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Section 1: 10-K (10-K)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549

FORM 10-K

(Mark One)

x ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2017
¨ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number: 001-34528

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

910 West Legacy Center Drive, Suite 500, Midvale, Utah
 
84047
(Address of principal executive offices)
 
(Zip Code)

Issuer’s telephone number: (801) 263-0699
Securities registered under 12(b) of the Exchange Act:
Common Stock, $.001 par value
 
The NASDAQ Stock Market LLC
(Title of Class)
 
(Name of exchange on which registered)
 
Securities registered under 12 (g) of the Exchange Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. Yes ¨ No x
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 2 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant: (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 x No ¨
Indicate by check mark if disclosure of delinquent filings pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an 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
x 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-2 of the Exchange Act). Yes ¨ No x
Based on the closing sales price of the voting and non-voting common equity held by non-affiliates as of June 30, 2017, the last business day of the Registrant's second fiscal quarter, the aggregate market value on the NASDAQ Stock Market of the voting and non-voting common equity held by non-affiliates was approximately $198,214,975. For purposes of the foregoing calculation only, directors and executive officers and holders of 10% or more of the issuer’s common capital stock have been deemed affiliates.
The number of shares of the Registrant’s common stock outstanding as of February 28, 2018, was 28,224,073.
Documents incorporated by reference. Portions of the Registrant's Definitive Proxy Statement for the Registrant's 2018 Annual Meeting of Stockholders are incorporated by reference in Part III of this report. The Definitive Proxy Statement or an amendment to this Form 10-K will be filed with the Securities and Exchange Commission within 120 days after the Registrant's fiscal year end.
 





ZAGG INC
Fiscal year ended December 31, 2017
Form 10-K
TABLE OF CONTENTS
 
 
Page
 
 
 
 
 
 
 
 





PART I
Special Note Regarding Forward-Looking Statements
Information included or incorporated by reference in this report contains forward-looking statements. All forward-looking statements are inherently uncertain as they are based on current expectations and assumptions concerning future events or future performance of the Company. Readers are cautioned not to place undue reliance on these forward-looking statements, which are only predictions and speak only as of the date hereof. Forward-looking statements may contain the words “believes,” “project,” “expects,” “anticipates,” “estimates,” “forecasts,” “intends,” “strategy,” “plan,” “may,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions, and are subject to numerous known and unknown risks and uncertainties. Additionally, statements relating to implementation of business strategy, future financial performance, acquisition strategies, capital raising transactions, performance of contractual obligations, and similar statements may contain forward-looking statements. In evaluating such statements, prospective investors and shareholders should carefully review various risks and uncertainties identified in this report, including the matters set forth under the captions “Risk Factors” and in the Company’s other SEC filings. These risks and uncertainties could cause the Company’s actual results to differ materially from those indicated in the forward-looking statements. The Company disclaims any obligation to update or publicly announce revisions to any forward-looking statements to reflect future events or developments.
Although forward-looking statements in this report reflect the good faith judgment of our management, such statements can only be based on facts and factors currently known by us. Consequently, forward-looking statements are inherently subject to risks and uncertainties, and actual results and outcomes may differ materially from the results and outcomes discussed in or anticipated by the forward-looking statements. Factors that could cause or contribute to such differences in results and outcomes include, without limitation, those specifically addressed under the heading “Risk Factors” below, as well as those discussed elsewhere in this report. Readers are urged not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. We file reports with the Securities and Exchange Commission (“SEC”). You can read and copy any materials we file with the SEC at the SEC’s Public Reference Room, 100 F. Street, NE, Washington, D.C. 20549. You can obtain additional information about the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet site (www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, including us. The URL is included here as an inactive textual reference.
We disclaim any obligation to revise or update any forward-looking statements in order to reflect any event or circumstance that may arise after the date of this report. Readers are urged to carefully review and consider the various disclosures made throughout the entirety of this Annual Report, which attempt to advise interested parties of the risks and factors that may affect our business, financial condition, results of operations and prospects.
ITEM 1.
BUSINESS
Our Business (amounts in thousands)
ZAGG® Inc and its subsidiaries (“we,” “us,” “our,” “ZAGG,” or the “Company”) are innovation leaders 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®, and IFROGZ® brands.
We maintain our corporate headquarters at 910 West Legacy Center Drive, Suite 500, Midvale, Utah, 84047. The telephone number of the Company is 801-263-0699. Our website addresses are www.ZAGG.com and www.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 and guide ZAGG daily:
392609957_zagginc.jpg
Corporate Objectives
 
Core Values
The Preferred Brand
 
Integrity
Creative Product Solutions
 
Ownership
Targeted Global Distribution
 
Care for People
Operational Excellence
 
Passion
 
 
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 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.
ZAGG has the leading market share in screen protection, and has maintained that leading position by consistently delivering innovative products to the market.

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mophie Products
mophie is a leading battery case, 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, 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.
Strategy
At ZAGG, our focus is to (1) design creative product solutions for users of mobile devices, (2) sell these products to consumers through targeted global distribution partners and online, (3) drive operational excellence across the organization, and (4) become the preferred brand through emphasizing innovation and product-quality, providing excellent customer service, and focusing on the end-users’ experience with our products. We focus our corporate, team, and individual goals to accomplish these overall corporate objectives.
We plan to continue to expand our product offerings, including entering new product categories and entering new domestic and global markets that we believe will be consistent with our overall corporate strategy.
Design and Packaging
We design our InvisibleShield glass and film products for application on thousands of specific electronic devices. Our logistics partners acquire precision-cut raw materials from exclusive third-party suppliers. These precision-cut InvisibleShield film and glass either use the EZ Apply tabs installation or are packaged with an installation kit consisting of a moisture adhesive-activating solution, a squeegee, and instructions for application on specific electronic devices. We have established relationships with package assembly, shipping, and logistics

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companies worldwide that we expect will allow us to expand production and shipping capacity for InvisibleShield film as well as glass production as we continue to grow and enter new markets.
We also customize each InvisibleShield film cut design for the specific electronic device and currently have thousands of unique designs. Each cut design is developed internally and is owned exclusively by us. We do not own the patent for the raw materials, which is held by our exclusive supplier. Our film supplier has contractually agreed to not sell the base materials to any of our competitors. We believe that our relationship with the manufacturer of the raw material is on excellent terms and anticipate no interruption in our ability to acquire adequate supplies of raw materials and produce products.
We manufacture our other mobile device accessories (InvisibleShield glass, keyboards, keyboard cases, audio products, cases, power cases, mobile power solutions, wireless charging solutions, and other accessories) using third party contract manufacturers located primarily in Asia. We have established relationships with third-party manufacturers, package assembly, warehousing, shipping, and logistics companies that allow us to expand our accessories production and shipping capacity as we continue to grow our current customer base and enter new markets.
For all our products, we design the exterior packaging to ensure it is consistent with the overall marketing strategy and is consistent with the desires of our major retailer partners. We have designed the hard plastic and cardboard box packaging to be informative and attractive for point-of-sale displays. We outsource the production of packaging to various independent third parties.
Market for Products
Portable electronic devices, notably handheld devices, continue to advance in performance and functionality. Furthermore, the market is expanding as evidenced by continued innovative new product releases, particularly in tablets and smartphones. Correspondingly, the aesthetics of such devices are increasingly important as buyers typically consider the look and feel of such devices, as much as performance, in making their purchasing decisions.
As a result, a significant market has emerged for (1) protecting portable electronic devices, notably the “high end” tablet and smartphone devices, and (2) enhancing the consumer experience with accessories for mobile electronic devices.
We sell each of our product lines to consumers of electronic and hand-held devices directly via our websites and other key online e-tailers, and through our distributors and retail partners. We sell a significant amount of product for use on Apple’s iPad, iPhone, and iPod devices; Samsung’s Galaxy smartphones and tablets; and Microsoft’s Surface tablets, though we have experienced continued diversification as other manufacturers’ presence in the market has increased.
In addition to Apple and Samsung, the handheld electronics industry has continued to develop and market devices with touch screen interfaces, and several major manufacturers, including Microsoft, Motorola, Dell, Lenovo, Blackberry, Xiaomi, and HTC, continue to release innovative products each year. The InvisibleShield is the ideal device protection offering for all types of touch-screen devices, as it does not interfere with the functionality of the device while offering complete scratch-proof protection. Our keyboard product line is ideal for tablet and smartphone users as the product line includes keyboards that are both device specific and device agnostic, which are compatible with many tablet and smartphone devices. In addition, our IFROGZ Audio product lines offer excellent enhancement to any mobile device. Lastly, we view our mophie power cases and other portable power solutions as a potential market for significant future growth as mobile devices become more ingrained in our day-to-day lives. We intend to continue to focus our marketing and innovation efforts around these types of product solutions that protect and enhance mobile devices.
Market Segments
With thousands of InvisibleShield products/product configurations available, we have a protective covering for all major market segments of handheld electronic devices, including: smartphones, tablets, MP3 players, notebook computers, laptops, gaming devices, GPS devices, watch faces, and similar devices and surfaces. We intend to continue to configure the InvisibleShield product for use in newly developed consumer devices. The InvisibleShield can be quickly configured, packaged, and shipped to customers for new devices as they enter the consumer marketplace, making the InvisibleShield available for purchase at the time of or within days of the launch of new electronic devices. In addition, ISOD, a patent pending system used to cut an InvisibleShield for virtually any mobile device in seconds, makes it possible for retailers to have an InvisibleShield available on the launch date for all device releases.
One of the strongest market segments currently is the smartphone segment. Along with the tablet market, buyers are drawn to these devices by their elegant design, as well as their easy-to-use functionality. However, everyday use often mars the finish of the devices’ screens and other areas that receive wear and tear. InvisibleShield protection products and mophie and IFROGZ cases, offer excellent device protection, while not impeding the form or functionality of the smartphones and tablets and do not inhibit the touch sensitivity for smartphones and tablets with touch screen technology. Further, our keyboard line provides a professional and innovative solution to interact with tablets and smartphones. Lastly, the mophie ecosystem provides both power and protection accessories for virtually any mobile device.
As sales of electronics continue to grow, we anticipate that sales of our complementary accessory products will also continue to grow. The largest areas of our market opportunities relate to sales of smartphones and tablets. Management believes that ZAGG is positioned to serve

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market needs within this industry with our multiple product lines that include device protection, keyboards and keyboard cases, audio, power cases, mobile power, wireless charging, and protective cases.
Marketing and Distribution
Domestically, we sell our products on our websites, to big box electronics retailers, wireless retailers, distributors, and franchisees that own and operate kiosks and ZAGG branded stores in shopping malls and retail centers. In addition, our products are available for sale worldwide via our websites and through retailers and distributors we have partnered with from our subsidiaries in Ireland and China. Currently we advertise our products primarily on the Internet, through print advertisements in conjunction with our retail partners, and through point of sale displays at retail locations. We intend to continue to strategically expand our advertising activities in 2018, particularly through point of sales displays within retailers and social media campaigns on the Internet. We are also seeking to create strategic partnerships with makers of smartphones and tablets, electronic accessories, and mobile content providers to enhance our product offerings.
Indirect Channels (amounts in thousands)
We sell our products through indirect channels, including big box retailers, wireless retailers, domestic and international distributors, independent Apple retailers, university bookstores, and small independently owned consumer electronics stores. For the year ended December 31, 2017, we sold $463,366 of product, or approximately 89% of our overall net sales through this channel. We require indirect channel partners to enter into a reseller agreement with us.
We continue to sell directly to retailers or through distributors to market and place our products for sale in the United States and non-U.S. markets. We have entered into distribution agreements with partners throughout the world for the marketing, distribution and sale of our products.
Website Sales (amounts in thousands)
We sell our products worldwide directly to consumers on our websites at www.ZAGG.com and www.mophie.com. For the year ended December 31, 2017, we sold $39,661 of product, or approximately 8% of our overall net sales, through our websites. 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.
Franchises (amounts in thousands)
We sell our products to franchisees that operate kiosks and ZAGG-branded stores in shopping malls and retail centers. We enter into agreements with third-party franchisees who then purchase our products and resell them to consumers. As part of the standard franchise agreement, franchisees are charged an up-front fee that is recognized into revenue over the life of the franchise term. In addition, ZAGG operates a corporate ZAGG-branded store. For the year ended December 31, 2017, we sold $16,468 of product, or approximately 3% of our overall net sales, through franchisees and our corporate owned store.
Warranties
We offer a limited lifetime warranty of the durability of our InvisibleShield products. If the InvisibleShield is ever scratched or damaged in the course of normal use, a customer may return the old product and we will replace it at no cost to the customer other than a minimal handling fee. The products to which the InvisibleShield is applied typically have relatively short lives, which helps to limit our exposure for warranty claims. Should products cease to function properly, we also offer manufacturer's warranties for our products. For ZAGG and iFrogz-branded products, we offer a one-year manufacturer's warranty and for mophie-branded products, we offer a two-year manufacturer's warranty.
Suppliers
We do not directly manufacture any of our products, rather we employ various third-party manufacturing partners in the United States and Asia to perform these services on our behalf. The services employed by these third parties include the selection of sub-suppliers that provide raw materials and other components used in the manufacturing process. We have endeavored to use common components and readily available raw materials in the design of our products that can be sourced from multiple sub-suppliers. However, raw film used in our InvisibleShield film and ISOD products has been produced by a single supplier for the last nine years. Our film supplier has contractually agreed to not sell the raw materials to any of our competitors.
Below is a high-level summary by product category of the manufacturing sources used by the Company:
Screen Protection – Our screen protection product line is comprised of InvisibleShield glass products (approximately 85% of 2017 screen protection sales or 40% of net sales), InvisibleShield film products (approximately 13% of 2017 screen protection sales or 6% of net sales), and ISOD film blanks (approximately 2% of 2017 screen protection sales or 1% of net sales). Our InvisibleShield glass products are sourced from factories in Asia with protective glass expertise, each of which uses a number of

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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 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.
Keyboards – Our keyboard product line consists of (1) device specific keyboards designed to fit individual tablets produced by original equipment manufacturers and (2) keyboards that are designed to be device agnostic and can be used on virtually any mobile device. Our keyboard products are sourced from factories in Asia with keyboard expertise, each of which uses a number of sub-suppliers for raw materials and other components.
Audio – Our audio product line consists of earbuds and headphones that are designed to be compatible with virtually all electronic mobile devices. Our audio products are sourced from factories in Asia with audio expertise, each of which uses a number of sub-suppliers for raw materials and other components.
Our product and operations teams work closely with suppliers from initial product development and throughout the manufacturing process to ensure that (1) the supplier understands and will build according to product specifications, (2) appropriate quality is maintained for the finished goods and for all sub-components, and (3) the supplier can meet our supply needs.
Intellectual Property Rights
We own utility and design patents in the U.S. and in various foreign countries which correspond to a number of our products, including patents with claims focused on certain features of ZAGG’s InvisibleShield screen protection for electronic devices. ZAGG continues to actively pursue further protection for its InvisibleShield screen protection and associated methods in the United States and in foreign countries, having filed patent applications for (i) both wet and dry application processes for securing protective films to consumer electronic devices; (ii) dry-application protective films; and (iii) on-demand production of electronic device accessories, including films. In addition, ZAGG has filed applications, and in some instances secured patents, for a variety of its battery cases, mobile power, wireless charging, keyboard, and protective case products. ZAGG has additional patents pending in the U.S. and internationally for a variety of current and expected products.
ZAGG owns thousands of InvisibleShield protective film designs for protecting a variety of consumer electronic devices. New designs are routinely added to ZAGG’s portfolio to accommodate the newest electronic devices on the market. Additionally, ZAGG is the owner of numerous trademarks for use in connection with its goods and services. ZAGG has filed formal applications for a variety of trademarks, and has further secured trademark registrations for many of its trademarks in both the U.S. and in foreign countries.
ZAGG has strategically developed relationships and exclusive agreements with a number of third party vendors and suppliers. ZAGG’s long-standing relationship with its raw material suppliers and its manufacturers expands the scope of potential intellectual property (“IP”) protection available to ZAGG, including development of innovative solutions for protective films. These relationships also provide ZAGG with a reasonable expectation that it will be able to supply customers with products long into the future.
Our film supplier retains the patents and IP rights for products it develops on our behalf, though has contractually agreed to not sell the raw materials to any of our competitors. The IP protection held by the Company varies in effectiveness in preventing certain aspects of competition. Although the Company believes the protection of IP is an important factor in its business and that its success does depend in part on the ownership thereof, the Company views the following as our keys to past and future success: (1) our distribution relationships with customers, (2) the speed we can bring a product to market, and (3) our ability to effectively launch a product into market to generate maximum sales. Additionally, we believe ZAGG’s success is also based upon creative product solutions, establishing the preferred brand among both retailers and consumers, and targeted global distribution.
Protection of IP is important to the Company and we protect IP when appropriate, however, we do not view IP in our industry as the key barrier to entry because of the rapidly changing industry that we operate in. Very often, by the time we receive patent or other IP protection on a product that would serve as a barrier to entry, the market has moved on to new technologies or products. Given this, we are very selective in what we decide to protect, measuring the cost to protect certain aspects of IP against the potential benefit.
Due to our close partnership with suppliers in Asia, our third-party logistics partner, and the manufacturer of the raw film used in our InvisibleShield and ISOD products, our product development teams work directly with these partners in the development of products. Our key suppliers in Asia have contractually agreed that the Company will retain all patents and IP rights to products that arise through our relationship, including design changes and innovations regardless of who instigates the product development change.
Employees
As of December 31, 2017, we had 543 full-time and part-time employees, including our management team. 457 of our employees are located in the United States and support our domestic operations, while 86 employees are located in international locations to support our international operations. No employee is represented by a labor union, and we have never suffered an interruption of business caused by labor disputes. We believe our relationship with our employees is good.

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Our Corporate History
ZAGG and its subsidiaries 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, cases, and social tech sold under the ZAGG, InvisibleShield, mophie, and IFROGZ brands.
In June 2011, ZAGG acquired IFROGZ, an audio and protective case company, which expanded the ZAGG product lines beyond screen protection and keyboards.
In March 2016, ZAGG acquired mophie, a leader in the power management and power case categories. This acquisition further diversified the ZAGG product lines into key growth product categories. The results of operations of mophie are included in the Company's results of operations beginning on March 3, 2016.
Seasonal Business
The Company has historically been positively impacted near the time of major device launches by Apple and Samsung, particularly when there is a change in form factor. We expect major device launches to continue to positively impact our operations during 2018 and beyond.
ITEM 1A.
RISK FACTORS
Because of the following factors, as well as other factors affecting the Company’s financial condition and operating results, past financial performance should not be considered to be a reliable indicator of future performance, and investors should not use historical trends to anticipate results or trends in future periods.
Risks Related to our Financial Condition
If we are unable to maintain our line of credit facility or have a significant change in our borrowing base, we could face a deficiency in our short-term cash needs that would negatively impact our business (amounts in thousands).
The Company maintains a Credit and Security Agreement with KeyBank National Association (“KeyBank”), as administrative agent, KeyBanc Capital Markets Inc., ZB, N.A., dba Zions First National Bank, and JPMorgan Chase, N.A. (“Credit and Security Agreement”).The Credit and Security Agreement provides an $110,000 revolving credit commitment (“Revolver”) from January 1, 2018 to May 31, 2018, which reduces to a $100,000 Revolver from June 1, 2018 forward. Borrowings and repayments under the Revolver may occur from time to time in the Company’s ordinary course of business through the maturity date of March 2, 2021, at which time any amounts outstanding are to be paid in full (60-month term). All borrowings under the Revolver are subject to a borrowing base limit, which is calculated from outstanding accounts receivable and inventory on hand, and is reported to the administrative agent monthly. Interest on the Revolver will accrue at the base rate (as defined in the Credit and Security Agreement) plus 0.5% or LIBOR plus 1.5%. The Revolver is subject to an unused line fee calculated as 0.2% multiplied by the average unused amount of the Revolver.
The Credit and Security Agreement also provides a $25,000 term loan commitment (“Term Loan”). Payments on the Term Loan are to be made in consecutive monthly installments commencing on April 1, 2016 and continuing until the Term Loan is paid in full on March 2, 2020 (48-month term). Interest on the Term Loan will accrue at the base rate plus 1.0% or at a rate of LIBOR plus 2.0%.
The Credit and Security Agreement contains a number of financial and non-financial debt covenants, and the amount available under the Revolver is limited to the borrowing base calculated on at least a monthly basis. If we are not compliant with the covenants or have a reduction in our borrowing base, our ability to access the Revolver will be limited and the outstanding borrowings under the Term Loan may be declared immediately due and payable. In such event, our short-term cash requirements may exceed available cash on hand resulting in material adverse consequences to our business. If we need to obtain additional funds as a result of the termination of the Credit and Security Agreement or the acceleration of amounts due thereunder, there can be no assurance that alternative financing can be obtained on substantially similar or acceptable terms, or at all. Our failure to promptly obtain alternate financing could limit our ability to implement our business plan and have an immediate, severe and adverse impact on our business, results of operations, financial condition and liquidity. In the event that no alternative financing is available, we would be forced to drastically curtail operations, dispose of assets, or cease operations altogether.
The restrictive covenants contained in our Credit and Security Agreement may limit our activities.
Our obligations under the Credit and Security Agreement are secured by substantially all of the assets of the Company. Under the Credit and Security Agreement, we are subject to specified affirmative covenants customary for loans of this type. We are also subject to certain negative covenants customary for loans of this type.
Failure to comply with the restrictive covenants could accelerate the repayment of any debt outstanding under the Credit and Security Agreement. Additionally, as a result of these restrictive covenants, we may be at a disadvantage compared to our competitors that have greater operating and financing flexibility than we do.

7



Our level of indebtedness reduces our financial flexibility and could impede our ability to operate.
The Credit and Security Agreement requires us to pay a variable rate of interest, which will increase or decrease based on variations in LIBOR. Additionally, fluctuations in interest rates can significantly decrease our profits. We do not have any hedge or similar contracts that would protect us against changes in interest rates.
The amount of our indebtedness could have important consequences for us, including the following:
requiring us to dedicate a substantial portion of our cash flow from operations to make payments on our debt, thereby reducing funds available for operations, future growth opportunities and other purposes;
limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;
making it more difficult for us to satisfy our debt obligations, as any failure to comply with such obligations, including financial and other restrictive covenants, could result in an event of default under the Credit and Security Agreement, which could lead to, among other things, an acceleration of our indebtedness or foreclosure of the collateral, which could have a material adverse effect on our business or financial condition;
limiting our ability to borrow additional funds, or to sell assets to raise funds, if needed, for working capital, capital expenditures, acquisitions or other purposes; and
increasing our vulnerability to general adverse economic and industry conditions, including changes in interest rates.
We may not generate sufficient cash flows from operations to service and repay our debt and related obligations and have sufficient remaining funds to achieve or sustain profitability in our operations, meet our working capital and capital expenditure needs or compete successfully in our industry, which would have a material adverse effect on our operations.
Increases in interest rates may increase our interest expense and adversely affect our cash flow and our ability to service our indebtedness.
As of December 31, 2017, we had approximately $37,538 of debt outstanding which was subject to variable interest rates. This variable rate debt had a total weighted average interest rate of approximately 3.33% per annum as of December 31, 2017. Increases in interest rates on this variable rate debt would increase our interest expense, which could harm our cash flow.
Risks Related to our Company and Business
Because sales of consumer electronic accessories are dependent on new products, product development and consumer acceptance, we could experience sharp decreases in our sales and profit margin if we are unable to continually introduce new products and achieve consumer acceptance.
The consumer and mobile electronics accessory industries are subject to constant and rapidly changing consumer preferences based on performance features and industry trends. We generate all of our sales from our consumer and mobile electronics accessories business. We cannot assure our stakeholders that we will be able to grow the revenues of our business or maintain profitability. Our consumer accessories business depends, to a large extent, on the introduction and availability of innovative products and technologies. We believe that our future success depends in large part upon our ability to enhance our existing products and to develop, introduce, and market new products and improvements to our existing products.
However, if we are not able to continually innovate and introduce new products that achieve consumer acceptance, our sales and profit margins may decline. Our revenues and profitability will depend on our ability to maintain existing and generate additional customers and develop new products. A reduction in demand for our existing products would have a material adverse effect on our business. The sustainability of current levels of our business and the future growth of such revenues, if any, depends on, among other factors:
the overall performance of the economy and discretionary consumer spending,
competition within key markets,
continued customer acceptance of our products,
customer acceptance of newly developed products, and
the demand for other products and services.
We cannot provide assurance that we will maintain or increase our current level of revenues or profits in future periods.
While we are pursuing and will continue to pursue product development opportunities, there can be no assurance that such products will come to fruition or become successful. Furthermore, while a number of those products are being tested, we cannot provide any definite date by which they will be commercially available or financially viable. We may experience operational problems with such products after commercial introduction that could delay or defeat the ability of such products to generate revenue or operating profits. Future operational problems could increase our costs, delay our plans or adversely affect our reputation or our sales of other products which, in turn, could have a material adverse effect on our success and our ability to satisfy our obligations. We cannot predict which of the many possible future products will meet evolving industry standards and consumer demands. We cannot provide assurance that we will be able to adapt to such technological changes, offer such products on a timely basis or establish or maintain a competitive position.

8



Because we sell indirectly to customers through third-party retailers who operate traditional brick-and-mortar locations, the shift of sales demographics to more online retail business could harm our market share and our revenues.
Part of our current business model includes indirectly selling our products through third-party retailers. These third-party retailers operate physical brick-and-mortar locations to sell our product to our end customers. The current shift in purchasing demographics due to the changing preferences of customers who are moving from in-store purchases of goods to the convenience of online purchases creates additional risks of current revenue streams being impacted negatively and an overall decrease of market share.
Because we face intense competition, including competition from companies with significantly greater resources than ours, if we are unable to compete effectively with these companies, our market share may decline and our business could be harmed.
Our market is highly competitive with numerous competitors. Some of our competitors may have substantially greater financial, technical, marketing, and other resources than we possess, which may afford them competitive advantages over us. As a result, our competitors may introduce products that have advantages over our products in terms of features, functionality, ease of use, and revenue producing potential. They may also have more fully developed sales channels for consumer sales including large retail seller arrangements and international distribution capabilities. In addition, new companies may enter the markets in which we compete, further increasing competition in the consumer electronics accessories industry. Increased competition may result in price reductions, reduced profit margins, loss of market share and an inability to generate cash flows that are sufficient to maintain or expand our development and marketing of new products, which would adversely impact our financial performance.
Because we are dependent on third party sources to acquire sufficient quantities of raw materials to produce our products, any interruption in those relationships could harm our results of operations and our revenues.
The Company does not manufacture any of our products, rather employs various third party manufacturing partners 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. Our manufacturing partners acquire substantially all of the raw materials that we use in our products from a variety of suppliers. We can give no assurance that:
our supplier relationships will continue as presently in effect,
our suppliers will not become competitors,
our suppliers will be able to obtain the components necessary to produce high-quality, technologically-advanced products for us,
we will be able to obtain adequate alternatives to our supply sources should they be interrupted,
if obtained, alternatively sourced products of satisfactory quality would be delivered on a timely basis, competitively priced, comparably featured or acceptable to our customers, and
our suppliers will have sufficient financial resources to fulfill their obligations.
Our inability to procure sufficient quality and quantities of products that are in demand could reduce our profitability and have a negative effect on our relationships with our customers. If any of our supplier relationships are terminated or interrupted, we could experience an immediate or long-term supply shortage, which would have a negative effect on our business.
Because we do not own all the technology incorporated in the InvisibleShield film products, the impact of technological advancements may cause profit margin erosion and adversely impact our profitability and inventory value.
Although protection of IP is important to the Company and we protect IP when appropriate, we do not view IP in our industry as an effective barrier to entry because of the rapidly changing industry in which we operate. Very often, by the time we receive patent or other IP protection on a product that would serve as a barrier to entry, the market has moved on to new technologies or products. Given this, we are very selective in what we decide to protect, measuring the cost to protect certain aspects of IP against the potential benefit.
Due to our close partnership with suppliers in Asia, our third-party logistics partner, and the manufacturer of the raw film used in our InvisibleShield and ISOD products, our product development teams work directly with these partners in the development of products. Our key suppliers in Asia have contractually agreed that the Company will retain all patents and IP rights to products that arise through our relationship, including design changes and innovations regardless of who instigates the product development change. Our film supplier retains the patents and IP rights for products it develops on our behalf, though has contractually agreed to not sell the raw materials to any of our competitors. As we do not own the IP for raw materials, including the InvisibleShield film and glass products, we cannot provide assurance that we will be able to source technologically advanced products in the future in order to remain competitive. Furthermore, the introduction or expected introduction of new products or technologies may depress sales of existing products and technologies. This may result in declining profit margins and inventory obsolescence. Because we maintain a substantial investment in product inventory, declining prices and inventory obsolescence could have a material adverse effect on our business and financial results.
Although we do not own the patent for the film raw materials, which is held by our exclusive supplier, this supplier has contractually agreed to not sell the raw materials to any of our competitors. We believe that our relationship with the manufacturer of the raw material is on excellent terms and anticipate no interruption in our ability to acquire adequate supplies of raw materials and produce products. The Company has not entered into any material agreements to license technology included in our other products.

9



Our estimates of excess and obsolete inventory may prove to be inaccurate, in which case the net realizable value for excess and obsolete inventory may be understated or overstated. Although we make every effort to ensure the accuracy of our forecasts of future product demand, any significant unanticipated changes in demand or technological developments could have a significant impact on the value of our inventory and operating results.
There can be no guarantee that we will be able to expand into additional complementary product categories or to continue to configure our products to match new products or devices.
Although we anticipate expanding into additional complementary product categories to provide support to our strategy to provide creative product solutions to mobile device users, there can be no guarantee that we will be successful in innovating and expanding into additional product categories. Numerous factors, including market acceptance, finding and retaining contract partners that are acceptable to ZAGG, and general market and economic conditions, could prevent us from participating in these complementary product categories, which could limit our ability to implement our business strategy
Similarly, although we intend to continue to configure the screen protection, keyboards, audio, battery cases, power management, wireless charging, cases, and other product categories for new products and devices, there can be no guarantee that we will be able to either match the current demand for our products as new devices and products are introduced, or that purchasers of such devices and products will want to purchase our products for use in connection with them. Any limitation in our ability to match demand or gain market acceptance of our products in connection with new devices and products could have a material adverse effect on our business.
Breaches of our information technology systems may materially damage business partner and customer relationships, curtail or otherwise adversely impact access to online stores, or subject the Company to significant reputational, financial, legal and operational consequences.
Our business requires that the Company use and store customer, employee and business partner personally identifiable information (“PII”), which may include, among other information, names, addresses, phone numbers, email addresses, contact preferences, tax identification numbers, and payment account information. The Company requires user names and passwords in order to access its information technology systems. The Company also uses encryption and authentication technologies designed to secure the transmission and storage of data and prevent access to Company data or accounts. As with all companies, these security measures are subject to third-party security breaches, employee error, malfeasance, faulty password management, or other irregularities. For example, third parties may attempt to fraudulently induce employees or customers into disclosing user names, passwords or other sensitive information, which may in turn be used to access our information technology systems. To help protect customers and the Company, the Company monitors accounts and systems for unusual activity and may freeze accounts under suspicious circumstances, which may result in the delay or loss of customer orders.
The Company devotes significant resources to network security, data encryption and other security measures to protect its systems and data, but these security measures cannot provide absolute security. To the extent the Company was to experience a breach of its systems and was unable to protect sensitive data, such a breach could materially damage business partner and customer relationships, and curtail or otherwise adversely impact access to online stores and services. Moreover, if a computer security breach affects the Company’s systems or results in the unauthorized release of PII, the Company’s reputation and brand could be materially damaged, use of the Company’s products and services could decrease, and the Company could be exposed to a risk of loss or litigation and possible liability. While the Company maintains insurance coverage that, subject to policy terms and conditions and subject to a significant self-insured retention, is designed to address certain aspects of cyber risks, such insurance coverage may be insufficient to cover all losses or all types of claims that may arise in the continually evolving area of cyber risk.
If we fail to maintain proper inventory levels, our business could be harmed.
We produce our key products prior to the time we receive customers’ purchase orders. We do this to minimize purchasing costs, the time necessary to fill customer orders, and the risk of non-delivery. However, we may be unable to sell the products we have produced in advance. Inventory levels in excess of customer demand may result in inventory write-downs, and the sale of excess inventory at discounted prices could significantly impair our brand image and have a material adverse effect on our operating results and financial condition. Conversely, if we underestimate demand for our products or if we fail to produce the quality products that we require at the time we need them, we may experience inventory shortages. Inventory shortages might delay shipments to customers, negatively impact distributor relationships, and diminish brand loyalty.
Mobile electronic devices typically have relatively short life cycles. We may be left with obsolete inventory if we do not accurately project the life cycle of different mobile electronic devices. The charges associated with reserving slow-moving or obsolete inventory as a result of not accurately estimating the useful life of mobile electronics could negatively impact the value of our inventory, and operating results.
As we continue to grow our business into new markets, including internationally, it may put pressure on our gross profit margins.
The Company looks to continue its expansion into new markets, including internationally. As the Company expands into new international markets through distributors, new indirect customers, and existing relationships with current indirect customers, it is possible that this expansion will adversely impact our consolidated gross profit margins. Accordingly, there is no assurance that we will continue to recognize similar gross profit margins in the future to those currently being realized.

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As we continue to grow our business, entrance into new and complimentary product categories may put pressure on our gross profit margins.
We anticipate expanding into additional complementary product categories or in expanding our footprint in current product categories to support our strategies to provide creative product solutions to mobile device users and to diversify our product portfolio. However, there can be no guarantee that this expansion will occur at or above the gross profit margins we have historically realized. Accordingly, there is no assurance that we will continue to recognize similar gross profit margins in the future to those currently being realized.
Because we are dependent for our success on key executive officers, our inability to retain these officers could impede our business plan and growth strategies, which could have a negative impact on our business and the value of your investment.
Our success depends on the skills, experience and performance of key members of our management team including Chris Ahern, our CEO; Brian Stech, our President; and Bradley J. Holiday, our CFO. Although we have employment agreements with these individuals, were we to lose one or more of these key executive officers, we could be forced to expend significant time and money in the pursuit of a replacement, which could result in both a delay in the implementation of our business plan and the diversion of working capital. Thus, the Board has implemented succession plans for each of these roles, and systematically monitors the development and progression of each employees who has been identified as a possible future candidate for such roles.
A small number of our customers account for a significant amount of our net sales, and the loss of, or reduced purchases from, these or other customers could have an adverse effect on our operating results.
For the year ended December 31, 2017, Superior Communications, Inc. ("Superior") was our largest customer and accounted for greater than 10% of net sales. For the years ended December 31, 2016 and 2015, Superior, Best Buy Co., Inc. (“Best Buy”), and GENCO Distribution Systems, Inc.(“GENCO”) were our largest customers. The amount of net sales for each of these customers is outlined as follows:
 
2017
 
2016
 
2015
Superior
30
%
 
27
%
 
17
%
Best Buy
9
%
 
11
%
 
20
%
GENCO
8
%
 
11
%
 
11
%
During 2017, 2016, and 2015, no other customers accounted for greater than 10% of net sales.
Although we have contracts in place governing our relationships with customers, the contracts are not long-term and all of our retailers generally purchase from us on a purchase order basis. As a result, these retailers generally may, with little or no notice or penalty, cease ordering and selling our products, or materially reduce their orders. If any of these retailers cease selling our products, slow their rate of purchase of our products, or decrease the number of products they purchase, our results of operations could be adversely affected.
If the Company loses one or more of its significant customers, it would have a material adverse effect on the Company’s financial condition, results of operations and cash flows.
We may be adversely affected by the financial condition of our retailers and distributors.
Some of our retailers and distributors have experienced financial difficulties in the past. A retailer or distributor experiencing such difficulties will generally not purchase and sell as many of our products as it would under normal circumstances and may cancel orders. In addition, a retailer or distributor experiencing financial difficulties generally increases our exposure to uncollectible receivables. We extend credit to our retailers and distributors based on our assessment of their financial condition, without requiring collateral. While such credit losses have historically been within our estimated reserves for allowances for bad debts, we cannot assure that this will continue to be the case. Financial difficulties on the part of our retailers or distributors could have a material adverse effect on our results of operations and financial condition.
At December 31, 2017, the balance of accounts receivable from two separate customers exceeded 10%: Superior and Best Buy. At December 31, 2016, the balance of accounts receivable from three separate customers exceeded 10%: Superior, Best Buy, and GENCO.
 
2017
 
2016
Superior
31
%
 
32
%
Best Buy
18
%
 
22
%
GENCO
7
%
 
10
%

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No other customer account balances were more than 10% of accounts receivable at December 31, 2017 or 2016. If one or more of the Company’s significant customers were to become insolvent or were otherwise unable to pay for the products provided, it would have a material adverse effect on the Company’s financial condition and results of operations.
If we fail to attract, train and retain sufficient numbers of our qualified personnel, our prospects, business, financial condition and results of operations will be materially and adversely affected.
Our success depends to a significant degree upon our ability to attract, retain and motivate skilled and qualified personnel. Failure to attract and retain necessary technical personnel, sales and marketing personnel, and skilled management could adversely affect our business. If we fail to attract, train, and retain sufficient numbers of these highly qualified people, our prospects, business, financial condition, and results of operations will be materially and adversely affected.
If our products contain defects, our reputation could be harmed and our results of operations adversely affected.
Some of our products may contain undetected defects due to imperfections in the underlying base materials used in production or manufacturing defects. The occurrence of defects or malfunctions could result in financial losses for our customers and in turn increase warranty claims from our customers and diversion of our resources. Any of these occurrences could also result in the loss of or delay in market acceptance of our products and loss of sales.
Because we experience seasonal and quarterly fluctuations in demand for our products, no one quarter is indicative of our results of operations for the entire fiscal year.
Our quarterly results may fluctuate quarter to quarter as a result of market acceptance of our products, the sales mix, changes in pricing, the timing of inventory write downs, changes in the cost of materials, the use of airfreight to transport products, incurring other operating costs and factors beyond our control, such as general economic conditions and actions of competitors. We are also affected by seasonal buying cycles of consumers, such as the holiday season, and the introduction of popular consumer electronics, such as a new introduction of products from Apple, Samsung, Microsoft, HTC, Blackberry, and others. Accordingly, the results of operations in any quarter will not necessarily be indicative of the results that may be achieved for a full fiscal year or any future quarter.
Because we have limited protection on the intellectual property underlying our products, we may not be able to protect our products from the infringement of others or may be prevented from marketing our products.
We do not own proprietary rights with respect to the film we use in our InvisibleShield products. However, we have protected key proprietary design and utility elements of other products through patents. In addition, we own and keep confidential the design configurations of the film and the product cut designs which are our copyrights. We seek to protect our IP rights through confidentiality agreements with our employees, consultants and partners, and domestic and foreign patent prosecution and similar means. However, no assurance can be given that such measures will be sufficient to protect our IP rights or that the IP rights that we have are sufficient to protect other persons from creating and marketing substantially similar products. If we cannot protect our rights, we may lose our competitive advantage. Moreover, if it is determined that our products infringe on the IP rights of third parties, we may be prevented from marketing our products.
Claims relating to the infringement of third-party proprietary rights, even if not meritorious, could result in costly litigation, divert management’s attention and resources, or require us to either enter into royalty or license agreements which are not advantageous to us or pay material amounts of damages. In addition, parties making these claims may be able to obtain an injunction, which could prevent us from selling our products.
Uncertainty in the economy can affect consumer spending patterns, which could adversely affect our business.
Consumer spending patterns, especially discretionary spending for products such as mobile, consumer and accessory electronics, are affected by, among other things, prevailing economic conditions, energy costs, raw material costs, wage rates, inflation, interest rates, consumer debt, consumer confidence, and consumer perception of economic conditions. A general slowdown in the U.S. and certain international economies, or an uncertain economic outlook or market volatility could have a material adverse effect on our sales and operating results.
The disruptions in the national and international economies due to market volatility and uncertainty could depress consumer confidence and spending. If such conditions persist, consumer spending will likely decline further and this would have an adverse effect on our business and our results of operations.

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If we are unable to effectively manage our growth, our operating results and financial condition will be adversely affected.
We intend to grow our business through strategic acquisitions and organically by expanding our sales and product development organizations. Any growth in or expansion of our business is likely to place a strain on our management and administrative resources, infrastructure, and information systems. As with other growing businesses, we expect that we will need to refine and expand our business development capabilities, our systems and processes, and our access to financing sources. We also will need to hire, train, supervise, and manage new employees. These processes are time consuming and expensive, will increase management responsibilities and will divert management attention. We provide no assurance that we will be able to:
expand our systems effectively or efficiently or in a timely manner;
allocate our human resources optimally;
meet our capital needs;
identify and hire qualified employees or retain valued employees; or
incorporate effectively the components of any business or product line that we may acquire in our effort to achieve growth.
If our competitors misappropriate our proprietary know-how and trade secrets, it could have a material adverse effect on our business.
We depend heavily on the expertise of our product development team. If any of our competitors copy or otherwise gains access to similar products independently, we might not be able to compete as effectively. The measures we take to protect our designs may not be adequate to prevent their unauthorized use. Further, the laws of foreign countries may provide inadequate protection of such IP rights. We have brought and in the future may need to bring legal claims to enforce or protect such IP rights. Any litigation, whether successful or unsuccessful, could result in substantial costs and diversions of resources.
If any of our facilities were to experience catastrophic loss, our operations would be seriously harmed.
Our facilities could be subject to a catastrophic loss from fire, flood, earthquake, or terrorist activity. Our activities, including sales and marketing, customer service, finance, and other critical business operations are in two primary locations. Our manufacturing and logistics activities are conducted at other facilities separate from our corporate headquarters. Any catastrophic loss at these facilities could disrupt our operations, delay production and revenue, and result in large expenses to repair or replace the facility. While we have obtained insurance to cover most potential losses, we cannot provide assurance that our existing insurance coverage will be adequate against all other possible losses.
If we fail to maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial results, and current and potential stockholders may lose confidence in our financial reporting.
We are required to establish and maintain adequate internal control over financial reporting that provides reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements in accordance with United States generally accepted accounting principles (“U.S. GAAP”). We are likewise required, on an annual basis, to evaluate the effectiveness of our internal controls and to disclose on a quarterly basis any material changes in those internal controls.
Any failure to maintain and continue to improve our internal controls could adversely impact our ability to report our financial results on a timely and accurate basis. If our financial statements are not accurate, investors may not have a complete understanding of our operations or may lose confidence in our reported financial information. Likewise, if our financial statements are not filed on a timely basis as required by the SEC and The Nasdaq Global Market, we could face severe consequences from those authorities. In either case, it could result in a material adverse effect on our business or have a negative effect on the trading price of our common stock.
We have identified a material weakness in our internal control over financial reporting for the most recent reporting period, and our business and stock price may be adversely affected if we do not adequately address the weakness or if we have other material weaknesses or significant deficiencies in our internal control over financial reporting.
Our risk assessment process was ineffective because we failed to consider the business changes and their impact on financial reporting and internal controls; specifically, we failed to consider the impact of changes in operational processes related to (1) the proper tracking and recording of customer returns; and (2) the increased volume of accounts receivable transactions with a significant customer as of December 31, 2017. As a consequence, the Company did not design effective process level control activities over the accuracy of net sales and accounts receivable amounts. A material weakness is a control deficiency, or combination of control deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the registrant's annual or interim financial statements will not be prevented or detected on a timely basis. The existence of these material weaknesses could result in errors in our financial statements. Additionally, if we cannot produce reliable financial reports, investors could lose confidence in our reported financial information, the market price of our stock could decline significantly, we may be unable to obtain additional financing to operate and expand our business, and our business and financial condition could be harmed.

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Because we distribute products internationally, economic, political and other risks associated with our international sales and operations could adversely affect our operating results.
Because we sell our products worldwide, our business is subject to risks associated with doing business internationally. Our sales to customers outside the United States accounted for approximately 16% of our net sales in fiscal 2017. Accordingly, our future results could be harmed by a variety of factors, including:
changes in foreign currency exchange rates;
exchange controls;
changes in regulatory requirements;
changes in a specific country's or region's political or economic conditions;
tariffs, other trade protection measures and import or export licensing requirements;
potentially negative consequences from changes in tax laws or application of such tax laws;
difficulty in staffing and managing widespread operations;
changing labor regulations;
requirements relating to withholding taxes on remittances and other payments by subsidiaries;
different regimes controlling the protection of our IP;
restrictions on our ability to own or operate subsidiaries, make investments or acquire new businesses in these jurisdictions; and
restrictions on our ability to repatriate dividends from our subsidiaries.
Our international operations are affected by global economic and political conditions, only some of which are described above. Changes in economic or political conditions in any of the countries in which we operate could result in exchange rate movement, new currency or exchange controls or other restrictions being imposed on our operations. We cannot provide assurance that such changes will not have an adverse effect on our foreign operations and our financial results.
There can be no guarantee that additional amounts spent on marketing or advertising will result in additional sales or revenue to the Company.
In 2018, management intends to expand our advertising with more interactive displays within retailers, continue our marketing efforts relating to existing products and potential new product introductions and increase our social media marketing campaigns. However, there can be no guarantee that such increased advertising or marketing efforts and strategies will result in increased sales.
Due to the changes in U.S. tax laws, uncertainty arises in our various tax conclusions.
On December 22, 2017, the U.S. President signed into law a sweeping tax reform bill known as the Tax Cuts and Jobs Act of 2017 (the "Tax Act"). The Tax Act makes changes to the corporate tax rate, business-related deductions and taxation of foreign earnings, among others, that will generally be effective for taxable years beginning after December 31, 2017. These changes did have a material adverse impact on the value of our U.S. deferred tax assets, resulting in a significant one-time charge in the current taxable year. We are continuing to evaluate the Tax Act and its requirements, as well as its application to our business and its impact on our effective tax rate. At this stage, it is unclear how many U.S. states will incorporate these federal law changes, or portions thereof, into their tax codes.
The Tax Act, or any related, similar or amended legislation or other changes in U.S. federal income tax laws, could adversely affect the U.S. federal income taxation of our and our affiliates’ ongoing operations and may also adversely affect the integration efforts relating to, and potential synergies from, past strategic transactions. Any such changes and related consequences could have a material adverse impact on our financial results.
Risks Related to the Company’s Securities
Because the price of our common stock has been, and may continue to be, volatile, our shareholders may not be able to sell shares of our common stock at or above the price paid for such shares.
The price for shares of our common stock has exhibited high levels of volatility with significant volume and price fluctuations, which may make our common stock unsuitable for some investors. For example, for the two years ended December 31, 2017, the closing price of our common stock ranged from a high of $23.70 to a low of $4.71 per share. At times, the fluctuations in the price of our common stock may be unrelated to our operating performance. The price of our common stock may also be influenced by:
fluctuations in our results of operations or the operations of our competitors or customers;
the aggregate amount of our outstanding debt and perceptions about our ability to make debt service payments;
failure of our results of operations and sales revenues to meet the expectations of stock market analysts and investors;
perceived reductions in demand or expectations regarding future demand by our customers;
changes in stock market analyst recommendations regarding us, our competitors or our customers;
the timing and announcements of product innovations, new products or financial results by us or our competitors;
the performance of mophie post acquisition;
changes in ZAGG directors or executives;

14



increases in the number of shares of our common stock outstanding; and
changes in our industry.
Based on the above, our stock price may continue to experience volatility. Therefore, we cannot guarantee that our investors will be able to resell our common stock at or above the price at which they purchased it.
Because we may, at some time in the future, issue additional securities, shareholders are subject to dilution of their ownership.
Although we have no immediate plans to raise additional capital, we may at some time in the future do so. Any such issuance would likely dilute shareholders’ ownership interest in our company and may have an adverse impact on the price of our common stock. In addition, from time to time we may issue shares of common stock in connection with equity financing activities or as incentives to our employees and business partners. We may expand the number of shares available under stock incentive and option plans, or create new plans. All issuances of common stock would be dilutive to an existing investor’s holdings in the Company. If an investor’s holdings are diluted, the overall value of the shares may be diminished and the ability to influence shareholder voting will also be harmed.
Because we do not expect to pay dividends for the foreseeable future, investors seeking cash dividends will not purchase our common stock.
We currently intend to retain any future earnings to support the development and expansion of our business and do not anticipate paying cash dividends in the foreseeable future. Our payment of any future dividends will be at the discretion of our board of directors after taking into account various factors, including but not limited to our financial condition, operating results, cash needs, growth plans and the terms of any credit agreements that we may be a party to at the time. In addition, our ability to pay dividends on our common stock may be limited by state law. Accordingly, investors must rely on sales of their common stock after price appreciation, which may not occur in the future, as the only way to realize their investment.
We may not be able to successfully integrate businesses we have acquired or which we may acquire in the future, and we may not be able to realize anticipated cost savings, revenue enhancements, or other synergies from such acquisitions.
Our ability to successfully implement our business plan and achieve targeted financial results and other benefits including, among other things, greater market presence and development, and enhancements to our product portfolio and customer base, is dependent on our ability to successfully integrate businesses we may acquire in the future. We may not realize these benefits, as rapidly as, or to the extent, anticipated by our management. There can be no assurance that we will be able to successfully integrate any acquired businesses, products or technologies without substantial expenses, delays or other operational or financial problems. Acquisitions involve a number of risks, some or all which could have a material adverse effect on any acquired businesses, products or technologies. Furthermore, there can be no assurance that any acquired business, product, or technology will be profitable or achieve anticipated revenues and income. Our failure to manage our acquisition strategy successfully could have a material adverse effect on our business, results of operations and financial condition. The process of integrating an acquired business involves risks, including but not limited to:
demands on management related to the significant increase in the size of our business;
diversion of management's attention from the management of daily operations;
difficulties in the assimilation of different corporate cultures and business practices;
difficulties in conforming the acquired company's accounting policies to ours;
retaining the loyalty and business of the customers of acquired businesses;
retaining employees that may be vital to the integration of acquired businesses or to the future prospects of the combined businesses;
difficulties and unanticipated expenses related to the integration of departments, information technology systems, including accounting systems, technologies, books and records, and procedures, and maintaining uniform standards, such as internal accounting controls, procedures, and policies;
costs and expenses associated with any undisclosed or potential liabilities;
the use of more cash or other financial resources on integration and implementation activities than we expect; and
our ability to avoid labor disruptions in connection with any integration, particularly in connection with any headcount reduction.
Failure to successfully integrate any acquired businesses in the future may result in reduced levels of anticipated revenue, earnings, or operating efficiency than might have been achieved if we had not acquired such businesses.
In addition, any future acquisitions could result in the incurrence of additional debt and related interest expense, contingent liabilities, and amortization expenses related to intangible assets, which could have a material adverse effect on our financial condition, operating results, and cash flow.
Techniques employed by short sellers may drive down the market price of the Company’s common stock.
Short selling is the practice of selling securities that the seller does not own, but rather has borrowed from a third party with the intention of buying identical securities back at a later date to return to the lender. The short seller hopes to profit from a decline in the value of the securities between the sale of the borrowed securities and the purchase of the replacement shares, as the short seller expects to pay less in that

15



purchase than it received in the sale. As it is in the short seller’s best interests for the price of the stock to decline, many short sellers publish, or arrange for the publication of, negative opinions regarding the relevant issuer and its business prospects in order to create negative market momentum and generate profits for themselves after selling a stock short. These short attacks have, in the past, led to selling of shares in the market.
In the past several years, our securities have been the subject of short selling. Reports and information have been published about ZAGG which the Company believes are mischaracterized or incorrect, and which have occasionally been followed by a decline in our stock price.
It is not clear what additional effects the negative publicity will have on the Company, if any, other than potentially affecting the market price of our common stock. If the Company continues to be the subject of unfavorable allegations, the Company may have to expend a significant amount of resources to investigate such allegations and/or defend itself. While the Company would strongly defend against any such short seller attacks, the Company may be constrained in the manner in which it can proceed against the relevant short seller by principles of freedom of speech, applicable state law, or issues of commercial confidentiality. Such a situation could be costly and time-consuming, and could distract the Company’s management from growing the Company. Additionally, such allegations against the Company could negatively impact its business operations and stockholders' equity, and the value of any investment in the Company’s stock could be reduced.
ITEM 1B.
UNRESOLVED STAFF COMMENTS
None.
ITEM 2.
PROPERTIES
Real Property (dollar amounts in thousands)
Our principal executive offices and facilities are currently located at 910 West Legacy Center Drive, Suite 500, Midvale, Utah, 84047. The lease agreement expires July 1, 2023, excluding two five-year extensions at our option. Rent at this location is recorded on a straight-line lease rate of $80 per month. In addition, we lease a storefront in Utah, office space in California, office space and warehouse space in Michigan, and office space in both Ireland and China for our international operations.
ITEM 3.
LEGAL PROCEEDINGS
Certain of the legal proceedings in which we are involved are discussed in Note 12, "Commitments and Contingencies," to our Consolidated Financial Statements in this report, and are hereby incorporated by reference.
ITEM 4.
MINE SAFETY DISCLOSURES
Not applicable.

16



PART II
ITEM 5.    MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES (dollar and share amounts in thousands, excluding average price per share)
During the fourth quarter of 2015, the Company’s board of directors authorized the repurchase of up to $20,000 of the Company’s outstanding common stock with no expiration date. The Company’s board of directors also authorized the use of a Rule 10b5-1 plan, which was put into place during the fourth quarter of 2016. The 10b5-1 plan was subsequently terminated during the first quarter of 2017.
During the year ended December 31, 2017, the Company purchased 234 shares of ZAGG common stock for total consideration of $1,492, which included commissions and processing fees totaling $9. As of December 31, 2017, a total of $17,558 remained authorized under the stock repurchase program.
Market Information
Our common stock is currently quoted on The NASDAQ Global Market of The NASDAQ Stock Market under the symbol ZAGG. The following table sets forth, for each full quarterly period within the two most recent fiscal years, the high and low sales prices (in dollars per share) of our common stock as reported or quoted on The NASDAQ Capital Market. On February 28, 2018, the closing price of our common stock was $15.05.
For the Year Ended December 31, 2017
 
High
 
Low
First Quarter
 
$
7.55

 
$
5.90

Second Quarter
 
$
9.15

 
$
6.55

Third Quarter
 
$
16.15

 
$
8.30

Fourth Quarter
 
$
23.70

 
$
14.10

For the Year Ended December 31, 2016
 
High
 
Low
First Quarter
 
$
10.83

 
$
8.29

Second Quarter
 
$
9.23

 
$
4.71

Third Quarter
 
$
8.10

 
$
4.89

Fourth Quarter
 
$
8.22

 
$
5.15

Holders of Common stock
On February 28, 2018, there were approximately 20 registered holders or persons otherwise entitled to hold our common shares pursuant to a shareholders’ list provided by our transfer agent, Empire Stock Transfer. The number of registered shareholders excludes any estimate by us of the number of beneficial owners of common shares held in street name.
Dividends
There are no restrictions in our articles of incorporation or bylaws that restrict us from declaring dividends. The Delaware General Corporation Law and applicable case law, however, does prohibit us from declaring dividends where, after giving effect to the distribution of the dividend:
we would not be able to pay our debts as they become due in the usual course of business;
we would be engaged in a business for which our remaining assets would be unreasonably small in relation to the business; or
our net assets would be less than the amount determined to be our capital.
We have not declared or paid cash dividends on our common stock since our inception, and our board of directors currently intends to not declare or issue cash dividends for the foreseeable future. Any future payment of dividends to holders of common stock will depend upon our results of operations, financial condition, cash requirements, and other factors deemed relevant by our board of directors.

17



Securities Authorized for Issuance Under Equity Compensation Plans (share amounts in thousands)
Plan Category
 
Number of securities to be issued
upon exercise of outstanding
options and vesting of restricted
 stock
 
Weighted-average exercise price
of outstanding options
 
Number of securities remaining
available for future issuances
under equity compensation
plans (excluding securities
reflected in first column)
Equity compensation plans approved by security holders
 
1,034

 
$
8.29

 
8,737

Equity compensation plans not approved by security holders
 

 

 

Total
 
1,034

 
$
8.29

 
8,737

In 2007, the Company’s board of directors adopted and in 2008 the Company’s shareholders approved the ZAGG Incorporated 2007 Stock Incentive Plan (the “2007 Plan”). The 2007 Plan was amended to increase the number of shares issuable under the 2007 Plan to 10,000. As of December 31, 2017, there were 6,239 shares available for grant under the 2007 Plan. However, upon adoption of the 2013 Plan in January 2013, the Company ceased to grant awards pursuant to the 2007 Plan. All subsequent awards were and all future awards will be granted under the 2013 Plan. All awards that are outstanding under the 2007 Plan will continue to vest, be exercisable, and expire according to their respective terms.
In January 2013, the Company’s board of directors adopted and in June 2013, the Company’s shareholders approved the ZAGG Inc 2013 Equity Incentive Award Plan (the “2013 Plan”), a new equity incentive plan intended to replace the 2007 Plan. In April 2017, the compensation committee of the Company’s board of directors adopted, and in June 2017, the Company’s shareholders approved an amendment and restatement of the 2013 Plan (the “Amended Plan”). The Amended Plan is an “omnibus plan” under which stock options, stock appreciation rights, performance share awards, restricted stock, and restricted stock units can be awarded. The Amended Plan’s initial share reservation is 5,000 shares. The term of the plan is for 10 years from the date of original adoption of the 2013 Plan. As of December 31, 2017, there were approximately 2,498 shares available for grant under the Amended Plan.
Recent Sales of Unregistered Securities (amounts in thousands)
We did not issue any unregistered securities during the years ended December 31, 2017 and 2016.
Stock Performance Graph
The graph below compares the cumulative 5-Year total return provided shareholders on the Company's common stock relative to the cumulative total returns of the Russell 2000 index, Russell Microcap and a customized peer group of ten companies, whose individual companies are listed in footnote 1 below. An investment of $100 (with reinvestment of all dividends) is assumed to have been made in our common stock, in each index and in each of the peer groups on December 31, 2012 and its relative performance is tracked through December 31, 2017.
1)
The ten companies included in the Company's customized peer group (the “Peer Group” in the chart below) are: Callaway Golf Co, Columbia Sportswear Co, Deckers Outdoor Corp, Fossil Group Inc., Garmin Ltd, Harman International Industries Inc., Logitech International Sa, Plantronics Inc., Sodastream International Ltd and Vuzix Corp.

18



COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among ZAGG Inc, the Russell 2000 Index, the Russell Microcap Index,
and Peer Group
392609957_chart-c8622e87ff5488c26f0.jpg
*100 invested on December 31, 2012 in stock or index, including reinvestment of dividends. Fiscal year ending December 31. Copyright© 2018 Russell Investment Group. All rights reserved.
 
12/12
 
12/13
 
12/14
 
12/15
 
12/16
 
12/17
ZAGG Inc
100.00

 
59.10

 
92.26

 
148.64

 
96.47

 
250.68

Russell 2000
100.00

 
138.82

 
145.62

 
139.19

 
168.85

 
193.58

Russell Microcap
100.00

 
145.62

 
150.93

 
143.15

 
172.30

 
194.99

2015 Peer Group
100.00

 
134.95

 
142.00

 
104.31

 
135.37

 
168.16

In 2016, the Company determined to change the comparison peer group from a self-selected group based on market capitalization to the Russell Microcap index. We believe a change to the Russell Microcap index will provide a better comparison to the Company because it is a broader base of companies with similar market cap rather than ten selected in the peer group. Furthermore, the companies we would consider peers within the industry are not public companies and would therefore not have information available to calculate a comparative five-year return.

19



ITEM 6.
SELECTED FINANCIAL DATA (in thousands, except per share amounts)
The selected historical financial data presented below are derived from our consolidated financial statements. The selected financial data should be read in conjunction with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and our consolidated financial statements and the notes thereto included elsewhere in this report.
 
Years December 31,
 
2017
 
2016
 
2015
 
2014
 
2013
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
 
 
 
 
 
 
 
 
 
Net sales
$
519,495

 
$
401,857

 
$
269,311

 
$
261,585

 
$
219,356

Income (loss) from operations
44,735

 
(21,360
)
 
25,864

 
16,983

 
10,946

Net income (loss) attributable to stockholders
15,100

 
(15,587
)
 
15,587

 
10,461

 
4,790

Earnings (loss) per share attributable to stockholders:
 
 
 
 
 
 
 
 
 
Basic
$
0.54

 
$
(0.56
)
 
$
0.54

 
$
0.35

 
$
0.16

Diluted
0.53

 
(0.56
)
 
0.54

 
0.34

 
0.15

Weighted average shares:
 
 
 
 
 
 
 
 
 
Basic
27,996

 
28,006

 
28,773

 
30,247

 
30,900

Diluted
28,407

 
28,006

 
29,089

 
30,610

 
31,459

 
 
 
 
 
 
 
 
 
 
BALANCE SHEET DATA:
 
 
 
 
 
 
 
 
 
Total assets
$
320,591

 
$
310,729

 
$
179,541

 
$
201,279

 
$
175,470

Current assets
227,802

 
174,436

 
131,701

 
147,023

 
116,481

Current liabilities
184,592

 
183,844

 
49,024

 
74,206

 
33,096

Total equity
135,999

 
117,262

 
130,517

 
127,073

 
124,831

ITEM 7.
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 and Section 21E of the Exchange Act. 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 effect on our operations and future prospects include, but are not limited to: changes in economic conditions, legislative/regulatory changes, availability of capital, interest rates, and competition. 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.
Overview
At ZAGG, our focus is to (1) provide creative product solutions, (2) execute targeted global distribution, (3) achieve operational excellence and (4) be the preferred brand for our customers. We focus our corporate, team, and individual goals to accomplish this overall corporate strategy.
We believe that hand-held devices and gadgets can be best enjoyed with the right mix of (1) protection from scratches and damage and (2) accessories that enhance the consumers’ electronic and mobile device experience. We believe that our full product offering, which includes screen protection, keyboard, audio accessories, mobile power solutions, wireless charging, and protective cases, provides consumers with unparalleled device protection and enhanced enjoyment of their mobile electronic device.
We plan to continue to expand our product offerings, including into new product categories, and enter new domestic and global markets that we believe will be consistent with our overall corporate strategy. Our products are available through our websites at www.ZAGG.com and www.mophie.com, and through our retail distribution channels, which include major retailers like Apple Inc., Amazon.com, Inc., Best Buy

20



Co Inc., Wal-Mart Stores Inc., AT&T Inc., Sprint Corp., Verizon Communications Inc., T-Mobile International AG, Target Corporation, Walgreens Boots Alliance, Inc., Ingram Micro, Inc., and The Carphone Warehouse; independent electronics resellers; college bookstores; independent Apple stores; mall kiosks; and other online retailers.
Critical Accounting Policies
The discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Significant items subject to such estimates include inventory realizability and sales returns liability.
An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, if different estimates reasonably may have been used, or if changes in the estimate that are reasonably likely to occur may materially impact the financial statements. Management believes the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.
Inventories
Inventories, consisting primarily of finished goods and raw materials, are valued at the lower of cost, determined on a first in, first out basis, or net realizable value. Management performs periodic assessments to determine the existence of obsolete, slow moving, and non-saleable inventories, and records necessary write-downs in cost of sales to reduce such inventories to net realizable value. Once established, the original cost of the inventory less the related inventory write down represents the new cost basis of such products.
In assessing the realization of inventories, we are required to make judgments as to future demand requirements and to compare these with current inventory levels. Our inventory requirements may change based on our projected customer demand, market conditions, technological and product life cycle changes, longer or shorter than expected usage periods, and other factors that could affect the valuation of our inventories.
Revenue recognition
The Company records revenue when persuasive evidence of an arrangement exists, product delivery has occurred or risk of loss has transferred to the customer, the sales price to the customer is fixed or determinable, and collectability is reasonably assured. Revenue is recognized net of any taxes collected from customers and subsequently remitted to governmental authorities. The Company’s revenue is derived from sales of our products through our indirect channel, including retailers and distributors; through our direct channel, including www.ZAGG.com and www.mophie.com and our corporate-owned and third-party-owned mall kiosks and ZAGG-branded stores; and from the franchise fees derived from the onboarding of new franchisees. For product sales, our standard shipping terms are FOB shipping point, and we record revenue when the product is shipped, net of estimated returns and discounts. For some customers, the contractual shipping terms are FOB destination. For these shipments, we record revenue when the product is delivered, net of estimated returns and discounts. For franchise fees, we recognize revenue on a straight-line basis over the franchise term. The Company records revenue from royalty agreements in the period in which the royalty is earned.
Promotional products given to customers or potential customers are recognized as a cost of sales. Cash incentives provided to our customers are recognized as a reduction of the related sale price, and, therefore, are a reduction in sales.
Reserve for sales returns
Our return policy allows end users and certain retailers rights to return purchased products. Due to the nature of the screen protection product line, end user returns for screen protection are generally not salvageable and are not included in inventory. We estimate a reserve for sales returns and record the estimated reserve amount as a reduction of sales, and as a sales return reserve liability. When product is returned and is expected to be resold, as is the case with returns of packaged screen protection, keyboards, audio products, cases, and power products, the impact is recorded as a reduction of revenues and cost of sales, and as a reduction in the sales return reserve liability. The sales returns requires management to make estimates regarding return rates for sales. Historical experience, actual claims, and customer return rights are the key factors used in determining the estimated sales return reserve.

21



Results of Operations (in thousands)
The following table sets forth our results of operations expressed as a percentage of net sales for the periods indicated (amounts in thousands):
 
For the Years Ended December 31,
 
2017
 
2016
 
2015
Net sales
$
519,495

 
100.0
 %
 
$
401,857

 
100.0
 %
 
$
269,311

 
100.0
 %
Cost of sales
350,497

 
67.5

 
274,255

 
68.2

 
167,627

 
62.2

Gross profit
168,998

 
32.5

 
127,602

 
31.8

 
101,684

 
37.8

Advertising and marketing
11,101

 
2.1

 
12,440

 
3.1

 
10,436

 
3.9

Selling, general and administrative
105,398

 
20.3

 
96,229

 
23.9

 
56,752

 
21.1

(Gain) loss on disputed mophie purchase price
(6,967
)
 
(1.3
)
 
24,317

 
6.1

 

 

Transaction costs
725

 
0.1

 
2,591

 
0.6

 
179

 
0.1

Impairment of intangible asset
1,959

 
0.4

 

 

 

 

Amortization of long-lived intangibles
12,047

 
2.3

 
13,385

 
3.3

 
8,453

 
3.1

Total operating expenses
124,263

 
23.9

 
148,962

 
37.1

 
75,820

 
28.2

Income (loss) from operations
44,735

 
8.6

 
(21,360
)
 
(5.3
)
 
25,864

 
9.6

Interest expense
(2,081
)
 
(0.4
)
 
(1,851
)
 
(0.5
)
 
(97
)
 

Other income (expense)
698

 
0.1

 
(348
)
 
(0.1
)
 
(69
)
 

Total other expense
(1,383
)
 
(0.3
)
 
(2,199
)
 
(0.5
)
 
(166
)
 
(0.1
)
Income (loss) before provision for income taxes
43,352

 
8.3

 
(23,559
)
 
(5.9
)
 
25,698

 
9.5

Income tax benefit (provision)
(28,252
)
 
(5.4
)
 
7,972

 
2.0

 
(10,111
)
 
(3.8
)
Net income (loss)
$
15,100

 
2.9

 
$
(15,587
)
 
(3.9
)
 
$
15,587

 
5.8

YEAR ENDED DECEMBER 31, 2017, AS COMPARED TO THE YEAR ENDED DECEMBER 31, 2016 (in thousands, except per share data)
Net sales
Net sales for the year ended December 31, 2017 was $519,495 compared to net sales of $401,857 for the year ended December 31, 2016, an increase of $117,638 or 29%. The year-over-year change is due primarily to (1) the increase in sales of our power management products, particularly accessories supporting the wireless charging ecosystem, (2) increased sales of screen protection products in key wireless and retail accounts, particularly in international markets, and (3) the inclusion of 12 months of mophie sales during 2017 versus only 10 months in 2016.
The percentage of net sales related to our key product categories for the years ended December 31, 2017 and 2016, was approximately:
 
2017
 
2016
Screen protection
48
%
 
54
%
Power management
26
%
 
15
%
Power cases
15
%
 
15
%
Audio
5
%
 
6
%
Keyboards
5
%
 
9
%
Other
1
%
 
1
%
The percentage of net sales related to our key distribution channels for the years ended December 31, 2017 and 2016, was approximately:
 
2017
 
2016
Indirect
89
%
 
87
%
Website
8
%
 
9
%
Franchise
3
%
 
4
%

22



The percentage of net sales by geographic region for the years ended December 31, 2017 and 2016, was approximately:
 
2017
 
2016
United States
84
%
 
88
%
Europe
9
%
 
7
%
Other
7
%
 
5
%
Gross profit
Gross profit for the year ended December 31, 2017 was $168,998 or approximately 33% of net sales, compared to $127,602 or approximately 32% of net sales for the year ended December 31, 2016. The increase in gross profit margin was primarily due to improvements in margins of mophie-branded product and a $2,586 charge incurred during 2016 related to the impact of the fair value write-up of mophie inventory that did not recur in 2017. This increase was partially offset by an increase in freight costs and a shift in the product mix whereby 2017 screen protection sales were a smaller percentage of overall sales compared to the prior year (although overall screen protection sales increased by $33,628 or 16%).
Operating expenses
Total operating expenses for the year ended December 31, 2017, was $124,263, compared to operating expenses of $148,962 the year ended December 31, 2016, a decrease of $24,699 or 17%. The decrease in operating expenses was primarily attributable to (1) the $24,317 loss on disputed mophie purchase price in 2016 that did not recur in 2017, (2) a $6,967 gain recorded during the fourth quarter related to the settlement of litigation related to the disputed mophie purchase price, (3) synergies from cost reduction initiatives, (4) lower transaction-related costs, (5) a reduction in advertising and marketing spend, and (6) an overall reduction in amortization expense. These decreases were partially offset by the following increases in operating expense: (1) the inclusion of 12 months of mophie-related expenses for 2017 compared with 10 months in 2016, (2) the $1,959 impairment of an intangible asset in 2017, and (3) an increase in operating expense related to the launch of certain wireless charging accessories.
Income (loss) from operations
We reported income from operations of $44,735 for the year ended December 31, 2017 compared to a loss from operations of ($21,360) for the year ended December 31, 2016, an increase of $66,095. 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 and the $6,967 gain recorded in 2017 related to the settlement of litigation related to the disputed mophie purchase price.
Other expense, net
For the year ended December 31, 2017, total other expense, net was $1,383 compared to total other expense, net of $2,199 for the year ended December 31, 2016, a decrease of $816 or 37%. The decrease in the balance was primarily due to an increase in other income in 2017.
Income taxes
We recognized an income tax expense of $28,252 for the year ended December 31, 2017, compared to income tax benefit of $7,972 for the year ended December 31, 2016. From 2016 to 2017, our effective tax rate increased from 33.8% to 65.2%. During the fourth quarter of 2017, the United States Government passed the Tax Act, which enacted significant changes to the United States’ federal tax code, including a reduction in the federal income tax rate for corporations from 35% to 21%. As a result of the Tax Act, we recorded a one-time charge of $12,353, substantially all of which was non-cash, to income tax expense primarily to reflect (1) the re-measurement of deferred tax assets utilizing the lower federal income tax rate and (2) the tax on mandatory deemed repatriation of foreign earnings.
Net income (loss)
As a result of these factors, we reported net income of $15,100 or $0.53 per share on a fully diluted basis for the year ended December 31, 2017 compared to net loss of $(15,587) or $(0.56) per share on a fully diluted basis for the year ended December 31, 2016.
YEAR ENDED DECEMBER 31, 2016, AS COMPARED TO THE YEAR ENDED DECEMBER 31, 2015 (in thousands, except per share data)
Net sales
Net sales for the year ended December 31, 2016 was $401,857 compared to net sales of $269,311 for the year ended December 31, 2015, an increase of $132,546 or 49%. The increase in revenue from 2015 to 2016 was primarily related to the following factors: (1) ten months of mophie sales totaling $113,749 from the March 3, 2016 acquisition date, (2) expanded product penetration with existing customers, (3)

23



continued success within the screen protection product category, particularly with InvisibleShield Glass, and (4) increased sales in Western Europe. These increases in sales were partially offset by promotional credits incurred during the fourth quarter to drive increased mophie sell-through at retail. We continue to sell into our indirect channel retailers including Apple Inc., Best Buy Co Inc., Wal-Mart Stores Inc., AT&T Inc., Sprint Corp., Verizon Communications Inc., T-Mobile International, Target Corporation, Walgreens Boots Alliance, Inc., and The Carphone Warehouse; to domestic and foreign electronics accessory distributors; through our franchise program and through our websites, www.ZAGG.com and www.mophie.com.
The percentage of net sales related to our key product categories for the years ended December 31, 2016 and 2015, was approximately:
 
2016
 
2015
Screen protection
54
%
 
67
%
Power management
15
%
 
3
%
Power cases
15
%
 
%
Keyboards
9
%
 
19
%
Audio
6
%
 
9
%
Other
1
%
 
2
%
The percentage of net sales related to our key distribution channels for years ended December 31, 2016 and 2015, was approximately:
 
2016
 
2015
Indirect
87
%
 
89
%
Website
9
%
 
5
%
Franchise
4
%
 
6
%
The percentage of net sales by geographic region for the years ended December 31, 2016 and 2015, was approximately: 
 
2016
 
2015
United States
88
%
 
91
%
Europe
7
%
 
8
%
Other
5
%
 
1
%
Gross profit
Gross profit for the year ended December 31, 2016 was $127,602 or approximately 32% of net sales compared to $101,684 or approximately 38% of net sales for the year ended December 31, 2015. The decrease in gross profit percentage was due to the impact of mophie gross profit margins, which were 11% compared to ZAGG-segment gross profit of 40%. The lower margin for mophie was primarily driven by in-channel promotions and excess inventory write-offs in the current year.
Operating expenses
Total operating expenses for the year ended December 31, 2016 was $148,962, an increase of $73,142, or 96%, compared to year ended December 31, 2015, of $75,820. The $73,142 increase was primarily attributable to (1) mophie operating expenses of $43,656 from the March 3, 2016 acquisition date, which included $6,304 in amortization of acquired intangibles and $2,160 in restructuring charges, (2) a loss recorded on the disputed mophie purchase price (includes the final working capital adjustment and the impact of claims against the mophie shareholders for breaches of representations and warranties that directly impacted current assets and current liabilities) in the current period of $24,317, and (3) $2,591 in transaction expenses incurred by the Company as part of the mophie acquisition.
(Loss) income from operations
We reported a loss from operations of ($21,360) for the year ended December 31, 2016, compared to income from operations of $25,864 for the year ended December 31, 2015, a decrease of $47,224 or 183%. The decrease in income from operations was due primarily to (1) the mophie loss from operations of $31,177 and (2) a loss recorded on the disputed mophie purchase price (includes the final working capital adjustment and the impact of claims against the mophie shareholders for breaches of representations and warranties that directly impacted current assets and current liabilities) in the current period of $24,317. Since the date of acquisition, we continue to implement processes and procedures to optimize the mophie supply chain and improve operating results. These decreases were partially offset by improved profit margins from the ZAGG segment.

24



Other expense, net
For the year ended December 31, 2016, total other expense, net was $2,199 compared to $166 for the year ended December 31, 2015, an increase of $2,033 or 1,225%. The increase in other expense, net was due primarily to interest expense incurred under the Credit and Security Agreement.
Income taxes
We recognized an income tax benefit of $7,972 for the year ended December 31, 2016, compared to income tax expense of $10,111 for the year ended December 31, 2015. From 2015 to 2016, our effective tax rate decreased from 39.3% to 33.8%. The change in the effective tax rate for the year ended December 31, 2016, is primarily due to an inability to claim a domestic manufacturing deduction in 2016, the effect of the change in our state rate as a result of the mophie acquisition, and permanent differences related to the acquisition of mophie. Due to the fact that the Company is in a loss position, any unfavorable permanent adjustments will result in a decrease in the effective tax rate.
Net (loss) income
As a result of these factors, we reported a net loss of $(15,587) or $(0.56) per share on a fully diluted basis for the year ended December 31, 2016, compared to net income of $15,587 or $0.54 per share on a fully diluted basis for the year ended December 31, 2015.
Liquidity and Capital Resources (in thousands)
Comparison of the Year Ended December 31, 2017 to 2016
At December 31, 2017, our principal sources of liquidity were cash generated by operations and cash on-hand. Our principal uses of cash have been to fund working capital requirements, make payments on outstanding debt, and purchase tooling for new products.
Cash and cash equivalents on-hand increased to $24,989 on December 31, 2017, from $11,604 on December 31, 2016, an increase of $13,385. The increase in cash is largely the net result of $34,074 in cash provided by operating activities, which was offset by $14,083 used in payment of outstanding debt, $5,766 in purchases of property and equipment, and $1,492 paid for the purchase of treasury stock. Of the $24,989 cash balance on December 31, 2017, cash from foreign entities totaled $14,844, which constitutes 59% of the total cash and cash equivalents balance.
Accounts receivable, net of allowances, increased to $123,220 on December 31, 2017, from $83,835 on December 31, 2016, an increase of $39,385. The increase in accounts receivable is largely due to the year-over-year increase in fourth quarter sales from $114,929 in the fourth quarter of 2016 to $176,924 in the fourth quarter of 2017, an increase of $61,995 or 54%.
Inventories increased to $75,046 on December 31, 2017, from $72,769 on December 31, 2016, an increase of $2,277. The increase was primarily due to the launch of wireless charging accessories during the fourth quarter of 2017. This increase was partially offset by improvements in planning, forecasting, and purchasing processes.
Accounts payable increased to $96,472 on December 31, 2017, from $85,022 on December 31, 2016, an increase of $11,450. The increase is largely driven by the overall increase in sales and business operations compared to the prior year.
At December 31, 2017, working capital was $43,210 compared to $(9,408) as of December 31, 2016. The improvement in working capital is largely due to increased sales and profitability at the Company. Further, it should be noted that the KeyBank Line of Credit is classified as a current liability due to the existence of a lockbox agreement as required by current U.S. GAAP, although the outstanding balance is not due to be repaid until 2021.If the Line of Credit were excluded from current liabilities, the working capital would be $66,685 on December 31, 2017, versus $21,899 on December 31, 2016.
During the third quarter of 2015, the Company’s board of directors approved a $20,000 stock repurchase program with no expiration date. As of December 31, 2017, the Company still has $17,558 remaining under this program.
Comparison of the Year Ended December 31, 2016 to 2015
At December 31, 2016, our principal sources of liquidity were cash generated by operations, cash on-hand, and draws under our credit facilities. Our principal uses of cash have been to fund working capital requirements, acquire mophie, make payments on outstanding debt, and repurchase shares of ZAGG Inc common stock.
Cash and cash equivalents on-hand decreased to $11,604 on December 31, 2016, from $13,002 on December 31, 2015, a decrease of $1,398. The decrease in cash is largely the net result of $32,679 in cash provided by operating activities, $31,307 in net draws on the line of credit, and $20,312 in net proceeds from the term loan; these increases in cash were offset by $74,743 used in the acquisition of mophie, $8,633 in purchases of property and equipment, $1,144 paid in debt issuance costs, and $951 paid for the purchase of treasury stock. Of the $11,604 cash balance on December 31, 2016, cash from foreign entities totaled $4,458, which constitutes 38% of the total cash and cash equivalents

25



balance. Cash and cash equivalents in the ZAGG segment totaled $10,976 compared to $628 in the mophie segment as of December 31, 2016. All cash and cash equivalents were within the ZAGG segment in the prior year.
Accounts receivable, net of allowances, increased to $83,835 on December 31, 2016, from $57,647 on December 31, 2015, an increase of $26,188. The increase is largely due to the acquisition of mophie during the year which accounted for $22,567 of the total accounts receivable balance as of December 31, 2016. In addition, the ZAGG-related business experienced higher sales of $288,108 in 2016 compared to $269,311 in 2015 which resulted in higher accounts receivable balances.
Inventories increased to $72,769 on December 31, 2016, from $45,912 on December 31, 2015, an increase of $26,857. The increase was due to the acquisition of mophie and related inventories, which totaled $39,527 at December 31, 2016. ZAGG inventories decreased to $33,241 on December 31, 2016, from $45,912 on December 31, 2015, a decrease of $12,671. The decrease in ZAGG inventory is due primarily to the continued focus and improvements in the Company’s planning and forecasting processes.
Accounts payable increased to $85,022 on December 31, 2016, from $33,846 on December 31, 2015, an increase of $51,176. The increase is largely driven by the acquisition of mophie which accounted for $44,584 as of December 31, 2016. The remaining increase was due to the increase in sales for the ZAGG segment compared to the prior year.
At December 31, 2016, working capital was $13,642 compared to $82,677 as of December 31, 2015. The decline in working capital is largely due to (1) the KeyBank line of credit being classified as a current liability due to the existence of a lockbox agreement, although the outstanding balance is not due to be repaid until 2021, (2) the current portion of the KeyBank term loan, and (3) the mophie-segment sales and warranty reserve liability which totaled $20,514 compared to ZAGG-segment liability of $7,859 on sales of $113,749 and $288,108, respectively.
Debt and Letters of Credit
On March 3, 2016, the Company entered into a Credit and Security Agreement (“Credit and Security Agreement”) with KeyBank, as the administrative agent, KeyBanc Capital Markets Inc., JP Morgan Chase Bank, N.A and ZB, N.A dba Zions First National Bank.
The Credit and Security Agreement originally provided an $85,000 revolving credit commitment (“Revolver”). Borrowings and repayments under the Revolver may occur from time to time in the Company’s ordinary course of business through the maturity date of March 2, 2021, at which time any amounts outstanding are to be paid in full (60-month term). All borrowings under the Revolver are subject to a borrowing base limit, which is calculated from outstanding accounts receivable and inventory, and reported to the administrative agent monthly. Interest on the Revolver will accrue at the base rate (as defined in the Credit and Security Agreement) plus 0.5% or LIBOR plus 1.5%. The Revolver is subject to an unused line fee calculated as 0.2% multiplied by the average unused amount of the Revolver.
The Credit and Security Agreement also provides a $25,000 term loan commitment (“Term Loan”). Payments on the Term Loan are to be made in consecutive monthly installments commencing on April 1, 2016 and continuing until the Term Loan is paid in full on March 2, 2020 (48-month term). Interest on the Term Loan will accrue at the base rate plus 1.0% or at a rate of LIBOR plus 2.0%.
The Credit and Security Agreement also provides for letters of credit with a fronting fee of 0.125% (paid per annum) for all issued and outstanding letters of credit
The Credit and Security Agreement provides for a lockbox and cash collateral account and that all of the Company’s deposit accounts will be maintained with the administrative agent. The Credit and Security Agreement is collateralized by substantially all of the assets of the Company and its subsidiaries. The Credit and Security Agreement establishes two debt covenants that are measured on a quarterly basis:
Maximum Leverage Ratio: Defined as the ratio of total funded indebtedness to Consolidated EBITDA (as defined in the Credit and Security Agreement), which cannot be more than 3.50 on a trailing four quarter basis.
Minimum Fixed Charge Coverage: Defined as the ratio of Consolidated EBITDA (as defined in the Credit and Security Agreement) minus taxes, capital distributions and unfunded capital expenditures divided by the sum of interest payments, principal payments, and capital lease payments; the minimum allowed under the Credit and Security Agreement is 1.10 on a trailing-four quarter basis.
In addition, on July 17, 2017, ZAGG Inc, KeyBank National Association , Zions First National Bank, and JPMorgan Chase Bank, N.A. (collectively, the “Lenders”), and KeyBank, as the administrative agent for the Lenders, entered into a Third Amendment Agreement (“Amendment”), which amended the original Credit and Security Agreement as follows:
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

26



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 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 of the Lenders. In addition, the Company directed KeyBank in the third quarter of 2017 to establish an irrevocable standby letter of credit (“Letter of Credit”) to support purchases of inventory from a key supplier. The Credit and Security 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 pay interest at an annual rate of 1.625% calculated on the face value amount and paid quarterly, which interest is classified in interest expense on the consolidated statement of operations.
Based on our current operations, we believe that cash generated from operations, cash on hand, and available borrowings under the Credit and Security Agreement will be adequate to meet our expected capital expenditures and working capital needs for the next 12 months and beyond. However, we operate in a rapidly evolving and often unpredictable business environment that may change the timing or amount of expected future cash receipts and expenditures. Accordingly, we may need to raise additional funds through the sale of equity or debt securities or from debt facilities. Additional capital, if needed, may not be available on satisfactory terms, if at all.
Contractual Obligations and Commitments (in thousands)
The following table provides information on our contractual obligations as of December 31, 2017:
 
 
Payments due by period
Contractual Obligations
 
Total
 
Less Than 1 Year
 
1 - 3 years
 
3 - 5 years
 
More than 5 years
Credit and security agreement
 
$
37,538

 
$
14,063

 
$
23,475

 
$

 
$

Operating leases
 
9,311

 
2,107

 
3,133

 
2,960

 
1,111

Total
 
$
46,849

 
$
16,170

 
$
26,608

 
$
2,960

 
$
1,111

(1)Unrecognized uncertain tax benefits of $2,278 are not included in the table above as we are not sure when the amount will be paid.
Off Balance Sheet Arrangements
As of December 31, 2017, there were no off balance sheet arrangements, except our operating lease commitments.
ITEM 7A.
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.
See “Liquidity and Capital Resources” for further discussion of our financing facilities and capital structure. Market risk, calculated as the potential change in fair value of our cash equivalents and line of credit resulting from a hypothetical 1.0% (100 basis point) change in interest rates, was not material at December 31, 2017.
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our consolidated financial statements and notes thereto are set forth beginning on page F-1 of this Annual Report on Form 10-K.

27



ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A.    CONTROLS AND PROCEDURES
1.Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Exchange Act, as of December 31, 2017. Based on this evaluation, our principal executive officer and principal financial officer concluded that as of the end of the period covered by this Report, our disclosure controls and procedures are not effective due to material weaknesses described below in Item 9A.2.
2.Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Exchange Act. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Internal control over financial reporting includes those policies and procedures that:
pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles and our receipts and expenditures are being made only in accordance with authorization of our management and directors; and
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of assets that could have a material effect on our consolidated financial statements.
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2017 based on the framework in "Internal Control-Integrated Framework" (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management identified the following control deficiencies:
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.
Consequently, we failed to design and implement effective control activities related to (1) the tracking and accounting for customer product returns; and (2) accounting for accounts receivable related to sales returns with a significant customer, as of December 31, 2017.
The control deficiencies described above resulted in an immaterial misstatement to net sales, accounts receivable, cost of goods sold, and inventory as of and for the year ended December 31, 2017, which was corrected prior to issuance of the 2017 consolidated financial statements in this report. The control deficiencies described above created a reasonable possibility that a material misstatement to the consolidated financial statements would not be prevented or detected in a timely basis. As a result, management concluded that the deficiencies represent a material weakness and accordingly our internal control over financial reporting was not effective as of December 31, 2017.
Our independent registered public accounting firm, KPMG LLP, has issued an adverse report on the effectiveness of our internal control over financial reporting, which is included at 9A.6 below.
3.Changes in Internal Control Over Financial Reporting
Except for the identification of the material weakness noted above during the fourth quarter ended December 31, 2017, there were no changes in our internal control over financial reporting that occurred during the fourth quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

28



4.Remediation Plan
We will execute the following steps in 2018 to remediate the aforementioned material weakness in our internal control over financial reporting:
Enhance our control environment by establishing appropriate authorities and responsibilities in alignment with the objectives of internal control over financial reporting;
Implement a cross functional risk assessment process to identify and assess changes in the business that could significantly impact internal control over financial reporting;
Design and implement control activities over the customer 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.
5.Inherent Limitations on Effectiveness of Controls 
Internal control over financial reporting has inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting also can be circumvented by collusion or improper management override. Because of such limitations, there is a risk that material misstatements will not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.
6.REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the stockholders and board of directors
ZAGG Inc:
Opinion on Internal Control Over Financial Reporting
We have audited ZAGG Incs and subsidiaries’ (the “Company”) internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, because of the effect of the material weakness, described below, on the achievement of the objectives of the control criteria, the Company has not maintained effective internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated balance sheets of the Company as of December 31, 2017 and 2016, the related consolidated statements of operations, comprehensive income (loss), equity, and cash flows for each of the years in the three-year period ended December 31, 2017, and the related notes (collectively, the “consolidated financial statements”), and our report dated March 14, 2018 expressed an unqualified opinion on those consolidated financial statements.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. A material weakness related to the control environment, risk assessment and control activities related to customer product returns and accounts receivable as of December 31, 2017 has been identified and included in management’s assessment. The material weakness was considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2017 consolidated financial statements, and this report does not affect our report on those consolidated financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting (Item 9A.2). Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

29



Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ KPMG LLP
Salt Lake City, Utah
March 14, 2018


30



ITEM 9B.
OTHER INFORMATION
None.
PART III
Items 10, 11, 12, 13 and 14 in Part III of this report are incorporated herein by reference to our definitive proxy statement for our 2018 Annual Meeting of Stockholders. We intend to file our definitive proxy statement with the SEC not later than 120 days after December 31, 2017, pursuant to Regulation 14A of the Exchange Act.
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
ITEM 11.
EXECUTIVE COMPENSATION
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
PART IV
ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
15(a)(1). Financial Statements.
The following Consolidated Financial Statements, Notes to Consolidated Financial Statements, and Report of Independent Registered Public Accounting Firm are filed as part of this Annual Report:
CONTENTS
Page
 
 
Consolidated Financial Statements:
 
 
 
 
 
 
 
 
 
 
 
 
 

31



15(a)(2). Financial Statement Schedules.
All schedules have been omitted because they are not required, not applicable, not present in amounts sufficient to require submission of the schedule, or the required information is otherwise included.

32



15(a)(3). Exhibits.
Exhibit Number
 
 
Description
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
EX-101.INS
 
XBRL Instance Document
 
 
 
EX-101.SCH
 
XBRL Taxonomy Extension Schema Document
 
 
 
EX-101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase
 
 
 
EX-101.DEF
 
XBRL Taxonomy Extension Definition Linkbase
 
 
 
EX-101.LAB
 
XBRL Taxonomy Extension Labels Linkbase
 
 
 
EX-101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase
*
Management compensatory plan or arrangement required to be filed as an exhibit pursuant to Item 15(b) of this report.

33


ITEM 16.
FORM 10-K SUMMARY
None.
SIGNATURES
Pursuant to the requirements of section 13 or 15 (d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
ZAGG INC
 
 
Dated: March 14, 2018
By:
/s/ CHRIS AHERN
 
 
Chris Ahern
CEO & Director
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Dated: March 14, 2018
By:
/s/ CHRIS AHERN
 
 
Chris Ahern
CEO & Director
(Principal Executive Officer)
 
 
 
Dated: March 14, 2018
By:
/s/ BRADLEY J. HOLIDAY
 
 
Bradley J. Holiday
Chief Financial Officer
(Principal Accounting and Financial Officer)
 
 
 
Dated: March 14, 2018
By:
/s/ CHERYL LARABEE
 
 
Cheryl Larabee
Chairperson
 
 
 
Dated: March 14, 2018
By:
/s/ DAN MAURER
 
 
Dan Maurer
Director
 
 
 
Dated: March 14, 2018
By:
/s/ TODD HEINER
 
 
Todd Heiner
Director
 
 
 
Dated: March 14, 2018
By:
/s/ SCOTT STUBBS
 
 
Scott Stubbs
Director

34



ZAGG INC AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
CONTENTS
Page
 
 
Consolidated Financial Statements:
 
 
 
 
 
 
 
 
 
 
 
 
 

F- 1



Report of Independent Registered Public Accounting Firm
To the stockholders and board of directors
ZAGG Inc:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of ZAGG Inc and subsidiaries (the “Company”) as of December 31, 2017 and 2016, the related consolidated statements of operations, comprehensive income (loss), equity, and cash flows for each of the years in the three‑year period ended December 31, 2017, and the related notes (collectively, the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the years in the three‑year period ended December 31, 2017, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March 14, 2018 expressed an adverse opinion on the effectiveness of the Company’s internal control over financial reporting.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ KPMG LLP
We have served as the Company’s auditor since 2010.
Salt Lake City, Utah
March 14, 2018


F- 2



ZAGG INC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except par value)
 
December 31,
 
2017
 
2016
 
 
 
 
ASSETS
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
24,989

 
$
11,604

Accounts receivable, net of allowances of $734 and $824
123,220

 
83,835

Inventories
75,046

 
72,769

Prepaid expenses and other current assets
4,547

 
3,414

Income tax receivable

 
2,814

Total current assets
227,802

 
174,436

 
 
 
 
Property and equipment, net of accumulated depreciation of $12,540 and $18,371
13,444

 
17,755

Goodwill
12,272

 
12,272

Intangible assets, net of accumulated amortization of $66,639 and $55,298
39,244

 
53,362

Deferred income tax assets
24,403

 
50,363

Other assets
3,426

 
2,541

Total assets
$
320,591

 
$
310,729

 
 
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
Current liabilities
 
 
 
Accounts payable
$
96,472

 
$
85,022

Income tax payable
2,052

 

Accrued liabilities
10,515

 
22,216

Sales returns liability
32,189

 
28,373

Accrued wages and wage related expenses
5,652

 
6,169

Deferred revenue
315

 
273

Line of credit
23,475

 
31,307

Current portion of long-term debt, net of deferred loan costs of $141 and $65
13,922

 
10,484

Total current liabilities
184,592

 
183,844

 
 
 
 
Non-current portion of long-term debt, net of deferred loan costs of $0 and $141

 
9,623

Total liabilities
184,592

 
193,467

 
 
 
 
Stockholders' equity
 
 
 
Common stock, $0.001 par value; 100,000 shares authorized; 34,104 and 33,840 shares issued
34

 
34

Additional paid-in capital
96,145

 
92,782

Accumulated other comprehensive loss
(348
)
 
(2,114
)
Treasury stock, 6,065 and 5,831 common shares at cost
(37,637
)
 
(36,145
)
Retained earnings
77,805

 
62,705

 
 
 
 
Total stockholders' equity
135,999

 
117,262

Total liabilities and stockholders' equity
$
320,591

 
$
310,729

See accompanying notes to consolidated financial statements.

F- 3



ZAGG INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
 
For the Years Ended December 31,
 
2017
 
2016
 
2015
 
 
 
 
 
 
Net sales
$
519,495

 
$
401,857

 
$
269,311

Cost of sales
350,497

 
274,255

 
167,627

Gross profit
168,998

 
127,602

 
101,684

 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
Advertising and marketing
11,101

 
12,440

 
10,436

Selling, general and administrative
105,398

 
96,229

 
56,752

(Gain) loss on disputed mophie purchase price
(6,967
)
 
24,317

 

Transaction costs
725

 
2,591

 
179

Impairment of intangible asset
1,959

 

 

Amortization of long-lived intangibles
12,047

 
13,385

 
8,453

Total operating expenses
124,263

 
148,962

 
75,820

 
 
 
 
 
 
Income (loss) from operations
44,735

 
(21,360
)
 
25,864

 
 
 
 
 
 
Other income (expense):
 
 
 
 
 
Interest expense
(2,081
)
 
(1,851
)
 
(97
)
Other income (expense)
698

 
(348
)
 
(69
)
Total other expense
(1,383
)
 
(2,199
)
 
(166
)
 
 
 
 
 
 
Income (loss) before provision for income taxes
43,352

 
(23,559
)
 
25,698

 
 
 
 
 
 
Income tax (provision) benefit
(28,252
)
 
7,972

 
(10,111
)
 
 
 
 
 
 
Net income (loss)
$
15,100

 
$
(15,587
)
 
$
15,587

 
 
 
 
 
 
Earnings (loss) per share attributable to stockholders:
 
 
 
 
 
Basic earnings (loss) per share
$
0.54

 
$
(0.56
)
 
$
0.54

Diluted earnings (loss) per share
$
0.53

 
$
(0.56
)
 
$
0.54

See accompanying notes to consolidated financial statements.

F- 4



ZAGG INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
 
For the Years Ended December 31,
 
2017
 
2016
 
2015
 
 
 
 
 
 
Net income (loss)
15,100

 
(15,587
)
 
15,587

 
 
 
 
 
 
Other comprehensive gain (loss), net of tax:
 
 
 
 
 
Foreign currency translation gain (loss)
1,766

 
(517
)
 
(702
)
 
 
 
 
 
 
Total other comprehensive income (loss)
1,766

 
(517
)
 
(702
)
 
 
 
 
 
 
Comprehensive income (loss)
$
16,866

 
$
(16,104
)
 
$
14,885

See accompanying notes to consolidated financial statements.

F- 5



ZAGG INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY
(in thousands)
 
Common Stock
 
 
 
 
 
 
 
 
 
 
 
 
 
Shares
 
Amount
 
Additional
Paid-in
Capital
 
Accumulated
Other Comprehensive
Income (Loss)
 
Note
Receivable Collateralized
By Stock
 
Treasury
Stock
 
Retained
Earnings
 
Total
Stockholders'
Equity
Balances, December 31, 2014
32,686

 
$
33

 
$
85,154

 
$
(895
)
 
$
(348
)
 
$
(19,576
)
 
$
62,705

 
$
127,073

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income

 

 

 

 

 

 
15,587

 
15,587

Other comprehensive loss

 

 

 
(702
)
 

 

 

 
(702
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Purchase of 2,030 shares of treasury stock

 

 

 

 

 
(14,930
)
 

 
(14,930
)
Foreclosure of 80 shares of stock collateralizing note receivable

 

 

 

 
348

 
(688
)
 

 
(340
)
Option exercises
118

 

 
168

 

 

 

 

 
168

Warrant exercises
45

 

 
38

 

 

 

 

 
38

Restricted stock release
349

 

 

 

 

 

 

 

Consideration for acquisition of patent
21

 

 
198

 

 

 

 

 
198

Stock-based compensation expense

 

 
3,893

 

 

 

 

 
3,893

Payment of withholding taxes on restricted stock units

 

 
(724
)
 

 

 

 

 
(724
)
Excess tax benefit (shortfall) related to share-based payments

 

 
256

 

 

 

 

 
256

Balances, December 31, 2015
33,219

 
$
33

 
$
88,983

 
$
(1,597
)
 
$

 
$
(35,194
)
 
$
78,292

 
$
130,517

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net loss

 

 

 

 

 

 
(15,587
)
 
(15,587
)
Other comprehensive loss

 

 

 
(517
)
 

 

 

 
(517
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Purchase of 152 shares of treasury stock

 

 

 

 

 
(951
)
 

 
(951
)
Option exercises
21

 

 

 

 

 

 

 

Warrant exercises
7

 

 
54

 

 

 

 

 
54

Restricted stock release
589

 
1

 

 

 

 

 

 
1

Employee stock purchase plan release
4

 

 

 

 

 

 

 

Stock-based compensation expense

 

 
3,830

 

 

 

 

 
3,830

Payment of withholding taxes on restricted stock units

 

 
(630
)
 

 

 

 

 
(630
)
Excess tax benefit (shortfall) related to share-based payments

 

 
545

 

 

 

 

 
545

Balances, December 31, 2016
33,840

 
$
34

 
$
92,782

 
$