ACQUISITION OF MOPHIE INC.

On February 2, 2016, ZAGG and ZM Acquisition, Inc. (“Merger Sub”), a Delaware corporation and wholly-owned subsidiary of the Company, entered into an Agreement and Plan of Merger (the “Merger Agreement”) with mophie, a California corporation, the principal shareholders of mophie named therein (the “Principal Shareholders”), and Daniel Huang as representative of the mophie shareholders, warrant holders, and option holders, pursuant to which Merger Sub agreed to merge with and into mophie, with mophie continuing as the surviving corporation (the “Merger”). On March 3, 2016 (the “Acquisition Date”), the Company completed the Merger.

The Company purchased mophie for total gross up-front consideration of $100,000 in cash, subject to an adjustment based on the estimated and actual net working capital of mophie as of the Acquisition Date. The Merger Agreement included an earn-out provision whereby additional consideration could be paid based on whether mophie’s 12-month Adjusted EBITDA (as defined in the Merger Agreement) from April 1, 2016 to March 31, 2017 (the “Earnout Period”) exceeded $20,000 (the "Earnout Consideration"). mophie's 12-month Adjusted EBITDA did not exceed $20,000 and thus no additional earn-out consideration was earned or paid.

In addition to the Earnout Consideration, the Merger Agreement identified three other contingent payments (the “Contingent Payments”) to be remitted to the Principal Shareholders upon receipt of such funds by ZAGG after the Acquisition Date, subject to any applicable offset rights of ZAGG under the Merger Agreement:


•	Federal and state tax refunds due to the Company related to 2012 and 2013 tax years;


•	Customs and duties refunds for pre-closing overpayments of customs and duties amounts to governmental agencies; and


•	Proceeds from the sale of real property located in Kalamazoo, Michigan.

$2,000 of the cash consideration paid to the Principal Shareholders was placed in an escrow account to cover any net working capital shortfall and indemnification claims of ZAGG. ZAGG and the Principal Shareholders also jointly purchased a $10,000 insurance policy with a $2,000 deductible that insures against breaches by mophie and the Principal Shareholders of representations and warranties set forth in the Merger Agreement.

At the Acquisition Date, mophie’s estimated closing balance sheet reflected negative working capital of $23,478. Upon completion of the procedures to evaluate the working capital account, ZAGG determined that the closing balance sheet reflected actual closing negative working capital and losses from breaches of representations, warranties and covenants that directly impacted current assets and current liabilities in the aggregate amount of $49,795, resulting in an additional actual closing working capital deficit and loss claims in the amount of $26,317. As described in Note 12, the Company commenced procedures to recover the amounts related to the aggregate net working capital deficit and losses from breaches of representations and warranties from the Principal Shareholders. This matter was ultimately settled on October 31, 2017.

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



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

The total purchase price of $62,344 was allocated to identifiable assets acquired and liabilities assumed based on their respective fair values. The total purchase price was adjusted during the third quarter of 2016 because of (1) additional information related to the working capital reflected in the closing balance sheet and estimate of fair value of the assets acquired and liabilities assumed and (2) the determination that the fair value of the Earnout Consideration is insignificant. The excess of the purchase price over the fair value of tangible and intangible assets acquired and liabilities assumed was recorded as goodwill.

The following table summarizes the final fair values of the identifiable assets acquired and liabilities assumed as of the Acquisition Date:



Cash and cash equivalents	$	1,779
Trade receivables (gross contractual receivables of $12,914)	12,823
Inventories	24,911
Prepaid expenses and other assets	1,073
Income tax receivable	11,814
Deferred tax assets	16,168
Property and equipment	10,191
Land held for sale	325
Amortizable identifiable intangible assets	43,812
Goodwill	12,272
Accounts payable	(37,359		)
Income tax payable	(196		)
Accrued liabilities	(5,163		)
Deferred revenue	(9		)
Sales returns liability	(29,584		)
Other noncurrent liabilities	(513		)
Total	$	62,344

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



	Preliminary Purchase Price Allocation March 3, 2016			Adjustments to Working Capital and Fair Value			Final Purchase Price Allocation March 3, 2016
Cash and cash equivalents	$	1,779		$	—		$	1,779
Trade receivables	13,483			(660		)	12,823
Inventories	32,335			(10,010		)	22,325
Inventory step-up	6,937			(4,351		)	2,586
Prepaid expenses	485			215			700
Other assets	200			173			373
Income tax receivable	10,958			856			11,814
Deferred tax assets	24,925			(8,757		)	16,168
Property and equipment	10,191			—			10,191
Land held for sale	325			—			325
Amortizable identifiable intangible assets	45,463			(1,651		)	43,812
Goodwill	14,092			(1,820		)	12,272
Accounts payable	(34,228		)	(3,131		)	(37,359		)
Income tax payable	(196		)	—			(196		)
Accrued liabilities	(5,185		)	22			(5,163		)
Deferred revenue	(800		)	791			(9		)
Sales returns liability	(14,468		)	(15,116		)	(29,584		)
Deferred tax liabilities	(17,978		)	17,978			—
Other noncurrent liabilities	(513		)	—			(513		)
Total	$	87,805		$	(25,461	)	$	62,344

The 2016 adjustments to working capital represented in the table above consist of (1) the additional actual closing working capital deficit of $26,317 and (2) adjustments to fair value of $856.

As part of the acquisition of mophie, the Company incurred legal, accounting, investment banking and other due diligence fees that were expensed when incurred. Total fees incurred related to the acquisition of mophie for the years ended December 31, 2017 and 2016 were $725 and $2,591, respectively, which are included as a component of operating expenses on the consolidated statement of operations.

Identifiable Intangible Assets

Classes of acquired intangible assets include tradenames, patents and technology, customer relationships, non-compete agreements, and backlog. The fair value of the identifiable intangible assets was determined using various valuation methods, including the income and market approaches. For assets valued under the income approach, the estimate of the present value of expected future cash flows for each identifiable asset was based on discount rates which incorporate a risk premium to take into account the risks inherent in those expected cash flows. The expected cash flows were estimated using available historical data adjusted based on the Company’s historical experience and the expectations of market participants. The market approach was utilized to determine appropriate royalty rates applied to the valuation of the trademarks and technology. The amounts assigned to each class of intangible asset and the related weighted average amortization periods are as follows:



	Intangible asset class		Weighted-average amortization period

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

Goodwill

Goodwill represents the excess of the mophie purchase price over the fair value of the assets acquired and liabilities assumed. $160 of the acquired goodwill is deductible for tax purposes.

The Company believes that the primary factors supporting the amount of goodwill recognized are the significant growth opportunities and expected synergies of the combined entity.

Results of Operations

The results of operations of mophie are included in the Company’s results of operations beginning on March 3, 2016. For the year ended December 31, 2016, mophie generated net sales of $113,749 and had a net loss before tax of $31,145.

Pro forma Results from Operations

The following unaudited pro-forma results of operations for the 12 months ended December 31, 2016 and 2015 give pro forma effect as if the acquisition and borrowings used to finance the acquisition had occurred on January 1, 2015, after giving effect to certain adjustments including the amortization of intangible assets, interest expense, tax adjustments, specific transaction related expenses incurred prior to the execution date, and assumes the purchase price was allocated to the assets purchased and liabilities assumed based on their fair market values at the date of purchase.



	12 Months Ended
	December 31, 2016			December 31, 2015
Net sales	$	419,183		$	455,165
Net loss	$	(17,487	)	$	(5,393	)
Basic loss per share	$	(0.62	)	$	(0.19	)
Diluted loss per share	$	(0.62	)	$	(0.19	)

The unaudited pro forma information is presented for illustrative purposes only and is not necessarily indicative of the operating results that would have occurred had the transaction been consummated as of January 1, 2015. Furthermore, such unaudited pro forma information is not necessarily indicative of future operating results of the combined companies, due to changes in operating activities following the purchase, and should not be construed as representative of the operating results of the combined companies for any future dates or periods.

For the 12 months ended December 31, 2016 and 2015, pro forma net loss includes pro forma amortization expense of $6,770 and $7,432, respectively. In addition, the Company included interest from the new credit facility and amortization of debt issuance costs for the 12 months ended December 31, 2016 and 2015 of $1,753 and $1,924, respectively. Material non-recurring adjustments excluded from the pro forma financial information for the 12 months ended December 31, 2015 consists of the $2,586 step up of mophie inventory to its fair value, which has been recorded as an unfavorable adjustment to cost of goods sold during 2016 following the acquisition date.

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