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Section 1: 10-Q (10-Q)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
____________________

FORM 10-Q
(Mark one)
þ Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended March 31, 2018, or
¨ Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from ______________ to _____________.
001-34528
(Commission
File Number)
ZAGG INC
(Exact name of registrant as specified in its charter)
Delaware
20-2559624
(State or other jurisdiction of incorporation)
(I.R.S. Employer
Identification No.)
910 West Legacy Center Way, Suite 500 Midvale, Utah 84047
(Address of principal executive offices, including zip code)
(801) 263-0699
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
¨ Large Accelerated Filer
þ Accelerated Filer
¨ Non-accelerated Filer (do not check if a smaller reporting company)
¨ Smaller Reporting Company
¨ Emerging Growth Company
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-25 of the Exchange Act). Yes ¨ No þ
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 28,340,783 common shares as of May 7, 2018.
 


ZAGG INC AND SUBSIDIARIES
FORM 10-Q
TABLE OF CONTENTS


 
CONTENTS
PAGE
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 




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


ZAGG INC AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except par value)
(Unaudited)

 
 
March 31, 2018
 
December 31, 2017
 
 
 
 
 
ASSETS
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
$
17,745

 
$
24,989

 
Accounts receivable, net of allowances of $474 and $734
73,894

 
123,220

 
Inventories
78,891

 
75,046

 
Prepaid expenses and other current assets
4,529

 
4,547

Total current assets
175,059

 
227,802

 
 
 
 
 
Property and equipment, net of accumulated depreciation of $12,979 and $12,540
12,794

 
13,444

Goodwill
12,272

 
12,272

Intangible assets, net of accumulated amortization of $69,440 and $66,639
36,443

 
39,244

Deferred income tax assets
24,084

 
24,403

Other assets
3,803

 
3,426

Total assets
$
264,455

 
$
320,591

 
 
 
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
Current liabilities:
 
 
 
 
Accounts payable
$
54,798

 
$
96,472

 
Income tax payable
2,291

 
2,052

 
Accrued liabilities
9,214

 
10,515

 
Sales returns liability
30,913

 
32,189

 
Accrued wages and wage related expenses
7,775

 
5,652

 
Deferred revenue

 
315

 
Line of credit

 
23,475

 
Current portion of long-term debt, net of deferred loan costs of $141

 
13,922

Total current liabilities
104,991

 
184,592

 
 
 
 
 
Line of credit
22,038

 

Total liabilities
127,029

 
184,592

 
 
 
 
 
Stockholders' equity:
 
 
 
 
Common stock, $0.001 par value; 100,000 shares authorized; 34,416 and 34,104 shares issued
34

 
34

 
Additional paid-in capital
94,134

 
96,145

 
Accumulated other comprehensive loss
(59
)
 
(348
)
 
Treasury stock, 6,065 and 6,065 common shares at cost
(37,637
)
 
(37,637
)
 
Retained earnings
80,954

 
77,805

 
 
 
 
 
Total stockholders' equity
137,426

 
135,999

Total liabilities and stockholders' equity
$
264,455

 
$
320,591

See accompanying notes to condensed consolidated financial statements.

1

ZAGG INC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(Unaudited)

    
 
 
Three Months Ended
 
 
March 31, 2018
 
March 31, 2017
 
 
 
 
 
Net sales
$
112,066

 
$
92,946

Cost of sales
74,474

 
64,340

Gross profit
37,592

 
28,606

 
 
 
 
 
Operating expenses:
 
 
 
 
Advertising and marketing
2,594

 
3,006

 
Selling, general and administrative
24,307

 
27,054

 
Transaction costs

 
215

 
Impairment of intangible asset

 
1,959

 
Amortization of intangible assets
2,772

 
3,021

Total operating expenses
29,673

 
35,255

 
 
 
 
 
Income (loss) from operations
7,919

 
(6,649
)
 
 
 
 
 
Other income (expense):
 
 
 
 
Interest expense
(500
)
 
(490
)
 
Other income (expense)
495

 
(20
)
Total other expense
(5
)
 
(510
)
 
 
 
 
 
Income (loss) before provision for income taxes
7,914

 
(7,159
)
 
 
 
 
 
Income tax (provision) benefit
(885
)
 
1,021

 
 
 
 
 
Net income (loss)
$
7,029

 
$
(6,138
)
 
 
 
 
 
Earnings (loss) per share attributable to stockholders:
 
 
 
 
Basic earnings (loss) per share
$
0.25

 
$
(0.22
)
 
Diluted earnings (loss) per share
$
0.24

 
$
(0.22
)
See accompanying notes to condensed consolidated financial statements.

2

ZAGG INC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
(Unaudited)


 
 
Three Months Ended
 
 
March 31, 2018
 
March 31, 2017
 
 
 
 
 
Net income (loss)
$
7,029

 
$
(6,138
)
 
 
 
 
 
Other comprehensive gain, net of tax:
 
 
 
 
Foreign currency translation gain
289

 
288

 
 
 
 
 
Total other comprehensive income
289

 
288

 
 
 
 
 
Total comprehensive income (loss)
$
7,318

 
$
(5,850
)
See accompanying notes to condensed consolidated financial statements.

3

ZAGG INC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)


 
 
 
 
Three Months Ended
 
 
 
 
March 31, 2018
 
March 31, 2017
 
 
 
 
 
 
 
Cash flows from operating activities:
 
 
 
 
Net income (loss)
$
7,029

 
$
(6,138
)
 
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities
 
 
 
 
 
Stock-based compensation
601

 
670

 
 
Depreciation and amortization
5,030

 
5,781

 
 
Deferred income taxes
322

 
(238
)
 
 
Loss on disposal of property and equipment
10

 

 
 
Amortization of deferred loan costs
71

 
60

 
 
Impairment of intangible asset

 
1,959

 
 
Changes in operating assets and liabilities:
 
 
 
 
 
 
Accounts receivable, net
50,036

 
23,732

 
 
 
Inventories
(3,367
)
 
(2,828
)
 
 
 
Prepaid expenses and other current assets
1,279

 
153

 
 
 
Income tax payable
200

 
(858
)
 
 
 
Other assets
(385
)
 
1,022

 
 
 
Accounts payable
(41,394
)
 
(33,279
)
 
 
 
Accrued liabilities
(1,805
)
 
1,318

 
 
 
Sales returns liability
(6,555
)
 
(2,710
)
 
 
 
Accrued wages and wage related expenses
(497
)
 
(300
)
 
 
 
Deferred revenue

 
(47
)
 
 
 
Other
(847
)
 

Net cash provided by (used in) operating activities
9,728

 
(11,703
)
 
 
 
 
 
 
 
Cash flows from investing activities:
 
 
 
 
Purchase of property and equipment
(1,933
)
 
(1,820
)
 
Proceeds from disposal of equipment
26

 

Net cash used in investing activities
(1,907
)
 
(1,820
)
 
 
 
 
 
 
 
Cash flows from financing activities:
 
 
 
 
Proceeds from revolving credit facility
138,899

 
122,557

 
Payments on revolving credit facility
(152,711
)
 
(113,233
)
 
Payments on term loan facility
(1,563
)
 
(1,563
)
 
Purchase of treasury stock

 
(1,492
)
 
Payment of withholdings on restricted stock units

 
(240
)
Net cash (used in) provided by financing activities
(15,375
)
 
6,029

 
 
 
 
 
 
 
Effect of foreign currency exchange rates on cash equivalents
310

 
193

 
 
 
 
 
 
 
Net decrease in cash and cash equivalents
(7,244
)
 
(7,301
)
 
 
 
 
 
 
 
Cash and cash equivalents at beginning of the period
24,989

 
11,604

Cash and cash equivalents at end of the period
$
17,745

 
$
4,303

See accompanying notes to condensed consolidated financial statements.

4

ZAGG INC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(in thousands)
(Unaudited)


 
 
Three Months Ended
 
 
March 31, 2018
 
March 31, 2017
 
 
 
 
 
Supplemental disclosure of cash flow information:
 
 
 
 
Cash paid during the period for interest
$
478

 
$
417

 
Cash paid during the period for taxes, net
$
324

 
$
76

 
 
 
 
 
Supplemental schedule of non-cash investing and financing activities:
 
 
 
 
Purchase of fixed assets financed through accounts payable
$
178

 
$
676

 
Withholdings tax on restricted stock units recorded in accrued wages and wage related expenses
$
2,610

 
$

See accompanying notes to condensed consolidated financial statements.

5

ZAGG INC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars, units, & shares in thousands, except per share data)
(Unaudited)



(1)
NATURE OF OPERATIONS AND BASIS OF PRESENTATION
ZAGG Inc and its subsidiaries (“we,” “us,” “our,” “ZAGG,” or the “Company”) are innovation leaders in mobile tech accessories for smartphones and tablets. For over 10 years, ZAGG has developed creative product solutions that enhance and protect mobile devices for consumers around the world. The Company has an award-winning product portfolio that includes screen protection, power cases, power management, wireless charging, personal audio, mobile keyboards, and cases, sold under the ZAGG®, InvisibleShield®, mophie®, and IFROGZ® brands.
The accompanying unaudited condensed consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been condensed or omitted pursuant to such rules and regulations. These condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments) that, in the opinion of management, are necessary to present fairly the financial position, the results of operations, and cash flows of the Company for the periods presented. The Company suggests that these condensed consolidated financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s 2017 Annual Report on Form 10-K. Operating results for the interim periods are not necessarily indicative of the results that may be expected for the full year.
The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Significant Accounting Policies
The Company’s significant accounting policies are described in Note 1 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2017. Except for the changes below, the Company has consistently applied the accounting policies to all periods presented in these consolidated financial statements.
Adoption of ASC Topic 606, "Revenue from Contracts with Customers"
The Company adopted ASC Topic 606, "Revenue from Contracts with Customers" ("Topic 606") with a date of initial application of January 1, 2018. As a result of this adoption, the Company has changed its accounting policy for revenue recognition as detailed below.
The Company applied Topic 606 on January 1, 2018, using the modified retrospective approach, with the cumulative effect of adopting the new standard being recognized in retained earnings at January 1, 2018. Therefore, the prior period comparative information has not been adjusted and continues to be reported under Topic 605. The adoption of Topic 606 resulted in an increase in accounts receivable of $115; an increase in prepaid expenses and other current assets of $1,255 for the recognition of the right of return assets; an increase in accrued liabilities of $314; an increase in sales return liability of $5,250 for the recognition of the sales return liability on a gross basis and for the change in estimating refund liabilities under Topic 606; a decrease in deferred revenue of $314; and a decrease of $3,880 in retained earnings as a cumulative effect of adoption. The largest driver of changes for the adoption of Topic 606 was the change in estimate for price concessions offered to end customers. Under Topic 605, price concessions to end customers were recognized when such incentives were explicitly offered to the end customer, whereas under Topic 606 such incentives are estimated and recorded at the time of the sale of products to the Company’s customers.

6



The accounts that changed under Topic 606 for the condensed consolidated balance sheet, and the condensed income statement as of and for the three months ended March 31, 2018 have been outlined as follows:
Condensed Consolidated Balance Sheet changes
As Reported
 
Adjustments
 
Balances without adoption of Topic 606
 
 
 
 
 
 
Accounts receivable, net of allowances
$
73,894

 
$
(145
)
 
$
73,749

Prepaid expenses and other current assets
4,529

 
(719
)
 
3,810

Accrued liabilities
9,214

 
(178
)
 
9,036

Sales returns liability
30,913

 
(2,314
)
 
28,599

Deferred revenue

 
178

 
178

Retained earnings
80,954

 
1,450

 
82,404

Condensed Consolidated Statements of Operations changes
As Reported
 
Adjustments
 
Balances without adoption of Topic 606
 
 
 
 
 
 
Net sales
$
112,066

 
$
1,390

 
$
113,456

Cost of sales
74,474

 
(60
)
 
74,414

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

7



Contract balances
The following table provides information about receivables, right of return assets, contract liabilities, and refund liabilities from contracts with customers for the three months ended March 31, 2018:
 
March 31, 2018
 
 
Receivables, which comprises the balance in accounts receivable, net of allowances
$
73,894

Right of return assets, which are included in prepaid expenses and other current assets
$
719

Contract liabilities, which are included in accrued liabilities
$
178

Refund liabilities, which are included in sales return liability
$
26,978

Warranty liabilities, which are included in sales return liability
$
3,935

The current balance of the right of return assets is the expected amount of inventory to be returned that is expected to be resold. The current balance of contract liabilities primarily relates to the advance consideration received from customers for products for which transfer of control has not yet occurred, and therefore recognition of revenue is deferred until the transfer of control. The current balance refund liabilities is the expected amount of sales returns, discounts and other credits from sales that have occurred.
Practical expedients and policy elections
The Company applies the following practical expedients in its application of Topic 606:
The Company does not adjust the transaction price for significant financing components for periods less than one year.
The Company recognizes the incremental costs of obtaining contracts as an expense when incurred if the amortization period of the assets that the Company otherwise would have recognized is one year or less. These costs are included in selling, general, and administrative expenses.
The Company recognizes the cost for shipping and handling as a fulfillment activity after control over products have transferred to the customer. 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. Shipping and handling costs are included in cost of sales.
The Company does not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts for which we recognize revenue at the amount to which we have the right to invoice for services performed.
Disaggregation of revenue from contracts with customers
In the following tables, revenue from contracts with customers are disaggregated by key product lines, key distribution channels, and key geographic regions. These are disclosed below.
The percentage of net sales related to our key product lines for the three months ended March 31, 2018 and 2017, was approximately:
 
Three Months Ended
 
March 31, 2018
 
March 31, 2017
 
 
 
 
Screen Protection
50
%
 
46
%
Power Management
33
%
 
17
%
Power Cases
6
%
 
24
%
Audio
5
%
 
6
%
Keyboards
5
%
 
6
%
Other
1
%
 
1
%
The percentage of net sales related to our key distribution channels for the three months ended March 31, 2018 and 2017, was approximately:

8



 
Three Months Ended
 
March 31, 2018
 
March 31, 2017
 
 
 
 
Indirect channel
88
%
 
85
%
Website
8
%
 
11
%
Franchisees
4
%
 
4
%
The percentage of net sales related to our key geographic regions for the three months ended March 31, 2018 and 2017, was approximately:
 
Three Months Ended
 
March 31, 2018
 
March 31, 2017
 
 
 
 
United States
82
%
 
84
%
Europe
9
%
 
10
%
Other
9
%
 
6
%
Recent Accounting Pronouncements
In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842),” which requires lessees to recognize most leases, including operating leases, on-balance sheet via a right of use asset and lease liability. Lessees are allowed to account for short-term leases (i.e., leases with a term of 12 months or less) off-balance sheet, consistent with current operating lease accounting. A number of other significant changes to lease accounting have been effected through the issuance of this standard. The requirements of the new standard for leases shall be recognized and measured at the beginning of the earliest comparative period presented. When adopted, the Company will be required to adjust equity at the beginning of the earliest comparative period presented, and the other comparative amounts disclosed for each prior period presented in the financial statements, as if the requirements of the new standard had always been applied. The new standard also contains practical expedients which the Company may elect to follow. The new standard is effective for public business entities for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is currently evaluating the impact this ASU will have on its consolidated financial statements, including whether to elect the practical expedients outlined in the new standard.
(2)
INVENTORIES
At March 31, 2018 and December 31, 2017, inventories consisted of the following:
 
March 31, 2018
 
December 31, 2017
 
 
 
 
Finished goods
$
78,693

 
$
74,734

Raw materials
198

 
312

Total inventories
$
78,891

 
$
75,046

Included in prepaid expenses and other current assets were inventory deposits with third-party manufacturers at March 31, 2018 and December 31, 2017, of $1,783 and $1,906, respectively.

9



(3)
INTANGIBLE ASSETS
There were no additions to and no impairments of long-lived intangible assets for the three months ended March 31, 2018. Additionally, there were no additions to long-lived intangible assets for the three months ended March 31, 2017. The following table summarizes the impairments to gross long-lived intangible assets for the three months ended March 31, 2017:
Gross balance at December 31, 2016
$
108,659

Impairment loss on patent
(2,777
)
Gross balance at March 31, 2017
$
105,882

On April 11, 2017, the Company received a final court order stating that the claims of one of its patents were either not patentable or canceled. Accordingly, management determined that the patent’s carrying value was not recoverable through future cash flows and was impaired as of March 31, 2017. Consequently, for the three months ended March 31, 2017, the Company recorded an impairment loss consisting of a reduction of gross carrying amount of $2,777, accumulated amortization of $818, and net carrying value of $1,959 to reduce the net carrying value of the canceled patent to $0.
Long-lived intangible assets, net of accumulated amortization as of March 31, 2018 and December 31, 2017, were as follows:
 
March 31, 2018
 
December 31, 2017
 
 
 
 
Customer relationships
$
8,090

 
$
9,259

Trade names
17,055

 
17,854

Patents and technology
10,239

 
10,981

Non-compete agreements
1,048

 
1,137

Other
11

 
13

Total amortizable intangible assets
$
36,443

 
$
39,244

The total weighted average useful lives of amortizable long-lived intangible assets as of March 31, 2018 and December 31, 2017, was 8.1 years.
(4)
INCOME TAXES
For interim periods, the tax provision is determined utilizing an estimate of the Company’s annual effective tax rate adjusted for discrete items, if any. The Company’s effective tax rate was 11% and 14% for the three months ended March 31, 2018 and 2017, respectively. The decrease in the effective tax rate was due to several factors including but not limited to a change in the federal statutory rate from 35% to 21%, a change to book income in the first quarter of 2018 compared to a book loss in the first quarter of 2017, and an increase to income in foreign jurisdictions. The Company’s effective tax rate will generally differ from the U.S. Federal statutory rate of 21%, due to state taxes, permanent items, the Company’s global tax strategy, and the inclusion of global intangible low taxed income and the corresponding foreign tax credit.

10



(5)
DEBT AND LINE OF CREDIT
Long-term debt, net as of March 31, 2018 and December 31, 2017, was as follows:
 
March 31, 2018
 
December 31, 2017
 
 
 
 
Line of credit
$
22,038

 
$
23,475

Long-term debt, net of deferred loan costs of $141

 
13,922

Total debt outstanding
22,038

 
37,397

Current portion of line of credit and long-term debt, net of deferred loan costs of $141

 
37,397

Total long-term debt outstanding
$
22,038

 
$

On April 12, 2018, the Company entered into an Amended and Restated Credit and Security Agreement (the “New Credit Agreement”) with KeyBank National Association, as Administrative Agent, Swing Line Lender and Issuing Lender, KeyBanc Capital Markets Inc., as Sole Lead Arranger and Sole Book Runner, and other members of the lender group.
The New Credit Agreement consists of an $85,000 secured revolving credit facility (the “Revolver”), which is not subject to borrowing base limitations. Proceeds from the Revolver were used to fully retire the term loan (with the associated $125 of remaining deferred loan costs to be expensed as of the New Credit Agreement effective date) and thus the Revolver is the only credit instrument effective April 12, 2018. In addition, at the Company’s option, up to $40,000 of the Revolver may be made available for the issuance of letters of credit.
The Revolver initially bears interest at an annual rate, at the Company’s option, of (i) the Base Rate (as defined in the Credit Agreement) plus a margin of 0.25% to 1.375% based on the prior quarter-end Leverage Ratio or (ii) the Eurodollar Rate (as defined in the Credit Agreement) plus a margin of 1.25% to 2.375% based on the prior quarter-end Leverage Ratio. The Revolver matures April 11, 2023, subject to early termination in the event of default.
In addition, the Company is required to pay a monthly Applicable Commitment Fee Rate (as defined in the New Credit Agreement) that can fluctuate between 0.175% and 0.275% based on the Leverage Ratio (as defined in the New Credit Agreement). The commitment fee is calculated monthly using the Maximum Revolving Amount (as defined in the New Credit Agreement) at the end of each calendar month, minus the Revolving Credit Exposure (exclusive of the Swing Line Exposure) (each as defined in the New Credit Agreement) at the end of such day, multiplied by the Applicable Commitment Fee Rate in effect on such day divided by three hundred sixty (360). The monthly commitment fee is payable quarterly in arrears, commencing on July 1, 2018 and continuing on each regularly scheduled payment date thereafter.
The New Credit Agreement contains customary representations and warranties and restrictive covenants. The New Credit Agreement also contains affirmative and negative covenants requiring, among other things, the Company to meet certain financial ratio tests and to provide certain information to the lenders. The New Credit Agreement also includes financial maintenance covenants that require compliance with a Leverage Ratio and a Fixed Charge Coverage Ratio (each as defined in the New Credit Agreement), tested at the end of each fiscal quarter commencing with the fiscal quarter ending June 30, 2018.
The New Credit Agreement also contains customary events of default. If an event of default occurs, the lenders under the Credit Agreement would be entitled to take various actions, including the acceleration of amounts due thereunder and all other actions permitted to be taken by a secured creditor.
As part of the New Credit Agreement, the lockbox arrangement requirement in the prior agreement was terminated and thus the Company now has full dominion of cash upon receipt from customers. Because of the lockbox arrangement in the prior agreement, amounts outstanding under the Revolver were classified as a current liability because cash receipts were required to be automatically swept against the Revolver. Because the current Credit Agreement does not have a lockbox arrangement and the Revolver does not mature until 2023, the Revolver is classified as a non-current liability.

11



(6)
STOCK-BASED COMPENSATION
During the three months ended March 31, 2018 and 2017 the Company granted 81 and 311 restricted stock units, respectively. The restricted stock units granted during the three months ended March 31, 2018 and 2017 were estimated to have a weighted-average fair value per share of $14.50 and $6.66, respectively. The fair value of the restricted stock units granted is based on the closing share price of the Company’s common stock on the date of grant. The restricted stock units vest annually on a straight-line basis over a nine-month (annual board of directors’ grant) to three-year vesting term, depending on the terms of the individual grant.
As part of the 311 restricted stock units granted during the three months ended March 31, 2017, the Company granted 264 restricted stock units, to certain executives and employees of the Company where vesting is linked to specific performance criterion. These performance-based restricted stock units only vest upon the (1) Company’s achievement of specified thresholds of net sales, Adjusted EBITDA, or specific goals for the individual executive, and (2) continued employment through the applicable vesting date.
The estimated fair value of the restricted stock units is recognized on a straight-line basis over the requisite service period of the award, which is generally the vesting term of the award. During the three months ended March 31, 2018 and 2017, the Company recorded stock-based compensation expense related to restricted stock units of $601, and $670, respectively, which is included as a component of selling, general, and administrative expense on the condensed consolidated statement of operations.
During the three months ended March 31, 2018 and 2017, certain ZAGG employees elected to receive a net amount of shares upon the vesting of restricted stock unit grants in exchange for the Company paying up to the maximum statutory withholding amount of the employees’ tax liabilities for the fair value of the award on the vesting date. This resulted in the Company recording $2,610 in accrued wages and wage related expenses and paying $240 reflected as a reduction of additional paid-in capital, respectively.
(7)
EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per common share excludes dilution and is computed by dividing net earnings (loss) by the weighted average number of shares of common stock outstanding during the period. Diluted earnings (loss) per common share reflects the potential dilution that could occur if stock options and restricted stock, or other common stock equivalents were exercised or converted into common stock. The dilutive effect of stock options or other common stock equivalents is calculated using the treasury stock method.
The following is a reconciliation of the numerator and denominator used to calculate basic earnings (loss) per share and diluted earnings (loss) per share for the three months ended March 31, 2018 and 2017:
 
Three Months Ended
 
March 31, 2018
 
March 31, 2017
 
 
 
 
Net income (loss)
$
7,029

 
$
(6,138
)
Weighted average shares outstanding:
 
 
 
  Basic
28,209

 
28,059

  Dilutive effect of restricted stock units and warrants
484

 

  Diluted
28,693

 
28,059

Earnings (loss) per share:
 
 
 
  Basic
$
0.25

 
$
(0.22
)
  Diluted
$
0.24

 
$
(0.22
)
For the three months ended March 31, 2018, 114 restricted stock units used to purchase shares of common stock were not considered in calculating diluted earnings per share as their effect would have been anti-dilutive. For the three months ended March 31, 2017, 860 restricted stock units were not considered in calculating diluted loss per share because the company was in a loss position and, therefore, the effect would have been anti-dilutive.

12



(8)
TREASURY STOCK
During the fourth quarter of 2015, the Company’s board of directors authorized the repurchase of up to $20,000 of the Company’s outstanding common stock with no expiration date. As of March 31, 2018 and December 31, 2017, a total of $17,558 remained authorized under the stock repurchase program.
For the three months ended March 31, 2018, no share repurchases occurred.
For the three months ended March 31, 2017, the Company repurchased 234 shares of the Company's common stock. Cash consideration paid for the noted share repurchases was $1,492, which included commissions paid to brokers of $9. For the three months ended March 31, 2017, the weighted average price per share was $6.35. The consideration paid has been recorded within stockholders’ equity in the condensed consolidated balance sheet.

13



(9)
COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company leases office and warehouse space, office equipment, and a retail store location under operating leases that expire through 2025. Future minimum rental payments required under the operating leases at March 31, 2018, were as follows:
Remaining 2018
$
2,158

2019
1,610

2020
1,541

2021
1,467

2022
1,498

Thereafter
1,119

Total operating lease commitments
$
9,393

For the three months ended March 31, 2018 and 2017, rent expense was $728 and $685, respectively. Rent expense was recognized on a basis which approximates straight-line over the lease term and was recorded as a component of selling, general and administrative expense on the condensed consolidated statement of operations.
Commercial Litigation
ZAGG Inc and mophie, Inc. v. Anker Technology Co. Ltd. and Fantasia Trading LLC, United States District Court for the Central District of California, Case No. 8:17-CV-2193-DOC-DFM (the “Anker Lawsuit”).  On December 15, 2017, ZAGG and mophie filed the Anker Lawsuit alleging that Anker Technology Co. Ltd. (“Anker”) and Fantasia Trading LLC (“Fantasia”) infringe U.S. Patent Nos. 8,971,039, 9,077,013, 9,088,028, 9,088,029, 9,172,070, and 9,406,913 in connection with protective battery cases for smartphones.  The Anker products accused of infringement include Anker’s Ultra Slim Extended Battery Case for iPhone 6 / 6s (4.7 inch) with 2850mAh capacity; Premium Extended Battery Case for iPhone 6 / 6s (4.7 inch) with 3100mAh Capacity; PowerCore Case for iPhone 7 (4.7 inch), 80% Extra Battery; and PowerCore Case for iPhone 7 (4.7 inch), 95% Extra Battery.  The complaint filed by ZAGG and mophie seeks monetary damages and an injunction against Anker.
On March 12, 2018, Anker and Fantasia filed answers and counterclaims in the lawsuit. In their answers, Anker and Fantasia denied infringement of any valid claim and asserted counterclaims for non-infringement and invalidity of the patents at issue. The Company disputes these contentions and will defend the claims and otherwise respond to the allegations. This matter is not expected to have a material adverse effect on the Company’s financial position, results of operations, or liquidity.
SEC Investigation
In the fourth quarter of 2012, the Company received requests to provide documentation and information to the staff of the SEC in connection with an investigation being conducted by the SEC's Salt Lake City office. The Company believes the investigation includes a review of the facts and circumstances surrounding former Chief Executive Officer Robert Pedersen's pledge and subsequent sale of Company shares and the fact that such pledges and sales were not disclosed in the Company's 2011 10-K filed on March 15, 2012, or 2012 Proxy filed on April 27, 2012. The Company responded to these requests and is cooperating with the staff although there has been no resolution to date.
Other Litigation
The Company is not a party to any other material litigation or claims at this time. While the Company currently believes that the amount of any ultimate probable loss for known matters would not be material to the Company’s financial condition, the outcome of these actions is inherently difficult to predict. In the event of an adverse outcome, the ultimate potential loss could have a material adverse effect on the Company’s financial condition or results of operations in a particular period.
The Company establishes reserves when a particular contingency is probable and estimable. The Company has not accrued for any loss as of March 31, 2018, in the condensed consolidated financial statements as the Company does not consider a loss to be probable or estimable. The Company faces contingencies that are reasonably possible to occur; however, the reasonably possible exposure to losses cannot currently be estimated.

14



(10)
CONCENTRATIONS
Concentration of credit risk
Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash and accounts receivable. The Company places its cash with high credit quality financial institutions. The Company maintains its cash in bank deposit accounts, which, at times, exceed federally insured limits. The Company has not experienced any losses in cash accounts for the three months ended March 31, 2018 and 2017.
At March 31, 2018 and December 31, 2017, two separate customers exceeded 10% of the balance of accounts receivable, as follows:
 
March 31, 2018
 
December 31, 2017
 
 
 
 
Superior Communications, Inc. (“Superior”)
42
%
 
31
%
Best Buy Co., Inc. (“Best Buy”)
14
%
 
18
%
No other customer account balances were more than 10% of accounts receivable at March 31, 2018 or December 31, 2017. If one or more of the Company’s significant customers were to become insolvent or were otherwise unable to pay for the products provided, it would have a material adverse effect on the Company’s financial condition and results of operations.
Concentration of suppliers
We do not directly manufacture any of our products, rather, we employ various third party manufacturing partners in the United States and Asia to perform these services on our behalf. The services employed by these third parties include the selection of sub-suppliers that provide raw materials and other components used in the manufacturing process. We have endeavored to use common components and readily available raw materials in the design of our products that can be sourced from multiple sub-suppliers. However, raw film used in our InvisibleShield film and InvisibleShield On-Demand (“ISOD”) products has been produced by a single supplier for many years. Our film supplier has contractually agreed to not sell the raw materials to any of our competitors.
Below is a high-level summary by product category of the manufacturing sources used by the Company:
Screen Protection – Our screen product line is comprised of sales of InvisibleShield glass products, InvisibleShield film products, and ISOD film blanks. InvisibleShield glass products are sourced from factories in Asia with protective glass expertise, each of which uses a number of sub-suppliers for raw materials and other components. Our InvisibleShield film and ISOD products are sourced through our third-party logistics partner, who purchases the raw film inventory from a single supplier (as discussed above).
Battery Cases and Power Management – Our battery case and power management product lines consists of power products that are designed to provide on-the-go power and wireless charging for tablets, smartphones, laptops, cameras, and virtually all other electronic mobile devices. Our power products are sourced from factories in Asia with battery expertise, each of which uses a number of sub-suppliers for raw materials and other components.
Keyboards – Our keyboard product line consists of (1) device specific keyboards designed to fit individual tablets produced by original equipment manufacturers and (2) keyboards that are designed to be device agnostic and can be used on virtually any mobile device. Our keyboard products are sourced from factories in Asia with keyboard expertise, each of which uses a number of sub-suppliers for raw materials and other components.
Audio – Our audio product line consists of earbuds and headphones that are designed to be compatible with virtually all electronic mobile devices. Our audio products are sourced from factories in Asia with audio expertise, each of which uses a number of sub-suppliers for raw materials and other components.
Our product and operations teams work closely with suppliers from initial product development and throughout the manufacturing process to ensure that (1) the supplier understands, and will build according to, the product specifications, (2) appropriate quality is maintained for the finished goods and for all sub-components, and (3) the supplier can meet our supply needs.

15



Concentration of net sales
For the three months ended March 31, 2018, Superior accounted for over 10% of net sales, and for the three months ended March 31, 2017, Superior and Best Buy accounted for over 10% of net sales, as follows:
 
Three Months Ended
 
March 31, 2018
 
March 31, 2017
 
 
 
 
Superior
29
%
 
27
%
Best Buy
8
%
 
12
%
For the three months ended March 31, 2018 and 2017, no other customers accounted for greater than 10% of net sales.
Although we have contracts in place governing our relationships with our retail distribution customers (“retailers”), the contracts are not long-term and all our retailers generally purchase from us on a purchase order basis. As a result, these retailers generally may, with little or no notice or penalty, cease ordering and selling our products, or materially reduce their orders. If any of these retailers cease selling our products, slow their rate of purchase of our products, or decrease the number of products they purchase, our results of operations could be adversely affected.
Concentration of region
The percentage of net sales by geographic region for the three months ended March 31, 2018 and 2017, was approximately:
 
Three Months Ended
 
March 31, 2018
 
March 31, 2017
 
 
 
 
United States
82
%
 
84
%
Europe
9
%
 
10
%
Other
9
%
 
6
%
(11)
SUBSEQUENT EVENTS
As described in Note 5, “Debt and Line of Credit”, the Company entered into the New Credit Agreement on April 12, 2018.

16



ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Certain statements, other than purely historical information, including estimates, projections, statements relating to our business plans, objectives, and expected operating results, and the assumptions upon which those statements are based, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements generally are identified by the words “believes,” “project,” “expects,” “anticipates,” “estimates,” “forecasts,” “intends,” “strategy,” “plan,” “may,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions. We intend such forward-looking statements to be covered by the safe-harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and are including this statement for purposes of complying with those safe-harbor provisions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. Our ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse 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, competition, and generally accepted accounting principles. These risks and uncertainties should also be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise. Further information concerning our business, including additional factors that could materially affect our financial results, is included herein and in our other filings with the SEC.
Our Business
ZAGG is an innovation leader in mobile tech accessories for smartphones and tablets. The Company is committed to enhance every aspect of performance, productivity and durability in mobile devices with creative product solutions. ZAGG was created from the concept of applying a clear film originally designed to protect military-helicopter blades in harsh desert conditions to protect consumers’ mobile devices. Mobile devices are essential to modern living and ZAGG’s mission is to ensure better performance in the real world.
In addition to its home-grown brands, ZAGG has created a platform to combine category-creating and innovative brands that address specific consumer needs to empower a mobile lifestyle. The Company has an award-winning product portfolio that includes screen protection, power cases, power management, wireless charging, personal audio, mobile keyboards, and cases sold under the ZAGG®, InvisibleShield®, mophie®, and IFROGZ® brands.
We maintain our corporate headquarters at 910 West Legacy Center Way, 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.

17




The Company has established four corporate objectives and seven core values to act as a foundation for ZAGG's corporate culture and guide ZAGG daily:
393408276_zagga02.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 or scratched screen.
InvisibleShield is focused on producing industry-leading screen and device protection. Our protective film and glass products offer consumers a wide array of protection types and features, all with a limited lifetime warranty.
Our InvisibleShield films were originally developed to protect the leading edge of rotary blades on military helicopters. Through constant innovation, we continue to formulate new films that are designed to offer the highest standards in self-healing scratch and impact protection. We also continue to drive innovation around simplifying the customer application experience like we’ve done with our EZ Apply® tabs, which are designed to help users align and apply InvisibleShield products. We also provide custom-fit screen protection for thousands of device types through our automated InvisibleShield On Demand (“ISOD”) solution. With ISOD, retailers can supply consumers with screen protection for nearly any device model, all without having to hold excess inventory.
Launched during the first quarter of 2014, InvisibleShield Glass is designed to provide premium screen protection and clarity, along with a superior feel and universally compatible touch sensitivity.
ZAGG has the leading market share in screen protection, and has maintained that leading position by consistently delivering innovative products to the market.

18



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.
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.
Critical Accounting Policies and Estimates
The preparation of our financial statements requires that we make estimates and judgments. We base these on historical experience and on other assumptions that we believe to be reasonable. Our critical accounting policies are discussed in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the year ended December 31, 2017. There have been no material changes to the critical accounting policies or estimates previously disclosed in that report except for the implementation of certain estimates for revenue recognition under Topic 606 as disclosed below.

19



Revenue recognition
Topic 606 has required significant changes to how the Company's revenue is recognized. Updates to the Company's accounting policies have been made as part of adoption of this new standard. These changes to the Company's accounting policies and procedures under the new standard have most significantly impacted the estimates previously used to determine the company's sales returns, discounts and other credits. The new reserve calculations for these estimates apply assumptions allowable under Topic 606, which require judgment. In applying these new assumptions, and in the application of Topic 606, the Company has determined that the updated accounting policies to ensure compliance under Topic 606 continue to be critical accounting policies and estimates.
Revenue recognition accounting policy
The Company’s revenue is derived from (1) sales of our products through our indirect channel, including retailers and distributors; (2) sales of our products through our direct channel, including www.ZAGG.com and www.mophie.com and our corporate-owned ZAGG-branded store; and (3) from franchise fees derived from the on-boarding of new franchisees. The Company’s revenue is measured based on the amount of consideration we expect to receive, reduced by estimates for sales returns, discounts, and other credits. The observable standalone selling prices of products sold are based on the prices charged to customers and are mutually agreed upon by both parties before any orders are authorized.
For substantially all of our sales, revenue is recognized at a point in time when control of the goods is transferred to the customer, which generally occurs upon delivery to the carrier or the customer. For franchise fees, revenue is derived from the sale of licenses, training, inventory and equipment and marketing, among other items. We recognize revenue for performance obligations on a straight-line basis over the franchise term.
Taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction, that are collected by the Company from a customer, are excluded from revenue.
Sales returns, discounts and other credits
The nature of our contracts gives rise to several types of variable consideration, including sales returns, discounts, and other credits. Certain customers receive credit-based incentives or credits, which are accounted for as variable consideration in the form of credit memos off future purchases from the Company. We estimate these amounts based on the expected amount to be provided to customers and reduce revenue accordingly on the invoice date.
We estimate a reserve for sales returns, discounts, and other credits, and record the respective estimated reserve amounts, including a right to return asset when a product is expected to be returned and resold. Historical experience, actual claims, and customer return rights are the key factors used in determining the estimated sales returns, discounts, and other credits.
Recent Accounting Pronouncements
Information regarding recent accounting pronouncements is contained in Note 1, “Nature of Operations and Basis of Presentation” of the Notes to Condensed Consolidated Financial Statements, which is incorporated herein by reference.
Results of Operations
Three months ended March 31, 2018 and 2017 (in thousands, except per share data)
Net sales
Net sales for the three months ended March 31, 2018, were $112,066 compared to net sales of $92,946 for the three months ended March 31, 2017, an increase of $19,120, or approximately 21%. The $19,120 increase in net sales was primarily attributable to (1) the increase in sales of our power management products, particularly accessories supporting the wireless charging ecosystem, and (2) increased sales of screen protection products in key wireless and retail accounts, particularly in international markets.

20



The percentage of net sales related to our key product lines for the three months ended March 31, 2018 and 2017, was approximately:
 
Three Months Ended
 
March 31, 2018
 
March 31, 2017
 
 
 
 
Screen Protection
50
%
 
46
%
Power Management
33
%
 
17
%
Power Cases
6
%
 
24
%
Audio
5
%
 
6
%
Keyboards
5
%
 
6
%
Other
1
%
 
1
%
The percentage of net sales related to our key distribution channels for the three months ended March 31, 2018 and 2017, was approximately:
 
Three Months Ended
 
March 31, 2018
 
March 31, 2017
 
 
 
 
Indirect channel
88
%
 
85
%
Website
8
%
 
11
%
Franchisees
4
%
 
4
%
The percentage of net sales related to our key geographic regions for the three months ended March 31, 2018 and 2017, was approximately:
 
Three Months Ended
 
March 31, 2018
 
March 31, 2017
 
 
 
 
United States
82
%
 
84
%
Europe
9
%
 
10
%
Other
9
%
 
6
%
Gross profit
Gross profit for the three months ended March 31, 2018, was $37,592, or approximately 34% of net sales, compared to gross profit of $28,606, or approximately 31% of net sales for the three months ended March 31, 2017. The increase in gross profit margin was driven primarily by (1) the mix of screen protection products, our highest margin product category, which increased during the three months ended March 31, 2018, to approximately 50% of net sales compared to approximately 46% of net sales during the three months ended March 31, 2017, and (2) improved margins on mophie-branded products.
Operating expenses
Operating expenses for the three months ended March 31, 2018, were $29,673, compared to operating expenses of $35,255 for the three months ended March 31, 2017, a decrease of $5,582, or approximately 16%. The $5,582 decrease was primarily attributable to (1) a $2.0 million charge in 2017 related to the impairment of a patent that did not recur in 2018, (2) operating expense synergies realized related to the mophie integration, and (3) a reduction in marketing spend that ultimately shifted into later periods in 2018.
Income (loss) from operations
We reported income from operations of $7,919 for the three months ended March 31, 2018, compared to a loss from operations of $6,649 for the three months ended March 31, 2017, an increase of $14,568, or approximately 219%. The $14,568 increase was primarily attributable to the increase in net sales, the increase in gross profit margin and the decrease of operating expenses.

21



Other expense, net
For the three months ended March 31, 2018, other expense was $5 compared to other expense of $510 for the three months ended March 31, 2017. The improvement in 2018 is primarily due to a gain on foreign exchange transactions of approximately $495.
Income tax (provision) benefit
We recognized an income tax provision of $885 for the three months ended March 31, 2018, compared to an income tax benefit of $1,021 for the three months ended March 31, 2017. Our effective tax rate was 11% and 14% for the three months ended March 31, 2018 and 2017, respectively. The decrease in the effective tax rate was due to several factors including but not limited to a change in the federal statutory rate from 35% to 21%, a change to book income in the first quarter of 2018 compared to book loss in the first quarter of 2017, and an increase to income in foreign jurisdictions. The Company’s effective tax rate will generally differ from the U.S. Federal statutory rate of 21%, due to state taxes, permanent items, the Company’s global tax strategy, and the inclusion of global intangible low taxed income and the corresponding foreign tax credit.
Net income (loss)
Net income was $7,029, with diluted earnings per share of $0.24 for the three months ended March 31, 2018, compared to a net loss of $6,138, with diluted loss per share of $0.22, for the three months ended March 31, 2017.
Liquidity and Capital Resources (in thousands)
At March 31, 2018, our principal sources of liquidity were cash provided by operations, cash on hand, and the revolving credit facility. Our principal uses of cash have been used to reduce accounts payable balances, purchase of property and equipment, and make payments on the term and revolving credit facilities.
Cash and cash equivalents on-hand decreased to $17,745 on March 31, 2018, from $24,989 on December 31, 2017, a decrease of $7,244. The net decrease was primarily attributable to (1) $15,375 net payments on the line of credit and term loans, and (2) $1,907 from net property and equipment purchases, partially offset by $9,728 generated from operating activities.
Accounts receivable, net of allowances, decreased to $73,894 on March 31, 2018, from $123,220 on December 31, 2017, a decrease of $49,326. The net decrease was primarily attributable to comparatively lower sales for the quarter in comparison to the prior quarter as well as strong cash collections during the first three months of 2018.
Inventories increased to $78,891 on March 31, 2018, from $75,046 on December 31, 2017, an increase of $3,845. The net increase was primarily attributable to (1) increased wireless charge pad ecosystem inventory to support the growth of the wireless charging category and (2) increased inventory purchases to ensure adequate inventory levels during the second quarter.
Accounts payable decreased to $54,798 on March 31, 2018, from $96,472 on December 31, 2017, a decrease of $41,674. The net decrease was primarily attributable to timing of payments for larger expenses to suppliers in conjunction with larger sales volumes in the prior quarter.
At March 31, 2018, the Company had a positive working capital of $70,068 compared to positive working capital of $43,210 as of December 31, 2017, an increase of $26,858. The net increase in the working capital position was primarily attributable to reductions in accounts payable and the shift of debt from current liabilities to non-current liabilities.
Based on the current level of operations, we believe that cash to be generated from operations, cash on hand, and available borrowings under existing credit arrangements will be adequate to fund expected capital expenditures and working capital needs for the next 12 months.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to certain market risks in the ordinary course of our business. These risks result primarily from changes in foreign currency exchange rates and interest rates. In addition, our international operations are subject to risks related to differing economic conditions, changes in political climate, differing tax structures, and other regulations and restrictions.
To date we have not utilized derivative financial instruments or derivative commodity instruments. We do not expect to employ these or other strategies to hedge market risk in the foreseeable future.

22



Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management has established and maintains disclosure controls and procedures designed to ensure that information required to be disclosed in the reports that it files or submits pursuant to the Securities Exchange Act of 1934, as amended, or Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow for timely decisions regarding required disclosures.
At the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures in accordance with the Exchange Act requirements. Based upon that evaluation, our principal executive officer and principal financial officer concluded that as of the end of the period of this report, our disclosure controls and procedures are not effective due to the material weakness described below.
The Company’s control environment was ineffective because we failed to establish appropriate authorities and responsibilities in alignment with the objectives of internal control over financial reporting to certain employees; and
The Company’s risk assessment process was ineffective because we failed to consider changes in the business operations and their impact on financial reporting and internal controls.
Changes in Internal Control over Financial Reporting
To remediate this material weakness which 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 the Annual Report on Form 10-K), management has initiated the following changes to its internal controls during the three months ended March 31, 2018:
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.
During the three months ended March 31, 2018, the Company has implemented several new cross functional processes and controls to address the material weakness. In addition, others processes and controls are currently being implemented as part of the planned remediation.
Additionally, we initiated changes over internal controls relating to the implementation and ongoing accounting procedures (including applicable estimates and disclosures) for revenue recognition standard requirements found in Topic 606.
Inherent Limitations on the Effectiveness of Internal 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.


23



PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Certain of the legal proceedings in which we are involved are discussed in Note 9, “Commitments and Contingencies,” to our Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q, and are hereby incorporated by reference.
Item 1A. Risk Factors
In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the factors discussed in Part I, Item 1A. Risk Factors, in our Annual Report on Form 10-K for the year ended December 31, 2017 (the “2017 Form 10-K”), which could materially affect our business, financial condition or future results. These risk factors should be read carefully in connection with evaluating our business and in connection with the forward-looking statements contained in this Quarterly Report on Form 10-Q. Any of the risks described in the 2017 Form 10-K could materially adversely affect our business, financial condition or future results and the actual outcome of matters as to which forward-looking statements are made. These are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition, and/or operating results.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
Item 6. Exhibits
a. Exhibits: The following Exhibits are filed with this Form 10-Q pursuant to Item 601(a) of Regulation S-K:
Exhibit Number
 
Description of Exhibit
 
 
 
 
 
 
 
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

24



SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
 
ZAGG INC
 
 
Dated: May 9, 2018
/s/ CHRIS AHERN
 
Chris Ahern
 
Chief Executive Officer & Director
 
(Principal executive officer)
 
 
Dated: May 9, 2018
/s/ BRADLEY J. HOLIDAY
 
Bradley J. Holiday
 
Chief Financial Officer
 
(Principal financial officer)

25
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Section 2: EX-31.1 (EXHIBIT 31.1)

Exhibit


EXHIBIT 31.1
CERTIFICATION
I, Chris Ahern, certify that:
1.
I have reviewed this Quarterly Report on Form 10-Q of ZAGG Inc;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of and for the periods presented in this report.
4.
The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15(d)-15(f)) for the registrant and have:
a.
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b.
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;
c.
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d.
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5.
The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a.
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b.
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Dated: May 9, 2018
 
/s/ CHRIS AHERN
 
 
Chris Ahern
 
 
Chief Executive Officer & Director
 
 
(Principal executive officer)


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Section 3: EX-31.2 (EXHIBIT 31.2)

Exhibit


EXHIBIT 31.2
CERTIFICATION 
I, Bradley J. Holiday, certify that:
1.
I have reviewed this Quarterly Report on Form 10-Q of ZAGG Inc;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of and for the periods presented in this report.
4.
The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15(d)-15(f)) for the registrant and have:
a.
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b.
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;
c.
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d.
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5.
The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a.
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b.
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Dated: May 9, 2018
 
/s/ BRADLEY J. HOLIDAY       
 
 
Bradley J. Holiday       
 
 
Chief Financial Officer
 
 
(Principal financial officer)



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Section 4: EX-32.1 (EXHIBIT 32.1)

Exhibit


EXHIBIT 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-Q of ZAGG Inc (the "Company") for the three months ended March 31, 2018 as filed with the Securities and Exchange Commission (the "Report"), I, Chris Ahern, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:
(1)
The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Dated: May 9, 2018
 
/s/ CHRIS AHERN
 
 
Chris Ahern
 
 
Chief Executive Officer & Director
 
 
(Principal executive officer)
This certification accompanies the Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.
A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.


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Section 5: EX-32.2 (EXHIBIT 32.2)

Exhibit


EXHIBIT 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-Q of ZAGG Inc (the "Company") for the three months ended March 31, 2018 as filed with the Securities and Exchange Commission (the "Report"), I, Bradley J. Holiday, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:
(1)
The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Dated: May 9, 2018
 
/s/ BRADLEY J. HOLIDAY       
 
 
Bradley J. Holiday       
 
 
Chief Financial Officer
 
 
(Principal financial officer)
This certification accompanies the Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.
A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.


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