Table of Contents


UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington,

WASHINGTON, D.C. 20549

____________________
FORM 10-Q

(Mark one)

☒

☑ Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended September
June 30, 2017,2020, or

☐Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from ______________ to _____________.

Commission File No. 000-52211

001-34528
(Commission File Number)
ZAGG INC

Inc

(Exact name of registrant as specified in its charter)

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


910 West Legacy Center Drive,Way, Suite 500

Midvale, Utah 84047

(Address of principal executive offices, withincluding zip code)

(801) 263-0699

(Registrant'sRegistrant’s telephone number, including area code)

Not Applicable
(Former name, former address, and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒☑ No ☐.

☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒☑ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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☒   ☑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 ☒

☑

Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $0.001 par valueZAGGThe Nasdaq Stock Market, LLC
(Title of each class)(Trading Symbol(s))(Name of each exchange on which registered)
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 27,975,21629,821,837 common shares as of November 1, 2017.

August 4, 2020.


ZAGG INC AND SUBSIDIARIES

FORM 10-Q

TABLE OF CONTENTS

PART I - FINANCIAL INFORMATION



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PART I - FINANCIAL INFORMATION
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PART II - OTHER INFORMATION
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Exhibits26
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Table of Contents
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)

Table of Contents
ZAGG INC AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Amounts in thousands, except par value)

value amounts)

(Unaudited)

  September 30,  December 31, 
  2017  2016 
       
ASSETS      
       
Current assets:        
Cash and cash equivalents $11,394  $11,604 
Accounts receivable, net of allowances of $1,221 in 2017 and $824 in 2016  96,830   83,835 
Inventories  72,005   72,769 
Prepaid expenses and other current assets  3,531   3,414 
Income tax receivable  138   2,814 
Total current assets  183,898   174,436 
         
Property and equipment, net of accumulated depreciation of $20,950 in 2017 and $18,371 in 2016  15,066   17,755 
Goodwill  12,272   12,272 
Intangible assets, net of accumulated amortization of $63,596 in 2017 and $55,298 in 2016  42,286   53,362 
Deferred income tax assets  44,652   50,363 
Other assets  1,635   2,541 
Total assets $299,809  $310,729 
         
LIABILITIES AND STOCKHOLDERS’ EQUITY        
         
Current liabilities:        
Accounts payable $82,742  $85,022 
Accrued liabilities  23,825   22,216 
Sales returns liability  29,342   28,373 
Accrued wages and wage related expenses  5,649   6,169 
Deferred revenue  214   273 
Line of credit  16,264   31,307 
Current portion of long-term debt, net of deferred loan costs of $65 in 2017 and 2016  6,185   10,484 
Total current liabilities  164,221   183,844 
         
Noncurrent portion of long-term debt, net of deferred loan costs of $92 in 2017 and $141 in 2016  9,283   9,623 
         
Total liabilities  173,504   193,467 
         
Stockholders’ equity:        
Common stock, $0.001 par value; 100,000 shares authorized;        
34,057 and 33,840 shares issued in 2017 and 2016, respectively $34  $34 
Additional paid-in capital  95,106   92,782 
Accumulated other comprehensive loss  (944)  (2,114)
Treasury stock, 6,065 and 5,831 common shares in 2017 and 2016 respectively, at cost  (37,636)  (36,145)
Retained earnings  69,745   62,705 
         
Total stockholders’ equity  126,305   117,262 
Total liabilities and stockholders’ equity $299,809  $310,729 

June 30, 2020December 31, 2019
ASSETS
Current assets:
Cash and cash equivalents$17,314  $17,801  
Accounts receivable, net of allowances of $2,000 and $1,14363,090  142,804  
Income tax receivable5,666  —  
Inventories91,328  144,944  
Prepaid expenses and other current assets4,900  6,124  
Total current assets182,298  311,673  
Property and equipment, net of accumulated depreciation of $12,865 and $14,15915,926  18,019  
Intangible assets, net of accumulated amortization of $101,810 and $95,63255,061  63,110  
Deferred income tax assets, net23,704  22,657  
Operating lease right of use assets10,456  9,636  
Goodwill24,920  43,569  
Other assets428  567  
Total assets$312,793  $469,231  
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable$44,945  $87,303  
Income tax payable—  5,266  
Sales returns liability25,660  43,853  
Accrued wages and wage related expenses5,254  6,328  
Accrued liabilities7,087  15,164  
Current portion of operating lease liabilities2,774  2,099  
Total current liabilities85,720  160,013  
Line of credit92,040  107,140  
Operating lease liabilities10,631  10,599  
Other long-term liabilities9,444  —  
Total liabilities197,835  277,752  
Commitments and contingencies (Note 12 and Note 13)
Stockholders’ equity:
Common stock, $0.001 par value; 100,000 shares authorized; 36,884 and 36,610 shares issued37  37  
Treasury stock, 7,055 and 7,055 common shares at cost(50,455) (50,455) 
Additional paid-in capital118,862  116,533  
Accumulated other comprehensive loss(1,234) (1,631) 
Retained earnings47,748  126,995  
Total stockholders’ equity114,958  191,479  
Total liabilities and stockholders’ equity$312,793  $469,231  

See accompanying notes to condensed consolidated financial statements.

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ZAGG INC AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Amounts in thousands, except per share amounts)

(Unaudited)

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

For the Three Months EndedFor the Six Months Ended
June 30, 2020June 30, 2019June 30, 2020June 30, 2019
Net sales$77,117  $106,796  $168,098  $185,546  
Cost of sales53,805  69,037  163,728  123,965  
Gross profit23,312  37,759  4,370  61,581  
Operating expenses:
Advertising and marketing2,419  4,514  6,845  9,099  
Selling, general and administrative23,743  34,483  56,336  66,069  
Transaction costs51  374  396  621  
Impairment of goodwill—  —  18,649  —  
Loss on disposal of intangible assets and equipment—  8  3,683  6  
Amortization of intangible assets3,357  4,599  6,901  9,065  
Total operating expenses29,570  43,978  92,810  84,860  
Loss from operations(6,258) (6,219) (88,440) (23,279) 
Other (expense) income:
Interest expense(956) (1,103) (2,490) (2,113) 
Other income217  1,192  219  676  
Total other (expense) income(739) 89  (2,271) (1,437) 
Loss before provision for income taxes(6,997) (6,130) (90,711) (24,716) 
Income tax benefit3,664  794  11,823  4,956  
Net loss$(3,333) $(5,336) $(78,888) $(19,760) 
Loss per share attributable to stockholders:
Basic loss per share$(0.11) $(0.18) $(2.65) $(0.68) 
Diluted loss per share$(0.11) $(0.18) $(2.65) $(0.68) 

See accompanying notes to condensed consolidated financial statements.

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ZAGG INC AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

LOSS

(Amounts in thousands)

(Unaudited)

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

For the Three Months EndedFor the Six Months Ended
June 30, 2020June 30, 2019June 30, 2020June 30, 2019
Net loss$(3,333) $(5,336) $(78,888) $(19,760) 
Other comprehensive gain (loss), net of tax:
Foreign currency translation gain (loss)117  141  397  (15) 
Total other comprehensive income (loss)117  141  397  (15) 
Total comprehensive loss$(3,216) $(5,195) $(78,491) $(19,775) 

See accompanying notes to condensed consolidated financial statements.

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ZAGG INC AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

EQUITY

(Amounts in thousands)

(Unaudited)

  Nine Months Ended 
  September 30,  September 30, 
  2017  2016 
Cash flows from operating activities   
Net income (loss) $7,041  $(11,442)
Adjustments to reconcile net loss to net cash used in operating activities:        
Stock-based compensation  2,536   3,675 
Excess tax benefits related to share-based payments  -   (569)
Depreciation and amortization  16,508   19,108 
Loss on disposal of property and equipment  13   - 
Deferred income taxes  5,203   (9,512)
Amortization of deferred loan costs  192   141 
Impairment of intangible asset  1,959   - 
Loss on disputed mophie purchase price  -   24,317 
Changes in operating assets and liabilities, net of acquisition:        
Accounts receivable, net  (12,054)  (10,496)
Inventories  1,636   2,132 
Prepaid expenses and other current assets  (104)  500 
Income taxes receivable  3,195   12,899 
Other assets  918   (227)
Accounts payable  (3,526)  1,981 
Accrued liabilities  1,143   1,759 
Accrued wages and wage related expenses  (520)  802 
Deferred revenue  (59)  - 
Sales returns liability  907   (9,152)
Other  (416)  - 
Net cash provided by operating activities  24,572   25,916 
         
Cash flows from investing activities        
Purchase of property and equipment  (3,792)  (6,135)
Proceeds from disposal of equipment  28   - 
Purchase of mophie, net of cash acquired  -   (74,743)
Net cash used in investing activities  (3,764)  (80,878)
         
Cash flows from financing activities        
Payment of debt issuance costs  (157)  (1,144)
Proceeds from revolving credit facility  296,485   230,117 
Payments on revolving credit facility  (311,528)  (199,922)
Proceeds from term loan facility  -   25,000 
Payments on term loan facility  (4,687)  (3,125)
Purchase of treasury stock  (1,492)  - 
Payment of withholdings on restricted stock units  (240)  (621)
Proceeds from exercise of warrants and options  29   54 
Excess tax benefits related to share-based payments  -   569 
Net cash (used in) provided by financing activities  (21,590)  50,928 
         
Effect of foreign currency exchange rates on cash equivalents  572   (13)
         
Net decrease in cash and cash equivalents  (210)  (4,047)
         
Cash and cash equivalents at beginning of the period  11,604   13,002 
Cash and cash equivalents at end of the period $11,394  $8,955 
         
Supplemental disclosure of cash flow information        
Cash paid during the period for interest $1,361  $1,106 
Cash (refunded) during the period for taxes, net  (2,317)  (597)
Cash refunded during the period for mophie taxes, net  -   (11,021)

For the Three Months Ended June 30, 2020
Common Stock
SharesAmountAdditional Paid-in CapitalAccumulated Other Comprehensive LossTreasury StockRetained EarningsTotal Stockholders’ Equity
Balances, March 31, 202036,884  $37  $117,552  $(1,351) $(50,455) $51,081  $116,864  
Net loss—  —  —  —  —  (3,333) (3,333) 
Other comprehensive income—  —  —  117  —  —  117  
Stock-based compensation expense—  —  1,310  —  —  —  1,310  
Balances, June 30, 202036,884  $37  $118,862  $(1,234) $(50,455) $47,748  $114,958  


For the Six Months Ended June 30, 2020
Common Stock
SharesAmountAdditional Paid-in CapitalAccumulated Other Comprehensive LossTreasury StockRetained EarningsTotal Stockholders’ Equity
Balances, December 31, 201936,610  $37  $116,533  $(1,631) $(50,455) $126,995  $191,479  
Cumulative effect of accounting change—  —  —  —  —  (359) (359) 
Balance after cumulative effect of accounting change36,610  37  116,533  (1,631) (50,455) 126,636  191,120  
Net loss—  —  —  —  —  (78,888) (78,888) 
Other comprehensive income—  —  —  397  —  —  397  
Restricted stock release270  —  —  —  —  —  —  
Employee stock purchase plan release4  —  39  —  —  —  39  
Stock-based compensation expense—  —  2,604  —  —  —  2,604  
Payment of withholding taxes on restricted stock units—  —  (314) —  —  —  (314) 
Balances, June 30, 202036,884  $37  $118,862  $(1,234) $(50,455) $47,748  $114,958  

See accompanying notes to condensed consolidated financial statements.

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ZAGG INC AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY (Continued)
(Amounts in thousands)
(Unaudited)
For the Three Months Ended June 30, 2019
Common Stock
SharesAmountAdditional Paid-in CapitalAccumulated Other Comprehensive LossTreasury StockRetained EarningsTotal Stockholders’ Equity
Balances, March 31, 201936,117  $36  $109,870  $(1,566) $(50,455) $98,651  $156,536  
Net loss—  —  —  —  —  (5,336) (5,336) 
Other comprehensive income—  —  —  141  —  —  141  
Restricted stock release22  —  —  —  —  —  —  
Employee stock purchase plan release1  —  —  —  —  —  —  
Stock-based compensation expense—  —  1,475  —  —  —  1,475  
Payment of withholding taxes on restricted stock units—  —  (66) —  —  —  (66) 
Balances, June 30, 201936,140  $36  $111,279  $(1,425) $(50,455) $93,315  $152,750  


For the Six Months Ended June 30, 2019
Common Stock
SharesAmountAdditional Paid-in CapitalAccumulated Other Comprehensive LossTreasury StockRetained EarningsTotal Stockholders’ Equity
Balances, December 31, 201834,457  $34  $96,486  $(1,410) $(49,733) $113,114  $158,491  
Cumulative effect of accounting change—  —  —  —  —  (39) (39) 
Balance after cumulative effect of accounting change34,457  34  96,486  (1,410) (49,733) 113,075  158,452  
Net loss—  —  —  —  —  (19,760) (19,760) 
Other comprehensive loss—  —  —  (15) —  —  (15) 
Treasury stock purchase—  —  —  —  (722) —  (722) 
Restricted stock release222  —  —  —  —  —  —  
Employee stock purchase plan release3  —  13  —  —  —  13  
Stock-based compensation expense—  —  2,660  —  —  —  2,660  
Payment of withholding taxes on restricted stock units—  —  (848) —  —  —  (848) 
Shares issued as consideration for acquisition1,458  2  12,968  —  —  —  12,970  
Balances, June 30, 201936,140  $36  $111,279  $(1,425) $(50,455) $93,315  $152,750  

See accompanying notes to condensed consolidated financial statements.
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ZAGG INC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
For the Six Months Ended
June 30, 2020June 30, 2019
Cash flows from operating activities:
Net loss$(78,888) $(19,760) 
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Stock-based compensation expense2,604  2,660  
Depreciation and amortization10,345  12,256  
Deferred income tax assets(1,043) (2,169) 
Loss on disposal of intangible assets and equipment3,683  6  
Amortization of deferred loan costs302  101  
Impairment of goodwill18,649  —  
Right of use asset expenses1,321  1,066  
Changes in operating assets and liabilities:
Accounts receivable, net79,162  55,006  
Inventories53,566  (24,313) 
Prepaid expenses and other current assets1,175  396  
Other assets148  179  
Accounts payable(43,131) (12,654) 
Income tax payable(10,938) (3,555) 
Sales returns liability(18,170) (19,627) 
Accrued wages and wage related expenses(1,070) (360) 
Accrued liabilities(8,033) (1,904) 
Lease liabilities(1,586) (1,134) 
Other373  79  
Net cash provided by (used in) operating activities8,469  (13,727) 
Cash flows from investing activities:
Purchase of property and equipment(2,790) (4,213) 
Proceeds from disposal of equipment—  2  
Purchase of HALO, net of cash acquired—  (20,368) 
Net cash used in investing activities(2,790) (24,579) 
Cash flows from financing activities:
Proceeds from revolving credit facility63,580  176,566  
Payments on revolving credit facility(78,680) (139,566) 
Proceeds from the paycheck protection program loan9,444  —  
Purchase of treasury stock—  (722) 
Payment of withholding on restricted stock units(314) (782) 
Payment of debt issuance costs(257) —  
Proceeds from issuance of stock under employee stock purchase plan39  13  
Net cash (used in) provided by financing activities(6,188) 35,509  
Effect of foreign currency exchange rates on cash equivalents22  (111) 
Net decrease in cash and cash equivalents(487) (2,908) 
Cash and cash equivalents at beginning of the period17,801  15,793  
Cash and cash equivalents at end of the period$17,314  $12,885  

See accompanying notes to condensed consolidated financial statements.
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ZAGG INC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(Amounts in thousands)

(Unaudited)

Supplemental schedule

For the Six Months Ended
June 30, 2020June 30, 2019
Supplemental disclosure of cash flow information:
Cash paid during the period for interest$2,190  $1,998  
Cash paid during the period for income taxes, net157  629  
Cash paid during the period for rent expenses included in the measurement of lease liabilities1,889  1,453  
Supplemental disclosure of non-cash investing and financing activities:
Purchase of property and equipment financed through accounts payable$1,391  $451  
Withholding tax on restricted stock units recorded in accrued wages and wage related expenses—  66  
Purchase of HALO through amounts due to seller, contingent payments and common stock—  16,985  
Noncash change in lease asset and operating liabilities from reassessment of existing leases and addition of new leases2,142  1,856  

See accompanying notes to condensed consolidated financial statements.
7
Table of noncash investing and financing activities

For the Nine Months Ended September 30, 2017:

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

For the Nine Months Ended September 30, 2016:

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

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

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ZAGG INC AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

amounts)

(Unaudited)

(1)NATURE OF OPERATIONS AND BASIS OF PRESENTATION

ZAGG®

(1) NATURE OF OPERATIONS AND BASIS OF PRESENTATION
ZAGG Inc and its subsidiaries (“we,” “us,” “our,” “ZAGG,” or the(the “Company”) are innovation leaders in mobile tech accessories for smartphones and tablets. For over 1015 years, ZAGGthe Company 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, protective cases, and casesother mobile accessories sold under the ZAGG®ZAGG®, InvisibleShield®InvisibleShield®, mophie®mophie®, IFROGZ®, Gear4®, and IFROGZ®HALO® brands.

The accompanying unaudited condensed consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the United States (“U.S.”) Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principlesUnited States generally accepted in the United States of Americaaccounting principles (“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 suggestsrecommends that these condensed consolidated financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s 2016 Annual Report on Form 10-K.10-K for the year ended December 31, 2019 (the “2019 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.periods, with related disclosures of these amounts in the notes to the financial statements. Actual results could differ from those estimates.

On March 3, 2016,

Coronavirus Outbreak and Company Impact
In December 2019, a mutated strain of coronavirus (“COVID-19”) was reported to have surfaced in Wuhan, China. The outbreak, which had previously been concentrated in China, has largely spread through the Company acquired mophie inc. ("mophie").U.S. and the world. The recent COVID-19 pandemic has materially impacted the Company's financial condition and results of operations of mophie are included inoperations. The Company recommends that the Company's results of operations beginning on March 3, 2016. See Note 3 for additional details on the acquisition.

The condensed consolidated financial statements includeand notes thereto in this Quarterly Report on Form 10-Q be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations in Item 2 of Part I to this Quarterly Report on Form 10-Q, and the accountsCompany's Risk Factors in Item 1A of ZAGG Inc and its wholly owned subsidiaries ZAGG International Distribution Limited (“ZAGG International”); Patriot Corporation; ZAGG Intellectual Property Holding Co, Inc. (“ZAGG IP”); ZAGG Retail, Inc; ZAGG Netherlands B.V.; ZAGG Mobile Accessories Australia Pty Ltd; ZAGG Hong Kong Ltd; ZAGG Japan G.K.; ZAGG Singapore Pte. Ltd.; mophie inc.; mophie LLC; mophie Technology Development Co., Ltd; mophie Netherlands Coöperatie U.A.; and mophie Limited. All intercompany transactions and balances have been eliminated in consolidation.

Part II to this Quarterly Report on Form 10-Q for further information.

Significant Accounting Policies

The Company’s significant accounting policies are described in Note 1 to the Company’s Annual Report onconsolidated financial statements included in the 2019 Form 10-K10-K. Except for the year ended December 31, 2016.

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

Recent Accounting Pronouncements (amounts in thousands)

In May 2014, the FinancialAdoption of Accounting Standards BoardCodification (“FASB”ASC”) issued an Accounting Standard Update (“ASU”Topic 326, “Financial Instruments - Credit Losses”

The Company adopted ASC Topic 326,“Financial Instruments - Credit Losses” (“Topic 326”) No. 2014-09, “Revenue from Contracts with Customers (Topic 606).” This ASU includes a five-step process by which entities will recognize revenue to depict the transfer of goods or services to customers in amounts that reflect the consideration to which an entity expects to be entitled in exchange for those goods or services. The ASU also will require enhanced disclosures to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The ASU may be adopted utilizing one of two methods. The first method is to adopt the ASU by recording the effect of the guidance in the ASU retrospectively to each prior period presented in the period of adoption. The second method is to adopt the ASU by recording the effect of the guidance in the ASU retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application. On July 9, 2015, the FASB voted to approve a one-year deferralapplication of the effective date of this ASU. This deferral was issued by the FASB in ASU No. 2015-14, “Revenue from Contracts with Customers (Topic 606) – Deferral of the Effective Date”.January 1, 2020. As a result of ASU No. 2015-14this adoption, the Company expects that it will applyhas changed its accounting policy for estimating allowance for credit losses on trade receivable, as detailed below.
The Company applied Topic 326 prospectively with recording a cumulative effect adjustment in retained earnings beginning January 1, 2020, which allows for the new revenueapplication of the standard solely to annual and interim reporting periods beginning after December 15, 2017. In May 2016, the FASB issued ASU No. 2016-12, “Revenue from Contracts with Customers (Topic 606) – Narrow-Scope Improvements and Practical Expedients”. The amendments and practical expedients presented in the ASU aim to simplify the transition period in 2020 but does not require application to prior fiscal comparative periods presented. Therefore, the new standard,prior period comparative information has not been adjusted and continues to provide practical expedients for transition and sales taxes, and to clarify certain aspectsbe reported under the previous incurred loss impairment methodology.
The adoption of the standard. The Company currently anticipates adopting the standard using the modified retrospective approach with theTopic 326 resulted in a decrease of $359 in retained earnings as a cumulative effect of adoption recorded at the date of initial application.adoption. The Company is currently evaluating the impact the ASU will have on its consolidated financial statements.

In July 2015, the FASB issued ASU No. 2015-11, “Simplifying the Measurement of Inventory.” This ASU provides guidance to entities that measure inventory using a method other than last-in, first-out (LIFO) or the retail inventory method. For entities using first-in, first-out (FIFO) or average cost, the measurement principle for their inventory changes from the lower of cost or market to lower of cost and net realizable value. Current U.S. GAAP requires, at each financial statement date, that entities measure inventory at the lower of cost or market. The measurement of market is commonly the current replacement cost. However, entities also need to consider net realizable value and net realizable value less an approximately normal profit margin in their measurement. For entities using a method other than LIFO or the retail inventory method, the ASU replaces market with net realizable value. This ASU requires prospective adoption for inventory measurement for annual and interim periods beginning after December 15, 2016, for public business entities. The Company has concluded that this ASUnew standard did not have a material impact on our financial positionin the Company’s consolidated balance sheets or resultscondensed consolidated statements of operations.

In November 2015,addition, the FASB issued ASU No. 2015-17, “Balance Sheet Classificationadoption of Deferred Taxes,” which requires entities with a classified balance sheetTopic 326 had no impact to present all deferred tax assets and liabilities as noncurrent. The amendmentscash provided by or used in the ASU may be applied either prospectively to all deferred tax liabilities and assetsoperating, financing, or retrospectively to all periods presented. The ASU is effective for public business entities for interim and annual periods in fiscal years beginning after December 15, 2016. During the year ended December 31, 2017, the Company adopted the ASU using the retrospective approach resulting in recording deferred tax assets as non-current for current and prior periods presented. This adoption does not impact our results of operations.

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.

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In March 2016, the FASB issued ASU No. 2016-09, “Improvements to Employee Share-Based Payment Accounting,” which simplified accounting for share-based payments. The ASU is effective for fiscal years beginning after December 15, 2016, and interim periods within those years for public business entities. Early adoption is permitted in any interim or annual period provided that the entire ASU is adopted. The new standard contains several amendments that simplify the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures, statutory tax withholding requirements, classification of awards as either equity or liabilities, and classificationinvesting on the statementcondensed consolidated statements of cash flows.

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Allowance for credit losses accounting policy
The Company estimates the allowance for credit losses in relation to accounts receivable based on relevant qualitative and quantitative information about historical events, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported accounts receivable. Topic 326 permits different methods to calculate the estimate for the allowance for credit losses. The Company started with its historical loss experience as suggested by Topic 326 and evaluated its previous method of estimating the allowance for credit losses. The Company determined that its previous method of using an aging schedule to develop historical credit loss percentages, which is allowed under Topic 326, is appropriate. The historical credit loss percentages are developed for each aging category based on eight quarters of credit loss history and the Company determined that its customers in each of these aging categories share similar risk characteristics.
Additionally, as required by Topic 326, the Company adjusts the historical credit loss percentage by current and forecasted economic conditions. Due to the short-term nature of its accounts receivable and that it carries credit insurance on a significant portion of the accounts receivable balance, the Company believes changes to economic conditions may not have significant effect on the estimate of the allowance for credit losses for accounts receivable; thus, the Company determined to include a baseline credit loss percentage into the historical credit loss percentage for each aging category to reflect the potential impact of the current and future economic conditions. Such baseline credit loss is adjusted when changes in the new standard eliminateeconomic environment change the accountingCompany's expectation for excess tax benefitsfuture credit losses.
As of June 30, 2020, the Company determined the baseline of credit loss percentage should be increased in response to the COVID-19 pandemic and estimated the allowance for credit losses to be recognized$2,000.
(2) REVENUE
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.
The percentage of net sales related to the Company’s key product lines for the three and six months ended June 30, 2020, and 2019, was approximately as follows:
For the Three Months EndedFor the Six Months Ended
June 30, 2020June 30, 2019June 30, 2020June 30, 2019
Protection (screen protection and cases)47%54%58%56%
Power (power management and power cases)36%34%30%32%
Productivity (keyboards and other)15%9%10%8%
Audio2%3%2%4%
During the three and six months ended June 30, 2020, the Company revised the online channel to include sales to a key direct-to-consumer customer whose sales were included within the indirect channel in additional paid-in capital and tax deficiencies recognized either in the income tax provision or in additional paid-in capital.prior periods. The Company has adopted ASU 2016-09also made the same change to 2019 net sales by key distribution channels to make the net sales comparable. The percentage of net sales related to the Company’s key distribution channels for the three and six months ended June 30, 2020, and 2019, was approximately as follows:
For the Three Months EndedFor the Six Months Ended
June 30, 2020June 30, 2019June 30, 2020June 30, 2019
Indirect channel75%81%80%79%
Online22%14%16%15%
Franchisees3%5%4%6%

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The percentage of net sales related to the Company’s key geographic regions for the three and six months ended June 30, 2020, and 2019, was approximately as follows:
For the Three Months EndedFor the Six Months Ended
June 30, 2020June 30, 2019June 30, 2020June 30, 2019
United States85%74%80%72%
Europe12%15%14%14%
Other3%11%6%14%
Contract Balances
Timing of revenue recognition may differ from timing of invoicing to customers or timing of consideration received. The following table provides information about receivables, right of return assets, contract liabilities, refund liabilities, and warranty liabilities from the Company’s contracts with customers as of the beginningJune 30, 2020, and December 31, 2019:
June 30, 2020December 31, 2019
Receivables, which comprises the balance in accounts receivable, net of allowances$63,090  $142,804  
Right of return assets, which are included in prepaid expenses and other current assets291  2,177  
Refund liabilities, which are included in sales return liability23,203  39,790  
Warranty liabilities, which are included in sales return liability2,457  4,063  
Contract liabilities, which are included in accrued liabilities35  39  
The current balance of the quarter ended March 31, 2017. Duringright of return assets is the quarter ended March 31, 2017,estimated amount of inventory to be returned that is expected to be resold. The current balance of refund liabilities is the Company appliedexpected amount of estimated sales returns, discounts and other credits from sales that have occurred. The current balance of warranty liabilities is the amendment relatingexpected amount of warranty claim returns from sales that have occurred. The current balance of contract liabilities primarily relates to the recognitionadvance consideration received from customers for products for which transfer of excess tax benefits and deficiencies on a prospective basis and, accordingly, has recognized all excess tax benefits and tax deficiencies as income tax expense or benefit as discrete items resulting in the recognition of income tax expense of $171 for the nine months ended September 30, 2017. The Companycontrol has not recorded a cumulative-effect adjustment to retained earnings as of the beginning of the year because all tax benefits had previously beenyet occurred and therefore, revenue is deferred and will be recognized when the tax deductions relatedtransfer of control has been completed.
The following table summarizes the activities in the Company’s warranty liabilities for the six months ended June 30, 2020, and 2019:
For the Six Months Ended
June 30, 2020June 30, 2019
Balance at beginning of period$4,063  $4,646  
Accrual for product warranty1,902  4,744  
Warranty claims charged(3,507) (5,772) 
Foreign currency translation gain(1) —  
Balance at end of period$2,457  $3,618  

(3) ACQUISITION OF HALO
On January 3, 2019, ZAGG Hampton LLC, a Delaware limited liability company and wholly owned subsidiary of the Company, entered into a membership interest purchase agreement with Halo2Cloud, LLC (“HALO”) and its equity owners to stock compensation were utilized to reduce taxes payable.acquire all of the outstanding equity interests of HALO (the “HALO Acquisition”). HALO is a leading direct-to-consumer mobile accessories company with an extensive intellectual property portfolio that specializes in wireless charging, car and wall chargers, portable power, and other accessories. The Company has electedacquired HALO primarily to applyenter into new distribution channels and to expand its product and intellectual property portfolio.
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(4) INVENTORIES
During the amendment relatedsix months ended June 30, 2020, as a result of current and expected 2020 demand reductions due to the presentationCOVID-19 pandemic, the Company reassessed the (1) long-term profitability of cash flows for excess tax benefits onall brands and product lines, and (2) the recoverability of inventory on-hand (the “Strategic Review”). As a prospective basisresult of the Strategic Review, the Company determined to discontinue the BRAVEN audio brand, exit the battery case product category, and no prior periods have been adjusted. The Company’s financial position or resultssimplify the following product lines: IFROGZ audio, ZAGG keyboards, and mophie power stations. Ultimately, the demand reduction linked to COVID-19 combined with these efforts to exit less profitable categories, resulted in a write-down to inventory during the six months ended June 30, 2020 of operations were not impacted by amendments related to the statutory tax withholding requirement and, accordingly, no adjustment has been recorded. The Company will continue to classify cash remitted to the tax authorities as a financing activity as now required by the amendments$44,833, which was included in the ASU. The ASU permits a policy election to either record forfeitures as they occur or estimate forfeitures consistent with historical U.S. GAAP. The Company has elected to record forfeitures as they occur, which did not have a material impact on our financial position or resultscost of operations.

In August 2016,sales in the FASB issued ASU No. 2016-15, “Classificationcondensed consolidated statements of Certain Cash Receipts and Cash Payments,” which addresses eight classification issues related to the statement of cash flows: (1) debt prepayment or debt extinguishment costs; (2) settlement of zero-coupon bonds; (3) contingent consideration payments made after a business combination; (4) proceeds from the settlement of insurance claims; (5) proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies; (6) distributions received from equity method investees; (7) beneficial interests in securitization transactions; and (8) separately identifiable cash flows and applicationoperations.

Inventories consisted of the predominance principle. The ASU is effective for public business entities for fiscal years beginning after December 15, 2017. Early adoption is permitted, including adoption in an interim period. The amendments in the ASU should be applied using a retrospective transition method to each period presented. If it is impracticable for the amendments to be applied retrospectively for some of the issues, the amendments for those issues may be applied prospectivelyfollowing as of the earliest date practicable. The Company has elected to early adopt this standard in the current quarter ended SeptemberJune 30, 2017, and will apply this standard to any classification issues that occur in future periods as none exist in the current reportable period.

In October 2016, the FASB issued ASU 2016-16, “Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory,” which requires entities to recognize at the transaction date the income tax consequences of intercompany asset transfers other than inventory. This ASU is effective for public business entities for annual and interim periods in fiscal years beginning after December 15, 2017. The Company will adopt this standard in the first quarter of 2018. The adoption of this standard is not expected to have a material impact on our financial position or results of operations.

In November 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash,” which requires companies to include cash and cash equivalents that have restrictions on withdrawal or use in total cash and cash equivalents on the statement of cash flows. This ASU is effective for public business entities for annual and interim periods in fiscal years beginning after December 15, 2017. The Company has elected to early adopt this standard in the current quarter ended September 30, 2017, and if in future periods restricted cash exists at the Company, this standard will be applied as none exist in the current reportable period.

In January 2017, the FASB issued ASU 2017-04, “Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment,” which requires an entity to no longer perform a hypothetical purchase price allocation to measure goodwill impairment. Instead, impairment will be measured using the difference between the carrying amount and the fair value of the reporting unit. The ASU is effective for annual and interim periods in fiscal years beginning after December 15, 2019. All entities may early adopt the standard for goodwill impairment tests with measurement dates after January 1, 2017. The Company has elected to early adopt this standard and will perform its annual goodwill impairment assessment in the fourth quarter of 2017. The adoption of this standard is not expected to have a material impact to our financial position or results of operations.

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In May 2017, the FASB issued ASU 2017-09, “Compensation – Stock Compensation (Topic 718),” which clarifies what constitutes a modification of a share-based payment award. This ASU is effective for all entities for annual and interim periods in fiscal years beginning after December 15, 2017. Early adoption is permitted as of the beginning of an annual period for which financial statements (interim or annual) have not been issued or made available for issuance. The Company has elected to early adopt this ASU in the current quarter ended September 30, 2017, and will apply any stock compensation modifications that occur in future periods as none exist in the current reportable period.

(2)INVENTORIES

At September 30, 2017,2020, and December 31, 2016, inventories consisted of the following:

  September 30, 2017  

December 31,

2016

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

2019:

June 30, 2020December 31, 2019
Finished goods$89,435  $142,054  
Raw materials1,893  2,890  
Total inventories$91,328  $144,944  
Included in prepaid expenses and other current assets were inventory deposits with third-party manufacturers at Septemberof $2,176 and $148 as of June 30, 2017,2020, and December 31, 2016, of $1,333 and $437,2019, respectively.

(3)ACQUISITION OF MOPHIE

On February 2, 2016, ZAGG and ZM Acquisition, Inc., a Delaware corporation and wholly-owned subsidiary of

(5) PROPERTY AND EQUIPMENT
In connection with the Strategic Review, the Company entered into an Agreementdetermined to dispose of certain equipment and Plan of Merger (the “Merger Agreement”) with mophie, a California corporation,molds that would no longer be used on go-forward brands and product lines, and wrote-off $2,535 during the principal shareholders of mophie named therein (the “Principal Shareholders”), and Daniel Huang as representative of the mophie shareholders, warrant holders, and option holders, pursuant to which ZM Acquisition, Inc. agreed to merge with and into mophie, with mophie continuing as the surviving corporation (the “Merger”). On March 3, 2016, the Company completed the Merger.

Results of Operations

The results of operations of mophie aresix months ended June 30, 2020. These write-offs were included in the Company’s results of operations beginningloss on March 3, 2016. For the period of March 3, 2016, through September 30, 2016, mophie generated net sales of $79,390 and a net loss before tax of $17,030.

Pro forma Results from Operations

The following unaudited pro-forma results of operations for the nine months ended September 30, 2016, give pro forma effect as if the acquisition had occurred at the beginning of the period presented, after giving effect to certain adjustments including the amortizationdisposal of intangible assets interest expense, tax adjustments, specific transaction related expenses incurred prior toand equipment in the execution date,condensed consolidated statements of operations.

Property and assumes the purchase price was allocated to the assets purchased and liabilities assumed based on their values at the date of purchase.


  

Nine months ended

September 30, 2016

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

The unaudited pro forma information is presented for illustrative purposes only and is not necessarily indicativeequipment, net consisted of the operating results that would have occurred hadfollowing as of June 30, 2020, and December 31, 2019:

Useful LivesJune 30, 2020December 31, 2019
Equipment and molds3 to 10 years$15,399  $18,851  
Leasehold improvements1 to 9 years7,085  7,710  
Building and improvements40 years2,429  2,429  
Computer equipment and software3 to 5 years2,037  1,237  
Furniture and fixtures7 years1,806  1,876  
Automobiles5 years35  75  
Property and equipment, gross28,791  32,178  
Less accumulated depreciation and amortization(12,865) (14,159) 
Property and equipment, net$15,926  $18,019  
For the transaction been consummated forsix months ended June 30, 2020, and 2019, depreciation expenses were $3,444 and $3,191, respectively, which were included as a component of selling, general and administrative expense in the dates indicated. Furthermore, such unaudited pro forma information is not necessarily indicativecondensed consolidated statements of future operating resultsoperations.
(6) GOODWILL AND INTANGIBLE ASSETS
There was 0 change in goodwill during the three months ended June 30, 2020. There was an $18,649 impairment to goodwill during the six months ended June 30, 2020, as the carrying value of the combined companies, due to changes in operating activities followingCompany's net assets as of March 31, 2020 exceeded the purchase, and should not be construed as representativeCompany's calculation of its diminished market capitalization caused by a decrease of the operating resultsCompany's stock price that occurred during the three months ended March 31, 2020. The market capitalization was determined by multiplying the total number of the combined companiesCompany's outstanding shares by the Company's average stock price for any future dates or periods.

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a determined reasonable period with an estimated additional control premium included as part of the market capitalization. This adjustment was recorded during the first quarter of 2020.

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There was 0 change in goodwill during the ninethree months ended SeptemberJune 30, 2016, pro forma net loss includes projected amortization expense of $5,076. In addition,2019. During the Company included interest from the new credit facility and amortization of debt issuance costs for the ninesix months ended SeptemberJune 30, 2016, of $1,508. Material non-recurring adjustments excluded from2019, goodwill was increased by $15,922 in connection with the pro forma financial information above consists of the $2,586 step up of mophie inventory to its fair value, which was recorded as an unfavorable adjustment to cost of goods sold during the nine months following the acquisition date.

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

(4)GOODWILL AND INTANGIBLE ASSETS

Goodwill

There were no additions to nor impairment of goodwill for the three or nine months ended September 30, 2017. The balance of goodwill as of September 30, 2017, was $12,272.

Long-lived Intangible Assets

HALO Acquisition.

The following table summarizes the changes in gross long-livedgoodwill during the six months ended June 30, 2020, and the twelve months ended December 31, 2019:
For the Six Months EndedFor the Twelve Months Ended
June 30, 2020December 31, 2019
Balance at beginning of period$43,569  $27,638  
Addition in connection with the acquisition of HALO—  15,931  
Impairment of goodwill(18,649) —  
Balance at end of period$24,920  $43,569  
There were 0 additions to intangible assets:

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

On April 11, 2017,assets during the three and six months ended June 30, 2020.

There were 0 additions to intangible assets for the three months ended June 30, 2019. For the six months ended June 30, 2019, as a consequence of the HALO Acquisition, intangible assets increased $27,554 for patents and technology, trade names, customer relationships, net of unfavorable leases obtained. During the six months ended June 30, 2020, the Company receiveddiscontinued its use of certain trade names, patents and technology in connection with the Strategic Review. As such, a final court order stating that the claimsloss of one of its patents were either unpatentable or cancelled. Accordingly, management determined that the patent’s carrying value$1,148 was not recoverable through future cash flowsrecorded to reduce intangible assets and was impaired asincluded in loss on disposal of March 31, 2017. Consequently,intangible assets and equipment in the condensed consolidated statements of operations. This adjustment was recorded during the first quarter of 2020. There was 0 impairment of intangible assets for the ninethree and six months period ended SeptemberJune 30, 2017, the Company recorded an impairment loss consisting of a reduction of gross carrying amount of $2,777, accumulated amortization of $818,2020, and net carrying value of $1,959 to reduce the net carrying value of the cancelled patent to $0.

Long-lived intangible2019.

Intangible assets, net of accumulated amortization as of SeptemberJune 30, 2017,2020, and December 31, 2016,2019, were as follows:

  September 30,
2017		  

December 31,

2016

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

The total weighted average useful lives of amortizable intangible assets as of September 30, 2017, and December 31, 2016, is 8.2 years.

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June 30, 2020Weighted Average Amortization PeriodDecember 31, 2019Weighted Average Amortization Period
Trade names$22,665  9.7 years$25,871  9.7 years
Customer relationships18,999  7.7 years21,514  7.7 years
Patents and technology13,158  8.4 years15,306  8.3 years
Non-compete agreements239  4.9 years419  4.9 years
Total intangible assets, net of accumulated amortization$55,061  8.3 years$63,110  8.3 years

(5)INCOME TAXES


(7) INCOME TAXES
For interim periods, the tax provision is generally determined utilizing an estimate of the Company’s annual effective tax rate adjusted for discrete items, if any. Due to the Company's year-to-date loss and forecasted loss for the year, the tax benefit for the loss for the six months ended June 30, 2020, was limited to the expected annual tax benefit for the year ended December 31, 2020. The Company’s effective tax rate was 52% and 13% for the three and six months ended SeptemberJune 30, 2017, and 2016, was 37% and 47%,2020, respectively. The Company’s effective tax rate was 13% and 20% for the ninethree and six months ended SeptemberJune 30, 2017, and 2016, was 47% and 41%,2019, respectively. The change in the effective tax rate for the three months ended SeptemberJune 30, 2017,2020, compared to the three months ended SeptemberJune 30, 2016,2019, as well as the six months ended June 30, 2020, compared to the six months ended June 30, 2019, was primarily due to losses from foreign jurisdictions for which incomethe impact of the methodology used in the tax benefits were not recognizedprovision calculation described above as well as an inclusion of an additional benefit related to the ratioprojected carryback of credits and other permanent differencesthe net operating loss (“NOL”). Under the CARES Act, a temporary five-year NOL carryback enables most corporate taxpayers to pre-tax bookoffset 2015 income and loss for respective periods. The changetaxed at 35% by 2020 income taxed at 21%. This projected benefit is included in the effective tax rate for the nine months ended September 30, 2017, compared to the nine months ended September 30, 2016, was primarily due to various discrete expenses recognized during the period related to the true up of a deferred amount for stock compensation and other discrete items related to the return to provision calculation.period. The Company’s effective tax rate will generally differ from the U.S. Federal statutory rate of 35%21%, due to state taxes, permanent items andincluding amounts disallowed under §162(m) of the Internal Revenue Code, the Company’s global tax strategy.

(6)FAIR VALUE MEASURES

Fair Valuestrategy, and the inclusion of Financial Instruments

At September 30, 2017,global intangible low taxed income and the Company’s financial instruments included cash and cash equivalents, accounts receivable, accounts payable, a linecorresponding foreign tax credit.

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Table of credit, and a term loan. The carrying amounts of cash and cash equivalents, accounts receivable and accounts payable approximates fair value due to the short-term maturities of these financial instruments. The carrying value of the debt balances approximate fair value because the variable interest rates reflect current market rates.

Fair Value Measurements

The Company measures at fair value certain financial and non-financial assets by using a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, essentially an exit price, based on the highest and best use of the asset or liability. The levels of the fair value hierarchy are:

Level 1 — Quoted market prices in active markets for identical assets or liabilities;

Level 2 — Significant other observable inputs (e.g., quoted prices for similar items in active markets, quoted prices for identical or similar items in markets that are not active, inputs other than quoted prices that are observable such as interest rate and yield curves, and market-corroborated inputs); and

Level 3 — Unobservable inputs in which there is little or no market data, which require the Company to develop its own assumptions.

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

  Fair Value Measurements Using: 
  

September 30,

2017

  

Level 1

Inputs

  

Level 2

Inputs

  

Level 3

Inputs

 
Money market funds included in cash equivalents $5  $5   —   — 

  Fair Value Measurements Using: 
  

December 31,

2016

  

Level 1

Inputs

  

Level 2

Inputs

  

Level 3

Inputs

 
Money market funds included in cash equivalents $5  $5   —   — 

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(8) LONG-TERM DEBT

(7)DEBT AND LINE OF CREDIT

Long-term debt, net as of SeptemberJune 30, 2017,2020 and December 31, 2016,2019, was as follows:

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

June 30, 2020December 31, 2019
Line of credit$92,040  $107,140  
PPP Loan9,444  —  
Total long-term debt outstanding$101,484  $107,140  
On July 17, 2017, ZAGG Inc,April 12, 2018, the Company entered into an amended and restated credit and security agreement (the “2018 Credit and Security Agreement”) with KeyBank National Association (“KeyBank”), Zions First National Bank (“Zions Bank”), and JPMorgan Chase Bank, N.A. (collectively, the “Lenders”), and KeyBank, as the administrative agent, forSwing Line Lender and Issuing Lender, KeyBanc Capital Markets Inc., as sole lead arranger and sole book runner, and other members of the Lenders, entered intolender group, which was subsequently amended by a Thirdfirst amendment agreement dated as of November 28, 2018, a second amendment agreement dated as of August 30, 2019, a third amendment agreement dated as of December 4, 2019, and a fourth amendment agreement dated as of April 13, 2020 (the “Fourth Amendment Agreement (“Amendment”Agreement”), which amends. The maturity date of the original2018 Credit and Security Agreement, dated as ofamended, is April 11, 2023.
The Fourth Amendment Agreement temporarily increased the revolving credit amount from $125,000 to $144,800 from April 13, 2020, through March 3, 2016, by and among31, 2021. Under the Company and the Lenders. TheFourth Amendment includes the following revisionsAgreement, interest rates were revised to add an additional 50 basis points to the original Credit Agreement:

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

prior rates; the applicable interest rates are based on the Company's leverage ratio as defined in the Fourth Amendment Agreement.

In connection with the Fourth Amendment Agreement, the Company alsopaid approximately $257 in debt issuance costs.
On April 13, 2020, the Company entered into replacement revolving credit notesa loan agreement with eachKeyBank as the lender under the Paycheck Protection Program of the Lenders. As consideration for entering intoCARES Act administered by U.S. Small Business Administration (the “SBA”), and on April 17, 2020 (the “Disbursement Date”), received a loan in the Amendment,amount of $9,444 (the “PPP Loan”) to help sustain its employee payroll costs, rent, and utilities due to the impact of the COVID-19 pandemic. Under the Paycheck Protection Program, the Company's PPP Loan is fully forgivable if the Company agreedmeets certain requirements and receives formal approval, as defined by the CARES Act, subject to an audit by the SBA. The Company intends to seek partial or full forgiveness of the PPP Loan; however, there can be no assurance that the Company will obtain forgiveness of all or part of the PPP Loan amount. The interest rate for the PPP Loan is 1% per annum, and all required payments are deferred for six months from the Disbursement Date (interest will accrue over this six-month deferral period). Unless the PPP Loan is fully or partially forgiven, the Company must pay $525 of the administrative agentprincipal every month once the deferral period is over, as well as accumulated interest, until the maturity date which is two years from the Disbursement Date.
As of June 30, 2020, there were 0 letters of credit issued, and Lenders total amendment and arrangement fees$52,760 was available to be issued for letters of $145, pursuant tocredit under the terms of an administrative agent fee letterthe 2018 Credit and a closing fee letter entered into with KeyBank. Security Agreement, as amended.
(9) STOCK-BASED COMPENSATION
The changes to the Credit Agreement described above were made to support core-business opportunities.

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

From September 4, 2017, through September 17, 2017, the face value amount of the Letter of Credit was $10,000. From September 18, 2017, through February 28, 2018 (the end of the contractual period), the face value was increased to $25,000. The Company agreed to 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 condensed consolidated statement of operations. Fees incurred associated with the Letter of Credit as of September 30, 2017, are $157. No draws on the Letter of Credit occurred as of September 30, 2017.

(8)STOCK-BASED COMPENSATION

During the three and nine months ended September 30, 2017, the Company granted 45 and 479 restricted stock units respectively. During the three and nine months ended September 30, 2016, the Company granted 163 and 876 restricted stock units, respectively. The restricted stock units granted during the three and nine months ended September 30, 2017, were estimated to have awith respective weighted-average fair value per share of $8.65 and $6.77, respectively. The restricted stock units granted duringfor the three and ninesix months ended SeptemberJune 30, 2016, were estimated to have a weighted-average fair value per share of $6.412020, and $8.17, respectively. 2019, is summarized as follows:

For the Three Months EndedFor the Six Months Ended
June 30, 2020June 30, 2019June 30, 2020June 30, 2019
Units Granted107  —  727  643  
Weighted average fair value per share$3.47  $—  $6.90  $9.82  
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 a three-year vesting term, depending on the terms of the individual grant.

12

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As part of the 479727 and 876 grants discussed above,643 restricted stock units granted during the ninesix months ended SeptemberJune 30, 2017,2020, and 2016,2019, respectively, the Company granted 372417 and 575287 restricted stock units respectively, to certain executives and employees of the Company where vesting is linked to specific performance criterion. TheThese performance-based restricted stock units granted in 2017 and 2016 only vest upon the (1) Company’s achievement of specified thresholds of net sales, Adjusted EBITDA, orand other specific net sales and profitability goals, forand (2) continued employment through the individual executive. As of September 30, 2017, the Company believes it is probable that it will achieve the targets for all restricted stock units granted in the nine months ended September 30, 2017. Of the 575 restricted stock units granted in the nine months ending September 30, 2016, 42 shares vested and 307 shares were forfeited, and 226 have not yet vested or been forfeited.

applicable vesting date.

The estimated fair value of the restricted stock units is recognized on a straight-line basis over the requisite service period of the award, which is generally the vesting term of the award. During the three and nine months ended September 30, 2017, the Company recordedThe following are stock-based compensation expenseexpenses related to restricted stock units of $899recorded for the three and $2,536,six months ended June 30, 2020, and 2019, respectively, which isare included as a component of selling, general, and administrative expense. Duringexpense on the three and nine months ended September 30, 2016, thecondensed consolidated statement of operations:
For the Three Months EndedFor the Six Months Ended
June 30, 2020June 30, 2019June 30, 2020June 30, 2019
Stock-based compensation expense$1,310  $1,475  $2,604  $2,660  
Certain Company recorded stock-based compensation expense related to restricted stock units of $1,384 and $3,675, respectively, which is included as a component of selling, general, and administrative expense.

During the nine months ended September 30, 2017, and 2016, certain ZAGG employees have 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. ThisThese elections have resulted in the Company paying $240recording $314 and $621, respectively, which is$848 reflected as a reduction of additional paid-in capital. We also recognized an increasecapital during the six months ended June 30, 2020, and 2019, respectively. All of the $314 recorded as a reduction of additional paid-in capital was paid as of June 30, 2020. Of the $848 recorded as a reduction of additional paid-in capital, $66 was included in accrued wages and wage related to the employee stock purchase planexpenses as of $29 and $54, respectively, for the nine months ended SeptemberJune 30, 2017, and 2016.

(9)EARNINGS (LOSS) PER SHARE

2019.

(10) LOSS PER SHARE
Basic earnings (loss)loss per common share excludes dilution and is computed by dividing net earnings (loss)loss by the weighted average number of shares of common stock outstanding during the period. Diluted earnings (loss) per common share, if applicable, 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)loss per common share and diluted earnings (loss)loss per common share for the three and ninesix months ended SeptemberJune 30, 2017,2020, and 2016:

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

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

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2019:


For the Three Months EndedFor the Six Months Ended
June 30, 2020June 30, 2019June 30, 2020June 30, 2019
Net loss$(3,333) $(5,336) $(78,888) $(19,760) 
Weighted average shares outstanding:
  Basic29,814  29,064  29,779  28,974  
  Dilutive effect of restricted stock units—  —  —  —  
  Diluted29,814  29,064  29,779  28,974  
Loss per share:
  Basic$(0.11) $(0.18) $(2.65) $(0.68) 
  Diluted$(0.11) $(0.18) $(2.65) $(0.68) 
For the three and ninesix months ended SeptemberJune 30, 2017, there were no2020, 1,240 restricted stock units excluded from the calculation of diluted earnings per share. For the three and nine months ended September 30, 2016, 1,001 restricted stock units and 50 warrants to purchase shares of common stock were not considered in calculating diluted earningsloss per share as theirbecause the Company was in a loss position and, therefore, the effect would have been anti-dilutive.

(10)TREASURY STOCK

For the three and ninesix months ended SeptemberJune 30, 2017,2019, 966 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.

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(11) TREASURY STOCK
During the fourth quarter of 2015, the Company’s board of directors authorized the repurchase of up to $20,000 of the Company’s outstanding common stock with no expiration date (the “2015 Stock Repurchase Program”). On March 11, 2019, the Company's board of directors authorized the cancellation of the 2015 Stock Repurchase Program, and authorized a new stock repurchase program of up to $20,000 of the Company's outstanding common stock (the “2019 Stock Repurchase Program”).
During the three and six months ended June 30, 2020, the Company did 0t purchase any shares of the Company's common stock. During the three months ended June 30, 2019, the Company did 0t purchase any shares of the Company's common stock. During the six months ended June 30, 2019, the Company purchased 0 and 23472 shares of ZAGG Incthe Company's common stock respectively. Cashunder the 2015 Stock Repurchase Program for total consideration paid for the purchase of ZAGG Inc common stock for the nine months ended September 30, 2017, was $1,492,$722 with a weighted average price of $10 per share, which included commissions paid to brokersand processing fees totaling $2. As of $9. ForJune 30, 2020, and December 31, 2019, a total of $20,000 remained authorized for the nine months ended September 30, 2017,repurchase of the weighted average price per share was $6.32. Company's outstanding common stock under the 2019 Stock Repurchase Program.
The consideration paid has been recorded within stockholders’ equity in the condensed consolidated balance sheet.

(12) LEASES
The Company has operating leases for offices, retail stores, and warehouse space that expire through 2027. The Company’s leases have remaining lease terms of 2 months to 7.5 years, some of which include options to extend the leases up to 10 years. For the three and ninesix months ended SeptemberJune 30, 2016, no purchases of treasury stock occurred.

(11)COMMITMENTS AND CONTINGENCIES

Operating leases

The Company leases office2020, rent expense was $907 and warehouse space, office equipment, and mall cart locations under operating leases that expire through 2023. Future minimum rental payments required under the operating leases at September 30, 2017, were as follows:

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

$2,019, respectively. For the three and six months ended SeptemberJune 30, 2017, and 2016,2019, rent expense was $736$799 and $793, respectively. For the nine months ended September 30, 2017, and 2016, rent expense was $2,179 and $2,450,$1,652, respectively. Rent expense wasis recognized on a basis which approximates straight-line over the lease term and wasis recorded as a component of selling, general and administrative expense on the condensed consolidated statement of operations.

As of June 30, 2020, the Company had a weighted-average remaining lease term of 4.7 years and a weighted-average discount rate used to calculate the lease liability of 4.37%.

Future maturities of lease liabilities as of June 30, 2020, were as follows:

Remaining of 2020$1,761  
20213,312  
20223,215  
20232,789  
20241,850  
Thereafter1,971  
Total lease payments14,898  
Less: imputed interest(1,493) 
Lease liabilities$13,405  
No other leases have been entered into under which the Company has significant rights and obligations as the lessee except those noted above.
(13) CONTINGENCIES
Commercial Litigation

Daniel Huang, individually

Dan Dolar, an individual and as shareholder representativeon behalf of those similarly situated, Plaintiff, v. ZAGG Incmophie Inc., a California corporation, Defendant, Superior Court of Chancery of the State of Delaware, C.A.California, Orange County, Case No. 12842 (the “Huang Delaware Lawsuit”)30-2019-01066228-CU-BT-CXC. On October 21, 2016, Daniel Huang, as the representative of the former mophie inc. shareholders, under the Merger Agreement as disclosed in Note 3, filed the Huang Delaware Lawsuit alleging that the Company breached the Merger Agreement by failing to pay certain contingent payments (the “Contingent Payments”) related to tax refunds and customs duty recoveries and seeking damages in an amount no less than $11,420. On December 16, 2016, the Company filed an Answer and Counterclaims in the lawsuit. In its Answer, the Company acknowledged its obligation under the Merger Agreement to make the Contingent Payments under certain circumstances, but averred that this obligation was subject to a right to withhold the tax refunds and customs duty recoveries received to date and, subject to the Court’s ruling on the Company’s Counterclaims, subsequently set-off its damages against the Contingent Payments. In its Answer, the Company denied that any payments were due at that time or that it was in breach of any provision of the Merger Agreement. Regarding the Counterclaims, after the closing of the merger, ZAGG discovered breaches of certain representations, warranties and covenants made by Huang and mophie that have resulted in damages exceeding $22,000.

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

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

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ZAGG Inc et al. v. Daniel Huang et al., Orange County Superior Court, State of California, Civil No. 30-2016-00892767-CU-BC-CJC (the “Huang California Lawsuit”). On December 15, 2016, ZAGG and mophieApril 25, 2019, Dolar filed a complaint against Daniel Huangmophie inc. (“mophie”) alleging, among other things, violation of California Consumers Legal Remedies Act, California False Advertising Law, breach of express warranty, violation of the Magnuson-Moss Warranty Act, violation of California Unfair Competition Law, and Immotor, LLC (“Immotor”).violation of state Consumer Protection Statutes. The complaint alleged that Huangmophie mischaracterizes the mAh ratings of the batteries in its products, and asked the company he founded, Immotor, misappropriated confidential information belongingcourt to certify a class of Californians who purchased mophie while Huang was servingbattery-enabled products. On June 14, 2019, the court dismissed the complaint without prejudice at Dolar’s request so that Dolar’s claims could be pursued in the U.S. District Court in the case of Young v. mophie Inc., Case No. 8:19-cv-00827-JVS-DFM, discussed below.

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Michael Young and Dan Dolar, individually and on behalf of other similarly situated individuals, Plaintiff, v. mophie Inc., Defendant, U.S. District Court, Central District of California, Case No. 8:19-cv-00827-JVS-DFM. This action started with a complaint filed by Young against mophie on May 2, 2019. On June 13, 2019, Young and Dolar joined together as plaintiffs and filed a first amended complaint (the “FAC”). In the FAC, Young and Dolar allege, among other things, that mophie has engaged in unfair and deceptive acts and practices in violation of California and Florida laws, violation of purportedly material identical state consumer protection statutes in various other states, violation of the Magnuson-Moss Warranty Act, breach of express warranty, and unjust enrichment. The FAC is based on Young’s and Dolar’s allegation that mophie mischaracterizes the mAh ratings of the batteries in certain of its products. Young and Dolar seek to certify a class of consumers nationwide and in various states who purchased mophie battery-enabled products. The FAC does not specify an officeramount of damages claimed, but alleges that damages will be in excess of $5,000. mophie denies that it has engaged in the alleged practices, and directorintends to vigorously defend the lawsuit. On July 15, 2020, the parties gave joint notice to the court that they had reached a tentativesettlement of mophie.

On October 31, 2017,this action, subject to the Company, mophie, Immotor and Daniel Huang entered intoparties executing a written settlement agreement, (“California Settlement Agreement”). The California Settlement Agreement provides for a mutual general release of all claims asserted inand on July 16, 2020, the Huang California Lawsuit and of other claims asserted by Huang againstcourt entered an order dismissing the Company and mophie and that Huang would receive a non-exclusive license for certain power management technology for use solely in connection with two-wheeled vehicles.

The Company continuesaction without prejudice to retain rights under a representations and warranties insurance policy obtained atreopening the time of the acquisition of mophie to seek reimbursement for payments of third party claims or to recover losses relating to breaches of mophie’s representations and warranties, except in respect of the claims released in connection the dismissal of the Huang Delaware Lawsuit and the Huang California Lawsuit.

Eric Stotz and Alan Charlescase if settlement is not consummated within 45 days.

Enchanted IP v. mophie, inc.Inc., U.S. District Court, Central District of California, Civil ActionCase No. 2:16-cv-08898-GW-FFM. 8:19-cv-1648.On January 13, 2017, Eric StotzAugust 27, 2019, Enchanted IP LLC filed an action for patent infringement against mophie in the Central District of California, asserting U.S. Patent No. 6,194,871. This patent generally relates to a charge and Alan Charles, individuallydischarge control circuit for an external secondary battery. The complaint identifies mophie’s juice pack reserve micro product as an accused product and seeks damages and injunctive relief. Enchanted IP does not appear to make or sell any products, and the asserted ‘871 patent expired in April 2020. ZAGG responded to the complaint on October 21, 2019 to formally assert its defenses and counterclaims. On April 21, 2020, the parties finalized a confidential settlement, and on behalfJune 1, 2020, the court dismissed the action with prejudice.
Shenzhen CN-iMX Technology Co., Ltd. v. Apple Electronic Products Trading (Beijing) Co., Ltd. and ZAGG (Shenzhen) Technology Development Co., Ltd. (2020) Yue 03 No. 774. In August 2019, Shenzhen CN-iMXTechnology Co., Ltd. filed an action in Shenzhen Intermediate Court against ZAGG China and Apple, asserting infringement of Chinese Patent No. ZL 2012 1 0335618.4 relating to a purported class,method of wireless charging. The action identified mophie’s PowerStation wireless XL charger as an accused product and sought damages and injunctive relief. In September 2019, ZAGG filed a first amended class action complaint alleging that they purchased certain mophie external battery packs and thatseparate invalidation request (Case No. 4W9507) with the battery packs did not extendChinese National Intellectual Property Administration to challenge the lifevalidity of the phones’ internal batteries as advertised and adversely affectedpatent. On April 8, 2020, the phones’ internal battery life. Plaintiffs allege violations of California’s unfair competition law, California’s Consumer Legal Remedies Act, New York’s unlawful deceptive acts and practices statute, and New York’s false advertising law. The Company has denied all liability and will defendparties finalized a confidential settlement to resolve the claims and otherwise respond tomatter. On April 20, 2020, ZAGG’s invalidation request was formally withdrawn. On June 5, 2020, the allegations. This matter is not expected to haveShenzhen Intermediate Court issued 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 staffMediation Paper confirming dismissal 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.

infringement action.

Other Litigation

The Company is not a party to any other material litigation or claims at this time. While the Company currently believes that the amount of any ultimate probable loss for known matters would not be material to the Company’s financial condition, the outcome of these actions is inherently difficult to predict. In the event of an adverse outcome, for any of the litigation or claims noted above, the ultimate potential loss could have a material adverse effect on the Company’s financial condition or results of operations in a particular period.

The Company establishes reserves when a particular contingency is probable and estimable. The Company has not accrued for any loss at September 30, 2017,estimated liabilities of $900 and $750 in the condensed consolidated financial statementsbalance sheets 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.

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of June 30, 2020, and December 31, 2019, respectively.

(12)CONCENTRATIONS

(14) 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,customarily exceed federally insured limits. The Company has not experienced any losses in cash accounts for the three and ninesix months ended SeptemberJune 30, 2017.

At September2020, and 2019.

As of June 30, 2017,2020, Verizon Wireless (“Verizon”) and Amazon.com (“Amazon”) exceeded 10% of the Company's accounts receivable. As of December 31, 2016, the balance of accounts receivable from two separate customers exceeded 10%: Superior Communications, Inc. (“Superior”)2019, Verizon and Best Buy Co., Inc. (“Best Buy”). GENCO Distribution Systems, Inc. (“GENCO”) also exceeded 10% of the balance of accounts receivable. The amount of accounts receivable for each of these customers are outlined as follows:
June 30, 2020December 31, 2019
Verizon17%24%
Amazon11%3%
Best Buy8%14%
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Other than the customers noted in the table above, no other customer account balances exceeded 10% of accounts receivable as of June 30, 2020, and December 31, 2016, but not as of September 30, 2017.

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

No other customer account balances were more than 10% of accounts receivable at September 30, 2017, or December 31, 2016.2019. 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 wouldcould 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 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 product line consists of InvisibleShield glass products, InvisibleShield film products, and ISOD film blanks. Our InvisibleShield glass products are sourced from factories in Asia with protective glass expertise, each of which uses a number of sub-suppliers for raw materials and other components. Our InvisibleShield film and ISOD products are sourced through our third-party logistics partner, who purchases the raw film inventory from a single supplier (as discussed above).

●Battery Cases and Power Management – Our battery case and power management product lines each consist of power products that are designed to provide on-the-go power for tablets, smartphones, MP3 players, cameras, and virtually all other electronic mobile devices. Our power products are sourced from factories in Asia with battery expertise, each of which uses a number of sub-suppliers for raw materials and other components.
●Audio– Our audio product line consists of earbuds and headphones that are designed to be compatible with virtually all electronic mobile devices. Our audio products are sourced from factories in Asia with audio expertise, each of which uses a number of sub-suppliers for raw materials and other components.
●Keyboards– Our keyboard product line consists of (1) device-specific keyboards designed to fit individual tablets produced by original equipment manufacturers and (2) keyboards that are designed to be device agnostic and can be used on virtually any mobile device. Our keyboard products are sourced from factories in Asia with keyboard expertise, each of which uses a number of sub-suppliers for raw materials and other components.

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.

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Concentration of net sales

For the three and six months ended June 30, 2020, purchases by Verizon exceeded 10% of net sales. For the three months ended SeptemberJune 30, 2017, and 2016, Superior and Best Buy were our largest customers, each of which accounted for over2019, purchases by Verizon exceeded 10% of net sales. The amount of net sales for each of these customers are outlined as follows:

  

Three months ended

September 30, 2017

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

For the Three Months EndedFor the Six Months Ended
June 30, 2020June 30, 2019June 30, 2020June 30, 2019
Verizon15%13%20%9%
For the ninethree and six months ended SeptemberJune 30, 2017,2020, and 2016, Superior and Best Buy were our largest2019, no other customers each of which accounted for overexceeded 10% of net sales, as follows:

  

Nine months ended

September 30, 2017

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

Forsales.

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

Although we haveCompany has contracts in place governing ourthe relationships with its retail distribution customers (“Retailers”), the contracts are not long-term and all ourthe retailers generally purchase from us on athe Company using purchase order basis.orders. As a result, these retailersRetailers generally may, with little or no notice or penalty, cease ordering and selling ourthe Company’s products, or materially reduce their orders. If any of these retailersRetailers cease selling ourthe Company’s products, slow their rate of purchase of ourits products, or decrease the number of products they purchase, ourthe Company’s results of operations could be adversely affected.

The percentage

(15) SUBSEQUENT EVENTS
In July 2020, the U.S. Trade Representative published a Notice of net sales by geographic region for the three months endedProduct Exclusion Amendments affecting certain products imported from China on dates between September 30, 2017,24, 2018 and 2016, was approximately:

  

Three months ended

September 30, 2017

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

August 7, 2020. The percentage of net sales by geographic region for the nine months ended September 30, 2017, and 2016, was approximately:

  

Nine months ended

September 30, 2017

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

(13)SEGMENT REPORTING

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

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

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

(14)SUBSEQUENT EVENTS

Certain settlements around litigation occurred subsequentcurrently evaluating duties paid during that date range that may be subject to September 30, 2017, involving the Huang Delaware Lawsuitrefund.

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Item 2. Management’s Discussion and the Huang California Lawsuit. Refer to Note 11 above for information regarding these settlements.

17
Analysis of Financial Condition and Results of Operations

ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Certain statements, other than purely historical information, including estimates, projections, statements relating to our business plans, objectives, and expected operating results, and the assumptions upon which those statements are based, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements generally are identified by the words “believes,” “project,” “expects,” “anticipates,” “estimates,” “forecasts,” “intends,” “strategy,” “plan,” “may,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions. We intend such forward-looking statements to be covered by the safe-harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and are including this statement for purposes of complying with those safe-harbor provisions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. Our ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse affecteffect on our operations and future prospects include, but are not limited to: changes in economic conditions, legislative/regulatory changes, availability of capital, interest rates, competition, pandemic and other health-related events, 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 anInc and its subsidiaries (“we,” “us,” “our,” “ZAGG,” or the “Company”) are global innovation leaderleaders in accessories and technologies that empower mobile tech accessories for smartphones and tablets. The Company is committedlifestyles, with a commitment to enhance every aspect of performance, productivity, and durability in mobile devices with our creative product solutions. ZAGGOur business was initially created from the concept of applyingusing a clear film originally designed to protect military-helicopterthe blades of military helicopters in harsh desert conditions to protect consumers’ mobile devices. Since then, we have endeavored to continuously innovate and improve our products to meet changing customer needs, and now offer a wide array of innovative products in several product categories to protect, enhance, and create a better mobile device experience. Mobile devices are essential to modern living and ZAGG’sour mission is to ensure better performance inenable the real world.

In addition to its home-grown brands, ZAGG hasoptimal mobile lifestyle through the use of our products.

We have created a platform to combine category-creating and innovative brands that we have acquired with our existing house of brands to address specific consumer needs toand better empower a mobile lifestyle. The Company hasWe have an award-winning product portfolio that includes screen protection, powerprotective cases, power management, wireless charging, personal audio, mobile keyboards, and casesother mobile accessories sold under the ZAGG®, InvisibleShield®, mophie®, IFROGZ®, Gear4®, and IFROGZHALO® brands.

We maintain our corporate headquarters at 910 West Legacy Center Drive,Way, Suite 500, Midvale, UT,Utah, 84047. TheOur telephone number of the Company is 801-263-0699. Our801-263-0699, and our website addresses areaddress is www.ZAGG.com andwww.mophie.com. The URLs are (the URL is included here as an inactive textual references. Informationreference, and information contained on, or accessible through, our websiteswebsite is not a part of, and is not incorporated by reference into, this report.

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report).

The Company hasWe have established four corporate objectivesCorporate Objectives and seven core valuesfour Core Values to act as a foundation for and guide ZAGG daily:

 

our corporate culture:
zagg-20200630_g1.jpg

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

The corporate objectives

To better implement our Corporate Objectives and Core Values, we have also adopted six Cultural Beliefs that guide us daily:
•Be Brave - I respectfully listen, speak candidly, consistently exchange feedback and communicate broadly.
•Be Accountable - I see it, own it, solve it and do it.
•Be Better - I relentlessly pursue opportunities to improve.
•Reach Out - I reach across all boundaries to collaborate and create alignment.
•Take Charge - I make decisions, take the necessary risks and act with no fear of failure.
•ZOOM! - I learn fast, move fast, and deliver.
These Corporate Objectives are intended to align the Company’sour functional teams’team goals and execution. Every ZAGG employeeone of our employees is trained to understand his or her role in executing to these objectives. Each core valueCore Value and Cultural Belief acts as a key component in working toward ZAGG’s corporate objectivesour Corporate Objectives of providing creative product solutions,Creative Product Solutions, executing targeted global distribution,Targeted Global Distribution, achieving operational excellence,Operational Excellence, and being the preferred brandThe Preferred Brand for itsour customers.

Our Products

Our innovative products are included in the following general categories:
•Protection (screen protection and protective cases)
•Power (power stations and wireless chargers)
•Productivity and Other (keyboards and other mobile accessory products)
•Audio (earbuds and headphones)
These four general product categories are broken down by brand as follows:
InvisibleShield Products

InvisibleShield products, including InvisibleShield Film, InvisibleShield Glass, and our InvisibleShield On Demand® (“ISOD”) solution, 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 experiencewithout the inconvenience of a shattered, cracked, or scratched screen.

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

Our

InvisibleShield films wereFilm was originally developed to protect the leading edge of rotary blades on military helicopters.helicopters in harsh environments. Through constant innovation, we continue to formulate new filmsfilm that areis 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 alsoAdditionally, we provide custom-fit screen protection for thousands of device types through our automated InvisibleShield On Demand (“ISOD”)ISOD solution. With our ISOD solution, 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. Beside these basic protection functions from impacts and scratches, we also provide the following add-on features:
•VisionGuard™ - InvisibleShield Glass VisionGuard products feature protective EyeSafe® technology that filters out portions of the harmful high-energy visible blue light spectrum emanating from device screens, while maintaining the superior color performance of the device display.
•Anti-Microbial Technology - InvisibleShield Glass with anti-microbial technology promotes physical wellness by eliminating 99.99% of harmful bacteria on the device screen. As the anti-microbial properties are infused in the glass, they will not wear away over time.
In the thirdsecond quarter of 20162020, we announcedlaunched the InvisibleShield Glass+,UV Sanitizer, an ultraviolet light that penetrates cracks and crevices of handheld items, which is designed to provide additional scratch resistancekill 99.99% of the most common surface bacteria found on mobile devices, keys, credit cards, earbuds, and impact protection over InvisibleShield Glass. Additionally, we launched InvisibleShield Sapphire Defense during the third quartermore.
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Table of 2016, which is a hybrid glass screen protector infused with sapphire crystals designed to provide premium screen protection.

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ZAGG hasWe have maintained the leading market share in screen protection in the United States (“U.S.”) and has maintained that leading positionthe United Kingdom (“U.K.”) by consistently delivering innovative InvisibleShield products to the market.

We continue to innovate and expand our screen protection products to meet the evolution of new technology and consumer needs in the market.

Gear4 Products
Gear4 is a leader in smartphone cases with unique and stylish case designs, unparalleled protection, and proven durability. With Gear4's beginnings in the U.K., Gear4 grew to be one of the top selling U.K. smartphone case brands and now has a global market for its products. Gear4 protective cases exclusively feature D3O® technology, which is designed to provide the thinnest and most advanced impact and shock absorption - the same material used in many professional sports, industrial, and military equipment applications. In their raw state, D3O materials can flow freely when manipulated slowly, but upon shock, the material locks together to absorb and disperse energy before instantly returning to their flexible state.
With D3O technology and our expansive global distribution channels, we believe Gear4 cases can offer the best mobile device protection experience for our customers and provide us with meaningful growth opportunities in our protection product line.
mophie Products

mophie is a leading battery casemobile power and mobile powerwireless charging brand with award-winning products designed to liberate mobile users from themobile device power and charging limitations of mobile devices by providingto provide 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 bothprovides 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

mophie’s innovative new universal wireless charging pad that ispads are designed to provide an optimized charging experience forwith the iPhone 8, iPhone 8 Plus and iPhone X; the mophie charging pad also includes latest Qi® wireless charging technology for universal compatibility.

compatibility, and its charge stream powerstation® products are made to ensure consumers have access to easy, fast, and convenient wireless charging anywhere and anytime for Apple, Samsung®, Google, and other Qi-enabled mobile devices.

In the first quarter of 2020, we unveiled the mophie powerstation go™ universal battery which utilizes HALO's portable car jump starter technology; the lightweight and portable battery can jump start sport utility vehicles or full-sized cars and is also equipped with USB-A ports, an AC power outlet, and Qi wireless charging for mobile devices and laptops. In addition, in the second quarter of 2020, we launched mophie UV Sanitizer, an ultraviolet light that penetrates cracks and crevices of handheld items, which is designed to kill 99.99% of the most common surface bacteria found on mobile devices, keys, credit cards, earbuds, and more. While sanitizing a mobile device and small personal items, the mophie UV Sanitizer can simultaneously charge the mobile device through a Qi-enabled wireless charging lid.
In response to the COVID-19 pandemic, we implemented plans to simplify our business and focus on profitable growth (the “Strategic Review”). As part of the Strategic Review, we determined to discontinue participation in the battery case category and to reduce our mobile power offerings under our power station product line.
We continue to innovate and expand our mobile power and wireless charging product lines under the mophie brand to provide new product experiences that are pleasing to consumers.
HALO Products
HALO is a leader in providing direct-to-consumer accessories backed by an extensive intellectual property portfolio designed to make consumers' lives easier through empowering mobile lifestyles. With a rich history of innovation that includes wireless charging, car and wall chargers, portable power, and power wallets, and with a long-standing reputation as one of the top selling electronics brands on QVC®, HALO is a global leader in the televised home shopping and e-commerce space.
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.

The recently launched AIRTIME™ Truly Wireless Earbuds include quick-charging and auto-pair technology that seamlessly connects both earbuds to any Bluetooth® device. Shortly following the launch of the AIRTIME Truly Wireless Earbuds, we launched AIRTIME PRO™ Truly Wireless Earbuds with the latest audio technology features, enabling consumers to enjoy audio streaming and hands-free calling free from wires.
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In 2007,early 2020, we unveiled the AIRTIME VIBE™ active noise cancellation headphones which reduce ambient noise by approximately twenty decibels at the push of a button, as well as the IPX5 water-resistant AIRTIME SPORT™ Truly Wireless Earbuds with around-the-ear sport wings and IPX5 water resistance built for an active lifestyle.
In connection with the Strategic Review, we determined to reduce our IFROGZ EarPollution™ product line was released. The eclectic selection of earbuds and headphones specifically targeted a younger demographic while still appealingaudio offerings 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 loversfocus on the move that combine impressiveHSN channel.
BRAVEN Products
In connection with the Strategic Review, we decided to discontinue the BRAVEN 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.

brand.

ZAGG Products

Products under the ZAGG brand are designed to empower people to live their lives unleashed. Mobility is changing how consumers do everything in their lives and ZAGG is drivingwe seek to drive the mobile lifestyle forward with products that are designed to allow consumers to be productive and connected at work, at play, and at rest. ZAGG products, which include keyboards cases, power management and social techcases, 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.

OurAs such, 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 withsupport the communicators, commuters, creators, and closers who live a mobile lifestyle. With the right ZAGG mobile accessories, we believe no one ever hasneeds to feel tethered or held back.

In connection with the Strategic Review, we determined to reduce our ZAGG keyboards are designedkeyboard offerings 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 devicesfocus only on active tablets 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.

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Apple.

Critical Accounting Policies and Estimates

The preparation of our financial statements requires that we make estimates and judgments. We basejudgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of these amounts in the notes to the financial statements. On an on-going basis, we evaluate our estimates based on historical experience and on various other assumptions that we believeare believed to be reasonable.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. Our critical accounting policies and estimates are discussed in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on2019 Form 10-K for the year ended December 31, 2016.10-K. There have been no material changes to the critical accounting policies or estimates previously disclosed in that report.

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 SEPTEMBER 30, 2017, AND 2016 (amounts

(Amounts in thousands, except per share data)

Three months ended June 30, 2020, and 2019
For the Three Months Ended
June 30, 2020June 30, 2019
Amount% of Net SalesAmount% of Net Sales
Net sales$77,117  100.0 %$106,796  100.0 %
Gross profit23,312  30.2 %37,759  35.4 %
Operating expenses29,570  38.3 %43,978  41.2 %
Other (expense) income, net(739) (1.0)%89  0.1 %
Income tax benefit3,664  4.8 %794  0.7 %
Net loss(3,333) (4.3)%(5,336) (5.0)%
Net sales

Net sales for the three months ended SeptemberJune 30, 2017,2020, were $134,398$77,117, compared to net sales of $124,662$106,796 for the three months ended SeptemberJune 30, 2016, an increase2019, a decrease of $9,736,$29,679 or approximately 8%28%. The increase$29,679 decrease in net sales comparing the three months ended September 30, 2017, to 2016 was primarily attributable to (1) increased sales retail store closures and related demand reductions due to the global COVID-19 pandemic. This decrease was partially offset by an increase in direct-to-consumer sales.
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Table of screen protection products in key wireless and retail accounts, particularly in international markets, and (2) the launch of the mophie wireless charging pad. During the third quarter of 2016, the Company launched a new line of power station products and loaded-in a significant amount of product to retail, however, there was no similar power station launch in the third quarter of 2017, resulting in a decline in overall power management sales.

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

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

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

  

2017

  

2016

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

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

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

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Gross profit

Gross profit for the three months ended SeptemberJune 30, 2017,2020, was $48,392,$23,312 or approximately 36%30% of net sales, as compared to $43,146,$37,759 or approximately 35% of net sales for the three months ended SeptemberJune 30, 2016. Typically, the Company experiences higher2019. The decrease in gross profit margin in periods whenpercentage was primarily attributable to (1) increased duty rates for products sourced from China, (2) increased freight rates, and (3) the mixsale of screen protection products increases. The mix of screen protection products increased during the three months ended September 30, 2017, to approximately 57% of net sales compared to approximately 52% of net sales during the three months ended September 30, 2016, benefiting overall gross profit margin.

excess inventory at margins lower than our historical average.

Operating expenses

Total operating expenses for the three months ended SeptemberJune 30, 2017,2020, were $32,457, a decrease$29,570, compared to operating expenses of $23,399, or approximately 42%, from total operating expenses$43,978 for the three months ended SeptemberJune 30, 2016,2019, a decrease of $55,856.$14,408 or 33%. The $23,399$14,408 decrease in operating expenses was primarily attributable to cost reduction initiatives in response to COVID-19, including (1) a $24,317 loss on disputed mophie purchase pricedecrease in 2016 that did not recursalaries and related expenses from the furlough of certain employees, elimination of bonuses in 2017,the second quarter of 2020, and (2) a reduction in advertising and marketing spend. These reductions in operatingsalary of executives and senior management, (2) reduced in-channel marketing spend, and (3) the elimination of global discretionary spend.
Other (expense) income, net
For the three months ended June 30, 2020, total other expense, were partially offset by an increase in selling, general and administrative expensenet was $739 compared to total other income, net of $1,113 and amortization expense of $616.

Income (loss) from operations

We reported income from operations of $15,935$89 for the three months ended SeptemberJune 30, 2017, compared2019. The change in other (expense) income, net is primarily attributable to a loss from operationsgain recorded on settlement of ($12,710)liabilities during the three months ended June 30, 2019.

Income tax benefit
We recognized an income tax benefit of $3,664 for the three months ended SeptemberJune 30, 2016, an increase of $28,645. The increase in income was primarily attributable to the increases in net sales, improvements in gross profit margin, and the reduction of operating expenses primarily due to a $24,317 loss on disputed mophie purchase price in 2016.

Other expense, net

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

Income taxes

We recognized income tax expense of $5,760 for the three months ended September 30, 2017,2020, compared to an income tax benefit of $6,261$794 for the three months ended SeptemberJune 30, 2016.2019. Our effective tax rate was 37%52% and 47%13% for the three months ended SeptemberJune 30, 2017,2020, and 2016,2019, respectively. The decreasechange in the effective tax rate for the three months ended June 30, 2020, compared to the three months ended June 30, 2019, was primarily due to income in lower rate foreign jurisdictions in which the Company experienced lossesimpact of the methodology used in the prior year for which benefits were not recognizedcurrent tax provision calculation above as well as an inclusion of an additional benefit related to the ratioprojected carryback of credits and other permanent differencesthe net operating loss (“NOL”). Under the CARES Act, a temporary five-year NOL carryback enables most corporate taxpayers to pre-tax book income.offset 2015 income taxed at 35% by 2020 income taxed at 21%.This projected benefit is included in the effective tax rate for the period. Due to the expected loss before taxes for the year ended December 31, 2020, the tax benefit is limited to the expected annual tax benefit for the year. The Company’s effective tax rate will generally differ from the U.S. Federal statutory rate of 35%21%, due to state taxes, permanent items, and the Company’s global tax strategy.

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

Net income (loss)

As a result of the factors noted above, weloss

We reported net incomeloss of $9,776,$3,333 or $0.34$0.11 per share on a fully diluted share,basis for the three months ended SeptemberJune 30, 2017,2020, compared to a net loss of ($7,105),$5,336 or ($0.25)$0.18 per share on a fully diluted basis for the three months ended SeptemberJune 30, 2016.

NINE MONTHS ENDED SEPTEMBER2019.

Six months ended June 30, 2017, AND 2016 (amounts in thousands, except per share data)

2020, and 2019

For the Six Months Ended
June 30, 2020June 30, 2019
Amount% of Net SalesAmount% of Net Sales
Net sales$168,098  100.0 %$185,546  100.0 %
Gross profit4,370  2.6 %61,581  33.2 %
Operating expenses92,810  55.2 %84,860  45.7 %
Other expense, net(2,271) (1.4)%(1,437) (0.8)%
Income tax benefit11,823  7.0 %4,956  2.7 %
Net loss(78,888) (46.9)%(19,760) (10.6)%
Net sales

Net sales for the ninesix months ended SeptemberJune 30, 2017,2020, were $342,571$168,098, compared to net sales of $286,928$185,546 for the ninesix months ended SeptemberJune 30, 2016, an increase2019, a decrease of $55,643,$17,448 or approximately 19%9%. The increase$17,448 decrease in net sales comparing the nine months ended September 30, 2017, to 2016 was primarily attributable to retail store closures and related demand reductions due to the global COVID-19 pandemic. This decrease was partially offset by (1) increased sales ofimproved first quarter screen protection, for new device releases during the current year,HALO product, and mophie wireless sales and (2) higheran increase in second quarter direct-to-consumer sales linked to retail store closures.
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Table of power management and power case products. Results for the nine months ended September 30, 2017, also include nine months of mophie sales compared to only seven months in 2016 as the acquisition occurred on March 3, 2016.

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

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

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

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

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

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

Gross profit

Gross profit for the ninesix months ended SeptemberJune 30, 2017,2020, was $112,822,$4,370 or approximately 3% of net sales, compared to $61,581 or approximately 33% of net sales as compared to $97,748, or approximately 34% of net sales for the ninesix months ended SeptemberJune 30, 2016.2019. The decrease in the gross profit margin percentage was primarily attributable to (1) a full nine monthsthe March 2020 inventory write-downs of mophie operations in 2017, compared$44,833 primarily linked to only seven monthsthe discontinuation of mophie operations in 2016, which arecertain brands and product lines resulting from our March 2020 strategic review of long-term profitability of all brands and product lines and the recoverability of inventory on-hand, combined with decreased demand due to the effects of COVID-19, (2) increased duty rates for products sourced from China, (3) increased freight rates, and (4) the sale of excess inventory at margins lower gross profit margins than our historical average. Excluding the corporate average, and (2) lowerimpact from the inventory write-downs, gross profit margin on curved glasswas 29% for the Samsung Galaxy S8,six months ended June 30, 2020, compared to historical gross margins on non-curved glass products. These items were partially offset by amortization expense from33% for the acquisition-related fair value inventory write-up in 2016, which did not recur in 2017.

six months ended June 30, 2019.

Operating expenses

Total operating expenses for the ninesix months ended SeptemberJune 30, 2017,2020, were $98,040, a decrease of $17,474, or approximately 15%, from total$92,810, compared to operating expenses of $84,860 for the ninesix months ended SeptemberJune 30, 2016,2019, an increase of $115,514.$7,950 or 9%. The decrease$7,950 increase in operating expenses was primarily attributable to (1) an $18,649 impairment charge to goodwill resulting from the carrying value of our net assets exceeding our market capitalization, (2) a $24,317 loss on disputed mophie purchase price in 2016 that did not recur in 2017, (2) synergies realized$2,535 charge from cost reduction initiatives,the write-off of product tooling linked to discontinued brands and product lines, (3) a reduction$1,148 write-off recorded for the intangible assets resulting from discontinued brands and product lines, and (4) $528 incurred in transaction-related costs, (4) a reductionconnection with the lay-off of certain employees in advertising and marketing spend, and (5) an overall reduction in amortization expense.March 2020. These decreasesincreases were partially offset by cost reduction initiatives in response to COVID-19, including (1) a decrease in salaries and related expenses from the following increasesfurlough of certain employees, elimination of bonuses in operating expense: (1) the inclusionsecond quarter of nine2020, and reductions in salary of executives and senior management, (2) reduced in-channel marketing spend, and (3) the elimination of global discretionary spend.
Other expense, net
For the six months ended June 30, 2020, total other expense, net was $2,271 compared to total other expense, net of mophie-related expenses for 2017 compared with seven months in 2016 and (2) the impairment of an intangible asset in 2017 related to an invalidated patent totaling $1,959.

Income (loss) from operations

We reported income from operations of $14,782$1,437 for the ninesix months ended SeptemberJune 30, 2017, compared2019. The increase in total other expense, net is primarily attributable to a loss from operations of ($17,766) for the nine months ended September 30, 2016, an increase of $32,548. The increase in income from operations was primarily attributableinterest expense due to increases in net sales and gross profit,higher amounts of debt and a decrease in operating expenses primarily due to a $24,317 lossof gains on disputed mophie purchase price in 2016.

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foreign exchange transactions.

Income tax benefit

Other expense, net

For

We recognized an income tax benefit of $11,823 for the ninesix months ended SeptemberJune 30, 2017, other expense was $1,460 compared to other expense of $1,639 for the nine months ended September 30, 2016.

Income taxes

We recognized income tax expense of $6,281 for the nine months ended September 30, 2017,2020, compared to an income tax benefit of $7,963$4,956 for the ninesix months ended SeptemberJune 30, 2016.2019. Our effective tax rate was 47%13% and 41%20% for the ninesix months ended SeptemberJune 30, 2017,2020, and 2016,2019, respectively. The increasechange in the effective tax rate for the six months ended June 30, 2020, compared to the six months ended June 30, 2019, was primarily due to various discrete expenses recognized during the periodimpact of the methodology used in the current tax provision calculation above as well as an inclusion of an additional benefit related to the true upprojected carryback of the NOL. Under the CARES Act, a deferred amounttemporary five-year NOL carryback enables most corporate taxpayers to offset 2015 income taxed at 35% by 2020 income taxed at 21%.This projected benefit is included in the effective tax rate for stock compensation and other discrete items relatedthe period. Due to the returnexpected loss before taxes for the year ended December 31, 2020, the tax benefit is limited to provision calculation.the expected annual tax benefit for the year. The Company’s effective tax rate will generally differ from the U.S. Federal statutory rate of 35%21%, due to state taxes, permanent items, and the Company’s global tax strategy.

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

Net income (loss)

As a result of the factors noted above, weloss

We reported net income of $7,041, or $0.25 per diluted share, for the nine months ended September 30, 2017, compared to a net loss of ($11,442),$78,888 or ($0.41)$2.65 per share on a fully diluted basis for the ninesix months ended SeptemberJune 30, 2016.

2020, compared to $19,760 or $0.68 per share on a fully diluted basis for the six months ended June 30, 2019.

Liquidity and Capital Resources (in(Amounts in thousands)

At September

Liquidity is a measurement of our ability to generate adequate amounts of cash to meet both our current and future obligations, including ongoing commitments to fund continuing operations and capital expenditures, repay our debt, purchase treasury shares, and acquire businesses. As of June 30, 2017,2020, our principal sources of liquidity were cash providedgenerated by operations and cash on hand, and the revolving credit facility.on-hand. Our principal uses of cash have beenwere primarily for repayment of the 2018 Revolver (as defined below) and working capital needs. As of December 31, 2019, our principal sources of liquidity were cash used to reduce accounts payable balances,on-hand and net borrowings from the 2018 Revolver. Our principal uses of cash were for operating activities, purchase of property and makeequipment, payments onfor the termnet share settlement of restricted stock units, purchase of treasury shares, and revolving credit facilities.

business acquisitions.

Cash and Cash Equivalents
Cash and cash equivalents on-hand decreased to $11,394$17,314 on SeptemberJune 30, 2017,2020, from $11,604$17,801 on December 31, 2016,2019, a decrease of $210. Earnings from foreign operations are considered permanently re-invested and$487. The decrease in cash is largely the result of $15,100 net payments against the $11,394 cash balance on September 30, 2017, cash from foreign entities totaled $8,735, which constitutes 77% of the total cash and cash equivalents balance.

Accounts receivable, net of allowances, increased to $96,830 on September 30, 2017, from $83,835 on December 31, 2016, an increase of $12,995. The increase was primarily attributable to increased sales in 20172018 Revolver, partially offset by strong$9,444 of proceeds received from the PPP Loan and $8,469 provided by operating activities.

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Cash Flows
For the Six Months Ended
June 30,
20202019
Net cash flow provided by (used in):
Operating activities$8,469  $(13,727) 
Investing activities(2,790) (24,579) 
Financing activities(6,188) 35,509  
Effect of foreign currency exchange rates on cash and cash equivalents22  (111) 
Net decrease in cash and cash equivalents$(487) $(2,908) 
Operating Activities
Net cash collections duringprovided from operating activities was $8,469 for the first ninesix months ended June 30, 2020, compared to $13,727 of 2017.

Inventories decreased to $72,005 on Septembernet cash used in operating activities for the six months ended June 30, 2017, from $72,769 on December 31, 2016,2019, a net change of $22,196. The change was primarily driven by (1) a decrease in use of $764. Thecash for inventory for the six months ended June 30, 2020, compared to the six months ended June 30, 2019, and (2) higher collections on accounts receivable resulting in a lower balance of receivables for the six months ended June 30, 2020, compared to the six months ended June 30, 2019. These increases were partially offset by an increase in cash used to pay our vendors.

Investing Activities
Net cash used in investing activities was $2,790 for the six months ended June 30, 2020, compared to $24,579 for the six months ended June 30, 2019, a net decrease of $21,789. The decrease in net cash used in investing activities was primarily attributabledue to improved supply chain$20,368 of cash used in the acquisition of HALO in 2019 and inventory purchasing processes,decreased spending in purchases of property and equipment for the six months ended June 30, 2020.
Financing Activities
Net cash used in financing activities was $6,188 for the six months ended June 30, 2020, compared to $35,509 of net cash provided by financing activities for the six months ended June 30, 2019, a net change of $41,697. The change was primarily due to a higher ratio of net payments made on the 2018 Revolver relative to net proceeds received from that revolving credit facility for the six months ended June 30, 2020, compared to a higher ratio of net proceeds received from the 2018 Revolver relative to net payments made to that revolving credit facility for the six months ended June 30, 2019, partially offset by inventory purchases atproceeds received from the end of the third quarter to meet fourth quarter demand for new product launches.

Accounts payable decreased to $82,742 on September 30, 2017, from $85,022 on December 31, 2016,PPP Loan.

Working Capital
Working capital is a decrease of $2,280. The decrease was primarily attributable to timing of payments to suppliers at each respective period-end.

At September 30, 2017, the Company had a positivenon-GAAP measurement which is defined by us as current assets less current liabilities. We believe working capital is a meaningful way to measure our operational efficiency and short-term financial health. As of $19,677June 30, 2020, working capital was $96,578 compared to negative working capital of ($9,408)$151,660 as of December 31, 2016.2019, a decrease of $55,082. The increasedecrease in the working capital position was primarily attributable to reductionschanges in accounts payablereceivable, inventories, including a $44,833 write-down of inventory during the six months ended March 31, 2020, and accounts payable.

Accounts receivable, net of allowances, decreased to $63,090 on June 30, 2020, from $142,804 on December 31, 2019, a decrease of $79,714. The net decrease was primarily attributable to the collection of accounts receivable since year-end combined with lower sales during the second quarter of 2020 in comparison to the fourth quarter of 2019.
Inventories decreased to $91,328 on June 30, 2020, from $144,944 on December 31, 2019, a decrease of $53,616. The net decrease was primarily attributable to a write-down of $44,833 of inventory due primarily by the effects of the COVID-19 pandemic and the Strategic Review conducted by management in response.
Accounts payable decreased to $44,945 on June 30, 2020, from $87,303 on December 31, 2019, a decrease of $42,358. The net decrease was primarily attributable to lower seasonal inventory purchases and operating activities in the first half year of 2020 in comparison to the fourth quarter of 2019, and payment on accounts payable outstanding on December 31, 2019, during the six months ended June 30, 2020.
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Share Repurchase Program
During the third quarter of 2015, our board of directors approved a stock repurchase program with no expiration date. On March 11, 2019, our board of directors authorized the cancellation of the 2015 stock repurchase program, and authorized a new stock repurchase program that grants the repurchase of up to $20,000 of our outstanding common stock. As of June 30, 2020, we have $20,000 remaining under this program.
Debt and Credit Facilities
We entered into the 2018 Credit and Security Agreement, as amended, to obtain a secured revolving credit facility (the “2018 Revolver”) and letters of credit. We use the net borrowing from the 2018 Revolver for general corporate purposes, including funding for working capital, purchase of property and equipment, purchase of treasury shares and business acquisitions. As of June 30, 2020, we had $92,040 of the 2018 Revolver outstanding, with a weighted average interest rate of 2.7%. There were no letters of credit issued as of June 30, 2020 and $52,760 was available to be issued for letters of credit. In addition, we entered into a loan agreement under the Paycheck Protection Program of the CARES Act, and received a loan in the amount of $9,444. These items are further discussed in Note 8, “Long-Term Debt,” to our Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q, and are hereby incorporated by reference.
Company Actions Due to COVID-19 Pandemic
As a result of the COVID-19 pandemic, we have experienced a reduction in demand as over 84% of our sales occur through brick and mortar retail or franchise locations. In order to meet short and long-term capital needs and to comply with debt covenant requirements under the 2018 Revolver throughout 2020 and beyond, we instituted in the six months ended June 30, 2020 a number of global cash savings and cost-cutting initiatives including the following:
•Implemented furloughs or lay-offs of approximately 20% of U.S. employees and reduced our Europe and Asia Pacific staff, excluding China, by approximately 20%. Employees on furlough retain their health insurance coverage throughout the furlough;
•Temporarily reduced salaries during the second quarter of 2020, including a 15% reduction for our Chief Executive Officer, 10% reductions for the rest of the executive team and 5% reductions for senior management;
•Temporarily reduced the cash portion of the Board of Directors’ compensation by 15% and replaced such compensation with stock-based compensation;
•Temporarily suspended our employee bonus program for the three months ended June 30, 2020;
•Significantly reduced marketing spend throughout the remainder of 2020;
•Deferred or cancelled spending on all non-essential projects;
•Delayed or cancelled certain purchase orders to align with our adjusted demand forecast;
•Limited travel of employees internationally and domestically throughout the remainder of 2020;
•Discontinued the BRAVEN audio brand;
•Discontinued the battery case product category; and
•Simplified our iFrogz audio, ZAGG keyboard and mophie power station businesses, including reducing SKU counts and discontinuing certain product lines.
The Company continues to evaluate this evolving business environment due to the COVID-19 pandemic and may institute additional cash savings and cost-cutting initiatives in future periods.
In addition to the cash savings and cost-cutting initiatives, we closed on an amendment to the 2018 Revolver to increase our line of credit capacity by $19,800 through March 31, 2021. In addition, on April 13, 2020, we entered into a loan agreement with KeyBank as the lender under the Paycheck Protection Program of the CARES Act administered by U.S. Small Business Administration (the “SBA”), and subsequently received a loan in the amount of $9,444 (the “PPP Loan”) to help sustain our employee payroll costs, rent, and utilities due to the severe impact of the COVID-19 pandemic. Under the Paycheck Protection Program, the Company's PPP Loan is fully forgivable if the Company meets certain requirements and receives formal approval, as defined by the CARES Act, subject to an increase in accounts receivable.

Based onaudit by the current levelSBA. The Company intends to seek partial or full forgiveness of operations, wethe PPP Loan; however, there can be no assurance that the Company will obtain forgiveness of all or part of the PPP Loan amount. The interest rate for the PPP Loan is 1% per annum, and all required payments are deferred for six months from the Disbursement Date (interest will accrue over this six-month deferral period). Unless the PPP Loan is fully or partially forgiven, the Company must pay $525 of the principal every month once the deferral period is over, as well as accumulated interest, until the maturity date which is two years from the Disbursement Date.

We believe that the combination of the (1) cash to be generated from operations,savings and cost reduction initiatives, (2) expansion of the credit capacity under the 2018 Revolver, (3) the proceeds of the PPP Loan, and (4) cash on hand and available borrowings under existing credit arrangements will be adequate to fundmeet our expected capital expenditures and working capital needs for the next 12 months.

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months and beyond.

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We believe that the measures and initiatives discussed above will enable us to meet our financial obligations and continue to build our business. However, we operate in a rapidly evolving and often unpredictable business environment, which is currently exacerbated by the COVID-19 pandemic, 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.
Item 3.Quantitative and Qualitative Disclosures About Market Risk

Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to certain market risks in the ordinary course of our business. These risks result primarily from changes in foreign currency exchange rates, interest rates, and interest rates.tariffs. In addition, our domestic and international operations are subject to risks related to differing economic conditions, changes in political climate,climates, differing tax structures, environmental and health risks, and other regulations and restrictions.

To date we have not utilized material 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 theseour financial instruments are immaterial, althoughthough there can be no guarantee that these market risks will be immaterial to us.

Item 4.Controls and Procedures

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

We maintain

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

Underdisclosures.

At the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluationof the effectiveness of the design and operation of our disclosure controls and procedures as such term is defined under Rule 13a-15(e) promulgated underin accordance with the Exchange Act as of the end of the period covered by this Report.requirements. Based on thisupon that evaluation, theour principal executive officer and principal financial officer concluded that as of the end of the period covered byof this Report,report, our disclosure controls and procedures were effective at theand were designed to provide reasonable assurance level.

that information required to be included in the reports filed or submitted under the Exchange Act of 1934 is recorded, processed, summarized, and reported as specified in the SEC’s rules and forms.

Changes in Internal Control over Financial Reporting

As a result of the material weakness related to a material overstatement of net sales and accounts receivable as of and for the year ended December 31, 2016, which was corrected by management prior to issuance of the 2016 consolidated financial statements

There were no significant changes in the Company’s Annual Report on Form 10-K, management has completed the following changes to its internal controls during the nine months ended September 30, 2017:

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

Management has assessed the above identified changes to its internal control over financial reporting during the most recent fiscal quarter that have materially affected, or are reasonably likely to ensure thatmaterially affect, the changes have been properly designed and implemented and are operating effectively. The assessment performed has allowed management to conclude that the material weakness at December 31, 2016 has been remediated.Company’s internal control over financial reporting. The process for evaluating controls and procedures is continuous and encompasses constant improvement of the design and effectiveness of established controls and procedures and the remediation of any deficiencies which may be identified during this process.

Inherent Limitations on the Effectiveness of Internal Controls

Our disclosure controls

Internal control over financial reporting has inherent limitations. Internal control over financial reporting is a process that involves human diligence and procedures are designedcompliance and is subject to provide reasonable assurance of achieving their objectives. Nevertheless, an internallapses in judgment and breakdowns resulting from human failures. Internal control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system reflects the fact that there are resource constraints, and the benefits of controls are considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controlsover financial reporting also can be circumvented by the individual actscollusion or improper management override. Because of some persons,such limitations, there is a risk that material misstatements will not be prevented or detected on a timely basis by collusion of two or more people, or by management overrideinternal control over financial reporting. However, these inherent limitations are known features of the internal control. Thefinancial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.
26
Table of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate.

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Contents

PART II - OTHER INFORMATION

Item 1.Legal Proceedings

Item 1. Legal Proceedings
Certain of the legal proceedings in which we are involved are discussed in Note 11, “Commitments and Contingencies,13, “Contingencies,” to our Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q, and are hereby incorporated by reference.

Item 1A.Risk Factors

Item 1A. Risk Factors(amounts in thousands)
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 on2019 Form 10-K, for the year ended December 31, 2016 (the “2016 Form 10-K”), which could materially affect our business, financial condition, or future results. These risk factors should be read carefully in connection with evaluating our business and in connection with the forward-looking statements contained in this Quarterly Report on Form 10-Q.Report. Any of the risks described in the 20162019 Form 10-K could materially adversely affect our business, financial condition or future results and the actual outcome of matters as to which forward-looking statements are made. These are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition, and/or operating results.

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

There were no material changes during the period covered in this report to the risk factors previously disclosed in our 2019 Form 10-K except as follows:
Our financial condition and results of operations in future periods have been adversely affected by the recent COVID-19 pandemic.
In December 2019, a mutated strain of coronavirus was reported to have surfaced in Wuhan, China. The outbreak, which had previously been concentrated in China, has largely spread through the U.S. and the world. The pandemic has resulted in federal, state, and local restrictions, requiring or recommending social distancing, travel bans, quarantines and other restrictions. Additionally, concerns regarding the spread and ultimate human and economic impacts have caused significant downturns in global stock markets, including U.S. stock markets. For these and other reasons, future demand for our products may decline for an uncertain duration of time. Our sales are mainly concentrated through the retail sale channel, which has been impacted due to the previous shutdown of many brick and mortar retail stores around the current outbreak. In addition, smartphone, tablet computers, and other similar product sales are decreasing due to the current outbreak, which also has an impact on our forecasted sales. Due to these impacts on current and future demand, our revenue is likely to be adversely impacted during the duration of the outbreak, which is currently unknown and difficult to forecast. These factors will likely negatively impact our financial results and could have an impact on our ability to continue as a going concern. In addition, the coronavirus pandemic may have an impact on our supply chain, as production is affected by current and potential future conditions, potentially forcing us to curtail, delay, or cancel product manufacturing. In response to such conditions, we have taken the following proactive measures to provide enhanced financial flexibility:
•Amended our secured revolving credit facility to increase available borrowings by $19,800 through March 2021;
•Closed on a U.S. Small Business Administration loan under the CARES Act of approximately $9,444;
•Implemented furloughs or lay-offs of approximately 20% of U.S. employees and reduced our Europe and Asia Pacific staff, excluding China, by approximately 20%. Employees on furlough retain their health insurance coverage throughout the furlough;
•Temporarily reduced salaries during the second quarter of 2020, including a 15% reduction for our Chief Executive Officer, 10% reductions for the rest of the executive team and 5% reductions for senior management;
•Temporarily reduced the cash portion of the Board of Directors’ compensation by 15% and replaced such compensation with stock-based compensation;
•Temporarily suspended our employee bonus program for the three months ended June 30, 2020;
•Significantly reduced marketing spend throughout the remainder of 2020;
•Deferred or cancelled spending on all non-essential projects;
•Delayed or cancelled certain purchase orders to align with our adjusted demand forecast;
•Limited travel of employees internationally and domestically throughout the remainder of 2020;
•Discontinued the BRAVEN audio brand;
•Discontinued the battery case product category; and
•Simplified our iFrogz audio, ZAGG keyboard and mophie power station businesses, including reducing SKU counts and discontinuing certain product lines.
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These practices may continue into the future while the consequences of the outbreak are uncertain. Despite our efforts to proactively respond to the COVID-19 pandemic, concerns regarding the continued spread and ultimate human and economic impacts may affect our ability to obtain and retain financing for future cash-flow demands, and we may see a decrease in the value of inventory due to obsolescence and/or impairment. Material impairments with respect to goodwill, intangible assets, long-lived assets, and right of use assets may also occur in the future. We anticipate there may be increases in credit losses from our customers. Our estimates around product returns may also be impacted, with potential increases in expected returns from customers.
The extent to which the coronavirus pandemic impacts our results of operations will depend on future developments, many of which are out of our control, are highly uncertain and cannot be predicted, including new events that may occur, including additional outbreaks of COVID-19 and actions taken to contain its spread or treat its impact, among others. With the uncertainty caused by this outbreak, we may not adequately quantify or qualify the longer-term ramifications of the pandemic on our business, our customers and/or our potential investors and other stakeholders. We will continue to monitor the situation and timely communicate to our investors when necessary.
If we do not qualify for retention or forgiveness of the Paycheck Protection Program loan, our financial condition may be adversely affected.
On April 13, 2020, we entered into a loan agreement with KeyBank National Association as the lender under the Paycheck Protection Program (the “PPP”) of the CARES Act administered by the U.S. Small Business Administration (the “SBA”), and subsequently received a loan in the amount of $9,444 (the “PPP Loan”) to help sustain our employee payroll costs, rent, and utilities due to the impact of the COVID-19 pandemic. We made good faith certifications of our necessity for the PPP Loan, and believe that we are in full compliance with the terms and conditions outlined in the CARES Act. However, as a consequence of post-PPP Loan rule-making by the SBA, shifting regulatory guidance and/or other factors that may be considered by the SBA during its audit process, we may be required to return the PPP Loan before its expected maturity date. In addition, we hope to obtain forgiveness of all or a portion of the PPP Loan, as allowed under the CARES Act. As there is still substantial uncertainty about PPP forgiveness qualifications, we make no representations that we will qualify for forgiveness of all or part of the PPP Loan. Due to the incomplete and changing regulations around the PPP, new pronouncements may also change our current compliance status under the law, and any potential allowable forgiveness of the outstanding PPP Loan amount. If we are required to repay the PPP Loan, we may need to incur other indebtedness and we cannot provide assurance that we can obtain additional indebtedness with the terms and availability needed for our ongoing operations.
U.S. tariffs and international trade disputes with China and/or others could increase the cost of our products or make our products more expensive for customers.
Between July 2018, and December 2019, the U.S. government imposed tariffs on a variety of imports from China with rates ranging from 10 percent to 25 percent and the Chinese government retaliated with tariffs ranging from 5 percent to 10 percent on U.S. imports. The U.S. and China have been engaging in ongoing trade talks in the last two years. However, significant trade war tariffs still remain in effect that adversely impact our business, with no clear future outlook if and/or when changes to tariffs may occur. In addition, tariffs may decrease and/or increase depending on ongoing trade negotiations. With the noted uncertainty of future trade talks, these trade disputes may impact certain product lines that were previously not impacted by recent tariffs and our business could be adversely affected by increased costs in importing our products. These factors could make our products less competitive and reduce consumer demand. We are uncertain of the potential future magnitude that these and other potential trade disputes and policies that may have, and these factors could materially adversely affect our business, financial condition, and operating results.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.

Item 3.Defaults Upon Senior Securities

Item 3. Defaults Upon Senior Securities
None.

Item 4.Mine Safety Disclosures

Item 4. Mine Safety Disclosures
Not applicable.

Item 5.Other Information

Item 5. Other Information
None.

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Item 6.Exhibits

a.Exhibits:

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

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

26

Exhibit NumberExhibit DescriptionIncorporated by ReferenceFiled or Furnished Herewith
FormFile NumberExhibitFiling Date
8-K001-3452810.104/16/2020
8-K001-3452810.204/16/2020
8-K001-3452810.304/16/2020
8-K001-3452810.404/16/2020
8-K001-3452810.504/16/2020
X
X
X
X
101.INSXBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL documentX
101.SCHInline XBRL Taxonomy Extension Schema DocumentX
101.CALInline XBRL Taxonomy Extension Calculation Linkbase DocumentX
101.DEFInline XBRL Taxonomy Extension Definition Linkbase DocumentX
101.LABInline XBRL Taxonomy Extension Label Linkbase DocumentX
101.PREInline XBRL Taxonomy Extension Presentation Linkbase DocumentX


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SIGNATURES

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

ZAGG INC
ZAGG INC
Date: November 2, 2017/s/ RANDALL L. HALES(Registrant)
Randall L. Hales,
Dated: August 4, 2020By:/s/ CHRIS M. AHERN
Chris M. Ahern
Chief Executive Officer President, & Director
(Principal executive officer)
Date: November 2, 2017Dated: August 4, 2020By:/s/ BRADLEY J. HOLIDAYTAYLOR D. SMITH
Bradley J. Holiday,         Taylor D. Smith
Chief Financial Officer
(Principal financial and accounting officer)

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31