is derived from (1) sales of our products through our indirect channel, including retailers and distributors; (2) sales of our products through our direct channel, including www.ZAGG.com and www.mophie.com and our corporate-owned ZAGG-branded store; and (3) from franchise fees derived from the on-boarding of new franchisees. The Company’s revenue is measured based on the amount of consideration we expect to receive, reduced by estimates for sales returns, discounts, and other credits. The observable standalone selling prices of products sold are based on the prices charged to customers and are mutually agreed upon by both parties before any orders are authorized.
For substantially all of our sales, revenue is recognized at a point in time when control of the goods is transferred to the customer, which generally occurs upon delivery to the carrier or the customer. For franchise fees, revenue is derived from the sale of licenses, training, inventory and equipment and marketing, among other items. We recognize revenue for performance obligations on a straight-line basis over the franchise term.
Taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction, that are collected by the Company from a customer, are excluded from revenue.
Sales returns, discounts and other credits
The nature of our contracts gives rise to several types of variable consideration, including sales returns, discounts, and other credits. Certain customers receive credit-based incentives or credits, which are accounted for as variable consideration in the form of credit memos off future purchases from the Company. We estimate these amounts based on the expected amount to be provided to customers and reduce revenue accordingly on the invoice date.
We estimate a reserve for sales returns, discounts, and other credits, and record the respective estimated reserve amounts, including a right to return asset when a product is expected to be returned and resold. Historical experience, actual claims, and customer return rights are the key factors used in determining the estimated sales returns, discounts, and other credits.
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.

Results of Operations
Three months ended March 31, 2018

THREE MONTHS ENDED SEPTEMBER 30, and2017 AND 2016 (amounts (in thousands, except per share data)

Net sales

Net sales for the three months ended September 30, 2017,March 31, 2018, were $134,398$112,066 compared to net sales of $124,662$92,946 for the three months ended September 30, 2016,March 31, 2017, an increase of $9,736,$19,120, or approximately 8%21%. The $19,120 increase in net sales comparing the three months ended September 30, 2017, to 2016 was primarily attributable to (1) the increase in sales of our power management products, particularly accessories supporting the wireless charging ecosystem, and (2) increased sales of screen protection products in key wireless and retail accounts, particularly in international markets, and (2) the launch of the mophie wireless charging pad. During the third quarter of 2016, the Company launched a new line of power station products and loaded-in a significant amount of product to retail, however, there was no similar power station launch in the third quarter of 2017, resulting in a decline in overall power management sales.

markets.



The percentage of net sales related to our key product lines for the three months ended September 30,March 31, 2018 and 2017, and 2016, was approximately:

  2017  2016 
Screen Protection  57%  52%
Power Management  19%  22%
Power Cases  12%  12%
Audio  6%  6%
Keyboards  5%  6%
Other  1%  2%

 Three Months Ended
 March 31, 2018 March 31, 2017
    
Screen Protection50% 46%
Power Management33% 17%
Power Cases6% 24%
Audio5% 6%
Keyboards5% 6%
Other1% 1%
The percentage of net sales related to our key distribution channels for the three months ended September 30,March 31, 2018 and 2017, and 2016, was approximately:

  

2017

  

2016

 
Indirect channel  90%  90%
Website  7%  7%
Mall cart and kiosk program  3%  3%

 Three Months Ended
 March 31, 2018 March 31, 2017
    
Indirect channel88% 85%
Website8% 11%
Franchisees4% 4%
The percentage of net sales byrelated to our key geographic regionregions for the three months ended September 30,March 31, 2018 and 2017, and 2016, was approximately:

  2017  2016 
United States  85%  87%
Europe  9%  8%
Other  6%  5%

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 Three Months Ended
 March 31, 2018 March 31, 2017
    
United States82% 84%
Europe9% 10%
Other9% 6%
Gross profit

Gross profit for the three months ended September 30, 2017,March 31, 2018, was $48,392,$37,592, or approximately 36%34% of net sales, as compared to $43,146,gross profit of $28,606, or approximately 35%31% of net sales for the three months ended September 30, 2016. Typically, the Company experiences higherMarch 31, 2017. The increase in gross profit margin in periods whenwas driven primarily by (1) the mix of screen protection products, increases. The mix of screen protection productsour highest margin product category, which increased during the three months ended September 30, 2017,March 31, 2018, to approximately 57%50% of net sales compared to approximately 52%46% of net sales during the three months ended September 30, 2016, benefiting overall gross profit margin.

March 31, 2017, and (2) improved margins on mophie-branded products.

Operating expenses

Total operating

Operating expenses for the three months ended September 30, 2017,March 31, 2018, were $32,457, a decrease$29,673, compared to operating expenses of $23,399, or approximately 42%, from total operating expenses$35,255 for the three months ended September 30, 2016,March 31, 2017, a decrease of $55,856.$5,582, or approximately 16%. The $23,399$5,582 decrease was primarily attributable to (1) a $24,317 loss on disputed mophie purchase price$2.0 million charge in 20162017 related to the impairment of a patent that did not recur in 2017,2018, (2) operating expense synergies realized related to the mophie integration, and (2)(3) a reduction in advertising and marketing spend. These reductionsspend that ultimately shifted into later periods in operating expense were partially offset by an increase in selling, general and administrative expense of $1,113 and amortization expense of $616.

2018.

Income (loss) from operations

We reported income from operations of $15,935$7,919 for the three months ended September 30, 2017,March 31, 2018, compared to a loss from operations of ($12,710)$6,649 for the three months ended September 30, 2016,March 31, 2017, an increase of $28,645.$14,568, or approximately 219%. The $14,568 increase in income was primarily attributable to the increasesincrease in net sales, improvementsthe increase in gross profit margin and the reductiondecrease of operating expenses primarily due to a $24,317 loss on disputed mophie purchase price in 2016.

expenses.



Other expense, net

For the three months ended September 30, 2017,March 31, 2018, other expense was $399$5 compared to other expense of $656$510 for the three months ended September 30, 2016.

March 31, 2017. The improvement in 2018 is primarily due to a gain on foreign exchange transactions of approximately $495.

Income taxes

tax (provision) benefit

We recognized an income tax expenseprovision of $5,760$885 for the three months ended September 30, 2017,March 31, 2018, compared to an income tax benefit of $6,261$1,021 for the three months ended September 30, 2016.March 31, 2017. Our effective tax rate was 37%11% and 47%14% for the three months ended September 30,March 31, 2018 and 2017, and 2016, respectively. The decrease in the effective tax rate was due to several factors including but not limited to a change in the federal statutory rate from 35% to 21%, a change to book income in lower rate foreign jurisdictions in which the Company experienced lossesfirst quarter of 2018 compared to book loss in the prior year for which benefits were not recognized as well the ratiofirst quarter of credits2017, and other permanent differencesan increase to pre-tax book income.income in foreign jurisdictions. The Company’s effective tax rate will generally differ from the U.S. Federal statutory rate of 35%21%, due to state taxes, permanent items, and the Company’s global tax strategy.

strategy, and the inclusion of global intangible low taxed income and the corresponding foreign tax credit.

Net income (loss)

As a result

Net income was $7,029, with diluted earnings per share of the factors noted above, we reported net income of $9,776, or $0.34 per diluted share,$0.24 for the three months ended September 30, 2017,March 31, 2018, compared to a net loss of ($7,105), or ($0.25)$6,138, with diluted loss per share of $0.22, for the three months ended September 30, 2016.

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

Net sales

Net sales for the nine months ended September 30, 2017, were $342,571 compared to net sales of $286,928 for the nine months ended September 30, 2016, an increase of $55,643, or approximately 19%. The increase in net sales comparing the nine months ended September 30, 2017, to 2016 was primarily attributable to (1) increased sales of screen protection for new device releases during the current year, and (2) higher sales of power management and power case products. Results for the nine months ended September 30, 2017, also include nine months of mophie sales compared to only seven months in 2016 as the acquisition occurred on March 3, 2016.

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31, 2017.

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

  2017  2016 
Screen Protection  52%  53%
Power Cases  18%  15%
Power Management  18%  15%
Keyboards  6%  9%
Audio  6%  7%
Other  0%  1%

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

  2017  2016 
Indirect channel  89%  88%
Website  8%  8%
Mall cart and kiosk program  3%  4%

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

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

Gross profit

Gross profit for the nine months ended September 30, 2017, was $112,822, or approximately 33% of net sales, as compared to $97,748, or approximately 34% of net sales for the nine months ended September 30, 2016. The decrease in the gross profit margin percentage was primarily attributable to (1) a full nine months of mophie operations in 2017, compared to only seven months of mophie operations in 2016, which are at lower gross profit margins than the corporate average, and (2) lower gross profit margin on curved glass for the Samsung Galaxy S8, compared to historical gross margins on non-curved glass products. These items were partially 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 nine months ended September 30, 2017, were $98,040, a decrease of $17,474, or approximately 15%, from total operating expenses for the nine months ended September 30, 2016, of $115,514. The decrease in operating expenses was primarily attributable to (1) a $24,317 loss on disputed mophie purchase price in 2016 that did not recur in 2017, (2) synergies realized from cost reduction initiatives, (3) a reduction in transaction-related costs, (4) a reduction in advertising and marketing spend, and (5) an overall reduction in amortization expense. These decreases were partially offset by the following increases in operating expense: (1) the inclusion of nine months of mophie-related expenses for 2017 compared with seven months in 2016 and (2) the impairment of an intangible asset in 2017 related to an invalidated patent totaling $1,959.

Income (loss) from operations

We reported income from operations of $14,782 for the nine months ended September 30, 2017, compared to a loss from operations of ($17,766) for the nine months ended September 30, 2016, an increase of $32,548. The increase in income from operations was primarily attributable to increases in net sales and gross profit, and a decrease in operating expenses primarily due to a $24,317 loss on disputed mophie purchase price in 2016.

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Other expense, net

For the nine months ended September 30, 2017, other expense was $1,460 compared to other expense of $1,639 for the nine months ended September 30, 2016.

Income taxes

We recognized income tax expense of $6,281 for the nine months ended September 30, 2017, compared to an income tax benefit of $7,963 for the nine months ended September 30, 2016. Our effective tax rate was 47% and 41% for the nine months ended September 30, 2017, and 2016, respectively. The increase in the effective tax rate was primarily due to various discrete expenses recognized during the period related to the true up of a deferred amount for stock compensation and other discrete items related to the return to provision calculation. 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 income (loss)

As a result of the factors noted above, we reported net income of $7,041, or $0.25 per diluted share, for the nine months ended September 30, 2017, compared to a net loss of ($11,442), or ($0.41) per share, for the nine months ended September 30, 2016.

Liquidity and Capital Resources (in thousands)thousands

)

At September 30, 2017,March 31, 2018, our principal sources of liquidity were cash provided by operations, cash on hand, and the revolving credit facility. Our principal uses of cash have been cash used to reduce accounts payable balances, purchase of property and equipment, and make payments on the term and revolving credit facilities.

Cash and cash equivalents on-hand decreased to $11,394$17,745 on September 30, 2017,March 31, 2018, from $11,604$24,989 on December 31, 2016,2017, a decrease of $210. Earnings from foreign operations are considered permanently re-invested and of the $11,394 cash balance on September 30, 2017, cash from foreign entities totaled $8,735, which constitutes 77% of the total cash and cash equivalents balance.

Accounts receivable, net of allowances, increased to $96,830 on September 30, 2017, from $83,835 on December 31, 2016, an increase of $12,995. The increase was primarily attributable to increased sales in 2017 partially offset by strong cash collections during the first nine months of 2017.

Inventories decreased to $72,005 on September 30, 2017, from $72,769 on December 31, 2016, a decrease of $764.$7,244. The net decrease was primarily attributable to improved supply chain(1) $15,375 net payments on the line of credit and inventory purchasing processes,term loans, and (2) $1,907 from net property and equipment purchases, partially offset by $9,728 generated from operating activities.

Accounts receivable, net of allowances, decreased to $73,894 on March 31, 2018, from $123,220 on December 31, 2017, a decrease of $49,326. The net decrease was primarily attributable to comparatively lower sales for the quarter in comparison to the prior quarter as well as strong cash collections during the first three months of 2018.
Inventories increased to $78,891 on March 31, 2018, from $75,046 on December 31, 2017, an increase of $3,845. The net increase was primarily attributable to (1) increased wireless charge pad ecosystem inventory to support the growth of the wireless charging category and (2) increased inventory purchases atto ensure adequate inventory levels during the end of the third quarter to meet fourth quarter demand for new product launches.

second quarter.

Accounts payable decreased to $82,742$54,798 on September 30, 2017,March 31, 2018, from $85,022$96,472 on December 31, 2016,2017, a decrease of $2,280.$41,674. The net decrease was primarily attributable to timing of payments for larger expenses to suppliers at each respective period-end.

in conjunction with larger sales volumes in the prior quarter.

At September 30, 2017,March 31, 2018, the Company had a positive working capital of $19,677$70,068 compared to negativepositive working capital of ($9,408)$43,210 as of December 31, 2016.2017, an increase of $26,858. The net increase in the working capital position was primarily attributable to reductions in accounts payable and the lineshift of credit, and an increase in accounts receivable.

debt from current liabilities to non-current liabilities.

Based on the current level of operations, we believe that cash to 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.

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Item 3.Quantitative and Qualitative Disclosures About Market Risk

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. We 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.



Item 4.Controls and Procedures

Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures

We maintain

Our management has established and maintains disclosure controls and procedures designed to ensure that information required to be disclosed in ourthe reports filed underthat it files or submits pursuant to the Securities Exchange Act of 1934, as amended, (the “Exchange Act”),or Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the SECSEC’s rules and forms, and that such information is accumulated and communicated to our management, including the chiefour principal executive officer and chiefprincipal financial officer, as appropriate to allow for timely decisions regarding required disclosure.

Underdisclosures.

At the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluationof the effectiveness of the design and operation of our disclosure controls and procedures as such term is defined under Rule 13a-15(e) promulgated underin accordance with the Exchange Act as of the end of the period covered by this Report.requirements. Based on thisupon that evaluation, theour principal executive officer and principal financial officer concluded that as of the end of the period covered byof this Report,report, our disclosure controls and procedures wereare not effective atdue to the reasonable assurance level.

material weakness described below.

The Company’s control environment was ineffective because we failed to establish appropriate authorities and responsibilities in alignment with the objectives of internal control over financial reporting to certain employees; and
The Company’s risk assessment process was ineffective because we failed to consider changes in the business operations and their impact on financial reporting and internal controls.
Changes in Internal Control over Financial Reporting

As a result of the

To remediate this material weakness relatedwhich resulted in an immaterial misstatement to a material overstatement of net sales, and accounts receivable, cost of goods sold, and inventory as of and for the year ended December 31, 2016, which2017 (which was corrected by management prior to issuance of the 20162017 consolidated financial statements in the Company’s Annual Report on Form 10-K,10-K), management has completedinitiated the following changes to its internal controls during the ninethree months ended September 30, 2017:

Conducted training regarding the design and operationMarch 31, 2018:
Enhance our control environment by establishing appropriate authorities and responsibilities in alignment with the objectives of controls with those responsible for performing and reviewing the process level control activities over revenue, accounts receivable and in transit inventory.
Enhanced review controls over revenue, accounts receivable, and inventory.
Tasked the ZAGG operations team to identify information technology solutions that streamline the process for tracking and reporting orders shipped from China directly to customers.
Enhanced the risk assessment process to consider significant changes in the business operations and the associated impact on financial reporting and internal controls

Management has assessed the above identified changes to its internal control over financial reportingreporting;

Implement a cross functional risk assessment process to ensureidentify and assess changes in the business that could significantly impact internal control over financial reporting;
Design and implement control activities over the changes have been properly designedcustomer returns process;
Design and implement control activities over the management of accounts receivable transactions due to the growth of the Company; and
Evaluate whether control activities can be automated to replace manual processes.
During the three months ended March 31, 2018, the Company has implemented several new cross functional processes and are operating effectively. The assessment performed has allowed managementcontrols to conclude thataddress the material weakness at December 31, 2016 has been remediated. The process for evaluatingweakness. In addition, others processes and controls and procedures is continuous and encompasses constant improvementare currently being implemented as part of the designplanned remediation.
Additionally, we initiated changes over internal controls relating to the implementation and effectiveness of established controlsongoing accounting procedures (including applicable estimates and procedures and the remediation of any deficiencies which may be identified during this process.

disclosures) for revenue recognition standard requirements found in Topic 606.

Inherent Limitations on the Effectiveness of Internal Controls

Our disclosure controls

Internal control over financial reporting has inherent limitations. Internal control over financial reporting is a process that involves human diligence and procedures are designedcompliance and is subject to provide reasonable assurance of achieving their objectives. Nevertheless, an internallapses in judgment and breakdowns resulting from human failures. 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 reflects the fact that there are resource constraints, and the benefits of controls are 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 error or mistake. Additionally, controlsover financial reporting also can be circumvented by the individual actscollusion or improper management override. Because of some persons,such limitations, there is a risk that material misstatements will not be prevented or detected on a timely basis by collusion of two or more people, or by management overrideinternal control over financial reporting. However, these inherent limitations are known features of the internal control. Thefinancial reporting process. Therefore, it is possible to design of any system of controls also is based in part upon certain assumptions aboutinto 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.

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process safeguards to reduce, though not eliminate, this risk.




PART II - OTHER INFORMATION

Item 1.Legal Proceedings

Item 1. Legal Proceedings
Certain of the legal proceedings in which we are involved are discussed in Note 11,9, “Commitments and Contingencies,” to our Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q, and are hereby incorporated by reference.

Item 1A.Risk Factors

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, 20162017 (the “2016“2017 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 20162017 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.

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

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.

Item 3.Defaults Upon Senior Securities

Item 3. Defaults Upon Senior Securities
None.

Item 4.Mine Safety Disclosures

Item 4. Mine Safety Disclosures
Not applicable.

Item 5.Other Information

Item 5. Other Information
None.

Item 6.Exhibits

a.Exhibits:

Item 6. Exhibits
a. Exhibits: The following Exhibits are filed with this Form 10-Q pursuant to Item 601(a) of Regulation S-K:

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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, 2017Dated: May 9, 2018/s/ RANDALL L. HALESCHRIS AHERN
 Randall L. Hales,Chris Ahern
 Chief Executive Officer President, & Director
 (Principal executive officer)
  
Date: November 2, 2017Dated: May 9, 2018/s/ BRADLEY J. HOLIDAY
 Bradley J. Holiday
 Chief Financial Officer
 (Principal financial officer)

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