Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
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 30, 20192020, or
☐ Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from ______________ to _____________.
001-34528
(Commission File Number)
ZAGG Inc
(Exact name of registrant as specified in its charter)
Delaware20-2559624
(State or other jurisdiction of incorporation)(I.R.S. Employer Identification No.)

910 West Legacy Center Way, Suite 500
Midvale, Utah 84047
(Address of principal executive offices, including zip code)
(801) 263-0699
(Registrant’s telephone number, including area code)
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 every Interactive Data File required to be submitted 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 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☐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: 29,086,40229,848,506 common shares as of November 5, 2019.
9, 2020.




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PART I - FINANCIAL INFORMATION
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PART II - OTHER INFORMATION
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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 amounts)
(Unaudited)
September 30, 2019December 31, 2018
ASSETS
Current assets:
Cash and cash equivalents$14,669  $15,793  
Accounts receivable, net of allowances of $879 and $885135,345  156,667  
Income tax receivable  3,007  375  
Inventories138,452  82,919  
Prepaid expenses and other current assets  4,871  5,473  
Total current assets296,344  261,227  
Property and equipment, net of accumulated depreciation of $14,801 and $11,84418,644  16,118  
Intangible assets, net of accumulated amortization of $91,640 and $78,62767,102  52,054  
Deferred income tax assets13,994  19,403  
Operating lease right of use assets  10,067  —  
Goodwill  43,569  27,638  
Other assets1,103  1,571  
Total assets$450,823  $378,011  
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable$97,978  $80,908  
Sales returns liability  41,244  54,432  
Accrued wages and wage related expenses  6,934  6,624  
Accrued liabilities18,911  13,723  
Current portion of operating lease liabilities  2,129  —  
Total current liabilities167,196  155,687  
Line of credit111,363  58,363  
Operating lease liabilities  11,135  —  
Other long-term liabilities—  5,470  
Total liabilities289,694  219,520  
Commitments and contingencies (Note 1 and Note 11)
Stockholders’ equity:
Common stock, $0.001 par value; 100,000 shares authorized; 36,163 and 34,457 shares issued36  34  
Treasury stock, 7,055 and 6,983 common shares at cost(50,455) (49,733) 
Additional paid-in capital111,917  96,486  
Accumulated other comprehensive loss(2,366) (1,410) 
Retained earnings101,997  113,114  
Total stockholders’ equity161,129  158,491  
Total liabilities and stockholders’ equity$450,823  $378,011  

September 30, 2020December 31, 2019
ASSETS
Current assets:
Cash and cash equivalents$16,115 $17,801 
Accounts receivable, net of allowances of $1,088 and $1,14391,196 142,804 
Income tax receivable7,980 0 
Inventories80,024 144,944 
Prepaid expenses and other current assets8,539 6,124 
Total current assets203,854 311,673 
Property and equipment, net of accumulated depreciation of $14,354 and $14,15915,759 18,019 
Intangible assets, net of accumulated amortization of $105,168 and $95,63251,704 63,110 
Deferred income tax assets, net23,680 22,657 
Operating lease right of use assets9,890 9,636 
Goodwill24,920 43,569 
Other assets243 567 
Total assets$330,050 $469,231 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable$60,142 $87,303 
Income tax payable0 5,266 
Sales returns liability25,668 43,853 
Accrued wages and wage-related expenses6,225 6,328 
Accrued liabilities5,440 15,164 
Current portion of other long-term liabilities662 0 
Current portion of operating lease liabilities2,786 2,099 
Total current liabilities100,923 160,013 
Line of credit87,655 107,140 
Operating lease liabilities9,915 10,599 
Other long-term liabilities8,782 0 
Total liabilities207,275 277,752 
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 capital120,188 116,533 
Accumulated other comprehensive loss(962)(1,631)
Retained earnings53,967 126,995 
Total stockholders’ equity122,775 191,479 
Total liabilities and stockholders’ equity$330,050 $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)
For the Three Months EndedFor the Nine Months EndedFor the Three Months EndedFor the Nine Months Ended
September 30, 2019September 30, 2018September 30, 2019September 30, 2018September 30, 2020September 30, 2019September 30, 2020September 30, 2019
Net salesNet sales$146,488  $141,087  $332,034  $371,718  Net sales$115,456 $146,488 $283,554 $332,034 
Cost of salesCost of sales92,143  88,916  216,108  244,297  Cost of sales77,023 92,143 240,751 216,108 
Gross profitGross profit54,345  52,171  115,926  127,421  Gross profit38,433 54,345 42,803 115,926 
Operating expenses:Operating expenses:Operating expenses:
Advertising and marketing4,129  3,089  13,228  8,322  Advertising and marketing3,218 4,129 10,063 13,228 
Selling, general and administrative34,063  27,349  100,138  78,692  Selling, general, and administrative23,849 33,967 80,185 100,036 
Transaction costs547  618  1,168  635  Transaction costs72 547 468 1,168 
Amortization of intangible assets3,948  2,859  13,013  8,404  Impairment of goodwill0 0 18,649 0 
Loss on disposal of intangible assets and equipment0 96 3,683 102 
Amortization of intangible assets3,357 3,948 10,258 13,013 
Total operating expensesTotal operating expenses42,687  33,915  127,547  96,053  Total operating expenses30,496 42,687 123,306 127,547 
Income (loss) from operationsIncome (loss) from operations11,658  18,256  (11,621) 31,368  Income (loss) from operations7,937 11,658 (80,503)(11,621)
Other (expense) income:
Other income (expense):Other income (expense):
Interest expense(1,221) (286) (3,334) (1,132) Interest expense(885)(1,221)(3,375)(3,334)
Other (expense) income(462) (176) 214  (362) Other income (expense)867 (462)1,086 214 
Total other expenseTotal other expense(1,683) (462) (3,120) (1,494) Total other expense(18)(1,683)(2,289)(3,120)
Income (loss) before provision for income taxesIncome (loss) before provision for income taxes9,975  17,794  (14,741) 29,874  Income (loss) before provision for income taxes7,919 9,975 (82,792)(14,741)
Income tax (provision) benefitIncome tax (provision) benefit(1,293) (3,168) 3,663  (5,003) Income tax (provision) benefit(1,700)(1,293)10,123 3,663 
Net income (loss)Net income (loss)$8,682  $14,626  $(11,078) $24,871  Net income (loss)$6,219 $8,682 $(72,669)$(11,078)
Earnings (loss) per share attributable to stockholders:Earnings (loss) per share attributable to stockholders:Earnings (loss) per share attributable to stockholders:
Basic earnings (loss) per share$0.30  $0.52  $(0.38) $0.88  Basic earnings (loss) per share$0.21 $0.30 $(2.44)$(0.38)
Diluted earnings (loss) per share$0.30  $0.51  $(0.38) $0.87  Diluted earnings (loss) per share$0.21 $0.30 $(2.44)$(0.38)

See accompanying notes to condensed consolidated financial statements.
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ZAGG INC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Amounts in thousands)
(Unaudited)
For the Three Months EndedFor the Nine Months EndedFor the Three Months EndedFor the Nine Months Ended
September 30, 2019September 30, 2018September 30, 2019September 30, 2018September 30, 2020September 30, 2019September 30, 2020September 30, 2019
Net income (loss)Net income (loss)$8,682  $14,626  $(11,078) $24,871  Net income (loss)$6,219 $8,682 $(72,669)$(11,078)
Other comprehensive (loss) gain, net of tax:
Other comprehensive gain (loss), net of tax:Other comprehensive gain (loss), net of tax:
Foreign currency translation (loss) gain(941) 175  (956) (505) Foreign currency translation gain (loss)272 (941)669 (956)
Total other comprehensive (loss) income(941) 175  (956) (505) 
Total other comprehensive income (loss)Total other comprehensive income (loss)272 (941)669 (956)
Total comprehensive income (loss)Total comprehensive income (loss)$7,741  $14,801  $(12,034) $24,366  Total comprehensive income (loss)$6,491 $7,741 $(72,000)$(12,034)

See accompanying notes to condensed consolidated financial statements.
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ZAGG INC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(Amounts in thousands)
(Unaudited)
For the Three Months Ended September 30, 2019
Common Stock
SharesAmountAdditional Paid-in CapitalAccumulated Other Comprehensive LossTreasury StockRetained EarningsTotal Stockholders’ Equity
Balances, July 01, 201936,140  $36  $111,279  $(1,425) $(50,455) $93,315  $152,750  
Net income—  —  —  —  —  8,682  8,682  
Other comprehensive loss—  —  —  (941) —  —  (941) 
Restricted stock release19  —  —  —  —  —  —  
Employee stock purchase plan release4  —  48  —  —  —  48  
Stock-based compensation expense—  —  631  —  —  —  631  
Payment of withholding taxes on restricted stock units—  —  (41) —  —  —  (41) 
Balances, September 30, 201936,163  $36  $111,917  $(2,366) $(50,455) $101,997  $161,129  
For the Nine Months Ended September 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—  —  —  —  —  (11,078) (11,078) 
Other comprehensive loss—  —  —  (956) —  —  (956) 
Treasury stock purchase—  —  —  —  (722) —  (722) 
Restricted stock release241  —  —  —  —  —  —  
Employee stock purchase plan release7  —  61  —  —  —  61  
Stock-based compensation expense—  —  3,291  —  —  —  3,291  
Payment of withholding taxes on restricted stock units—  —  (887) —  —  —  (887) 
Shares issued as consideration for acquisition1,458  2  12,966  —  —  —  12,968  
Balances, September 30, 201936,163  $36  $111,917  $(2,366) $(50,455) $101,997  $161,129  
For the Three Months Ended September 30, 2020
Common Stock
SharesAmountAdditional Paid-in CapitalAccumulated Other Comprehensive LossTreasury StockRetained EarningsTotal Stockholders’ Equity
Balances, June 30, 202036,884 $37 $118,862 $(1,234)$(50,455)$47,748 $114,958 
Net income— — — — — 6,219 6,219 
Other comprehensive income— — — 272 — — 272 
Stock-based compensation expense— — 1,326 — — — 1,326 
Balances, September 30, 202036,884 $37 $120,188 $(962)$(50,455)$53,967 $122,775 


For the Nine Months Ended September 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— — — — — (72,669)(72,669)
Other comprehensive income— — — 669 — — 669 
Restricted stock release270 — — — — — — 
Employee stock purchase plan release4 — 39 — — — 39 
Stock-based compensation expense— — 3,930 — — — 3,930 
Payment of withholding taxes on restricted stock units— — (314)— — — (314)
Balances, September 30, 202036,884 $37 $120,188 $(962)$(50,455)$53,967 $122,775 

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 September 30, 2018
Common Stock
SharesAmountAdditional Paid-in CapitalAccumulated Other Comprehensive LossTreasury StockRetained EarningsTotal Stockholders’ Equity
Balances, July 01, 201834,423  $34  $94,977  $(1,028) $(40,643) $84,170  $137,510  
Net income—  —  —  —  —  14,626  14,626  
Other comprehensive income—  —  —  175  —  —  175  
Treasury stock purchase—  —  —  —  (3,091) —  (3,091) 
Restricted stock release9  —  —  —  —  —  —  
Employee stock purchase plan release1  —  —  —  —  —  —  
Stock-based compensation expense—  —  757  —  —  —  757  
Payment of withholding taxes on restricted stock units—  —  (92) —  —  —  (92) 
Balances, September 30, 201834,433  $34  $95,642  $(853) $(43,734) $98,796  $149,885  
For the Nine Months Ended September 30, 2018
Common Stock
SharesAmountAdditional Paid-in CapitalAccumulated Other Comprehensive LossTreasury StockRetained EarningsTotal Stockholders’ Equity
Balances, December 31, 201734,104  $34  $96,145  $(348) $(37,637) $77,805  $135,999  
Cumulative effect of accounting change—  —  —  —  —  (3,880) (3,880) 
Balance after cumulative effect of accounting change34,104  34  96,145  (348) (37,637) 73,925  132,119  
Net income—  —  —  —  —  24,871  24,871  
Other comprehensive loss—  —  —  (505) —  —  (505) 
Treasury stock purchase—  —  —  —  (6,097) —  (6,097) 
Restricted stock release327  —  —  —  —  —  —  
Employee stock purchase plan release2  —  55  —  —  —  55  
Stock-based compensation expense—  —  2,165  —  —  —  2,165  
Payment of withholding taxes on restricted stock units—  —  (2,723) —  —  —  (2,723) 
Balances, September 30, 201834,433  $34  $95,642  $(853) $(43,734) $98,796  $149,885  
For the Three Months Ended September 30, 2019
Common Stock
SharesAmountAdditional Paid-in CapitalAccumulated Other Comprehensive LossTreasury StockRetained EarningsTotal Stockholders’ Equity
Balances, June 30, 201936,140 $36 $111,279 $(1,425)$(50,455)$93,315 $152,750 
Net loss— — — — — 8,682 8,682 
Other comprehensive income— — — (941)— — (941)
Restricted stock release19 — — — — — — 
Employee stock purchase plan release4 — 48 — — — 48 
Stock-based compensation expense— — 631 — — — 631 
Payment of withholding taxes on restricted stock units— — (41)— — — (41)
Balances, September 30, 201936,163 $36 $111,917 $(2,366)$(50,455)$101,997 $161,129 


For the Nine Months Ended September 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— — — — — (11,078)(11,078)
Other comprehensive loss— — — (956)— — (956)
Treasury stock purchase— — — — (722)— (722)
Restricted stock release241 — — — — — — 
Employee stock purchase plan release7 — 61 — — — 61 
Stock-based compensation expense— — 3,291 — — — 3,291 
Payment of withholding taxes on restricted stock units— — (887)— — — (887)
Shares issued as consideration for acquisition1,458 2 12,966 — — — 12,968 
Balances, September 30, 201936,163 $36 $111,917 $(2,366)$(50,455)$101,997 $161,129 

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 Nine Months EndedFor the Nine Months Ended
September 30, 2019September 30, 2018September 30, 2020September 30, 2019
Cash flows from operating activities:Cash flows from operating activities:Cash flows from operating activities:
Net (loss) income$(11,078) $24,871  Net loss$(72,669)$(11,078)
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Stock-based compensation expense3,291  2,165  Stock-based compensation expense3,930 3,291 
Depreciation and amortization18,007  13,330  Depreciation and amortization15,435 18,007 
Deferred income tax assets(1,666) 2,266  Deferred income tax assets(762)(1,666)
Loss on disposal of property and equipment102  9  Loss on disposal of intangible assets and equipment3,683 102 
Loss on deferred loan costs with debt modification—  243  Amortization of deferred loan costs420 161 
Amortization of deferred loan costs161  147  Impairment of goodwill18,649 0 
Right of use asset costs1,897  —  Right of use asset expenses1,904 1,897 
Changes in operating assets and liabilities:Changes in operating assets and liabilities:
Accounts receivable, net20,813  7,735  Accounts receivable, net52,132 20,813 
Inventories(53,079) (1,751) Inventories65,606 (53,079)
Prepaid expenses and other current assets1,883  (694) Prepaid expenses and other current assets(2,519)1,883 
Other assets381  1,618  Other assets249 381 
Accounts payable14,758  (30,469) Accounts payable(27,304)14,758 
Income tax receivable(3,033) (3,153) Income tax payable(13,466)(3,033)
Sales returns liability(15,751) 3,831  Sales returns liability(18,305)(15,751)
Accrued wages and wage related expenses1  58  Accrued wages and wage related expenses(110)1 
Accrued and other long-term liabilities103  (539) Accrued liabilities(6,050)103 
Lease liabilities(1,913) —  Lease liabilities(2,307)(1,913)
Other320  191  Other(641)320 
Net cash (used in) provided by operating activities(24,803) 19,858  
Net cash provided by (used in) operating activitiesNet cash provided by (used in) operating activities17,875 (24,803)
Cash flows from investing activities:Cash flows from investing activities:Cash flows from investing activities:
Purchase of property and equipment(7,002) (4,444) 
Proceeds from disposal of equipment2  26  Purchase of property and equipment(5,495)(7,002)
Purchase of BRAVEN—  (3,951) Proceeds from disposal of equipment0 2 
Purchase of HALO, net of cash acquired(20,364) —  Purchase of HALO, net of cash acquired0 (20,364)
Net cash used in investing activitiesNet cash used in investing activities(27,364) (8,369) Net cash used in investing activities(5,495)(27,364)
Cash flows from financing activities:Cash flows from financing activities:Cash flows from financing activities:
Proceeds from revolving credit facility243,140  238,994  Proceeds from revolving credit facility106,130 243,140 
Payments on revolving credit facility(190,140) (246,448) Payments on revolving credit facility(125,615)(190,140)
Payments on term loan facility—  (2,084) Proceeds from the paycheck protection program loan9,444 0 
Purchase of treasury stock(722) (6,097) Contingent liability payments for HALO(3,724)0 
Payment of withholding on restricted stock units(848) (2,630) Purchase of treasury stock0 (722)
Payment of deferred loan costs(40) (294) Payment of withholding on restricted stock units(314)(848)
Proceeds from issuance of stock under employee stock purchase plan61  55  Payment of debt issuance costs(257)(40)
Net cash provided by (used in) financing activities51,451  (18,504) 
Proceeds from issuance of stock under employee stock purchase plan39 61 
Net cash (used in) provided by financing activitiesNet cash (used in) provided by financing activities(14,297)51,451 
Effect of foreign currency exchange rates on cash equivalentsEffect of foreign currency exchange rates on cash equivalents(408) (194) Effect of foreign currency exchange rates on cash equivalents231 (408)
Net decrease in cash and cash equivalentsNet decrease in cash and cash equivalents(1,124) (7,209) Net decrease in cash and cash equivalents(1,686)(1,124)
Cash and cash equivalents at beginning of the periodCash and cash equivalents at beginning of the period15,793  24,989  Cash and cash equivalents at beginning of the period17,801 15,793 
Cash and cash equivalents at end of the periodCash and cash equivalents at end of the period$14,669  $17,780  Cash and cash equivalents at end of the period$16,115 $14,669 

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)
For the Nine Months EndedFor the Nine Months Ended
September 30, 2019September 30, 2018September 30, 2020September 30, 2019
Supplemental disclosure of cash flow information:Supplemental disclosure of cash flow information:Supplemental disclosure of cash flow information:
Cash paid during the period for interest$3,154  $1,127  Cash paid during the period for interest$2,953 $3,154 
Cash paid during the period for income taxes, net1,009  5,729  Cash paid during the period for income taxes, net4,107 1,009 
Cash paid during the period for rent expenses included in the measurement of lease liabilities2,393  —  Cash paid during the period for rent expenses included in the measurement of lease liabilities2,749 2,393 
Supplemental disclosure of non-cash investing and financing activities:Supplemental disclosure of non-cash investing and financing activities:Supplemental disclosure of non-cash investing and financing activities:
Purchase of property and equipment financed through accounts payable$742  $1,036  Purchase of property and equipment financed through accounts payable$246 $742 
Withholding tax on restricted stock units recorded in accrued wages and wage related expenses39  93  Withholding tax on restricted stock units recorded in accrued wages and wage related expenses0 39 
Purchase of HALO through amounts due to seller, contingent payments and common stock16,642  —  Purchase of HALO through amounts due to seller, contingent payments and common stock0 16,642 
Modification of debt that resulted in payment of existing term loan balance—  11,991  Noncash change in lease asset and operating liabilities from reassessment of existing leases and addition of new leases2,159 2,473 
Noncash change in lease asset and operating liabilities from remeasurement of existing leases and addition of new leases2,473  —  
Indemnity Holdback of BRAVEN Acquisition included in accrued liabilities—  500  

See accompanying notes to condensed consolidated financial statements.
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ZAGG INC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars, units, and shares in thousands, except per share amounts)
(Unaudited)
(1)    NATURE OF OPERATIONS AND BASIS OF PRESENTATION
ZAGG Inc and its subsidiaries (the “Company”) are innovation leaders in mobile tech accessories for smartphones and tablets. For over 15 years, the 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, audio, mobile keyboards, protective cases, and other mobile accessories sold under the ZAGG®, InvisibleShield®, mophie®, IFROGZ®, BRAVEN®, Gear4®, and 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 principlesU.S. 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 Annual Report on Form 10-K for the year ended December 31, 20182019 (the “2018“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 at the date of the condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting periods, with related disclosures of these amounts in the notes to the financial statements. Actual results could differ from those estimates.
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 U.S. and the world. This COVID-19 pandemic has materially impacted the Company's financial condition and results of operations. The Company recommends that the condensed consolidated financial statements and 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 Company's Risk Factors in Item 1A of 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 consolidated financial statements included in the 20182019 Form 10-K. Except for the changes below, the Company has consistently applied the accounting policies to all periods presented in these condensed consolidated financial statements.
Adoption of Accounting Standards Codification (“ASC”) Topic 842, “Leases” (In thousands, except lease terms and discount rates)326, “Financial Instruments - Credit Losses”
The Company adopted ASC Topic 842326,“Leases”Financial Instruments - Credit Losses” (“Topic 842”326”) with a date of initial application of January 1, 2019.2020. As a result of this adoption, the Company has changed its accounting policy for leasesestimating allowance for credit losses on its accounts receivable, as detailed below.
The Company applied Topic 842 on January 1, 2019, using the modified retrospective approach. The adoption of Topic 842 includes the326 prospectively by recording a cumulative effect of adopting the new standard being recognizedadjustment in retained earnings atbeginning January 1, 2019,2020, which allows for the application of the standard solely to the transition period in 20192020 but does not require application to prior fiscal comparative periods presented. Therefore, the prior period comparative information has not been adjusted and continues to be reported under the previous ASC Topic 840, “Leases” (“Topic 840”) standard. The Company also elected the package of available practical expedients allowable under Topic 842 guidelines in its adoption approach.incurred credit loss allowance methodology.
The adoption of Topic 842326 resulted in an increase in long-term lease liabilities of $10,684 which was included in operating lease liabilities; an increase in short-term lease liabilities of $2,362 which was included in current portion of operating lease liabilities; an initial recognition of right of use (“ROU”) assets of $8,842 which was included in operating lease right of use assets; an increase of deferred tax assets, net of $1,424; a derecognition of $3,346 related to lease liabilities under Topic 840 which was included in accrued liabilities; a decrease in deferred rent of $819 which was included in accrued liabilities; and a decrease of $39$359 in retained earnings as a cumulative effect of adoption.
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As the Company The new standard did not have any finance leases upon adoption of Topic 842 at January 1, 2019, the largest driver of changes for the adoption of Topic 842 was the addition of the Company’s operating leases to the condensed consolidated balance sheet, creating ROU assets and lease liabilities on the condensed consolidated balance sheet as of September 30, 2019. Under Topic 840, operating leases were not included on the condensed consolidated balance sheets, whereas under Topic 842, ROU assets and lease liabilities are calculated and recorded on the lease commencement date. The standard had a material impact in the Company’s consolidated balance sheets but did not have a significant impact in itsor condensed consolidated statements of operations. In addition, the adoption of Topic 842326 had no impact to cash provided by or used in operating, financing, or investing on the condensed consolidated statements of cash flows.
Lease accounting policy
The Company determines if an arrangement is a lease at contract inception and then determines if such qualifying lease is classified as an operating lease or a finance lease. As of September 30, 2019, the Company only has operating leases. For operating leases, the Company measures lease liabilities based on the present value of the future minimum lease payments over the lease term at commencement date. As most of its leases do not provide an implicit rate, the Company uses an incremental borrowing rate (“IBR”) based on relevant information available at each leases' commencement date in determining the present value of future payments for each individual lease. The IBR is obtained by request from the Company's banking partners, who apply a collateralized rate of borrowing based on each leases’ specific term and based on the Company’s credit worthiness. ROU assets are measured as the sum of the amount of the initial measurement of the lease liability, plus any prepaid lease payments made minus any lease incentives received, and any initial direct costs incurred. The Company’s lease terms may include options to extend or terminate leases that will be recognized when it is reasonably certain that the Company will exercise that option. Lease expense for operating leases is recognized on a straight-line basis over the lease term.
The Company has lease agreements with lease and non-lease components under the definition of Topic 842. Upon adoption of Topic 842, the Company elected a practical expedient not to separate the lease and non-lease components for its leases for physical space and equipment and accounts for them as a single lease component.
Lease information
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 4 months to 8 years, some of which include options to extend the leases up to 10 years. The following summarizes the activities in the Company’s ROU assets and lease liabilities for the nine months ended September 30, 2019:
Beginning Balance as of January 1, 2019Adoption of Topic 842AdditionsCostsEnding Balance as of September 30, 2019
Operating lease ROU assets$—  $8,842  $3,122  $(1,897) $10,067  
Beginning Balance as of January 1, 2019Adoption of Topic 842AdditionsPayments, less accretionEnding Balance as of September 30, 2019
Operating lease liabilities$—  $13,046  $2,131  $(1,913) $13,264  
For the three and nine months ended September 30, 2019, rent expense was $1,123 and $2,775, respectively. For the three and nine months ended September 30, 2018, rent expense was $768 and $2,314, respectively. Rent expense is recognized on a basis which approximates straight-line over the lease term and is recorded as a component of selling, general and administrative expense on the condensed consolidated statement of operations. As of September 30, 2019, the Company had a weighted-average remaining lease term of 5.2 years and a weighted-average discount rate used to calculate the lease liability of 4.42%.
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Future maturitiesAllowance 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 lease liabilitiesthe 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 economic environment change the Company's expectation for future credit losses.
As of September 30, 2019 were as follows:
Remaining 2019$906  
20203,208  
20212,718  
20222,735  
20232,199  
Thereafter3,136  
Total lease payments14,902  
Less: imputed interest(1,638) 
Lease liabilities$13,264  
No other leases have been entered into under which2020, the Company has significant rightsdetermined the baseline of credit loss percentage should be increased in response to the COVID-19 pandemic and obligations asestimated the lessee except those noted above.
Minimum rental paymentsallowance for operating leases required under Topic 840 as of December 31, 2018, are as follows:
2019$3,198  
20202,842  
20212,457  
20222,517  
20231,976  
Thereafter2,098  
Total operating lease commitments$15,088  
Recent Accounting Pronouncements
In June 2016, the Financial Accounting Standards Board issued Accounting Standard Update No. 2016-13, “Measurement of Credit Losses on Financial Instruments” (“Topic 326”), which replaces the incurred loss impairment methodology under the current guidance with an expected loss methodology that requires consideration of forward-looking information to estimate credit losses with reasonable and supportable documentation. Topic 326 is effective for annual and interim periods beginning after December 15, 2019. The Company plans to adopt the guidance prospectively with recording a cumulative effect adjustment in retained earnings beginning January 1, 2020. The Company notes that Topic 326 will impact its short-term credit receivables, and is currently evaluating new credit loss models and its processes and controls in preparation for the adoption of Topic 326. The Company does not expect the adoption to have a material impact on the consolidated statement of operations or the beginning balance of retained earnings.be $1,088.
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(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 nine months ended September 30, 2019,2020, and 2018,2019, was approximately as follows:
For the Three Months EndedFor the Nine Months EndedFor the Three Months EndedFor the Nine Months Ended
September 30, 2019September 30, 2018September 30, 2019September 30, 2018September 30, 2020September 30, 2019September 30, 2020September 30, 2019
Protection (screen protection and cases)Protection (screen protection and cases)59%  64%  57%  57%  Protection (screen protection and cases)63%59%60%57%
Power (power management and power cases)Power (power management and power cases)31%  27%  31%  33%  Power (power management and power cases)26%31%28%31%
Productivity (keyboards and other)Productivity (keyboards and other)6%7%9%8%
AudioAudio3%  3%  4%  4%  Audio5%3%3%4%
Productivity (keyboards and other)7%  6%  8%  6%  
During the three and nine months ended September 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 prior periods. The Company also 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 nine months ended September 30, 2019,2020, and 2018,2019, was approximately as follows:
For the Three Months EndedFor the Nine Months EndedFor the Three Months EndedFor the Nine Months Ended
September 30, 2019September 30, 2018September 30, 2019September 30, 2018September 30, 2020September 30, 2019September 30, 2020September 30, 2019
Indirect channelIndirect channel88%  88%  85%  88%  Indirect channel84%86%82%82%
Website7%  7%  10%  8%  
OnlineOnline12%9%14%12%
FranchiseesFranchisees5%  5%  5%  4%  Franchisees4%5%4%6%

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The percentage of net sales related to the Company’s key geographic regions for the three and nine months ended September 30, 2019,2020, and 2018,2019, was approximately as follows:
For the Three Months EndedFor the Nine Months EndedFor the Three Months EndedFor the Nine Months Ended
September 30, 2019September 30, 2018September 30, 2019September 30, 2018September 30, 2020September 30, 2019September 30, 2020September 30, 2019
United StatesUnited States79%  85%  75%  84%  United States74%79%78%75%
EuropeEurope12%  8%  13%  9%  Europe19%12%16%13%
OtherOther9%  7%  12%  7%  Other7%9%6%12%
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 September 30, 2019,2020, and December 31, 2018:2019:
September 30, 2019December 31, 2018
Receivables, which comprises the balance in accounts receivable, net of allowances$135,345  $156,667  
Right of return assets, which are included in prepaid expenses and other current assets800  999  
Refund liabilities, which are included in sales return liability37,321  49,786  
Warranty liabilities, which are included in sales return liability3,923  4,646  
Contract liabilities, which are included in accrued liabilities50  96  
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September 30, 2020December 31, 2019
Receivables, which comprises the balance in accounts receivable, net of allowances$91,196 $142,804 
Right of return assets, which are included in prepaid expenses and other current assets431 2,177 
Refund liabilities, which are included in sales return liability23,175 39,790 
Warranty liabilities, which are included in sales return liability2,493 4,063 
Contract liabilities, which are included in accrued liabilities30 39 
The current balance of the right of return assets is the estimated amount of inventory to be returned that is expected to be resold. The current balance of refund liabilities is the expected amount of estimated sales returns, discounts, and other credits from sales that have occurred. The current balance of warranty liabilities is the expected amount of warranty claim returns from sales that have occurred. The current balance of contract liabilities primarily relates to the advance consideration received from customers for products for which transfer of control has not yet occurred and therefore, revenue is deferred and will be recognized when the transfer of control has been completed.
During the three and nine months ended September 30, 2019, revenue recognized that was included in the contract liability balance as of December 31, 2018, was $10 and $46, respectively.
The following table summarizes the activities in the Company’s warranty liabilities for the nine months ended September 30, 2020, and 2019:
Balance as of December 31, 2018$4,646 
Additions7,858 
Warranty claims charged(8,581)
Balance as of September 30, 2019$3,923 
For the Nine Months Ended
September 30, 2020September 30, 2019
Balance at beginning of period$4,063 $4,646 
Accrual for product warranty3,372 7,858 
Warranty claims charged(4,943)(8,581)
Foreign currency translation gain1 0 
Balance at end of period$2,493 $3,923 

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(3)    ACQUISITIONS
Acquisition ofACQUISITION OF HALO
On January 3, 2019 (the “HALO Acquisition“Acquisition Date”), ZAGG Hampton LLC, a Delaware limited liability company and wholly owned subsidiary of the Company, entered into a membership interest purchase agreement (the “Purchase Agreement”) with Halo2Cloud, LLC (“HALO”) and its equity owners to 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 acquired HALO primarily to enter into new distribution channels and to expand its product and intellectual property portfolio, andportfolio.
During the nine months ended September 30, 2020, the Company paid $4,089 to enter into new distribution channels.
The total purchase consideration forHALO upon the HALO Acquisition was $23,649 in cash, 1,458 sharesachievement of the Company’s common stock valued at $12,968, and contingent consideration estimated at $1,544 (the “HALO Earnout Consideration”). The initial purchase price was subject to adjustment within 90 days of the HALO Acquisition Date based upon the final determination of HALO’s (i) working capital, (ii) indebtedness, and (iii) transaction expensestarget Adjusted EBITDA as set forth in the Purchase Agreement.Agreement and also $2,130 to HALO for cash held back by the Company at the Acquisition Date in relation to HALO's indemnification obligations.
(4)    INVENTORIES
As noted in the Purchase Agreement, the Company retained $2,130 from the casha result of current and expected 2020 demand reductions due to the sellers and will hold this amount for 18 months following the HALO Acquisition Date as security for HALO’s indemnification obligations. The $2,130 retained byCOVID-19 pandemic, the Company that is due HALO is recordedreassessed the (1) long-term profitability of all brands and product lines, and (2) the recoverability of inventory on-hand in accrued liabilitiesthe first half of 2020 (the “Strategic Review”). As a result of the Strategic Review, the Company determined to discontinue the BRAVEN audio brand, exit the fitted battery case product category, and simplify 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 first quarter of 2020 of $44,833, which was included in the cost of sales in the condensed consolidated balance sheets.
HALO is also entitled to the HALO Earnout Consideration from the Company if HALO achieves the target Adjusted EBITDA set forth in the Purchase Agreement for the year ending December 31, 2019. If, however, HALO’s actual Adjusted EBITDA is less than the target Adjusted EBITDA for the year ending December 31, 2019, the HALO Earnout Consideration will be reduced by the difference between the actual Adjusted EBITDA and the target Adjusted EBITDA.
The following summarizes the components of the purchase consideration for HALO:
Preliminary Allocation
January 3, 2019 		 Adjustments to Working Capital and Fair Value  Final Allocation January 3, 2019  
Cash consideration$23,943  $(294) $23,649  
Company common stock12,968  —  12,968  
Contingent consideration1,593  (49) 1,544  
Total purchase price$38,504  $(343) $38,161  
The total purchase price of $38,161 has been allocated to identifiable assets acquired and liabilities assumed based on their respective fair values. The excess of the purchase price over the fair value of the tangible and intangible assets acquired and liabilities assumed is recorded as goodwill.
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The following table summarizes the fair values of the identifiable assets acquired and liabilities assumed as of September 30, 2019:
Preliminary Allocation
January 3, 2019 		 Adjustments to Working Capital and Fair Value  Final Allocation January 3, 2019  
Cash$1,151  $4  $1,155  
Accounts receivable2,436  (219) 2,217  
Inventory2,889  —  2,889  
Inventory step up494  —  494  
Prepaid expenses and other assets1,310  17  1,327  
Property and equipment627  —  627  
Amortizable identifiable intangible assets27,554  507  28,061  
Goodwill15,922  9  15,931  
Operating lease right of use assets—  649  649  
Other assets546  (546) —  
Accounts payable(2,867) 126  (2,741) 
Income tax payable(501) 119  (382) 
Accrued expenses(217) 36  (181) 
Notes payable—  (42) (42) 
Accrued wages and wage related expenses(324) 55  (269) 
Sales return liability(2,728) —  (2,728) 
Deferred tax liability, net(6,177) (894) (7,071) 
Lease liabilities—  (1,775) (1,775) 
Other long-term liabilities(1,611) 1,611  —  
Total$38,504  $(343) $38,161  
Identifiable Intangible Assets
Classes of acquired intangible assets include technologies, trade names, and customer relationships. The fair value of the identifiable intangible assets was determined using the income valuation method. For assets valued under the income approach, the estimate of the present value of expected future cash flows for each identifiable asset was based on discount rates which incorporate a risk premium to take into account the risks inherent in those expected cash flows. The expected cash flows were estimated using available historical data adjusted based on the Company’s historical experience and the expectations of market participants.
The amounts assigned to each class of intangible asset and the related weighted average amortization periods are as follows:
Intangible Asset ClassWeighted Average Amortization Period
Patents and technology$11,307 8.9 years
Trade names4,408 10.0 years
Customer relationships12,346 8.0 years
Total$28,061 
Goodwill
Goodwill represents the excess of the HALO purchase price over the fair value of the assets acquired and liabilities assumed. The Company believes that the primary factors supporting the amount of goodwill recognized are the significant growth opportunities and expected synergies of the combined entity.
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Acquisition Costs
As part of the HALO Acquisition, the Company incurred legal, accounting, and other due diligence fees that were expensed when incurred. Total fees incurred related to the HALO Acquisition for the three and nine months ended September 30, 2019 was $453 and $736, respectively, which were included as a component of operating expenses on the consolidated statements of operations.
Results of Operations
The results of operations of HALO were included in the Company’s results of operations beginning on January 4, 2019. For HALO’s results of operations from January 4, 2019 through September 30, 2019, HALO generated net sales of $15,126 and had a net loss before tax of $2,103.
Acquisition of Gear4
On November 30, 2018, Patriot Corporation Unlimited Company, an entity registered and incorporated in Ireland and a wholly-owned subsidiary of the Company, entered into a share purchase agreement with STRAX Holding GmbH, an entity registered and incorporated in Germany (“STRAX”), and Gear4 HK Limited, an entity registered and incorporated in Hong Kong and a wholly-owned subsidiary of STRAX (“Gear4”), to acquire from STRAX all of the issued and outstanding equity securities of Gear4 (the “Gear4 Acquisition”).
Pro Forma Results of Operations for HALO and Gear4
The following pro-forma results of operations for the three months ended September 30, 2018, and for the nine months ended September 30, 2019, and 2018, give pro forma effect as if the acquisitions of HALO and Gear4 and the related borrowings used to finance the acquisition had occurred on January 1, 2018, after giving effect to certain adjustments including the amortization of intangible assets, interest expense, tax adjustments, specific transaction related expenses incurred prior to the execution date, and assumes the purchase price was allocated to the assets purchased and liabilities assumed based on their fair market values at the date of purchase.
For the Three Months EndedFor the Nine Months Ended
September 30, 2018September 30, 2019September 30, 2018
Net sales$159,060  $332,034  $398,433  
Net income (loss) $15,626  $(9,953) $17,371  
Basic earnings (loss) per share$0.55  $(0.34) $0.61  
Diluted earnings (loss) per share$0.55  $(0.34) $0.61  
The pro forma information is presented for illustrative purposes only and is not necessarily indicative of the operating results that would have occurred had the transaction been consummated as of January 1, 2018. Furthermore, such pro forma information is not necessarily indicative of future operating results of the combined companies, due to changes in operating activities following the purchase, and should not be construed as representative of the operating results of the combined companies for any future dates or periods.
The nonrecurring pro forma adjustments attributable to the pro forma results of operations are as follows:
For the Three Months EndedFor the Nine Months Ended
September 30, 2018September 30, 2019September 30, 2018
Amortization expense$1,666  $89  $4,999  
Transaction costs$422  $(736) $1,028  
Amortization of fair value adjustment to inventory$—  $(494) $589  
Interest from the amended credit facility and amortization of debt issuance costs$433  $—  $1,299  
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The pro forma results do not reflect events that either have occurred or may occur after the HALO Acquisition and Gear4 Acquisition, including, but not limited to, the anticipated realization of ongoing savings from operating synergies in subsequent periods.
(4) INVENTORIES
Inventories consisted of the following as of September 30, 2019,2020, and December 31, 2018:2019:
September 30, 2019December 31, 2018September 30, 2020December 31, 2019
Finished goodsFinished goods$133,406  $81,397  Finished goods$78,702 $142,054 
Raw materialsRaw materials5,046  1,522  Raw materials1,322 2,890 
Total inventoriesTotal inventories$138,452  $82,919  Total inventories$80,024 $144,944 
Included in prepaid expenses and other current assets were inventory deposits with third-party manufacturers of $345$4,961 and $382$148 as of September 30, 2019,2020, and December 31, 2018,2019, respectively.
(5)    PROPERTY AND EQUIPMENT
In connection with the Strategic Review, the Company determined to dispose of certain equipment and molds that would no longer be used on go-forward brands and product lines, and wrote-off $2,535 during the first quarter of 2020. These write-offs were included in loss on disposal of intangible assets and equipment in the condensed consolidated statements of operations.
Property and equipment, net consisted of the following as of September 30, 2020, and December 31, 2019:
Useful LivesSeptember 30, 2020December 31, 2019
Equipment and molds3 to 10 years$16,471 $18,851 
Leasehold improvements1 to 8 years7,053 7,710 
Building and improvements40 years2,429 2,429 
Computer equipment and software3 to 5 years2,266 1,237 
Furniture and fixtures7 years1,858 1,876 
Automobiles5 years36 75 
Property and equipment, gross30,113 32,178 
Less accumulated depreciation and amortization(14,354)(14,159)
Property and equipment, net$15,759 $18,019 
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For the three months ended September 30, 2020, and 2019, depreciation expense was $1,733 and $1,803, respectively, which were included as a component of selling, general, and administrative expense in the condensed consolidated statements of operations. For the nine months ended September 30, 2020, and 2019, depreciation expense was $5,177 and $4,994, respectively, which were included as a component of selling, general, and administrative expense in the condensed consolidated statements of operations.
(6)    GOODWILL AND INTANGIBLE ASSETS
There was 0 additionschange in goodwill during the three months ended September 30, 2020. There was an $18,649 impairment to goodwill during the nine months ended September 30, 2020, as the carrying value of the Company's net assets as of March 31, 2020, exceeded the Company's calculation of its diminished market capitalization caused by a decrease of the Company'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 Company's outstanding shares by the Company's average stock price for 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.
There was 0 change in goodwill during the three months ended September 30, 2019. During the nine months ended September 30, 2019, goodwill increased by $15,931 in connection with the HALO Acquisition.
The following table summarizes the changes in goodwill during the nine months ended September 30, 2020, and the twelve months ended December 31, 2019:
Goodwill balance as of December 31, 2018$27,638 
Addition in connection with HALO Acquisition15,931 
Goodwill balance as of September 30, 2019$43,569 
For the Nine Months EndedFor the Twelve Months Ended
September 30, 2020December 31, 2019
Balance at beginning of period$43,569 $27,638 
Addition in connection with the acquisition of HALO0 15,931 
Impairment of goodwill(18,649)0 
Balance at end of period$24,920 $43,569 
There waswere 0 change in goodwilladditions to intangible assets during the three months ended September 30, 2018, and there was $298 change in goodwill during the nine months ended September 30, 2018.2020.
There were 0 additions to intangible assets for the three months ended September 30, 2019. For the nine months ended September 30, 2019, as a consequence of the HALO Acquisition, intangible assets increased $28,061 for patents and technology, trade names, customer relationships, net of unfavorable leases obtained. During the nine months ended September 30, 2019, intangible assets increased2020, the Company discontinued its use of certain trade names, patents and technology in connection with the HALO Acquisition. The following table summarizes the changes inStrategic Review. As such, a loss of $1,148 was recorded to reduce intangible assets and was included in loss on disposal of intangible assets and equipment in the condensed consolidated statements of operations. This adjustment was recorded during the nine months ended September 30, 2019:
Intangible assets balance as of December 31, 2018$130,681 
Addition in connection with HALO Acquisition28,061 
Intangible assets balance as of September 30, 2019$158,742 
There were $1,774 additions to intangible assets forfirst quarter of 2020. Other than the three and nine months ended September 30, 2018. Additionally,previously noted loss of $1,148, there werewas 0 other losses and/or impairments of intangible assets for the three and nine months ended September 30, 2019,2020, and 2018.2019.
Intangible assets, net of accumulated amortization as of September 30, 2019,2020, and December 31, 2018,2019, were as follows:
September 30, 2019Weighted Average Amortization PeriodDecember 31, 2018Weighted Average Amortization PeriodSeptember 30, 2020Weighted Average Amortization PeriodDecember 31, 2019Weighted Average Amortization Period
Trade namesTrade names$27,253  9.7 years$26,988  9.9 yearsTrade names$21,459 9.7 years$25,871 9.7 years
Customer relationshipsCustomer relationships17,742 7.7 years21,514 7.7 years
Patents and technologyPatents and technology16,486  8.3 years8,723  8.0 yearsPatents and technology12,353 8.4 years15,306 8.3 years
Customer relationships22,854  7.7 years15,560  7.6 years
Non-compete agreementsNon-compete agreements509  4.9 years778  4.9 yearsNon-compete agreements150 4.9 years419 4.9 years
Other—  1.8 years5  1.8 years
Total intangible assets, net of accumulated amortizationTotal intangible assets, net of accumulated amortization$67,102  8.3 years$52,054  8.3 yearsTotal intangible assets, net of accumulated amortization$51,704 8.3 years$63,110 8.3 years

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(6)(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 related to the net loss during the nine months ended September 30, 2020, was limited to the expected annual tax benefit for the year ended December 31, 2020. The Company'sCompany’s effective tax rate was 21% and 12% for the three and nine months ended September 30, 2020, respectively. The Company’s effective tax rate was 13% and 25% for the three and nine months ended September 30, 2019, was 13% and 25%, respectively. The Company’s effective tax rate for the three and nine months ended September 30, 2018, was 18% and 17%, respectively. The change in the effective tax rate for the three months ended September 30, 2019, compared to the three months ended September 30, 2018, was primarily due to the mix of projected income by jurisdiction, as well as the impact of discrete return-to-provision items relative to book income for the quarter. The increaseAny changes in the effective tax rate for the nine months ended September 30, 2019,2020, compared to the nine months ended September 30, 2018, was due to several factors including but not limited to the effect of favorable discrete items that increase the effective rate in the current year versus an opposite effect in the prior year given the Company’s financial position. The Company is currently in a book loss position for the nine months ended September 30, 2019, versus a book income position duringwas primarily due to the same periodimpact of the methodology used in the prior yeartax provision calculation described above, as well as an inclusion of an additional benefit related to the projected carryback of the net operating loss (“NOL”). The Company’sUnder the CARES Act, a temporary 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 the period. The Company’s effective tax rate will generally differ from the U.S. Federal statutory rate of 21%, due to state taxes, permanent items including amounts disallowed under §162(m) of the Internal Revenue Code, the Company’s global tax strategy, and the inclusion of global intangible low-taxedlow taxed income and the corresponding foreign tax credit.
(7) LINE OF CREDIT(8)    LONG-TERM DEBT
Long-term debt, net as of September 30, 20192020, and December 31, 2018,2019, was as follows:
September 30, 2019December 31, 2018September 30, 2020December 31, 2019
Line of creditLine of credit$111,363  $58,363  Line of credit$87,655 $107,140 
PPP Loan (which comprises the balances in current portion of other long-term liabilities and other long-term liabilities)PPP Loan (which comprises the balances in current portion of other long-term liabilities and other long-term liabilities)9,444 0 
Total debt outstandingTotal debt outstanding$97,099 $107,140 
Current portion of other long-term liabilitiesCurrent portion of other long-term liabilities662 0 
Total long-term debt outstandingTotal long-term debt outstanding$111,363  $58,363  Total long-term debt outstanding$96,437 $107,140 
On 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”), as administrative agent, Swing Line Lender and Issuing Lender, KeyBanc Capital Markets Inc., as sole lead arranger and sole book runner, and other members of the lender group, which was subsequently amended by a first amendment agreement dated as of November 28, 2018, (as amended, the “2018 Credit and Security Agreement”). On August 30, 2019 (“Amendment Date”), the Company entered into a second amendment agreement to amenddated 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”). The maturity date of the 2018 Credit and Security Agreement, and the first amendment agreement byas amended, is April 11, 2023.
The Fourth Amendment Agreement temporarily increasingincreased the revolving credit amount from $125,000 to $136,800$144,800 from April 13, 2020, through March 31, 2021, respectively. Under the Fourth Amendment Date through December 31, 2019.Agreement, interest rates were revised to add an additional 50 basis points to the 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 second amendmentFourth Amendment Agreement, the Company paid approximately $257 in debt issuance costs.
As of September 30, 2020, there were 0 letters of credit issued, and $57,145 was available to be issued for letters of credit under the terms of the 2018 Credit and Security Agreement, as amended.
On April 13, 2020, the Company capitalized approximately $40 in debt issuance costs to be amortized through December 31, 2019, which was included in other assetsentered 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 on April 17, 2020 (the “Disbursement Date”), received a loan in the condensed consolidated balance sheets.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 meets 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 until August 2021 (interest will accrue over this deferral period). Unless the PPP Loan is fully or partially forgiven, the Company must pay $398 of the principal and interest every month once the deferral period is over and pay a balloon payment of $6,441 on the maturity date in April 2022, which is two years from the Disbursement Date.
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(9)    STOCK-BASED COMPENSATION
The grant of restricted stock units with respective weighted-average fair value per share for the three and nine months ended September 30, 2019,2020, and 2018,2019, is summarized as follows:
For the Three Months EndedFor the Nine Months EndedFor the Three Months EndedFor the Nine Months Ended
September 30, 2019September 30, 2018September 30, 2019September 30, 2018September 30, 2020September 30, 2019September 30, 2020September 30, 2019
Granted75  14  718  293  
Units GrantedUnits Granted338 75 1,065 718 
Weighted average fair value per shareWeighted average fair value per share$6.59  $15.80  $9.48  $12.64  Weighted average fair value per share$2.98 $6.59 $5.66 $9.48 
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.
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the the 338 and 75 restricted stock units granted during the three months ended September 30, 2020, and 2019, respectively, were related to performance-based restricted stock where vesting is linked to specific performance criterion. As part of the 7181,065 and 293718 restricted stock units granted during the nine months ended September 30, 2020, and 2019, and 2018,respectively, the Company granted 287417 and 182287 restricted stock units to certain executives and employees of the Company where vesting is linked to specific performance criterion. These performance-based restricted stock units only vest upon the (1) Company’s achievement of specified thresholds of net sales, Adjusted EBITDA, and/orand other specific net sales and profitability goals, for the individual executive over a given fiscal year, and (2) continued employment through the applicable vesting date. As of September 30, 2019, the Company's management does not expect that it will meet the performance criterion for this fiscal year. As such, no amounts have been recorded in stock-based compensation expense for performance-based restricted stock for the nine months ended September 30, 2019.
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. The following are stock-based compensation expenses related to restricted stock units recorded for the three and nine months ended September 30, 2020, and 2019, and 2018,respectively, which are included as a component of selling, general, and administrative expense on the condensed consolidated statement of operations:
For the Three Months EndedFor the Nine Months Ended
September 30, 2019September 30, 2018September 30, 2019September 30, 2018
Stock-based compensation expense related to restricted stock units$631  $757  $3,291  $2,165  
For the Three Months EndedFor the Nine Months Ended
September 30, 2020September 30, 2019September 30, 2020September 30, 2019
Stock-based compensation expense$1,326 $631 $3,930 $3,291 
Certain Company 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. These elections have resulted in the Company recording $0 and $314, respectively, during the three and nine months ended September 30, 2020, and $41 and $887, respectively, during the three and $2,723nine months ended September 30, 2019, reflected as a reduction of additional paid-in capital. All of the $314 recorded as a reduction of additional paid-in capital during the nine months endedwas paid as of September 30, 2019, and 2018, respectively.2020. Of the $887 recorded as a reduction of additional paid-in capital, $39 was included in accrued wages and wage related expenses as of September 30, 2019.
(9)(10)    EARNINGS (LOSS) PER SHARE:SHARE
Basic earnings (loss) per common share excludes dilution and is computed by dividing net earnings (loss) by the weighted average number of shares of common stock outstanding during the period. Diluted earnings (loss) per common share, when 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.
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The following is a reconciliation of the numerator and denominator used to calculate basic earnings (loss) per common share and diluted earnings (loss) per common share for the three and nine months ended September 30, 2019,2020, and 2018:2019:

For the Three Months EndedFor the Nine Months EndedFor the Three Months EndedFor the Nine Months Ended
September 30, 2019September 30, 2018September 30, 2019September 30, 2018September 30, 2020September 30, 2019September 30, 2020September 30, 2019
Net income (loss)Net income (loss)$8,682  $14,626  $(11,078) $24,871  Net income (loss)$6,219 $8,682 $(72,669)$(11,078)
Weighted average shares outstanding:Weighted average shares outstanding:Weighted average shares outstanding:
Basic Basic29,077  28,241  29,009  28,250   Basic29,829 29,077 29,796 29,009 
Dilutive effect of restricted stock units Dilutive effect of restricted stock units50  322  —  390   Dilutive effect of restricted stock units2 50 0 0 
Diluted Diluted29,127  28,563  29,009  28,640   Diluted29,831 29,127 29,796 29,009 
Earnings (loss) per share:Earnings (loss) per share:Earnings (loss) per share:
Basic Basic$0.30  $0.52  $(0.38) $0.88   Basic$0.21 $0.30 $(2.44)$(0.38)
Diluted Diluted$0.30  $0.51  $(0.38) $0.87   Diluted$0.21 $0.30 $(2.44)$(0.38)
For the three months endedSeptember 30, 2020, and 2019, respectively, 1,192 and 562 restricted stock units used to purchase shares of common stock were not considered in calculating diluted earnings per share as their effect would have been anti-dilutive. For the nine months ended September 30, 2020 and 2019, respectively, 1,529 and 776 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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For the three and nine months ended September 30, 2018, 65 and 98 restricted stock units used to purchase shares of common stock were not considered in calculating diluted earnings per share as their effect would have been anti-dilutive.
(10)(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.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,Stock Repurchase Program, and authorized a new stock repurchase program of up to $20,000 of the Company's outstanding common stock.stock (the “2019 Stock Repurchase Program”).
As of September 30, 2019, and December 31, 2018, a total of $20,000 and $5,462 remained authorized under the respective stock repurchase programs.
The Company repurchased shares forDuring the three and nine months ended September 30, 2020, the Company did 0t purchase any shares of the Company's common stock. During the three months ended September 30, 2019, the Company did 0t purchase any shares of the Company's common stock. During the nine months ended September 30, 2019, the Company purchased 72 shares of the Company's common stock under the 2015 Stock Repurchase Program for total consideration of $722 with a weighted average price of $10 per share, which included commissions and 2018, as follows:
For the Three Months EndedFor the Nine Months Ended
September 30, 2019September 30, 2018September 30, 2019September 30, 2018
Shares repurchased—  201  72  383  
Cash consideration paid$—  $3,091  $722  $6,097  
Commissions to brokers included in cash consideration paid$—  $8  $2  $15  
Weighted average price per share repurchased$—  $15.36  $10.00  $15.90  
processing fees totaling $2. As of September 30, 2020, and December 31, 2019, a total of $20,000 remained authorized for the repurchase of the 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.
(11) CONTINGENCIES(12)    LEASES
Commercial Litigation
ZAGG Inc and mophie, Inc. v. Anker Technology Co. Ltd. and Fantasia Trading LLC, United States District Court for the Central District of California, Case No. 8:17-CV-2193-DOC-DFM (the “Anker Lawsuit”). On December 15, 2017, ZAGG and mophie filed the Anker Lawsuit alleging that Anker Technology Co. Ltd. (“Anker”) and Fantasia Trading LLC (“Fantasia”) infringe U.S. Patent Nos. 8,971,039, 9,077,013, 9,088,028, 9,088,029, 9,172,070, and 9,406,913 in connection with protective battery cases for smartphones. The Anker products accused of infringement include Anker’s Ultra Slim Extended Battery Case for iPhone® 6 / 6s (4.7 inch) with 2850mAh capacity; Premium Extended Battery Case for iPhone 6 / 6s (4.7 inch) with 3100mAh Capacity; PowerCore Case for iPhone 7 (4.7 inch), 80% Extra Battery; PowerCore Case for iPhone 7 (4.7 inch), 95% Extra Battery; and 2400mAh MFI Certified Rubber-Feel Premium Rechargeable Extended Battery Case for iPhone 5s, 5. The complaint filed by ZAGG and mophie seeks monetary damages and an injunction against Anker. On March 12, 2018, Anker and Fantasia filed answers and counterclaims in the lawsuit. In their answers, Anker and Fantasia denied infringement of any valid claim and asserted counterclaims for non-infringement and invalidity of the patents at issue. The parties have reached a confidential settlement, and Anker and Fantasia have ceased sales of the battery cases accused of infringement. The Anker Lawsuit was dismissed in June 2019.
Best Case and Accessories, Inc. v. Zagg, Inc. United States District Court for the Eastern District of New York, Case No. 1:18-CV-04048-LDH-RML (the “New York Best Case Lawsuit”). On July 13, 2018, Best Case and Accessories, Inc. (“Best Case”) filed a complaint against the Company. The Company had previously senthas operating leases for offices, retail stores, and warehouse space that expire through 2027. The Company’s leases have remaining lease terms of 4 months to 7.3 years, some of which include options to extend the leases up to 10 years. For the three and nine months ended September 30, 2020, rent expense was $905 and $2,924, respectively. For the three and nine months ended September 30, 2019, rent expense was $1,123 and $2,775, respectively. Rent expense is recognized on a letter to Best Case alleging that it was using product packagingbasis which approximates straight-line over the lease term and display trade dress that is confusingly similar torecorded as a component of selling, general, and administrative expense on the Company's trade dress. In the complaint, Best Case alleged that it does not infringe the Company's trade dress and thatcondensed consolidated statement of operations. As of September 30, 2020, the Company interfered with Best Case's business relationships, whichhad a weighted-average remaining lease term of 4.5 years and a weighted-average discount rate used to calculate the Company disputes. To respond to these allegations and defend against the claimslease liability of the New York Best Case Lawsuit, the Company filed a complaint for trade dress infringement against Best Case on February 8, 2019 in the United States District Court for the District of Utah, Case No. 2:19-CV-00090-PMW (the “Utah Best Case Lawsuit”)4.37%. In October 2019, the parties reached a settlement in which Best Case agreed to make changes to its packaging and display trade dress, as well as dismiss with prejudice the tortious interference claim. Both the New York Best Case Lawsuit and the Utah Best Case Lawsuit were dismissed in October 2019.

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

Remaining of 2020$879 
20213,321 
20223,223 
20232,796 
20241,858 
Thereafter1,977 
Total lease payments14,054 
Less: imputed interest(1,353)
Lease liabilities$12,701 
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
Dan Dolar, an individual and on behalf of those similarly situated, Plaintiff, v. Mophiemophie Inc., a California corporation, Defendant, Superior Court of the State of California, Orange County, Case No. 30-2019-01066228-CU-BT-CXC. On April 25, 2019, Dolar filed a complaint against mophie 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 violation of state Consumer Protection Statutes. The complaint alleged that mophie mischaracterizes the mAh ratings of the batteries in its products, and asked the court to certify a class of Californians who purchased mophie battery-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 United StatesU.S. District Court in the case of Young v. Mophiemophie Inc., Case No. 8:19-cv-00827-JVS-DFM, discussed below.
Michael Young and Dan Dolar, individually and on behalf of other similarly situated individuals, Plaintiff, v. Mophiemophie Inc., Defendant, United StatesU.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 the California Consumer Legal Remedies Act, violation of California’s False Advertising Law, violation of California’s Unfair Competition Law, violation of theand Florida Deceptive and Unfair Trade Practices Act,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 consumerconsumers nationwide and in various states who purchased mophie battery-enabled products. The FAC does not specify an amount of damages claimed, but alleges that damages will be in excess of $5,000. On July 11, 2019, mophie filed a motion to dismiss all of the claims asserted in the action. On October 9, 2019, the court entered an order granting in part and denying in part mophie's motion to dismiss. In its order, the court dismissed Young’s and Dolar’s Multi-State class of claims brought under the laws of states other than California and Florida, and the court denied the other relief requested in mophie’s motion to dismiss. mophie denies that it has engaged in the alleged practices, and intends to vigorously defend the lawsuit.
Enchanted IP v. mophie, Inc., United States District Court, Central District of California, Case No. 8:19-cv-1648. On August 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 discharge 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 expires in April 2020. On October 21, 2019, ZAGG responded1, 2020, the parties entered into a written settlement agreement. Pursuant to the Complaint, formally assertingthis agreement, mophie will pay a nominal service award to Young and Dolar, reimburse their counsel for up to $325 in attorney fees, costs and expenses, and agrees to entry of a permanent injunction ordering changes to its defensespackage labeling and counterclaims. No scheduleadvertising practices for the case has been set.
Shenzhen CN-iMX Technology Co., Ltd. v. Apple Electronic Products Trading (Beijing) Co., Ltd. and ZAGG (Shenzhen) Technology Development Co., Ltd. (2019) Yue 03 Pre-docketing Mediation No. 3234. On or about August 29, 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 tocertain battery products. There is currently pending a method of wireless charging. The action identifies mophie’s powerStation wireless XL charger as an accused product and seeks damages and injunctive relief. Because the infringement action has not yet been formally docketed, the Company has not yet filed a substantive response. On or about September 16, 2019, the Company filed a separate invalidation request (Case No. 4W9507) to challenge the validitymotion for court approval of the patent, and that action is currently pending.parties’ settlement agreement.
SEC Investigation
TheIn September 2020, the Company previously disclosed an investigation byreceived a subpoena from the SEC seeking documents related to facts and circumstances surrounding former Chief Executive Officer Robert Pedersen’s pledge and subsequent sale of Company shares andcertain sales transactions from late 2018, the fact that such pledges and sales were notinventory write down disclosed in the Company’s 2011 10-K filed on March 15, 2012, or 2012 Proxy filed on April 27, 2012. On March 7, 2019,May 28, 2020 Form 10-Q, and related accounting practices and guidance. The Company has been cooperating and intends to continue cooperating fully with the StaffSEC’s investigation. Following receipt of the SEC informedsubpoena, the Company that, after additional considerationbegan an internal investigation with the assistance of outside counsel and analysis, it decidedforensic accountants. The investigation is ongoing and is being directed by the Audit Committee. At this time, the Company is unable to terminatepredict the investigation and dismissoutcome of this matter or provide meaningful quantification of how the matter.final resolution of this matter may impact its future consolidated financial statements, results of operations, or cash flows.
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Other Litigation
The Company is not a party to any other material litigation or claims at this time. While the Company currently believes that the amount of any ultimate probable loss for known matters would not be material to the Company’s financial condition, the outcome of these actions is inherently difficult to predict. In the event of an adverse outcome, the ultimate potential loss could have a material adverse effect on the Company’s financial condition or results of operations in a particular period.
The Company records a liabilityestablishes reserves when a particular contingency is probable and estimable. The Company has not accrued for any lossesestimated liabilities of $400 and $750 in the condensed consolidated financial statementsbalance sheets as of September 30, 2020, and December 31, 2019, due to the fact that either the losses are immaterial or the losses are not considered probable or estimable. The Company faces contingencies that are reasonably possible to occur; however, the reasonably possible exposure to losses cannot currently be estimated.respectively.
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(12)(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 customarily exceed federally insured limits. The Company has not experienced any losses in cash accounts for the nine months ended September 30, 2019,2020, and 2018.2019.
As of September 30, 2019,2020, and December 31, 2018, 2 separate customers were equal to or2019, accounts receivable for Best Buy Co., Inc. (“Best Buy”) and Verizon Wireless (“Verizon”) exceeded 10% of the balanceCompany's aggregate accounts receivable. The amount of accounts receivable respectively,for each of these customers are outlined as follows:
September 30, 2019December 31, 2018
Verizon Wireless (“Verizon”)30%  1%  
Best Buy Co., Inc. (“Best Buy”)11%  15%  
Superior Communications, Inc. (“Superior”)8%  50%  
The Company began transitioning to a direct sales relationship with Verizon during the second half of 2018, which has continued to progress throughout 2019. Previous to the Company's direct sales relationship with Verizon, Verizon purchased the Company's products through Superior.
September 30, 2020December 31, 2019
Best Buy16%14%
Verizon13%24%
Other than the customers noted in the table above, no other customer account balances were more thanexceeded 10% of the Company's aggregate accounts receivable as of September 30, 2019,2020, and December 31, 2018.2019. 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 net sales
For the three and nine months ended September 30, 2019, Verizon accounted for over2020, purchases by Best Buy exceeded 10% of net sales,sales. For the nine months ended September 30, 2020, and for the three and nine months ended September 30, 2018, Superior and Best Buy 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:
For the Three Months EndedFor the Nine Months EndedFor the Three Months EndedFor the Nine Months Ended
September 30, 2019September 30, 2018September 30, 2019September 30, 2018September 30, 2020September 30, 2019September 30, 2020September 30, 2019
Best BuyBest Buy14%9%11%9%
VerizonVerizon23%  1%  15%  1%  Verizon9%23%15%15%
Best Buy9%  12%  9%  11%  
Superior3%  36%  5%  33%  
For the three and nine months ended September 30, 2019,2020, and 2018,2019, no other customers accounted for greater thanexceeded 10% of net sales.
Although the Company has contracts in place governing the relationships with its retail distribution customers (“retailers”Retailers”), the contracts are not long-term and all the retailersRetailers generally purchase from the Company using purchase orders. As a result, these retailersRetailers generally may, with little or no notice or penalty, cease ordering and selling the Company’s products, or materially reduce their orders. If any of these retailersRetailers cease selling the Company’s products, slow their rate of purchase of its products, or decrease the number of products they purchase, the Company’s results of operations could be adversely affected.
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Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations
Certain statements, other than purely historical information, including estimates, projections, statements relating to our business plans, objectives, and expected operating results, and the assumptions upon which those statements are based, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements generally are identified by the words “believes,” “project,” “expects,” “anticipates,” “estimates,” “forecasts,” “intends,” “strategy,” “plan,” “may,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions. We intend such forward-looking statements to be covered by the safe-harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and are including this statement for purposes of complying with those safe-harbor provisions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. Our ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on our operations and future prospects include, but are not limited to: changes in economic conditions, legislative/regulatory changes, availability of capital, interest rates, competition, 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 Inc and its subsidiaries (“we,” “us,” “our,” “ZAGG,” or the “Company”) are global innovation leaders in accessories and technologies that empower mobile lifestyles, with a commitment to enhance every aspect of performance, productivity, and durability in mobile devices with our creative product solutions. Our business was initially created from the concept of using a clear film originally designed to protect the 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 our mission is to enable the optimal mobile lifestyle through the use of our products.
In addition to our home-grown brands, weWe 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 and better empower a mobile lifestyle. We have an award-winning product portfolio that includes screen protection, powerprotective cases, power management, wireless charging, audio, mobile keyboards, protective cases, and other mobile accessories sold under the ZAGG®, InvisibleShield®, mophie®, IFROGZ®, BRAVEN®, Gear4®, and HALO® brands.
We maintain our corporate headquarters at 910 West Legacy Center Way, Suite 500, Midvale, Utah, 84047. Our telephone number is (801) 263-0699,801-263-0699, and our website addresses areaddress is www.ZAGG.com and www.BestHALO.com(the URLs areURL is included here as an inactive textual references,reference, and information contained on, or accessible through, our websiteswebsite is not a part of, and is not incorporated by reference into, this report).
We have established four corporate objectivesCorporate Objectives and seven core valuesfour Core Values to act as a foundation for our corporate culture and guide us daily:culture:
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Corporate ObjectivesCore Values
The Preferred BrandIntegrity
Creative Product SolutionsIntegrityPassion
Targeted Global DistributionOwnershipCare for People
Operational ExcellenceCare for People
The Preferred BrandPassion
Continuous Improvement
Performance
Sense of Urgency
The corporate objectivesTo 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 our functional teams’team goals and execution. Every one of our employees is trained to understand his or her role in executing these objectives. Each core valueCore Value and Cultural Belief acts as a key component in working toward our corporate objectivesCorporate 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 our 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, and power cases)
•Audio (earbuds, headphones, and speakers)chargers)
•Productivity and Other (keyboards and other mobile accessory products)
•Audio (earbuds and headphones)
These productsfour general product categories are broken down by brand as follows:
InvisibleShield Products
InvisibleShield products, including InvisibleShield Film, InvisibleShield Glass, and theour 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 enjoy their mobile devices without the inconvenience of a shattered, cracked, or scratched screen. Our protective InvisibleShield Film and InvisibleShield Glass products offer consumers a wide array of protection types and features, all with a limited lifetime warranty.
InvisibleShield Film 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 film that is designed to offer the highest standards in self-healing scratch and impact protection. Additionally, we provide custom-fit screen protection for thousands of device types through our automated 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.
InvisibleShield Glass is designed to provide premium screen protection and clarity, along with a superior feel and compatible touch sensitivity. In 2018 and 2019, we launched the following products to provide add-on features beside theBeside these basic protection functions from impacts and scratches:
•VisionGuard™ -scratches, we also provide the InvisibleShield Glass + VisionGuard™ was launched for Apple® iPhone® smartphones, Apple iPad® tablets and Google® Pixel® smartphones, which features protective EyeSafe®VisionGuard products feature 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.
•Ultra Clear™ - InvisibleShield Ultra VisionGuard™ and Ultra Clear™ was introduced for select smartphone models that offer maximum clarity and shatter protection with an advanced glass-like surface that feels as smooth as the smartphone’s original screen.
•Anti-Microbial Technology - InvisibleShield Glass Elite VisionGuard™ + with anti-microbial technology was launched for the Apple iPhone XS, XS Max and XR to promote digital 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.
•Glass Elite Family - InvisibleShield Glass + VisionGuard™ + with anti-microbial technology, Glass Elite Anti-Glare, Glass Elite Privacy and Glass Elite was unveiled for the Apple iPhone 11 series and Google Pixel 4 series. The Glass Elite family of products features our most advanced technologies to date and comprises of InvisibleShield's strongest screen protection ever.
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We have maintained the leading market share in screen protection in the United States (“U.S.”) and the 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.
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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 in the U.K.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 states,state, D3O materials can flow freely when manipulated slowly, but onupon shock, lockthe material locks together to absorb and disperse energy before instantly returning to their flexible state. In early 2019, we released the Chelsea product line which is a new-to-market concept that allows consumers to express their personal style by swapping the design of their case with ease. With this new Gear4 innovation, consumers can easily insert the design between a Gear4 clear case and the device for the perfect combination of style and impact protection.
With D3O technology and our expansive global distribution channels, we believe Gear4 cases willcan 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 case, mobile power and wireless 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® was 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 provides both power and protection for virtually any mobile device. With groundbreaking battery cases, wireless charging, universal batteries, cables, adapters, and docks, mophie products represent innovation at the forefront of design and development.
mophie’s innovative universal wireless charging pads are designed to provide an optimized charging experience with the latest Qi® wireless charging technology for universal compatibility. During 2018, newcompatibility, and its charge stream powerstation®products were launchedare 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 2019, we launched the following products:
•the new juice pack access battery cases to provide advanced impact protection for Apple’s latest smartphones that feature extra battery life, wireless charging and full accessIn response to the iPhone Lightning® port;
•a new lineCOVID-19 pandemic, we implemented plans to simplify our business and focus on profitable growth (the “Strategic Review”). As part of universal batteries with four capacities, featuring multiple charging ports including a shared USB-C inputthe Strategic Review, we determined to discontinue participation in the fitted battery case category and output port, and the powerstation hub portable battery with convenient foldable ACto reduce our mobile power prongs that can be used as a wall outlet hub or as a portable battery;
•new charging accessories, including a new wireless charging pad, two car chargers and a variety of USB cables for Apple products; and
•two multi-device wireless charging pads and two car chargers designed to work with a variety of Apple products.offerings under our power station product line.
We continue to innovate and expand our mobile power case and power managementwireless 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.
We believe that products under the HALO brand will continue to lead in providing the most innovative mobile lifestyle solutions available on the market today and that these products will continue to be positioned to address the evolving needs of consumers around the world.
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.
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In connection with the Strategic Review, we determined to reduce our IFROGZ EarPollution® product line of earbuds and headphones specifically target a younger demographic while still appealingaudio offerings to a wide spectrum of consumers. Infocus on the first half of 2019, we launched the AIRTIMETM Truly Wireless Earbuds, which include quick-charging and an auto-pair technology that connects both earbuds to any Bluetooth® device seamlessly. In the third quarter of 2019, we launched AIRTIMETM PRO Truly Wireless Earbuds with an add on feature of the latest audio technology, enabling consumers to enjoy audio streaming and hands-free calling free from wires.
We continue to innovate and expand our headphone and earbud product lines under the IFROGZ brand to include offerings for all ages under both the iFrogz and EarPollution product lines.
BRAVEN Products
BRAVEN products innovate the rugged Bluetooth audio category by combining unparalleled design with cutting-edge technology to produce premium Bluetooth audio solutions for the outdoor adventurer and modern audio enthusiast. BRAVEN’s intelligently designed products include robust craftsmanship and world-class engineering to create a thrilling audio experience. In 2019, we launched BRV® rugged speaker collection to feature its biggest and loudest Bluetooth speakers that are designed to be durable, shockproof and waterproof.
We anticipate that the combination of high audio quality, ease of use, and superior features will enable us to continue to expand the BRAVEN brand.HSN channel.
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 we 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 and cases, are designed to free consumers from the confines of the traditional workplace. We believe “getting away” shouldn’t mean being disconnected. As 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 support the communicators, commuters, creators, and closers who live a mobile lifestyle. With the right ZAGG mobile accessories, we believe no one ever needs 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, we have continually reinvented the ZAGG 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 providers. In addition to device-specific keyboards and folio keyboard cases, the ZAGG lineApple.
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Table of universal full-size Bluetooth keyboards are designed to be compatible with virtually any device and mobile operating system. In early 2019, we unveiled the Slim Book™ Go, Rugged Book™ Go, and Messenger Folio™ keyboards for iPad and iPad Pro models which feature a protective, yet lightweight design that boasts backlit, laptop-style keys for ultimate productivity in today’s on-the-go world.Contents
We continue to innovate and expand our wireless keyboard product lines as end users’ requirements evolve in this rapidly changing market.
Critical Accounting Policies and Estimates
The preparation of our financial statements requires that we make estimates and judgments 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 are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. 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 20182019 Form 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.
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Results of Operations
(Amounts in thousands, except per share data)
Three months ended September 30, 2019,2020, and 20182019
For the Three Months EndedFor the Three Months Ended
September 30, 2019September 30, 2018September 30, 2020September 30, 2019
Amount% of Net SalesAmount% of Net SalesAmount% of Net SalesAmount% of Net Sales
Net salesNet sales$146,488  100.0 %$141,087  100.0 %Net sales$115,456 100.0 %$146,488 100.0 %
Gross profitGross profit54,345  37.1 %52,171  37.0 %Gross profit38,433 33.3 54,345 37.1 
Operating expensesOperating expenses42,687  29.1 %33,915  24.0 %Operating expenses30,496 26.4 42,687 29.1 
Other expense, netOther expense, net(1,683) (1.1)%(462) (0.3)%Other expense, net(18)— (1,683)(1.1)
Income tax provisionIncome tax provision(1,293) (0.9)%(3,168) (2.2)%Income tax provision(1,700)(1.5)(1,293)(0.9)
Net incomeNet income8,682  5.9 %14,626  10.4 %Net income6,219 5.4 8,682 5.9 
Net sales
Net sales for the three months ended September 30, 2019,2020, were $146,488,$115,456, compared to net sales of $141,087$146,488 for the three months ended September 30, 2018, an increase2019, a decrease of $5,401$31,032 or 4%21%. The $5,401 increase$31,032 decrease in net sales was primarily attributable to(1) increased sales retail store closures and related demand reductions due to the global COVID-19 pandemic and the delay of protective cases under our Gear4 brand and (2) increased power management sales driven primarily by HALO product sales and new mophie product launches during the quarter. This was partially offset by lower sales2020 launch of screen protection products.Apple's newest iPhones into the early fourth quarter of 2020.
Gross profit
Gross profit for the three months ended September 30, 2019,2020, was $54,345$38,433 or approximately 37%33% of net sales, compared to $52,171$54,345 or approximately 37% of net sales for the three months ended September 30, 2018. Gross2019. The decrease in gross profit margin has not changed significantly duepercentage was primarily attributable to decreases in(1) increased freight rates and expedited freight charges as we chased demand at the end of the third quarter, and (2) the sale of excess inventory at margins lower than our historical average. The decrease was partially offset by (1) lower duty rates from the extensions of the screen protection salesand wireless charging exemptions to the end of 2020, and (2) the recognition of expected duty refunds partially offset by an increasethe reduction in sales of Gear4 brand cases, HALO branded power products, and InvisibleShield VisionGuard products.capitalized duties which were expensed as inventory was sold during the quarter.
Operating expenses
Total operating expenses for the three months ended September 30, 2019,2020, were $42,687,$30,496, compared to operating expenses of $33,915$42,687 for the three months ended September 30, 2018, an increase2019, a decrease of $8,772$12,191 or 26%29%. The $8,772 increase$12,191 decrease in operating expenses was primarily attributable to cost reduction initiatives in response to COVID-19, including (1) a decrease in salaries and related expenses from the furlough of certain employees, (1) additional selling, general(2) reduced in-channel marketing spend, and administrative expense associated with(3) the newly acquired BRAVEN, Gear4, and HALO brands, (2) severance chargeselimination of $1,818 associated with a corporate restructuring during the third quarter of 2019, (3) increased marketing investments to support our growing portfolio of brands and products, and (4) higher amortization of long-lived intangibles related to the BRAVEN, Gear4, and HALO acquisitions.global discretionary spend.
Other expense, net
For the three months ended September 30, 2019,2020, total other expense, net was $1,683$18 compared to total other expense, net of $462$1,683 for the three months ended September 30, 2018.2019. The increasechange in other expense, net is primarily attributable to an increase of interest expense due to higher amounts of debt and a lossgains on foreign exchange transactions.
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Income tax provision
We recognized an income tax provision of $1,700 for the three months ended September 30, 2020, compared to an income tax provision of $1,293 for the three months ended September 30, 2019, compared to an income2019. Our effective tax provision of $3,168rate was 21% and 13% for the three months ended September 30, 2018. Our2020, and 2019, respectively. Any change in the effective tax rate was 13% and 18% for the three months ended September 30, 2020, compared to the three months ended September 30, 2019, and 2018, respectively. The changewas primarily due to the impact of the methodology used in the current tax provision calculation above, as well as an inclusion of an additional benefit related to the projected carryback of the net operating loss (“NOL”). Under the CARES Act, a temporary 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 the three months endedSeptember 30, 2019, comparedperiod. Due to the three monthsexpected loss before taxes for the year endedSeptember 30, 2018,was due primarily December 31, 2020, the tax benefit is limited to the mix of projected income by jurisdiction, as well as the impact of discrete return-to-provision items relative to book incomeexpected annual tax benefit for the quarter. Ouryear. The Company’s effective tax rate will generally differ from the U.S. Federal statutory rate of 21%, due to state taxes, permanent items, ourthe Company’s global tax strategy, and the inclusion of global intangible low taxed income and the corresponding foreign tax credit (“FTC”).credit.
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Net income
We reported net income of $6,219 or $0.21 per share on a fully diluted basis for the three months ended September 30, 2020, compared to net income of $8,682 or $0.30 per share on a fully diluted basis for the three months ended September 30, 2019, compared to net income of $14,626 or $0.51 per share on a fully diluted basis for the three months ended September 30, 2018.2019.
Nine months ended September 30, 2019,2020, and 20182019
For the Nine Months EndedFor the Nine Months Ended
September 30, 2019September 30, 2018September 30, 2020September 30, 2019
Amount% of Net SalesAmount% of Net SalesAmount% of Net SalesAmount% of Net Sales
Net salesNet sales$332,034  100.0 %$371,718  100.0 %Net sales$283,554 100.0 %$332,034 100.0 %
Gross profitGross profit115,926  34.9 %127,421  34.3 %Gross profit42,803 15.1 115,926 34.9 
Operating expensesOperating expenses127,547  38.4 %96,053  25.8 %Operating expenses123,306 43.5 127,547 38.4 
Other expense, netOther expense, net(3,120) (0.9)%(1,494) (0.4)%Other expense, net(2,289)(0.8)(3,120)(0.9)
Income tax benefit (provision)3,663  1.1 %(5,003) (1.3)%
Net (loss) income(11,078) (3.3)%24,871  6.7 %
Income tax benefitIncome tax benefit10,123 3.6 3,663 1.1 
Net lossNet loss(72,669)(25.6)(11,078)(3.3)
Net sales
Net sales for the nine months ended September 30, 2019,2020, were $332,034,$283,554, compared to net sales of $371,718$332,034 for the nine months ended September 30, 2018,2019, a decrease of $39,684$48,480 or 11%15%. The $39,684$48,480 decrease in net sales was primarily attributable to (1) a decrease in sales of screen protection productsretail store closures and related demand reductions due to a pull forwardthe global COVID-19 pandemic and the delay of shipmentsthe 2020 launch of Apple's newest iPhones into the early fourth quarter of 2018 ahead of a then-expected tariff increase and (2) decreased sales of mophie power management due to challenging sell-in comparisons during the first half of 2019. These decreases were partially offset by increased sales of Gear4 cases and HALO products.2020.
Gross profit
Gross profit for the nine months ended September 30, 2019,2020, was $115,926$42,803 or approximately 35%15% of net sales, compared to $127,421$115,926 or approximately 34%35% of net sales for the nine months ended September 30, 2018. Gross2019. The decrease in gross profit margin has not changed significantlypercentage was primarily attributable to (1) the March 2020 inventory write-downs of $44,833 primarily linked to the discontinuation of certain brands and product lines resulting from our Strategic Review, combined with decreased demand due to decreases inthe effects of COVID-19, (2) increased freight rates and expedited freight charges, and (3) the sale of excess inventory at margins lower than our screen protection sales offset by an increase in sales of Gear4 brand cases, HALO branded power products, and InvisibleShield VisionGuard products.historical average. Excluding the impact from the inventory write-downs, the adjusted gross profit margin was 31% for the nine months ended September 30, 2020, compared to 35% for the nine months ended September 30, 2019.
Operating expenses
Total operating expenses for the nine months ended September 30, 2019,2020, were $127,547,$123,306, compared to operating expenses of $96,053$127,547 for the nine months ended September 30, 2018, an increase2019, a decrease of $31,494$4,241 or 33%3%. The $31,494 increase$4,241 decrease in operating expenses was primarily attributable to cost reduction initiatives in response to COVID-19, including (1) a decrease in salaries and related expenses from the furlough of certain employees, elimination of bonuses in the second quarter of 2020, and reductions in salary of executives and senior management, (2) reduced in-channel marketing spend, and (3) the elimination of global discretionary spend. The decrease was partially offset by (1) additional selling, generalan $18,649 impairment charge to goodwill resulting from the carrying value of our net assets exceeding our market capitalization, (2) a $2,535 charge from the write-off of product tooling linked to discontinued brands and administrative expense associatedproduct lines, (3) a $1,148 write-off recorded for the intangible assets resulting from discontinued brands and product lines, and (4) $786 incurred in connection with the newly acquired BRAVEN, Gear4 and HALO brands, (2) severance chargeslay-off of $2,225 associated with corporate restructurings during the second and third quartercertain employees in 2020.
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Other expense, net
For the nine months ended September 30, 2019,2020, total other expense, net was $3,120$2,289 compared to total other expense, net of $1,494$3,120 for the nine months ended September 30, 2018.2019. The increasedecrease in total other expense, net is primarily attributable to an increase of interest expense due to higher amounts of debt and partially offset by a gain recordedgains on settlement of liabilities.foreign exchange transactions.
Income tax benefit (provision)provision
We recognized an income tax benefit of $10,123 for the nine months ended September 30, 2020, compared to an income tax benefit of $3,663 for the nine months ended September 30, 2019, compared to an income2019. Our effective tax provision of $5,003rate was 12% and 25% for the nine months ended September 30, 2018. Our2020, and 2019, respectively. The change in the effective tax rate was 25% and 17% for the nine months ended September 30, 2020, compared to the nine months ended September 30, 2019, and 2018, respectively. The increasewas primarily due to the impact of the methodology used in the current tax provision calculation above as well as an inclusion of an additional benefit related to the projected carryback of the NOL. Under the CARES Act, a temporary 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 was duerate for the period. Due to several factors including but notthe expected loss before taxes for the year ended December 31, 2020, the tax benefit is limited to the effect of favorable discrete items that increaseexpected annual tax benefit for the effective rate in the current year versus an opposite effect in the prior year given our financial position. We are currently in a book loss position versus a book income position during the same period in the prior year. OurThe Company’s effective tax rate will generally differ from the U.S. Federal statutory rate of 21%, due to state taxes, permanent items, ourthe Company’s global tax strategy, and the inclusion of global intangible low taxed income and the corresponding FTC.
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Net (loss) incomeloss
We reported net loss of $11,078$72,669 or $(0.38)$2.44 per share on a fully diluted basis for the nine months ended September 30, 2019,2020, compared to a net incomeloss of $24,871$11,078 or $0.87$0.38 per share on a fully diluted basis for the nine months ended September 30, 2018.2019.
Liquidity and Capital Resources (Amounts in thousands)
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 September 30, 2019,2020, our principal sources of liquidity were cash on handgenerated by operations and net borrowingsproceeds received from revolving credit facilities.the PPP Loan (as defined below). Our principal uses of cash were primarily for repayment of the nine months ended September 30,2018 Revolver (as defined below), contingent liability payments in connection with the acquisition of HALO, and working capital needs. As of December 31, 2019, our principal sources of liquidity was net borrowings from the 2018 Revolver. Our principal uses of cash were for cash used in operations, a business acquisition,operating activities, purchase of property and equipment, payments for the net share settlement of restricted stock andunits, purchase of treasury shares.shares, and business acquisitions.
Cash and Cash Equivalents
Cash and cash equivalents on-hand decreased to $14,669$16,115 on September 30, 2019,2020, from $15,793$17,801 on December 31, 2018,2019, a decrease of $1,124.$1,686. The decrease in cash is largely the result of $19,485 net decrease was primarily attributable to (1) $24,803 used in operating activities, (2) $20,364 net cash paid forpayments against the HALO Acquisition, (3) $7,002 paid for property and equipment purchases, (4) $848 of payments for the net share settlement of restricted stock, and (5) $722 of payments for treasury stock. These expenditures are2018 Revolver, partially offset by $53,000 net$17,875 provided by operating activities and $9,444 of proceeds received from revolving credit facilities.the PPP Loan to cover employee payroll costs, rent, and utilities during the initial severe impact period of the COVID-19 pandemic.
Accounts receivable, netCash Flows
For the Nine Months Ended
September 30,
20202019
Net cash flow provided by (used in):
Operating activities$17,875 $(24,803)
Investing activities(5,495)(27,364)
Financing activities(14,297)51,451 
Effect of foreign currency exchange rates on cash and cash equivalents231 (408)
Net decrease in cash and cash equivalents$(1,686)$(1,124)

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Operating Activities
Net cash provided from $156,667 on December 31, 2018, a decrease of $21,322. The net decreaseoperating activities was primarily attributable to lower sales$17,875 for the third quarter of 2019 in comparison to the fourth quarter of 2018, as well as strong cash collections during the nine months ended September 30, 2019.
Inventories increased2020, compared to $138,452 on$24,803 of net cash used in operating activities for the nine months ended September 30, 2019, from $82,919 on December 31, 2018, an increasea net change of $55,533.$42,678. The net increasechange was primarily attributabledue to lower sales(1) a decrease in use of cash for inventory for the first nine months ended September 30, 2020, compared to the nine months ended September 30, 2019, and (2) higher collections on accounts receivable resulting in a lower balance of 2019,receivables for the nine months ended September 30, 2020, compared to the nine months ended September 30, 2019. These increases were partially offset by an increase in inventory levels neededcash used to support new product launches, and an increasepay our vendors.
Investing Activities
Net cash used in inventory frominvesting activities was $5,495 for the nine months ended September 30, 2020, compared to $27,364 of net cash used in investing activities for the nine months ended September 30, 2019, a net change of $21,869. The change was primarily due to $20,364 of cash used in the acquisition of HALO.HALO in 2019 and decreased spending in purchases of property and equipment for the nine months ended September 30, 2020.
Accounts payable increasedFinancing Activities
Net cash used in financing activities was $14,297 for the nine months ended September 30, 2020, compared to $97,978 on$51,451 of net cash provided by financing activities for the nine months ended September 30, 2019, from $80,908 on December 31, 2018, an increasea net change of $17,070.$65,748. The net increasechange was primarily attributabledue to increased operating expensesa higher ratio of net payments made on the 2018 Revolver relative to supportnet proceeds received from that revolving credit facility for the nine months ended September 30, 2020, compared to a higher sales/ anticipated sales duringratio of net proceeds received from the third and fourth quarters of2018 Revolver relative to net payments made on that revolving credit facility for the nine months ended September 30, 2019, partially drivenoffset by our newly acquired brands: Gear4, HALO, and BRAVEN.proceeds received from the PPP Loan.
Working Capital
Working capital is a non-GAAP measurement which is defined by us as current assets less current liabilities. As of September 30, 2019, we achieved2020, working capital of $129,148was $102,931 compared to $105,540$151,660 as of December 31, 2018, an increase2019, a decrease of $23,608.$48,729. The net increasedecrease in the working capital position was primarily attributable to the changes in accounts receivable, inventories, including a decrease in the sales return liability due to decreased sales$44,833 write-down of inventory during the nine months ended September 30, 2019, and2020, accounts payable previously noted; partially offset by accountsand sales returns liability.
Accounts receivable, net of allowances.allowances, decreased to $91,196 on September 30, 2020, from $142,804 on December 31, 2019, a decrease of $51,608. The net decrease was primarily attributable to the collection of accounts receivable since year-end combined with lower sales during the third quarter of 2020 in comparison to the fourth quarter of 2019.
BasedInventories decreased to $80,024 on September 30, 2020, from $144,944 on December 31, 2019, a decrease of $64,920. 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, and an increased focus on driving operational efficiency in inventory management.
Accounts payable decreased to $60,142 on September 30, 2020, from $87,303 on December 31, 2019, a decrease of $27,161. The net decrease was primarily attributable to lower seasonal inventory purchases and operating activities in the nine months ended September 30, 2020, in comparison to the fourth quarter of 2019, and payment on accounts payable outstanding on December 31, 2019, during the nine months ended September 30, 2020. In addition, in response to COVID-19 pandemic, we implemented several initiatives to control operating costs which has decreased the accounts payable balance as of September 30, 2020.
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 us the right to repurchase up to $20,000 of our outstanding common stock. As of September 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 September 30, 2020, we had $87,655 of the 2018 Revolver outstanding, with a weighted average interest rate of 2.8%. There were no letters of credit issued as of September 30, 2020, and $57,145 was available to be issued for letters of credit. In addition, we entered into a loan agreement with KeyBank National Association (“KeyBank”) under the Paycheck Protection Program 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”).
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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 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 have retained 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% in 2020 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 fitted 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, we obtained the PPP Loan to help cover our employee payroll costs, rent, and utilities during the initial severe impact period of the COVID-19 pandemic. Under the Paycheck Protection Program, the PPP Loan is fully forgivable if the Company meets 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 until August 2021 (interest will accrue over this deferral period). Unless the PPP Loan is fully or partially forgiven, the Company must pay $398 of the principal and interest every month once the deferral period is over and pay a balloon payment of $6,441 on the current level of operations, wematurity date in April 2022, which is two years from the Disbursement Date.
We believe that the combination of the (1) cash 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 our current credit arrangement will be adequate to fundmeet our expected capital expenditures and working capital needs for the next 12 months.months and beyond.
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.
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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, changes in interest rates, and changes in 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 any material derivative financial instruments or derivative commodity instruments. We believe that the market risks associated with our financial instruments are immaterial, though there can be no guarantee that these market risks will be immaterial to us.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management has established and maintains disclosure controls and procedures designed to ensure that information required to be disclosed in the reports that it files or submits pursuant to the Securities Exchange Act of 1934, as amended, or Exchange Act, is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial and accounting officer, as appropriate to allow for timely decisions regarding required disclosures.
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At the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures in accordance with the Exchange Act requirements. Based upon that evaluation, our principal executive officer and principal financial and accounting officer concluded that as of the end of the period of this report, our disclosure controls and procedures were effective and were designed to provide reasonable assurance 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
The acquisition of HALO on January 3, 2019, represents a material change in internal control over financial reporting since management’s last assessment of our internal control over financial reporting which was completed as of December 31, 2018. The HALO business utilizes separate information and accounting systems and processes. We intend to exclude the operations of HALO from the scope of our Sarbanes-Oxley Section 404 report on internal controls over financial reporting for the year ended December 31, 2019. Furthermore, we intend to extend our Sarbanes-Oxley Section 404 compliance program to include the HALO business beginning in 2020.
We acquired Gear4 on November 30, 2018, and excluded Gear4 from our assessment of internal control over financial reporting as of December 31, 2018. We are in the process of integrating the Gear4 and HALO businesses into our information and accounting systems and processes, and expect that Gear4's integration will be completed before the end 2019 and HALO's integration will be completed in 2020.
There were no significant changes in the Company’s internal control over financial reporting during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the 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
Internal control over financial reporting has inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting also can be circumvented by collusion or improper management override. Because of such limitations, there is a risk that material misstatements will not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Certain of the legal proceedings in which we are involved are discussed in Note 11,13, “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(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 20182019 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 20182019 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.
There were no material changes during the period covered in this report to the risk factors previously disclosed in our 20182019 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 the global stock markets, including the 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 and profitability 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 (“KeyBank”) 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.
On August 1,Between July 2018, and December 2019, the U.S. Government announcedgovernment imposed tariffs on a variety of imports from China with rates ranging from 10 percent tariff on an additional $300 billion worth ofto 25 percentage points and the Chinese imports effective on September 1, 2019. Chinese Governmentgovernment retaliated with tariffs ranging from 5 percent to 10 percentpercentage points on $75 billion worth of U.S. imports in two batches effective on September 1, 2019 and December 15, 2019.imports. The U.S. Government immediately responded by increasing the tariff rate to 15 percent on the $300 billion worth of Chinese imports announced in August 2019 with a portion effective on September 1, 2019 and the rest on December 15, 2019. Additionally, the U.S. Government increased the existing tariffs on the $250 billion worth of Chinese products from 25 percent to 30 percent effective on October 15, 2019. Prior to October 15, 2019, the U.S. and China resumedhave been engaging in ongoing trade discussions; aftertalks in the meeting,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 U.S. suspended the scheduled tariff increase on the $250 billion worth of Chinese products that were supposed to take effect on October 15, 2019. Both the U.S. and China plan to meet again and work together to reach a phased agreement on canceling the tariffs. However, there is no predictability of when these meetings will occur and if such meetings will be effective. With this noted uncertainty of thesefuture trade talks, these trade disputes willmay 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 occur,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
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
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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 NumberExhibit DescriptionIncorporated by ReferenceFiled or Furnished Herewith
FormFile NumberExhibitFiling Date
8-K001-3452810.19/5/2019
8-K001-3452810.209/05/2019
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
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
10-Q001-3452810.68/4/2020
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 registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
ZAGG INC
(Registrant)
Dated: November 6, 20199, 2020By:/s/ CHRIS M. AHERN
Chris M. Ahern
Chief Executive Officer & Director
(Principal executive officer)
Dated: November 6, 20199, 2020By:/s/ TAYLOR D. SMITH
Taylor D. Smith
Chief Financial Officer
(Principal financial and accounting officer)

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