UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

_______________________________________

FORM 10-Q

_______________________________________

(Mark One)



ý☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~September~~June 30, ~~2019~~2020



¨☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 0-21044

_______________________________________

UNIVERSAL ELECTRONICS INC.

(Exact Name of Registrant as Specified in its Charter)



Delaware		33-0204817
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

~~15147 N. Scottsdale Road, Suite H300~~ ~~Scottsdale, Arizona~~	~~85254-2494~~
~~(Address of Principal Executive Offices)~~	~~(Zip Code)~~

15147 N. Scottsdale Road, Suite H300, Scottsdale, Arizona85254-2494

(Address of principal executive offices and zip code)

(480) 530-3000

(Registrant's telephone number, including area ~~code: (480) 530-3000~~code)

~~__________________________________~~ _______________________________________



Securities registered pursuant to Section 12(b) of the Act:
Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.01 per share	UEIC	The NASDAQ Stock Market LLC

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 ý☒ 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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ý☒ 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 an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act. ~~(Check one):~~



Large accelerated filer	¨☐					Accelerated filer	ý☒

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-2 of the Exchange Act).		Yes¨	☐	Noý	☒



~~Securities registered pursuant to Section 12(b) of the Act:~~
~~Title of each class~~	~~Trading Symbols~~	~~Name of each exchange on which registered~~
~~Common Stock, par value $0.01 per share~~	~~UEIC~~	~~The NASDAQ Stock Market LLC~~

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: ~~13,928,185~~13,931,552 shares of Common Stock, par value $0.01 per share, of the registrant were outstanding on ~~November 6, 2019.~~August 4, 2020.

UNIVERSAL ELECTRONICS INC.

INDEX

PART I. FINANCIAL INFORMATION

ITEM 1. Consolidated Financial Statements (Unaudited)

UNIVERSAL ELECTRONICS INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share-related data)

(Unaudited)


	September 30, 2019			December 31, 2018			June 30, 2020			December 31, 2019
ASSETS
Current assets:
Cash and cash equivalents	$	54,729		$	53,207		$	58,832		$	74,302
Accounts receivable, net	157,138			144,689			143,893			139,198
Contract assets	21,721			25,572			6,493			12,579
Inventories, net	137,522			144,350
Inventories							134,650			145,135
Prepaid expenses and other current assets	6,061			11,638			5,339			6,733
Income tax receivable	3,392			997			1,743			805
Total current assets	380,563			380,453			350,950			378,752
Property, plant and equipment, net	91,067			95,840			83,438			90,732
Goodwill	48,404			48,485			48,451			48,447
Intangible assets, net	20,487			24,370			19,187			19,830
Operating lease right-of-use assets	19,890			—			17,854			19,826
Deferred income taxes	2,719			1,833			4,082			4,409
Other assets	2,357			4,615			2,458			2,163
Total assets	$	565,487		$	555,596		$	526,420		$	564,159
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	103,842		$	107,282		$	80,701		$	102,588
Line of credit	88,000			101,500			73,000			68,000
Accrued compensation	40,343			33,965			19,640			43,668
Accrued sales discounts, rebates and royalties	9,265			9,574			9,366			9,766
Accrued income taxes	3,560			3,524			8,425			6,989
Other accrued liabilities	32,659			24,011			31,117			35,445
Total current liabilities	277,669			279,856			222,249			266,456
Long-term liabilities:
Operating lease obligations	15,580			—			13,121			15,639
Contingent consideration	4,732			8,435			234			4,349
Deferred income taxes	4,195			930			2,871			1,703
Income tax payable	1,647			1,647			1,368			1,600
Other long-term liabilities	13			1,768			445			13
Total liabilities	303,836			292,636			240,288			289,760
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.01 par value, 5,000,000 shares authorized; none issued or outstanding	—			—			—			—
Common stock, $0.01 par value, 50,000,000 shares authorized; 24,099,047 and 23,932,703 shares issued on September 30, 2019 and December 31, 2018, respectively	241			239
Common stock, $0.01 par value, 50,000,000 shares authorized; 24,268,744 and 24,118,088 shares issued on June 30, 2020 and December 31, 2019, respectively							243			241
Paid-in capital	285,487			276,103			294,007			288,338
Treasury stock, at cost, 10,170,862 and 10,116,459 shares on September 30, 2019 and December 31, 2018, respectively	(277,630		)	(275,889		)
Treasury stock, at cost, 10,346,473 and 10,174,199 shares on June 30, 2020 and December 31, 2019, respectively							(284,222		)	(277,817		)
Accumulated other comprehensive income (loss)	(25,838		)	(20,281		)	(30,560		)	(22,781		)
Retained earnings	279,391			282,788			306,664			286,418
Total stockholders' equity	261,651			262,960			286,132			274,399
Total liabilities and stockholders' equity	$	565,487		$	555,596		$	526,420		$	564,159

~~See Note 4 for further information concerning our purchases from related party vendors.~~

The accompanying notes are an integral part of these consolidated financial statements.

UNIVERSAL ELECTRONICS INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(Unaudited)

Three Months Ended September 30, Nine Months Ended September 30,
2019 2018 2019 2018
Net sales $ 200,724
$ 182,717
$ 578,783
$ 509,938
Cost of sales 154,245
142,401
458,437
405,661
Gross profit 46,479
40,316
120,346
104,277
Research and development expenses 7,930
5,593
21,884
17,703
Selling, general and administrative expenses 32,422
29,994
94,598
90,811
Operating income (loss) 6,127
4,729
3,864
(4,237 )
Interest income (expense), net (784 ) (1,177 ) (3,088 ) (3,526 )
Gain on sale of Guangzhou factory —
—
—
36,978
Other income (expense), net (148 ) (2,282 ) (426 ) (3,951 )
Income (loss) before provision for income taxes 5,195
1,270
350
25,264
Provision for income taxes 2,526
311
3,747
2,233
Net income (loss) $ 2,669
$ 959
$ (3,397 ) $ 23,031

Earnings (loss) per share:
Basic $ 0.19
$ 0.07
$ (0.25 ) $ 1.65
Diluted $ 0.19
$ 0.07
$ (0.25 ) $ 1.63
Shares used in computing earnings (loss) per share:
Basic 13,894
13,836
13,861
13,997
Diluted 14,170
13,959
13,861
14,116

~~See Note 4 for further information concerning our purchases from related party vendors.~~



	Three Months Ended June 30,						Six Months Ended June 30,
	2020			2019			2020			2019
Net sales	$	153,133		$	193,896		$	304,911		$	378,059
Cost of sales	115,058			159,903			223,895			304,192
Gross profit	38,075			33,993			81,016			73,867
Research and development expenses	7,385			7,163			15,283			13,954
Selling, general and administrative expenses	24,230			30,756			51,227			62,176
Operating income (loss)	6,460			(3,926		)	14,506			(2,263		)
Interest income (expense), net	(372		)	(1,098		)	(1,004		)	(2,304		)
Accrued social insurance adjustment	9,464			—			9,464			—
Other income (expense), net	731			188			383			(278		)
Income (loss) before provision for income taxes	16,283			(4,836		)	23,349			(4,845		)
Provision for income taxes	1,883			225			3,103			1,221
Net income (loss)	$	14,400		$	(5,061	)	$	20,246		$	(6,066	)

Earnings (loss) per share:
Basic	$	1.03		$	(0.37	)	$	1.45		$	(0.44	)
Diluted	$	1.02		$	(0.37	)	$	1.43		$	(0.44	)
Shares used in computing earnings (loss) per share:
Basic	13,915			13,863			13,938			13,845
Diluted	14,151			13,863			14,181			13,845

The accompanying notes are an integral part of these consolidated financial statements.

UNIVERSAL ELECTRONICS INC.

CONSOLIDATED COMPREHENSIVE INCOME (LOSS) STATEMENTS

(In thousands)

(Unaudited)

Three Months Ended September 30, Nine Months Ended September 30,
2019 2018 2019 2018
Net income (loss) $ 2,669
$ 959
$ (3,397 ) $ 23,031
Other comprehensive income (loss):
Change in foreign currency translation adjustment (5,457 ) (3,778 ) (5,557 ) (5,190 )
Comprehensive income (loss) $ (2,788 )
$ (2,819 ) $ (8,954 ) $ 17,841

~~See Note 4 for further information concerning our purchases from related party vendors.~~



	Three Months Ended June 30,						Six Months Ended June 30,
	2020			2019			2020			2019
Net income (loss)	$	14,400		$	(5,061	)	$	20,246		$	(6,066	)
Other comprehensive income (loss):
Change in foreign currency translation adjustment	(770		)	(1,833		)	(7,779		)	(100		)
Comprehensive income (loss)	$	13,630		$	(6,894	)	$	12,467		$	(6,166	)

The accompanying notes are an integral part of these consolidated financial statements.

UNIVERSAL ELECTRONICS INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands)

(Unaudited)

The following summarizes the changes in total equity for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019:~~2020:

Common Stock
Issued Common Stock
in Treasury Paid-in
Capital Accumulated
Other
Comprehensive
Income (Loss) Retained
Earnings Totals
Shares Amount Shares Amount
Balance at December 31, 2018 23,933
$ 239
(10,116 ) $ (275,889 ) $ 276,103
$ (20,281 ) $ 282,788
$ 262,960
Net income (loss)

(1,005 ) (1,005 )
Currency translation adjustment

1,733

1,733
Shares issued for employee benefit plan and compensation 78
1

346

347
Purchase of treasury shares

(43 ) (1,215 )

(1,215 )
Shares issued to directors 8
—

—

—
Employee and director stock-based compensation

1,918

1,918
Performance - based common stock warrants

434

434
Balance at March 31, 2019 24,019
240
(10,159 ) (277,104 ) 278,801
(18,548 ) 281,783
265,172
Net income (loss)

(5,061 ) (5,061 )
Currency translation adjustment

(1,833 )
(1,833 )
Shares issued for employee benefit plan and compensation 17
—

273

273
Purchase of treasury shares

(5 ) (189 )

(189 )
Shares issued to directors 7
—

—

—
Employee and director stock-based compensation

2,273

2,273
Performance-based common stock warrants

236

236
Balance at June 30, 2019 24,043
240
(10,164 ) (277,293 ) 281,583
(20,381 ) 276,722
260,871
Net income (loss)

2,669
2,669
Currency translation adjustment

(5,457 )
(5,457 )
Shares issued for employee benefit plan and compensation 29
1

255

256
Purchase of treasury shares

(7 ) (337 )

(337 )
Stock options exercised 20

411

411
Shares issued to directors 7
—

—

—
Employee and director stock-based compensation

2,527

2,527
Performance-based common stock warrants

711

711
Balance at September 30, 2019 24,099
$ 241
(10,171 ) $ (277,630 ) $ 285,487
$ (25,838 ) $ 279,391
$ 261,651

~~See Note 4 for further information concerning our purchases from related party vendors.~~



	Common Stock Issued			Common Stock in Treasury					Paid-in Capital			Accumulated Other Comprehensive Income (Loss)			Retained Earnings		Totals
	Shares	Amount		Shares		Amount			Paid-in Capital			Accumulated Other Comprehensive Income (Loss)			Retained Earnings		Totals
Balance at December 31, 2019	24,118	$	241	(10,174	)	$	(277,817	)	$	288,338		$	(22,781	)	$	286,418	$	274,399
Net income (loss)															5,846		5,846
Currency translation adjustment												(7,009		)			(7,009		)
Shares issued for employee benefit plan and compensation	129	1							526								527
Purchase of treasury shares				(169	)	(6,291		)									(6,291		)
Shares issued to directors	9	1							(1		)						—
Employee and director stock-based compensation									2,303								2,303
Performance-based common stock warrants									184								184
Balance at March 31, 2020	24,256	$	243	(10,343	)	$	(284,108	)	$	291,350		$	(29,790	)	$	292,264	$	269,959
Net income (loss)															14,400		14,400
Currency translation adjustment												(770		)			(770		)
Shares issued for employee benefit plan and compensation	13	—							212								212
Purchase of treasury shares				(3	)	(114		)									(114		)
Employee and director stock-based compensation									2,291								2,291
Performance-based common stock warrants									154								154
Balance at June 30, 2020	24,269	$	243	(10,346	)	$	(284,222	)	$	294,007		$	(30,560	)	$	306,664	$	286,132

The accompanying notes are an integral part of these consolidated financial statements.

UNIVERSAL ELECTRONICS INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands)

(Unaudited)

The following summarizes the changes in total equity for the three and ~~nine~~six months ended ~~September~~June 30, ~~2018:~~2019:

Common Stock
Issued Common Stock
in Treasury Paid-in
Capital Accumulated
Other
Comprehensive
Income (Loss) Retained
Earnings Totals
Shares Amount Shares Amount
Balance at December 31, 2017 23,760
$ 238
(9,703 ) $ (262,065 ) $ 265,195
$ (16,599 ) $ 266,780
$ 253,549
Impact to retained earnings from adoption of ASU 2014-09 4,084
4,084
Balance at January 1, 2018 23,760
238
(9,703 ) (262,065 ) 265,195
(16,599 ) 270,864
257,633
Net income (loss)

(587 ) (587 )
Currency translation adjustment

3,646

3,646
Shares issued for employee benefit plan and compensation 42
—

336

336
Purchase of treasury shares

(13 ) (615 )

(615 )
Stock options exercised 20
—

439

439
Shares issued to directors 8
—

—

—
Employee and director stock-based compensation

2,204

2,204
Performance - based common stock warrants

471

471
Balance at March 31, 2018 23,830
238
(9,716 ) (262,680 ) 268,645
(12,953 ) 270,277
263,527
Net income (loss)

22,659
22,659
Currency translation adjustment

(5,058 )
(5,058 )
Shares issued for employee benefit plan and compensation 14
1

253

254
Purchase of treasury shares

(212 ) (6,499 )

(6,499 )
Stock options exercised 10
—

265

265
Shares issued to directors 8
—

—

—
Employee and director stock-based compensation

2,465

2,465
Performance-based common stock warrants

(128 )

(128 )
Balance at June 30, 2018 23,862
239
(9,928 ) (269,179 ) 271,500
(18,011 ) 292,936
277,485
Net income (loss)

959
959
Currency translation adjustment

(3,778 )
(3,778 )
Shares issued for employee benefit plan and compensation 18
—

290

290
Purchase of treasury shares

(148 ) (5,450 )

(5,450 )
Stock options exercised 5
—

160

160
Shares issued to directors 7
—

—

—
Employee and director stock-based compensation

2,139

2,139
Performance-based common stock warrants

404

404
Balance at September 30, 2018 23,892
$ 239
(10,076 ) $ (274,629 ) $ 274,493
$ (21,789 ) $ 293,895
$ 272,209

~~See Note 4 for further information concerning our purchases from related party vendors.~~



	Common Stock Issued			Common Stock in Treasury					Paid-in Capital		Accumulated Other Comprehensive Income (Loss)			Retained Earnings			Totals
	Shares	Amount		Shares		Amount
Balance at December 31, 2018	23,933	$	239	(10,116	)	$	(275,889	)	$	276,103	$	(20,281	)	$	282,788		$	262,960
Net income (loss)														(1,005		)	(1,005		)
Currency translation adjustment											1,733						1,733
Shares issued for employee benefit plan and compensation	78	1							346								347
Purchase of treasury shares				(43	)	(1,215		)									(1,215		)
Shares issued to directors	8	—							—								—
Employee and director stock-based compensation									1,918								1,918
Performance-based common stock warrants									434								434
Balance at March 31, 2019	24,019	240		(10,159	)	(277,104		)	278,801		(18,548		)	281,783			265,172
Net income (loss)														(5,061		)	(5,061		)
Currency translation adjustment											(1,833		)				(1,833		)
Shares issued for employee benefit plan and compensation	17	—							273								273
Purchase of treasury shares				(5	)	(189		)									(189		)
Shares issued to directors	7	—							—								—
Employee and director stock-based compensation									2,273								2,273
Performance-based common stock warrants									236								236
Balance at June 30, 2019	24,043	$	240	(10,164	)	$	(277,293	)	$	281,583	$	(20,381	)	$	276,722		$	260,871

The accompanying notes are an integral part of these consolidated financial statements.

UNIVERSAL ELECTRONICS INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

Nine Months Ended September 30,
2019 2018
Cash provided by (used for) operating activities:
Net income (loss) $ (3,397 ) $ 23,031
Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities:
Depreciation and amortization 23,734
25,264
Provision for doubtful accounts 275
2
Provision for inventory write-downs 11,222
6,450
Gain on sale of Guangzhou factory —
(36,978 )
Deferred income taxes 2,273
(1,370 )
Shares issued for employee benefit plan 876
880
Employee and director stock-based compensation 6,718
6,808
Performance-based common stock warrants 1,381
747
Impairment of China factory equipment —
2,886
Changes in operating assets and liabilities:
Accounts receivable and contract assets (11,117 ) (1,289 )
Inventories (6,819 ) (9,535 )
Prepaid expenses and other assets 5,507
(4,194 )
Accounts payable and accrued liabilities 11,686
(13,142 )
Accrued income taxes (2,418 ) (4,134 )
Net cash provided by (used for) operating activities 39,921
(4,574 )
Cash provided by (used for) investing activities:
Proceeds from sale of Guangzhou factory —
51,291
Acquisitions of property, plant and equipment (15,854 ) (16,838 )
Refund of deposit received toward sale of Guangzhou factory —
(5,053 )
Acquisitions of intangible assets (1,505 ) (1,911 )
Net cash provided by (used for) investing activities (17,359 )
27,489
Cash provided by (used for) financing activities:
Borrowings under line of credit 57,500
48,000
Repayments on line of credit (71,000 ) (82,500 )
Proceeds from stock options exercised 411
864
Treasury stock purchased (1,741 ) (12,564 )
Contingent consideration payments in connection with business combinations (4,251 ) (3,858 )
Net cash provided by (used for) financing activities (19,081 ) (50,058 )
Effect of exchange rate changes on cash, cash equivalents and restricted cash (1,959 ) 1,799
Net increase (decrease) in cash, cash equivalents and restricted cash 1,522
(25,344 )
Cash, cash equivalents and restricted cash at beginning of year 53,207
67,339
Cash, cash equivalents and restricted cash at end of period $ 54,729
$ 41,995

Supplemental cash flow information:
Income taxes paid $ 5,608
$ 5,453
Interest paid $ 3,479
$ 3,722

~~See Note 4 for further information concerning our purchases from related party vendors.~~



	Six Months Ended June 30,
	2020			2019
Cash provided by (used for) operating activities:
Net income (loss)	$	20,246		$	(6,066	)
Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities:
Depreciation and amortization	15,663			15,871
Provision for bad debts	240			5
Deferred income taxes	1,275			3,203
Shares issued for employee benefit plan	739			620
Employee and director stock-based compensation	4,594			4,191
Performance-based common stock warrants	338			670
Impairment of long-term assets	50			—
Accrued social insurance adjustment	(9,464		)	—
Loss on sale of Ohio call center	712			—
Changes in operating assets and liabilities:
Accounts receivable and contract assets	(848		)	(8,108		)
Inventories	9,571			(4,387		)
Prepaid expenses and other assets	1,947			2,578
Accounts payable and accrued liabilities	(40,869		)	16,822
Accrued income taxes	293			(5,166		)
Net cash provided by (used for) operating activities	4,487			20,233
Cash provided by (used for) investing activities:
Acquisitions of property, plant and equipment	(6,210		)	(10,093		)
Acquisitions of intangible assets	(3,077		)	(1,260		)
Payment on sale of Ohio call center	(500		)	—
Net cash provided by (used for) investing activities	(9,787		)	(11,353		)
Cash provided by (used for) financing activities:
Borrowings under line of credit	50,000			40,000
Repayments on line of credit	(45,000		)	(46,500		)
Treasury stock purchased	(6,405		)	(1,404		)
Contingent consideration payments in connection with business combinations	(3,091		)	(4,251		)
Net cash provided by (used for) financing activities	(4,496		)	(12,155		)
Effect of exchange rate changes on cash and cash equivalents	(5,674		)	(367		)
Net increase (decrease) in cash and cash equivalents	(15,470		)	(3,642		)
Cash and cash equivalents at beginning of period	74,302			53,207
Cash and cash equivalents at end of period	$	58,832		$	49,565

Supplemental cash flow information:
Income taxes paid	$	2,215		$	3,973
Interest paid	$	1,069		$	2,342

The accompanying notes are an integral part of these consolidated financial statements.

UNIVERSAL ELECTRONICS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~SEPTEMBER~~JUNE 30, ~~2019~~2020

(Unaudited)

Note 1 — Basis of Presentation ~~and Significant Accounting Policies~~

In the opinion of management, the accompanying consolidated financial statements of Universal Electronics Inc. and its subsidiaries contain all the adjustments necessary for a fair presentation of financial position, results of operations and cash flows for the periods presented. All such adjustments are of a normal recurring nature and certain reclassifications have been made to prior year amounts in order to conform to the current year presentation. Information and footnote disclosures normally included in financial statements, which are prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP"), have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange ~~Commission.~~Commission ("SEC"). As used herein, the terms "Company," "we," "us," and "our" refer to Universal Electronics Inc. and its subsidiaries, unless the context indicates to the contrary.

Our results of operations for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 are not necessarily indicative of the results to be expected for the full year. These financial statements should be read in conjunction with the "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Quantitative and Qualitative Disclosures About Market Risk," and the "Financial Statements and Supplementary Data" included in Items 1A, 7, 7A, and 8, respectively, of our Annual Report on Form 10-K for the year ended December 31, ~~2018~~2019.

Estimates, Judgments and Assumptions

The preparation of financial statements in conformity with U.S. GAAP requires us to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, we evaluate our estimates and assumptions, including those related to revenue ~~recognition, allowances~~recognition; allowance for ~~doubtful accounts,~~bad debts; inventory ~~valuation,~~valuation; our review for impairment of long-lived assets, intangible assets and ~~goodwill,~~goodwill; leases; business ~~combinations,~~combinations; income ~~taxes,~~taxes; stock-based compensation expense and performance-based common stock warrants.

The recent coronavirus ("COVID-19") pandemic and the mitigation efforts by governments to attempt to control its spread have created uncertainties and disruptions in the economic and financial markets. While we are not currently aware of events or circumstances that would require an update to our estimates, judgments or adjustments to the carrying values of our assets or liabilities, these estimates may change as developments occur and we obtain additional information. These future developments are highly uncertain and the outcomes are unpredictable. Actual results may differ from ~~these~~those estimates, and ~~assumptions, and they~~such differences may be ~~adjusted as more information becomes available.~~

~~Summary of Significant Accounting Policies~~

~~Revenue Recognition~~

~~We adopted Accounting Standards Update ("ASU") 2014-09, "Revenue from Contracts with Customers," and all related amendments as of January 1, 2018.~~

Our performance obligations primarily arise from manufacturing and delivering universal control, sensing and automation products and AV accessories, which are sold through multiple channels, and intellectual property that is embedded in these products or licensed to others. Our contracts have an anticipated duration of less than a year. These performance obligations are satisfied at a point in time or over time, as described below. Payment terms are typically on open credit terms consistent with industry practice and do not have significant financing components. Some contracts contain early payment discounts, which are recognized as a reduction to revenue if the customer typically meets the early payment conditions, and are insignificant to net sales. Consideration may be variable based on indeterminate volumes.

Effective January 1, 2018, revenue is recognized over time when the customer simultaneously receives and consumes the benefits provided by our performance, our performance creates or enhances an asset that the customer controls, or when our performance creates an asset with no alternative use to us (custom products) and we have an enforceable right to payment for performance completed to date through a contractual commitment from the customer. An asset does not have an alternative use if we are unable to redirect the asset to another customer in the foreseeable future without significant rework. The method for measuring progress towards satisfying a performance obligation for a custom product is based on the costs incurred to date (cost-to-cost method). We believe that the costs associated with production are most closely aligned with the revenue associated with those products. Revenue recognized over time, for which we have not yet invoiced the customer, is included in contract assets in our consolidated balance sheets. Generally, we invoice the customer within 90 days of revenue recognition.

~~We recognize revenue at a point in time if the criteria for recognizing revenue over time are not met, the title of the goods has transferred, and we have a present right to payment.~~

~~We typically recognize revenue for the sale of tooling at a point in time, which is generally upon completion of the tooling and, if applicable, acceptance by the customer.~~

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~~UNIVERSAL ELECTRONICS INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~SEPTEMBER 30, 2019~~

~~(Unaudited)~~

A provision is recorded for estimated sales returns and allowances and is deducted from gross sales to arrive at net sales in the period the related revenue is recorded. These estimates are based on historical sales returns and allowances, analysis of credit memo data and other known factors. Actual returns and claims in any future period are inherently uncertain and thus may differ from our estimates. If actual or expected future returns and claims are significantly greater or lower than the reserves that we have established, we will record a reduction or increase to net revenue in the period in which we make such a determination.

We accrue for discounts and rebates based on historical experience and our expectations regarding future sales to our customers. Accruals for discounts and rebates are recorded as a reduction to sales in the same period as the related revenue. Changes in such accruals may be required if future rebates and incentives differ from our estimates.

We license our intellectual property including our patented technologies, trademarks, and database of control codes. When license fees are paid on a per-unit basis, we record license revenue when our customers manufacture or ship a product incorporating our intellectual property and we have a present right to payment. When a fixed up-front license fee is received in exchange for the delivery of a particular database of infrared codes or the contract contains a minimum guarantee provision, we record revenue when delivery of the intellectual property has occurred. Tiered royalties are recorded on a straight-line basis accordingmaterial to the ~~forecasted per-unit fees taking into account the pricing tiers.~~financial statements.

Contract assets represent revenue which has been recognized based on our accounting policies but for which the customer has not yet been invoiced and thus an account receivable has not yet been recorded.

Trade accounts receivable are recorded at the invoiced amount and do not bear interest. Sales allowances are recognized as reductions of gross accounts receivable to arrive at accounts receivable, net if the sales allowances are distributed in customer account credits. See Note ~~3 for further information concerning our sales allowances.~~

We present all non-income government-assessed taxes (sales, use and value added taxes) collected from our customers and remitted to governmental agencies on a net basis (excluded from revenue) in our financial statements. The government-assessed taxes are recorded in our consolidated balance sheets until they are remitted2 to the ~~government agency.~~

~~Leases~~

~~We adopted ASU 2016-02, "Leases," and all related amendments as of January 1, 2019.~~

~~We determine if an arrangement is a lease at inception and determine the classification of the lease, as either operating or finance, at commencement. Operating leases are~~consolidated financial statements included ~~in operating lease right-of-use (“ROU”) assets, other accrued liabilities and long-term operating lease obligations on our consolidated balance sheets. We presently do not have any finance leases.~~

ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at the commencement date of the lease based on the present value of lease payments over the lease term. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at the commencement date, including the lease term, in determining the present value of lease payments. Operating lease ROU assets also factor in any lease payments made, initial direct costs and lease incentives received. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Some of our leases include options to extend with a range of three to five years with up to two extensions at the then current market rate. Lease expense for lease payments is recognized on a straight-line basis over the lease term.

Leases with an initial term of twelve months or less are not recorded on the balance sheet and are recognized on a straight-line basis over the lease term. If applicable, we combine lease and non-lease components, which primarily relate to ancillary expenses associated with real estate leases such as common area maintenance charges and management fees.

~~There have been no other significant changes in our accounting policies during the three and nine months ended September 30, 2019 compared to the significant accounting policies described~~ in our Annual Report on Form 10-K for the year ended December 31, ~~2018.~~

~~Table~~2019 for a summary of ~~Contents~~

~~UNIVERSAL ELECTRONICS INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~SEPTEMBER 30, 2019~~

~~(Unaudited)~~

our significant accounting policies.

Recently Adopted Accounting Pronouncements

In ~~February~~June 2016, the Financial Accounting Standards Board ("FASB") issued ASU 2016-02 (with amendments issued in 2018), which changes the accounting for leases and requires expanded disclosures about leasing activities. This new guidance also requires lessees to recognize a ROU asset and a lease liability at the commencement date for all leases with terms greater than twelve months. Accounting by lessors is largely unchanged. ASU 2016-02 is effective for fiscal periods beginning after December 15, 2018. We adopted ASU 2016-02 on January 1, 2019 using the modified retrospective optional transition method. Thus, the standard was applied starting January 1, 2019 and prior periods were not restated.

We applied the package of practical expedients permitted under the transition guidance. As a result, we did not reassess the identification, classification and initial direct costs of leases commencing before the effective date. We also applied the practical expedient to not separate lease and non-lease components to all new leases as well as leases commencing before the effective date.

Upon adoption, ASU 2016-02 resulted in the recognition of lease ROU assets, accrued liabilities and long-term liabilities related to operating leases of $20.7 million, $3.3 million and $17.0 million, respectively. In addition, assets and liabilities totaling $2.5 million and $2.3 million, respectively, were reclassified into the opening ROU asset balance. The adoption of ASU 2016-02 did not result in any cumulative-effect adjustment to the opening balance of retained earnings and did not have any impact on our results of operations, cash flows or debt covenants.

~~See Note 5 for additional information.~~

~~Other Accounting Pronouncements~~

In June 2018, the FASB issued ASU 2018-07, "Improvements to Non-employee Share-Based Payment Accounting." This guidance expands the scope of Topic 718, "Compensation - Stock Compensation" to include share-based payment transactions for acquiring goods and services from non-employees, but excludes awards granted in conjunction with selling goods or services to a customer as part of a contract accounted for under ASC 606, "Revenue from Contracts with Customers." The adoption of ASU 2018-07 did not have a material impact on our consolidated financial statements.

In August 2018, the FASB issued ASU 2018-15, "Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract," which amends ASC 350-40, "Intangibles - Goodwill and Other - Internal-Use Software." The ASU aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software and requires the capitalized implementation costs to be expensed over the term of the hosting arrangement. The accounting for the service element of a hosting arrangement that is a service contract is not affected. ASU 2018-15 is effective for fiscal periods beginning after December 15, 2019, and interim periods within those fiscal years. The adoption of ASU 2018-15, effective January 1, 2019, did not have a material impact on our consolidated financial statements.

~~Recent Accounting Updates Not Yet Effective~~

~~In June 2016, the FASB issued ASU~~ 2016-13, ~~“Measurement~~"Measurement of Credit Losses on Financial ~~Instruments.” This guidance~~Instruments", which updates existing guidance for measuring and recording credit losses on financial assets measured at amortized cost by replacing the ~~“incurred loss”~~incurred loss impairment model with an ~~“expected loss”~~expected loss impairment model. Accordingly, ~~these~~ financial assets ~~will be~~are presented at amortized costs net of an allowance for expected credit losses over the ~~net amount expected to be collected. ASU 2016-13 is effective~~lifetime of the assets. We adopted this new guidance on January 1, 2020 using the modified retrospective method. The adoption did not require an implementation adjustment and did not materially impact our consolidated statement of financial position, results of operations and cash flows. See Note 3 for ~~fiscal years beginning after December 15, 2019. Early adoption is permitted. We are currently evaluating the impact that ASU 2016-13 will have~~further discussion on our ~~consolidated financial statements.~~allowance for bad debts.

In January 2017, the FASB issued ASU 2017-04, "Simplifying the Test for Goodwill ~~Impairment." This guidance~~Impairment", which simplifies how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Instead, if the carrying amount of a reporting unit exceeds its fair value, an impairment loss will be recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to the reporting unit. ~~ASU 2017-04 is effective for fiscal periods beginning after December 31, 2019. Early~~Our adoption ~~is permitted. We do~~on January 1, 2020 did not ~~expect the adoption of ASU 2017-04 to~~ have a material impact on our consolidated statement of financial ~~statements.~~position, results of operations and cash flows.

In November 2019, the FASB issued ASU 2019-08, "Improvements - Share-based Consideration Payable to a Customer", which clarifies the accounting for share-based payments issued as sales incentives to customers. The guidance requires that stock-based compensation expense is recorded as a reduction in the transaction price on the basis of the grant-date fair value. The grant-date fair value is calculated using the provisions defined under Accounting Standards Codification "Stock Compensation". The transition provisions require that equity-classified awards be measured at the adoption date fair value if the measurement date has not been

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UNIVERSAL ELECTRONICS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~SEPTEMBER~~JUNE 30, ~~2019~~2020

(Unaudited)

established prior to the adoption date. This guidance impacts the measurement date of our performance-based common stock warrants. The measurement periods for the first two successive two-year periods of our outstanding performance-based common stock warrants were completed prior to adoption and were not impacted by this updated guidance. The measurement period for the final two-year period began on January 1, 2020, and accordingly, we measured the fair value of the award as of our adoption date on January 1, 2020. We adopted this guidance using the modified retrospective method. Our adoption did not result in a cumulative adjustment in our consolidated statement of financial position. See Note 15 for further discussion on the performance-based common stock warrants.

Recent Accounting Updates Not Yet Effective

In December 2019, the FASB issued ASU 2019-12 "Simplifying the Accounting for Income Taxes", which among other provisions, eliminates certain exceptions to existing guidance related to the approach for intra-period tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. This guidance also requires an entity to reflect the effect of an enacted change in tax laws or rates in its effective income tax rate in the first interim period that includes the enactment date of the new legislation, aligning the timing of recognition of the effects from enacted tax law changes on the effective income tax rate with the effects on deferred income tax assets and liabilities. Under existing guidance, an entity recognizes the effects of the enacted tax law change on the effective income tax rate in the period that includes the effective date of the tax law. The guidance is effective for interim and annual periods beginning after December 15, 2020, with early adoption permitted. We are currently evaluating the impact of this guidance on our consolidated statement of financial position, results of operations and cash flows.

Note 2 — Cash and Cash Equivalents

~~Cash and Cash Equivalents~~

Cash and cash equivalents were held in the following geographic regions:



(In thousands)	June 30, 2020		December 31, 2019
United States	$	8,608	$	16,751
People's Republic of China ("PRC")	14,799		13,700
Asia (excluding the PRC)	9,808		21,691
Europe	15,185		9,081
South America	10,432		13,079
Total cash and cash equivalents	$	58,832	$	74,302

(In thousands) September 30, 2019 December 31, 2018
United States $ 7,226
$ 1,156
People's Republic of China ("PRC") 12,813
20,885
Asia (excluding the PRC) 11,113
2,398
Europe 12,156
19,907
South America 11,421
8,861
Total cash and cash equivalents $ 54,729
$ 53,207

Note 3 — Revenue and Accounts Receivable, Net ~~and~~

Revenue ~~Concentrations~~Details

~~Accounts receivable,~~The pattern of revenue recognition was as follows:



	Three Months Ended June 30,				Six Months Ended June 30,
(In thousands)	2020		2019		2020		2019
Goods and services transferred at a point in time	$	121,187	$	140,670	$	238,245	$	277,008
Goods and services transferred over time	31,946		53,226		66,666		101,051
Net sales	$	153,133	$	193,896	$	304,911	$	378,059

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UNIVERSAL ELECTRONICS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2020

(Unaudited)

Our net sales to external customers by geographic area were as follows:



	Three Months Ended June 30,				Six Months Ended June 30,
(In thousands)	2020		2019		2020		2019
United States	$	65,233	$	106,547	$	139,614	$	205,483
Asia (excluding PRC)	30,295		25,468		58,120		49,544
Europe	26,004		22,823		46,506		46,122
People's Republic of China	20,511		20,453		38,028		42,761
Latin America	3,466		10,119		8,106		17,906
Other	7,624		8,486		14,537		16,243
Total net sales	$	153,133	$	193,896	$	304,911	$	378,059

(In thousands) September 30, 2019 December 31, 2018
Trade receivables, gross $ 151,220
$ 133,774
Allowance for doubtful accounts (1,292 ) (1,121 )
Allowance for sales returns (497 ) (731 )
Net trade receivables 149,431
131,922
Other 7,707
12,767
Accounts receivable, net $ 157,138
$ 144,689

~~Allowance~~Specific identification of the customer billing location was the basis used for ~~Doubtful Accounts~~

~~Changes in the allowance for doubtful accounts were as follows:~~

(In thousands) Nine Months Ended September 30,
2019 2018
Balance at beginning of period $ 1,121
$ 1,064
Additions to costs and expenses 275
2
(Write-offs)/Foreign exchange effects (104 ) (74 )
Balance at end of period $ 1,292
$ 992

~~Significant Customers~~attributing revenues from external customers to geographic areas.

Net sales to the following customers totaled more than 10% of our net sales:



	Three Months Ended June 30,
	2020				2019
	$ (thousands)		% of Net Sales		$ (thousands)		% of Net Sales
Comcast Corporation	$	29,546	19.3	%	31,393		16.2
Daikin Industries Ltd.	$	16,457	10.7	%	—	⁽¹⁾	—	⁽¹⁾


	Three Months Ended September 30,										Six Months Ended June 30,
	2019				2018						2020						2019
	$ (thousands)		% of Net Sales		$ (thousands)			% of Net Sales			$ (thousands)			% of Net Sales			$ (thousands)		% of Net Sales
Comcast Corporation	$	30,419	15.2	%	$	32,336		17.7	%		$	62,481		20.5	%		$	60,639	16.0	%
Ring L.L.C.	$	21,050	10.5	%	—		⁽¹⁾	—		⁽¹⁾
DISH Network Corporation											—		⁽¹⁾	—		⁽¹⁾	$	38,851	10.3	%


⁽¹⁾	Net sales to this customer did not total more than 10% of our total net sales in the indicated period.

Accounts Receivable, Net

Accounts receivable, net were as follows:



(In thousands)	June 30, 2020			December 31, 2019
Trade receivables, gross	$	138,177		$	130,888
Allowance for bad debts	(1,697		)	(1,492		)
Allowance for sales returns	(547		)	(623		)
Net trade receivables	135,933			128,773
Other	7,960			10,425
Accounts receivable, net	$	143,893		$	139,198

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UNIVERSAL ELECTRONICS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~SEPTEMBER~~JUNE 30, ~~2019~~2020

(Unaudited)

Allowance for Bad Debts

Changes in the allowance for bad debts were as follows:



(In thousands)	Six Months Ended June 30,
(In thousands)	2020			2019
Balance at beginning of period	$	1,492		$	1,121
Additions to costs and expenses	240			5
(Write-offs)/Foreign exchange effects	(35		)	(4		)
Balance at end of period	$	1,697		$	1,122

Nine Months Ended September 30,
2019 2018
$ (thousands) % of Net Sales $ (thousands) % of Net Sales
Comcast Corporation $ 91,058
15.7 % $ 99,853
19.6 %

⁽¹⁾ ~~Net sales to this customer did not total~~Trade receivables associated with these significant customers that totaled more than 10% of our ~~total net sales in the prior period.~~

~~There were no customers with an~~ accounts receivable, ~~balance in excess of 10% of the total accounts receivable balance~~net were as ~~of September 30, 2019.~~follows:



	June 30, 2020						December 31, 2019
	$ (thousands)			% of Accounts Receivable, Net			$ (thousands)			% of Accounts Receivable, Net
Comcast Corporation	$	25,782		17.9	%		—		⁽¹⁾	—		⁽¹⁾
DISH Network Corporation	—		⁽¹⁾	—		⁽¹⁾	$	14,677		10.5	%

~~Revenue Recognition Pattern~~

~~The pattern of revenue recognition was as follows:~~

Three Months Ended September 30, Nine Months Ended September 30,
(In thousands) 2019 2018 2019 2018
Goods and services transferred at a point in time $ 108,065
$ 97,952
$ 309,841
$ 275,552
Goods and services transferred over time 92,659
84,765
268,942
234,386
Net sales $ 200,724
$ 182,717
$ 578,783
$ 509,938


⁽¹⁾	Trade receivables associated with this customer did not total more than 10% of our accounts receivable, net for the indicated period.

Note 4 — Inventories ~~Net~~ and Significant Suppliers

Inventories ~~net~~ were as follows:



(In thousands)	June 30, 2020		December 31, 2019
Raw materials	$	48,523	$	56,352
Components	21,799		24,599
Work in process	3,570		1,526
Finished goods	60,758		62,658
Inventories	$	134,650	$	145,135

(In thousands) September 30, 2019 December 31, 2018
Raw materials $ 59,412
$ 68,834
Components 21,557
25,071
Work in process 5,757
5,577
Finished goods 60,306
50,006
Reserve for excess and obsolete inventory (9,510 ) (5,138 )
Inventories, net $ 137,522
$ 144,350

~~Reserve for Excess and Obsolete Inventory~~

~~Changes in the reserve for excess and obsolete inventory were as follows:~~

(In thousands) Nine Months Ended September 30,
2019 2018
Balance at beginning of period $ 5,138
$ 4,288
Additions charged to costs and expenses ⁽¹⁾
7,430
5,353
Sell through ⁽²⁾
(1,220 ) (1,240 )
(Write-offs)/Foreign exchange effects (1,838 ) (1,118 )
Balance at end of period $ 9,510
$ 7,283


⁽¹⁾	The additions charged to costs and expenses do not include inventory directly written-off that was scrapped during production totaling $3.8 million and $1.1 million for the nine months ended September 30, 2019 and 2018, respectively. These amounts are production waste and manufacturing inefficiencies and are not included in management's reserve for excess and obsolete inventory.


⁽²⁾	~~These amounts represent the reduction in reserves associated with inventory items that were sold during the period.~~

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UNIVERSAL ELECTRONICS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~SEPTEMBER~~JUNE 30, ~~2019~~2020

(Unaudited)

Significant Suppliers

We purchase integrated circuits, components and finished goods from multiple sources. ~~No suppliers~~Purchases from the following supplier totaled more than 10% of our total inventory ~~purchases for the three and nine months ended September 30, 2019 and 2018.~~purchases:



	Three Months Ended June 30,
	2020				2019
	$ (thousands)		% of Total Inventory Purchases		$ (thousands)		% of Total Inventory Purchases
Qorvo International Pte Ltd.	$	10,030	13.1	%	—	⁽¹⁾	—	⁽¹⁾

~~Related Party Supplier~~

~~During the nine months ended September 30, 2018, we purchased certain printed circuit board assemblies from a related party supplier.~~



	Six Months Ended June 30,
	2020				2019
	$ (thousands)		% of Total Inventory Purchases		$ (thousands)		% of Total Inventory Purchases
Qorvo International Pte Ltd.	$	21,207	13.6	%	—	⁽¹⁾	—	⁽¹⁾


⁽¹⁾	Purchases associated with this supplier did not total more than 10% of our total inventory purchases for the indicated period.

The supplier that totaled more than 10% of our accounts payable, was ~~considered a related party for financial reporting purposes because our Senior Vice President of Strategic Operations owned~~ ~~40%~~ ~~of this supplier. In the second quarter of 2018, our Senior Vice President sold his interest in this supplier, and thus this supplier is no longer considered a related party.~~as follows:

~~Total inventory purchases made from this supplier while it was a related party were $1.1 million during the nine months ended September 30, 2018.~~



	June 30, 2020				December 31, 2019
	$ (thousands)		% of Accounts Payable		$ (thousands)		% of Accounts Payable
Zhejiang Zhen You Electronics Co. Ltd.	$	8,176	10.1	%	$	11,394	11.1	%

Note 5 — Leases

We have entered into various operating lease agreements for automobiles, offices and manufacturing facilities throughout the world. At ~~September~~June 30, ~~2019,~~2020, our operating leases had remaining lease terms of up to 4240 years.

Lease balances within our consolidated balance sheet were as follows:



(In thousands)	June 30, 2020		December 31, 2019
Assets:
Operating lease right-of-use assets	$	17,854	$	19,826
Liabilities:
Other accrued liabilities	$	5,288	$	4,903
Long-term operating lease obligations	13,121		15,639
Total lease liabilities	$	18,409	$	20,542

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UNIVERSAL ELECTRONICS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2020

(Unaudited)

(In thousands) September 30, 2019
Assets:
Operating lease right-of-use assets $ 19,890
Liabilities:
Other accrued liabilities $ 4,501
Long-term operating lease obligations 15,580
Total lease liabilities $ 20,081

Operating lease expense, including ~~short-term~~variable and ~~variable~~short-term lease costs which ~~are~~were insignificant to the total, ~~and~~ operating lease cash flows and supplemental cash flow information were as follows:



(In thousands)	Three Months Ended June 30,				Six Months Ended June 30,
(In thousands)	2020		2019		2020		2019
Cost of sales	$	382	$	612	$	772	$	1,204
Selling, general and administrative expenses	1,020		1,156		2,018		2,288
Total operating lease expense	$	1,402	$	1,768	$	2,790	$	3,492
Operating cash outflows from operating leases	$	1,543	$	1,579	$	3,068	$	3,094
Operating lease right-of-use assets obtained in exchange for lease obligations	$	—	$	—	$	186	$	1,524

(In thousands) Three Months Ended September 30, 2019 Nine Months Ended September 30, 2019
Cost of sales $ 574
$ 1,627
Selling, general and administrative expenses 1,036
3,324
Total operating lease expense $ 1,610
$ 4,951
Operating cash outflows from operating leases $ 1,537
$ 5,197
Operating lease right-of-use assets obtained in exchange for lease obligations $ 1,131
$ 2,655

The weighted average remaining lease liability term and the weighted average discount rate were as follows:



	June 30, 2020		December 31, 2019
Weighted average lease liability term (in years)	3.9		4.3
Weighted average discount rate	4.42	%	4.50	%



	~~September 30, 2019~~
~~Weighted average lease liability term (in years)~~	~~4.60~~
~~Weighted average discount rate~~	~~4.62~~	%

~~Table of Contents~~

~~UNIVERSAL ELECTRONICS INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~SEPTEMBER 30, 2019~~

~~(Unaudited)~~

The following table reconciles the undiscounted cash flows for each of the first five years and thereafter to the operating lease liabilities recognized in our consolidated balance sheet at ~~September~~June 30, ~~2019.~~2020. The reconciliation excludes short-term leases that are not recorded on the balance sheet.



(In thousands)	June 30, 2020
2020 (remaining 6 months)	$	2,852
2021	6,242
2022	5,240
2023	2,405
2024	1,344
Thereafter	2,042
Total lease payments	20,125
Less: imputed interest	(1,716		)
Total lease liabilities	$	18,409

(In thousands) September 30, 2019
2019 (remaining 3 months) $ 1,190
2020 5,482
2021 5,493
2022 4,523
2023 2,306
Thereafter 3,366
Total lease payments 22,360
Less: imputed interest (2,279 )
Total lease liabilities $ 20,081

~~As of September~~At June 30, ~~2019,~~2020, we ~~have two~~had 1 operating ~~leases~~lease with a five-year term that ~~have~~had not yet ~~commenced with the~~commenced. The total initial lease liability of approximately ~~$3.2~~$1.6 million ~~with three and five-year terms, which are~~is not reflected within the above maturity ~~schedule above.~~schedule.

Note 6 — Goodwill and Intangible Assets, Net

Goodwill

Changes in the carrying amount of goodwill were as follows:


(In thousands)
Balance at December 31, 2018	$	48,485
Balance at December 31, 2019				$	48,447
Foreign exchange effects	(81		)	4
Balance at September 30, 2019	$	48,404
Balance at June 30, 2020				$	48,451

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UNIVERSAL ELECTRONICS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2020

(Unaudited)

Intangible Assets, Net

The components of intangible assets, net were as follows:


	September 30, 2019							December 31, 2018							June 30, 2020							December 31, 2019
(In thousands)	Gross ⁽¹⁾		Accumulated Amortization ⁽¹⁾			Net		Gross ⁽¹⁾		Accumulated Amortization ⁽¹⁾			Net		Gross ⁽¹⁾		Accumulated Amortization ⁽¹⁾			Net		Gross ⁽¹⁾		Accumulated Amortization ⁽¹⁾			Net
Distribution rights	$	314	$	(198	)	$	116	$	329	$	(188	)	$	141	$	322	$	(224	)	$	98	$	322	$	(210	)	$	112
Patents	15,606		(6,253		)	9,353		14,560		(5,704		)	8,856		19,250		(7,026		)	12,224		16,587		(6,491		)	10,096
Trademarks and trade names	2,786		(2,129		)	657		2,786		(1,900		)	886		2,785		(2,358		)	427		2,785		(2,205		)	580
Developed and core technology	12,560		(9,597		)	2,963		12,560		(8,087		)	4,473		12,480		(11,014		)	1,466		12,480		(10,016		)	2,464
Capitalized software development costs	—		—			—		155		—			155		33		—			33		—		—			—
Customer relationships	32,683		(25,285		)	7,398		32,534		(22,675		)	9,859		32,534		(27,595		)	4,939		32,534		(25,956		)	6,578
Total intangible assets, net	$	63,949	$	(43,462	)	$	20,487	$	62,924	$	(38,554	)	$	24,370	$	67,404	$	(48,217	)	$	19,187	$	64,708	$	(44,878	)	$	19,830


⁽¹⁾	This table excludes the gross value of fully amortized intangible assets totaling ~~$7.3~~$7.6 million and ~~$7.1~~$7.4 million at ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, respectively.

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~~UNIVERSAL ELECTRONICS INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~SEPTEMBER 30, 2019~~

~~(Unaudited)~~

Amortization expense, ~~is recorded~~which was recognized in selling, general and administrative expenses, ~~except amortization expense related to capitalized software development costs, which is recorded in cost of sales.~~was $1.9 million and $1.8 million during the three months ended June 30, 2020 and 2019, respectively. Amortization expense, ~~by statement of operations caption~~which was ~~as follows:~~

Three Months Ended September 30, Nine Months Ended September 30,
(In thousands) 2019 2018 2019 2018
Cost of sales $ —
$ 18
$ —
$ 91
Selling, general and administrative expenses 1,798
1,770
5,382
5,275
Total amortization expense $ 1,798
$ 1,788
$ 5,382
$ 5,366
recognized in selling, general and administrative expenses, was $3.7 million and $3.6 million during the six months ended June 30, 2020 and 2019, respectively.

Estimated future annual amortization expense related to our intangible assets at ~~September~~June 30, ~~2019~~2020, was as follows:



(In thousands)
2020 (remaining 6 months)	$	2,913
2021	3,445
2022	3,334
2023	3,172
2024	2,592
Thereafter	3,731
Total	$	19,187

(In thousands)
2019 (remaining 3 months) $ 1,791
2020 6,045
2021 2,555
2022 2,443
2023 2,298
Thereafter 5,355
Total $ 20,487

Note 7 — Line of Credit

Our Second Amended and Restated Credit Agreement ("Second Amended Credit Agreement") with U.S. Bank National Association ("U.S. Bank") provides for a $125.0 million revolving line of credit ("Credit Line") that expires on November 1, ~~2020.~~2021. The Credit Line may be used for working capital and other general corporate purposes including acquisitions, share repurchases and capital expenditures. Amounts available for borrowing under the Credit Line are reduced by the balance of any outstanding letters of credit, of which there were $2.7 million at ~~September~~June 30, ~~2019.~~2020.

All obligations under the Credit Line are secured by substantially all of our U.S. personal property and tangible and intangible assets as well as 65% of our ownership interest in Enson Assets Limited, our wholly-owned subsidiary which controls our manufacturing factories in the PRC.

Under the Second Amended Credit Agreement, we may elect to pay interest on the Credit Line based on LIBOR plus an applicable margin (varying from 1.25% to 1.75%) or base rate (based on the prime rate of U.S. Bank or as otherwise specified in the Second Amended Credit Agreement) plus an applicable margin (varying from 0.00% to 0.50%). The applicable margins are calculated quarterly and vary based on our cash flow leverage ratio as set forth in the Second Amended Credit Agreement. The interest rate

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UNIVERSAL ELECTRONICS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2020

(Unaudited)

in effect at ~~September~~June 30, ~~2019~~2020 was ~~3.55%~~1.43%. There are no0 commitment fees or unused line fees under the Second Amended Credit Agreement.

The Second Amended Credit Agreement includes financial covenants requiring a minimum fixed charge coverage ratio and a maximum cash flow leverage ratio. In addition, the Second Amended Credit Agreement contains other customary affirmative and negative covenants and events of default. ~~As of September~~At June 30, ~~2019,~~2020, we were in compliance with the covenants and conditions of the Second Amended Credit Agreement.

At ~~September~~June 30, ~~2019,~~2020, we had ~~$88.0~~$73.0 million outstanding under the Credit Line. Our total interest expense on borrowings was ~~$0.9~~$0.4 million and $1.2 million during the three months ended ~~September~~June 30, ~~2019~~2020 and ~~2018,~~2019, respectively. Our total interest expense on borrowings was ~~$3.4~~$1.1 million and ~~$3.7~~$2.5 million during the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~2018,~~2019, respectively.

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~~UNIVERSAL ELECTRONICS INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~SEPTEMBER 30, 2019~~

~~(Unaudited)~~

Note 8 — Income Taxes

We utilize our estimated annual effective tax rate to determine our provision for income taxes for interim periods. The income tax provision is computed by taking the estimated annual effective rate and multiplying it by the year-to-date pre-tax book income.

We recorded an income tax expense of ~~$2.5~~$1.9 million and ~~$0.3~~$0.2 million for the three months ended ~~September~~June 30, ~~2019~~2020 and ~~2018,~~2019, respectively. We recorded income tax expense of ~~$3.7~~$3.1 million and ~~$2.2~~$1.2 million for the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~2018,~~2019, respectively. The income tax expense for the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 increased primarily due to ~~the mix of~~an increase in global pre-tax income, ~~among~~offset partially by an increase in income not subject to tax in foreign jurisdictions, ~~including losses not benefited for federal~~research and ~~state as a result~~development tax benefits received in China and the reversal of a ~~valuation allowance and a remeasurement~~reserve of ~~deferred taxes~~an uncertain tax position related to ~~recognize~~our Guangzhou entity, which was sold in June 2018. The indemnification agreement related to the ~~High Technology Exemption ("HTE") approved for~~sale of our ~~Yangzhou factory located~~Guangzhou entity expired in ~~northern China.~~

June 2020.

At December 31, ~~2018,~~2019, we assessed the realizability of our deferred tax assets by considering whether it is "more likely than not" some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. We considered taxable income in carryback years, the scheduled reversal of deferred tax liabilities, tax planning strategies and projected future taxable income in making this assessment. At December 31, ~~2018,~~2019, we had a ~~three year~~three-year cumulative operating loss for our U.S. operations and accordingly, have provided a full valuation allowance on our U.S. and state deferred tax assets. During the ~~three and nine~~six months ended ~~September~~June 30, ~~2019,~~2020, there ~~has been~~was no change to our valuation allowance position.

At ~~September~~June 30, ~~2019,~~2020, we had gross unrecognized tax benefits of ~~$4.8~~$3.1 million, including interest and penalties, of which approximately ~~$4.4~~$3.1 million of this amount, if not for the state Research and Experimentation income tax credit valuation allowance, would affect the annual effective tax rate if these tax benefits are realized. Further, we are unaware of any positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will significantly increase within the next twelve months. However, based on federal, state and foreign statute expirations in various jurisdictions, we anticipate a decrease in unrecognized tax benefits of approximately $0.2 million within the next twelve ~~months.~~months based on federal, state, and foreign statute expirations in various jurisdictions. We have classified uncertain tax positions as non-current income tax liabilities unless they are expected to be paid within one year.

We have elected to classify interest and penalties as a component of tax expense. Accrued interest and penalties of ~~$0.6~~$0.2 million ~~as of September~~at June 30, ~~2019~~2020 and ~~$0.5~~$0.2 million at December 31, ~~2018~~2019 are included in the unrecognized tax benefits.

On March 18, 2020 and March 22, 2020, the Families First Coronavirus Response ("FFCR") Act and the Coronavirus Aid, Relief and Economic Security ("CARES") Act, respectively, were enacted in response to the COVID-19 pandemic. The FFCR Act and the CARES Act contain numerous income tax provisions, such as relaxing limitations on the deductibility of interest and the use of net operating losses arising in taxable years beginning after December 31, 2017. We are currently evaluating the impact of this legislation on our consolidated financial position, results of operations, and cash flows. Future regulatory guidance under the FFCR and CARES Acts (as well as under the Tax Cuts and Jobs Act) remains forthcoming and such guidance may ultimately increase or decrease their impact on our business and financial condition. It is also possible that Congress will enact additional legislation in connection with the COVID-19 pandemic, some of which may impact us.

In April 2020, recent interpretations of a German law relating to withholding taxes on intellectual property rights emerged. We are currently evaluating this law and any related impact to our financial position and results of operations.

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UNIVERSAL ELECTRONICS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2020

(Unaudited)

Note 9 — Accrued Compensation

In June 2018, we sold our Guangzhou entity via a stock deal and the terms of the agreement included a two-year indemnification period. In June 2020, the indemnification period expired and we determined we were no longer legally liable for any liabilities associated with our Guangzhou entity. Accordingly, we reversed the accrued social insurance by the amount associated with the Guangzhou entity which was approximately $9.5 million.

The components of accrued compensation were as follows:


(In thousands)	September 30, 2019		December 31, 2018		June 30, 2020		December 31, 2019
Accrued social insurance ⁽¹⁾	$	16,462	$	16,735	$	6,878	$	16,588
Accrued salary/wages	7,751		8,783		5,816		7,465
Accrued vacation/holiday	2,713		2,954		2,962		2,766
Accrued bonus ⁽²⁾	10,823		2,361		2,301		13,965
Accrued commission	1,027		1,432		531		1,283
Other accrued compensation	1,567		1,700		1,152		1,601
Total accrued compensation	$	40,343	$	33,965	$	19,640	$	43,668

⁽¹⁾

PRC employers are required by law to remit the applicable social insurance payments to their local government. Social insurance is comprised of various components such as pension, medical insurance, job industry insurance, unemployment insurance, and a housing assistance fund, and is administered in a manner similar to social security in the United States. This amount represents our estimate of the amounts due to the PRC government for social insurance on ~~September~~at June 30, ~~2019~~2020 and December 31, ~~2018~~2019.

⁽²⁾

~~Accrued bonus includes an accrual for an extra month of salary ("13~~^th ~~month salary") to be paid to employees in certain geographies where it is the customary business practice. This 13~~^th ~~month salary is paid to these employees if they remain employed with us through December 31st. The total accrued for the 13~~^th ~~month salary was $0.7 million and $0.4 million at~~ ~~September 30, 2019~~ ~~and December 31, 2018, respectively.~~

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~~UNIVERSAL ELECTRONICS INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~SEPTEMBER 30, 2019~~

~~(Unaudited)~~

Note 10 — Other Accrued Liabilities

The components of other accrued liabilities were as follows:



(In thousands)	June 30, 2020		December 31, 2019
Contract liabilities	$	2,292	$	1,840
Duties	4,620		3,731
Freight and handling fees	2,330		3,769
Operating lease obligations	5,288		4,903
Product warranty claims costs	1,782		1,514
Professional fees	3,272		2,833
Sales taxes and VAT	3,863		3,926
Short-term contingent consideration	2,000		5,428
Other	5,670		7,501
Total other accrued liabilities	$	31,117	$	35,445

(In thousands) September 30, 2019 December 31, 2018
Duties $ 4,426
$ 4,865
Freight and handling fees 4,852
3,217
Operating lease obligations 4,501
—
Professional fees 1,962
1,930
Sales taxes and VAT 1,500
1,050
Short-term contingent consideration 5,411
4,190
Tooling ⁽¹⁾
1,581
1,770
Other 8,426
6,989
Total other accrued liabilities $ 32,659
$ 24,011


⁽¹⁾	The tooling accrual balance relates to unearned revenue for tooling that will be sold to customers. Revenue recognized for the sale of tooling during the three and nine months ended September 30, 2019 and 2018 was insignificant in relation to our net sales.

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UNIVERSAL ELECTRONICS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2020

(Unaudited)

Note 11 — Commitments and Contingencies

Product Warranties

Changes in the liability for product warranty ~~claim~~claims costs were as follows:



(In thousands)	Six Months Ended June 30,
(In thousands)	2020			2019
Balance at beginning of period	$	1,514		$	276
Accruals for warranties issued during the period	578			—
Settlements (in cash or in kind) during the period/Foreign exchange effects	(310		)	—
Balance at end of period	$	1,782		$	276

(In thousands) Nine Months Ended September 30,
2019 2018
Balance at beginning of period $ 276
$ 339
Accruals for warranties issued during the period 695
787
Settlements (in cash or in kind) during the period —
(850 )
Balance at end of period $ 971
$ 276
Litigation

~~Restructuring Activities and Sale of Guangzhou Factory~~

In the first quarter of 2016, we implemented a plan to transition manufacturing activities from our southern-most China factory, located in the city of Guangzhou in the Guangdong province, to our other China factories. All operations ceased in our Guangzhou factory in the third quarter of 2017 and the transition to the other China factories was completed by the end of 2017.

Ruwido Matters

On September 26, 2016, we entered into an agreement to sell our Guangzhou manufacturing facility for RMB 320 million. In accordance with the terms of the agreement, the buyer deposited 10% of the purchase price into an escrow account upon the execution of the agreement. In April 2018, we and the buyer mutually agreed to terminate the sale. The mutually agreed termination took effect immediately with no incremental penalty or costs to either party. In connection with this termination, the deposit was returned to the buyer.

~~On April 23, 2018,~~May 28, 2020, we entered into a ~~new~~confidential settlement agreement ~~to sell~~with Universal Electronics BV, our ~~Guangzhou manufacturing facility to~~wholly owned subsidiary ("UEBV"), Telenet BVBA, a ~~second buyer for RMB 339 million (approximately $51.4 million based on exchange rates in effect at the time~~customer of ~~closing). On April 26, 2018, the second buyer paid to us a deposit of RMB 34 million (approximately $5.1 million based on exchange rates in effect at the time of closing)~~UEBV ("Telenet"), which under the terms of the agreement was nonrefundable. Upon receipt by the Governmental Agency of the second buyer’s application of approval of transfer, the second buyer was to pay to us RMB 237 million (approximately $35.8 million based on exchange rates in effect at the time of closing). Additionally, within two days after the second payment was made to us, the second buyer was to deposit the remaining consideration of RMB 68 million (approximately $10.3 million based on exchange rates in effect at the time of closing) into escrow, which was to be released to us upon the closing of the sale. Per the terms of the agreement, the sale was

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~~UNIVERSAL ELECTRONICS INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~SEPTEMBER 30, 2019~~

~~(Unaudited)~~

to be completed no later than June 30, 2018. On June 26, 2018, all conditions to closing were satisfied and the sale was completed, resulting in a pretax gain of $37.0 million ($32.1 million, net of income taxes).

~~Litigation~~

~~On or about June 10, 2015, FM Marketing GmbH ("FMH") and~~ Ruwido Austria GmbH ("Ruwido") ~~filed a Summons in Summary Proceedings in Belgium court against one of our subsidiaries, Universal Electronics BV~~and FM Marketing GmbH, an affiliated company to Ruwido ("~~UEBV"~~FM Marketing"), ~~and one of its customers, Telenet N.V. ("Telenet"), claiming that one of~~whereby all court proceedings (first filed in 2015) between the products UEBV supplied to Telenet violates two design patents and one utility patent owned by FMH and/or Ruwido. By this summons, FMH and Ruwido sought to enjoin Telenet and UEBV from continued distribution and use of the product at issue. After the September 29, 2015 hearing, the court issued its ruling in our and Telenet’s favor, rejecting FMH and Ruwido’s request entirely. On October 22, 2015, Ruwido filed its notice of appeal to this ruling.

~~The~~ parties have ~~fully briefed~~been dismissed with prejudice and ~~argued~~the patent opposition appeal pending before the appellate court and we are awaiting the appellate court’s ruling. In addition, on or about February 9, 2016, Ruwido filed a writ of summons for proceeding on the merits with respect to the asserted patents. UEBV and Telenet have replied, denying all of Ruwido's allegations, and in June 2017, a hearing was held before the trial court. During this hearing, Ruwido sought to have a second product which we are currently selling to Telenet included in this case. In September 2017, the Court ruled in our favor that our current product cannot be made part of this case. The Court also refused to rule on whether the original product (which we are no longer selling) infringes the Ruwido patent, instead deciding to wait until the European Patent Office ~~(the "EPO")~~ has ~~ruled on our Opposition (see below). Finally,~~been withdrawn. As a part of this agreement, in addition to allowing UEBV and Telenet to continue manufacturing and selling the Court ruled that our original product (which we are no longer selling) infringes certain of Ruwido’s design rights but stayed any decision of compensation and/or damages until all aspects of the case have been decided. We have filed an appeal as to the Court’s ruling of infringement. On September 16, 2019, the appellate court ruled in our favor concluding that our original product did not infringe Ruwido’s design rights. Now that the EPO has issued its ruling (see below), we expect the trial on Ruwido’s remaining infringement and unfair competition claims to occur in the summer of 2020.

Subsequent to the Court's ruling that a second product could not be added to the first case on the merits, Ruwido filed a separate case on the merits with respect to this second product, claiming that it too infringes the same patentremote control at issue ~~in the first suit. We have denied these claims. According to the Court’s trial schedule, briefs from both parties were due during the second half of 2018~~ and early 2019 with a trial date set for January 2019. This trial date has since been postponed pending a request to submit additional pleadings which the Court is expected to rule upon during the fourth quarter of 2019. Presently, the oral hearing on the merits with respect to this is set for February 10, 2020.

~~In September 2015, UEBV filed an Opposition with the EPO seeking to invalidate the one utility patent asserted~~dismissing Ruwido’s and FM Marketing’s claims against UEBV and Telenet, by Ruwido. The hearing on this opposition was held in July 2017. During this hearing the panel requested additional information. We have assembled this additional information and the final hearing was scheduled for January 29, 2019. The EPO held this hearing on January 29 and 30, 2019 and revoked Ruwido's patent as originally filed. The EPO, however, maintained the patent inFM Marketing paid an ~~amended form with a much narrower claim. On August 23, 2019, the EPO issued its written opinion. The parties had until November 1, 2019~~undisclosed amount to ~~file its notice of appeal. We and Ruwido have each filed notices of appeal and we are to file the detailed grounds for the appeal by the end of December.~~

~~On September 5, 2017, Ruwido and FMH filed a patent infringement case on the merits against~~ UEBV and Telenet in the Netherlands alleging the same claims of infringement as in the Belgium Courts (see above). We have denied these claims and filed a counterclaim seeking to invalidate the Ruwido patent. A November 30, Telenet.

Roku Matters

2018 hearing date was set by the Court but it deferred its decision until the decision from the EPO has become final. Subsequently, the parties requested they each be allowed to submit additional pleadings. The Court is expected to rule on this request during the fourth quarter of 2019. At about the same time, the Court is expected to set a trial date.

Lawsuit

On September 5, 2018, we filed a lawsuit against Roku, Inc. ~~(“Roku”~~("Roku") in the United States District Court, Central District of California, ~~(Universal Electronics Inc. v. Roku, Inc.)~~ alleging that Roku is willfully infringing ~~nine~~9 of our patents that are in ~~four~~4 patent families related to remote control set-up and touchscreen remotes. On December 5, 2018, we amended our complaint to add additional details supporting our infringement and willfulness allegations. We have alleged that this complaint relates to multiple Roku streaming players and components therefore and certain universal control devices, including but not limited to the Roku App, Roku TV, Roku Express, Roku Streaming Stick, Roku Ultra, Roku Premiere, Roku 4, Roku 3, Roku 2, Roku Enhanced Remote and any other Roku product that provides for the remote control of an external device such as a TV, audiovisual receiver, sound bar or Roku TV Wireless Speakers. In October 2019, the Court stayed this lawsuit pending action by the Patent Trial and Appeals Board (the "PTAB") with respect to Roku’s Inter Party Review requests (see discussion below).

International Trade Commission Investigation of Roku, ~~has answered our~~TCL, Hisense and Funai

On April 16, 2020, we filed a complaint with the International Trade Commission (the "ITC") against Roku, TCL Electronics Holding Limited and related entities (collectively, "TCL"), Hisense Co., Ltd. and related entities (collectively, "Hisense"), and Funai Electric Company, Ltd. and related entities (collectively, "Funai") claiming that certain of their televisions, set-top boxes, remote control devices, human interface devices, streaming devices, and sound bars infringe certain of our patents. We asked the ITC to issue a ~~general denial.~~ permanent limited exclusion order prohibiting the importation of these infringing products into the United States and a cease and desist order to stop these parties from continuing their infringing activities. On May 18, 2020, the ITC announced that it instituted its investigation as requested by us. We are in the early stages of this investigation, with discovery recently commencing.

Inter Partes Reviews

In September and October 2019, Roku filed Inter ~~Party~~Partes Review ~~(“IPR”~~("IPR") requests with the ~~Patent Trial and Appeals Board (the “PTAB”)~~PTAB on the ~~nine~~9 patents

at issue in the 2018 Lawsuit. Presently, the PTAB denied Roku’s request with respect to 3 of the 9 patents and granted Roku’s request with respect to 6 of the 9 patents. As for those IPRs for which the PTAB granted Roku’s request for review, we will vigorously defend our patents. In May and June 2020, Roku filed 4 IPR requests against 3 patents asserted in the ITC. UEI’s preliminary responses to these requests are due in August and September 2020.

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UNIVERSAL ELECTRONICS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~SEPTEMBER~~JUNE 30, ~~2019~~2020

(Unaudited)

at issue in this case, seeking to invalidate our patents. We have three months from those dates to file our responses with the PTAB, which we will do. The PTAB, in turn has three months after we file our responses to decide whether to institute the requested IPRs. We will vigorously defendFederal District Court Actions against ~~the IPRs. As a further result~~each of Roku, ~~filing~~TCL, Hisense, and Funai related to the ~~IPRs,~~ITC Matter

On April 9, 2020, we filed separate actions against each of Roku, TCL, Hisense, and Funai in the United States District Court, ~~has stayed~~Central District of California, alleging that Roku is willfully infringing 5 of our patents and TCL, Hisense, and Funai are willfully infringing 6 of our patents by incorporating our patented technology into certain of their televisions, set-top boxes, remote control devices, human interface devices, streaming devices, and sound bars. Each of the ~~underlying patent lawsuit pending the resolution of IPRs.~~

parties have accepted service and have not yet answered our complaint.

There are no other material pending legal proceedings to which we or any of our subsidiaries is a party or of which our respective property is the subject. However, as is typical in our industry and to the nature and kind of business in which we are engaged, from time to time, various claims, charges and litigation are asserted or commenced by third parties against us or by us against third parties arising from or related to product liability, infringement of patent or other intellectual property rights, breach of warranty, contractual relations, or employee relations. The amounts claimed may be substantial, but may not bear any reasonable relationship to the merits of the claims or the extent of any real risk of court awards assessed against us or in our favor. However, no assurances can be made as to the outcome of any of these matters, nor can we estimate the range of potential losses to us. In our opinion, final judgments, if any, which might be rendered against us in potential or pending litigation would not have a material adverse effect on our consolidated financial condition, results of operations, or cash flows. Moreover, we believe that our products do not infringe any third parties' patents or other intellectual property rights.

We maintain directors' and officers' liability insurance, which insures our individual directors and officers against certain claims, as well as attorney's fees and related expenses incurred in connection with the defense of such claims.

Note 12 — Treasury Stock

From time to time, our Board of Directors authorizes management to repurchase shares of our issued and outstanding common ~~stock on the open market.~~stock. On ~~October 30, 2018,~~March 10, 2020, our Board of Directors replaced the repurchase plan approved ~~an adjustment~~in 2018 with a new repurchase plan authorizing the repurchase of up to ~~the amount~~300,000 of our common stock ("2020 Plan"). As of June 30, 2020, we had 175,127 shares of common stock ~~that we could purchase under our existing~~authorized for repurchase ~~plan to an amount not to exceed $5.0 million of our common stock. As of September 30, 2019, we had $3.9 million of authorized repurchases~~ remaining under the ~~Board's authorizations.~~2020 Plan. We may ~~utilize various methods~~repurchase shares of common stock in privately negotiated and/or open-market transactions, including pursuant to effect the repurchases, which could include open market repurchases, negotiated block transactions, accelerated share repurchases or open market solicitations for shares, some of which may be effected throughplans complying with Rule 10b5-1 ~~plans. The timing and amount~~promulgated under the Securities Exchange Act of ~~future repurchases, if any, will depend upon several factors, including~~1934. While we have suspended repurchasing under our 2020 Plan due in part to the uncertainties surrounding the COVID-19 pandemic, management may resume such repurchasing when market and business conditions ~~and such repurchases may be discontinued at any time.~~

warrant.

Repurchased shares of our common stock were as follows:



	Six Months Ended June 30,
(In thousands)	2020		2019
Shares repurchased	172		48
Cost of shares repurchased	$	6,405	$	1,404

Nine Months Ended September 30,
(In thousands) 2019 2018
Shares repurchased 55
373
Cost of shares repurchased $ 1,741
$ 12,564

Repurchased shares are recorded as shares held in treasury at cost. We hold these shares for future use as management and the Board of Directors deem appropriate.

Note 13 — Long-lived Tangible Assets

Long-lived tangible assets by geographic area, which include property, plant, and equipment, net and operating lease right-of-use assets, were as follows:



(In thousands)	June 30, 2020		December 31, 2019
United States	$	17,976	$	19,938
People's Republic of China	61,089		67,625
Mexico	16,960		16,644
All other countries	5,267		6,351
Total long-lived tangible assets	$	101,292	$	110,558

Table of Contents

UNIVERSAL ELECTRONICS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~SEPTEMBER~~JUNE 30, ~~2019~~2020

(Unaudited)

~~Note 13 — Foreign Operations~~

~~Foreign Operations~~

~~Our net sales to external customers by geographic area were as follows:~~

Three Months Ended September 30, Nine Months Ended September 30,
(In thousands) 2019
2018 2019 2018
United States $ 107,546
$ 84,756
$ 313,029
$ 243,801
Asia (excluding PRC) 29,613
36,888
79,157
91,755
Europe 23,388
18,785
69,510
58,245
People's Republic of China 23,704
28,108
66,465
68,852
Latin America 8,281
6,411
26,187
23,077
Other 8,192
7,769
24,435
24,208
Total net sales $ 200,724
$ 182,717
$ 578,783
$ 509,938

~~Specific identification of the customer billing location was the basis used for attributing revenues from external customers to geographic areas.~~

~~Long-lived tangible assets by geographic area were as follows:~~

(In thousands) September 30, 2019 December 31, 2018
United States $ 13,385
$ 14,504
People's Republic of China 64,347
79,382
All other countries 15,692
6,569
Total long-lived tangible assets $ 93,424
$ 100,455

Note 14 — Stock-Based Compensation

Stock-based compensation expense for each employee and director is presented in the same statement of operations caption as their cash compensation. Stock-based compensation expense by statement of operations caption and the related income tax benefit were as follows:



	Three Months Ended June 30,				Six Months Ended June 30,
(In thousands)	2020		2019		2020		2019
Cost of sales	$	36	$	37	$	110	$	65
Research and development expenses	288		274		524		494
Selling, general and administrative expenses:
Employees	1,557		1,715		3,140		3,139
Outside directors	410		247		820		493
Total employee and director stock-based compensation expense	$	2,291	$	2,273	$	4,594	$	4,191

Income tax benefit	$	500	$	477	$	1,006	$	876

Three Months Ended September 30, Nine Months Ended September 30,
(In thousands) 2019 2018 2019 2018
Cost of sales $ 37
$ 21
$ 102
$ 61
Research and development expenses 315
200
809
556
Selling, general and administrative expenses:
Employees 1,866
1,671
5,005
4,936
Outside directors 309
247
802
1,255
Total employee and director stock-based compensation expense $ 2,527

$ 2,139

$ 6,718

$ 6,808

Income tax benefit $ 509
$ 441
$ 1,385
$ 1,423

~~Table of Contents~~

~~UNIVERSAL ELECTRONICS INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~SEPTEMBER 30, 2019~~

~~(Unaudited)~~

Stock Options

Stock option activity was as follows:

Number of Options
(in 000's)
Weighted-Average Exercise Price
Weighted-Average Remaining Contractual Term
(in years)

Aggregate Intrinsic Value
(in 000's)
Outstanding at December 31, 2018 597
$ 44.27

Granted 150
27.07

Exercised (20 ) 20.55
$ 494
Forfeited/canceled/expired —
—

Outstanding at September 30, 2019 ⁽¹⁾
727
$ 41.36
4.06 $ 9,149
Vested and expected to vest at September 30, 2019⁽¹⁾
727
$ 41.36
4.06 $ 9,149
Exercisable at September 30, 2019⁽¹⁾
501
$ 44.56
3.19 $ 5,201



	Number of Options (in 000's)	Weighted-Average Exercise Price		Weighted-Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value (in 000's)
Outstanding at December 31, 2019	745	$	41.73
Granted	109	46.17
Exercised	—	—			$	—
Forfeited/canceled/expired	—	—
Outstanding at June 30, 2020 ⁽¹⁾	854	$	42.29	3.88	$	7,266
Vested and expected to vest at June 30, 2020 ⁽¹⁾	854	$	42.29	3.88	$	7,266
Exercisable at June 30, 2020 ⁽¹⁾	613	$	43.34	2.93	$	5,412

⁽¹⁾

The aggregate intrinsic value represents the total pre-tax value (the difference between our closing stock price on the last trading day of the ~~third~~second quarter of ~~2019~~2020 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had they all exercised their options on ~~September~~June 30, ~~2019.~~2020. This amount will change based on the fair market value of our stock.

The assumptions we utilized in the Black-Scholes option pricing model and the resulting weighted average fair value of stock option grants were the following:



	Three Months Ended June 30,						Six Months Ended June 30,
	2020			2019			2020			2019
Weighted average fair value of grants	$	—		$	—		$	17.70		$	10.28
Risk-free interest rate	—		%	—		%	1.44		%	2.49		%
Expected volatility	—		%	—		%	43.95		%	41.64		%
Expected life in years	0.00			0.00			4.59			4.54

Three Months Ended September 30, Nine Months Ended September 30,
2019 2018 2019 2018
Weighted average fair value of grants $ —
$ —
$ 10.28
$ 14.26
Risk-free interest rate — % — % 2.49 % 2.51 %
Expected volatility — % — % 41.64 % 33.09 %
Expected life in years 0.00
0.00
4.54
4.53

As of ~~September~~June 30, ~~2019,~~2020, we expect to recognize ~~$2.2~~$3.1 million of total unrecognized pre-tax stock-based compensation expense related to non-vested stock options over a remaining weighted-average life of ~~1.8~~2.1 years.

Table of Contents

UNIVERSAL ELECTRONICS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2020

(Unaudited)

Restricted Stock

Non-vested restricted stock award activity was as follows:



	Shares (in 000's)		Weighted-Average Grant Date Fair Value
Non-vested at December 31, 2019	310		$	34.99
Granted	200		35.18
Vested	(132	)	37.89
Forfeited	(1	)	36.06
Non-vested at June 30, 2020	377		$	34.07

Shares
(in 000's)
Weighted-Average Grant Date Fair Value
Non-vested at December 31, 2018 204
$ 49.23
Granted 263
30.26
Vested (124 ) 47.43
Forfeited (19 ) 36.29
Non-vested at September 30, 2019 324
$ 35.23

As of ~~September~~June 30, ~~2019~~2020, we expect to recognize ~~$8.7~~$10.6 million of total unrecognized pre-tax stock-based compensation expense related to non-vested restricted stock awards over a weighted-average life of ~~1.8~~2.2 years.

~~Table of Contents~~

~~UNIVERSAL ELECTRONICS INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~SEPTEMBER 30, 2019~~

~~(Unaudited)~~

Note 15 — Performance-Based Common Stock Warrants

On March 9, 2016, we issued common stock purchase warrants to Comcast Corporation ("Comcast") to purchase up to 725,000 shares of our common stock at a price of $54.55 per share. The right to exercise the warrants is subject to vesting over ~~three~~3 successive two-year periods (with the first two-year period commencing on January 1, 2016) based on the level of purchases of goods and services from us by Comcast and its affiliates, as defined in the warrants. The table below presents the purchase levels and potential number of warrants ~~that will~~to vest in each period based upon achieving ~~these~~the purchase levels.



	Potential Warrants To Vest
Aggregate Level of Purchases by Comcast and Affiliates	January 1, 2016 - December 31, 2017	January 1, 2018 - December 31, 2019	January 1, 2020 - December 31, 2021
$260 million	100,000	100,000	75,000
$300 million	75,000	75,000	75,000
$340 million	75,000	75,000	75,000
Maximum Potential Warrants Earned by Comcast	250,000	250,000	225,000

Incremental Warrants That Will Vest
Aggregate Level of Purchases by Comcast and Affiliates January 1, 2016 - December 31, 2017 January 1, 2018 - December 31, 2019 January 1, 2020 - December 31, 2021
$260 million 100,000
100,000
75,000
$300 million 75,000
75,000
75,000
$340 million 75,000
75,000
75,000
Maximum Potential Warrants Earned by Comcast 250,000
250,000
225,000

If total aggregate purchases by Comcast and its affiliates are below $260 million in any of the two-year periods above, no warrants will vest related to that two-year period. If total aggregate purchases of goods and services by Comcast and its affiliates exceed $340 million during either the first or second two-year period, the amount of any such excess ~~will~~would count toward aggregate purchases in the following two-year period. This threshold was not met in either the first or second two-year period. For the two-year period ended December 31, 2017, Comcast earned and vested in 175,000 out of the maximum potential 250,000 warrants. For the two-year period ended December 31, 2019, Comcast earned and vested in 100,000 out of the maximum potential 250,000 warrants. At ~~September~~June 30, ~~2019, 175,000~~2020, 275,000 vested warrants were outstanding. To fully vest in the rights to purchase all of the remaining unearned ~~475,000~~225,000 underlying shares, Comcast and its affiliates must purchase an aggregate of ~~$680~~$340 million in goods and services from us during the period January 1, ~~2018~~2020 through December 31, 2021.

~~Any and all~~All warrants that vest will expire on January 1, 2023. The warrants provide for certain adjustments that may be made to the exercise price and the number of shares issuable upon exercise due to customary anti-dilution provisions. Additionally, in connection with the common stock purchase warrants, we have also entered into a registration rights agreement with Comcast under which Comcast may from time to time request that we register the shares of common stock underlying vested warrants with the SEC.

~~Because~~As the warrants contain performance criteria under which Comcast must achieve specified aggregate purchase levels for the warrants to vest, as detailed above, the measurement date for the warrants isfor the first two-year successive periods was the date on which the warrants ~~vest.~~vested.

Table of Contents

UNIVERSAL ELECTRONICS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2020

(Unaudited)

The FASB issued guidance in November 2019, which clarifies the accounting for share-based payments issued as sales incentives to customers. The guidance requires that stock-based compensation expense be recorded as a reduction in the transaction price on the basis of the grant-date fair value. The transition provisions require that equity-classified awards be measured at the adoption date fair value if the measurement date has not been established prior to the adoption date. The measurement periods for the first two successive two-year periods of our outstanding performance-based common stock warrants were completed prior to adoption and were not impacted by this updated guidance. The measurement period for the final two-year period began on January 1, 2020, and accordingly, we measured the fair value of the award as of our adoption date on January 1, 2020 using the Black-Scholes option pricing model. Through ~~September~~June 30, ~~2019, none~~2020, 0ne of the warrants had vested for the two-year period beginning January 1, ~~2018.~~2020.

The assumptions we utilized in the Black-Scholes option pricing model and the resulting grant-date fair value of the warrants as of January 1, 2020 were the following:



Fair value	$17.19
Price of Universal Electronics Inc. common stock	$52.21
Risk-free interest rate	1.62%
Expected volatility	48.86%
Expected life in years	3.00

Prior to the adoption of the new guidance on January 1, 2020, we adjusted the estimated weighted average fair value of the warrants each period. The assumptions we utilized in the Black Scholes option pricing model and the resulting weighted average fair value of the warrants were the following:



	Three Months Ended June 30, 2019	Six Months Ended June 30, 2019
Fair value	$10.61	$10.61
Price of Universal Electronics Inc. common stock	$40.69	$40.69
Risk-free interest rate	1.72%	1.72%
Expected volatility	46.32%	46.32%
Expected life in years	3.50	3.50

Three Months Ended September 30, Nine Months Ended September 30,
2019 2018 2019 2018
Fair value $16.78 $10.06 $16.78 $10.06
Price of Universal Electronics Inc. common stock $51.09 $38.95 $51.09 $38.95
Risk-free interest rate 1.56% 2.92% 1.56% 2.92%
Expected volatility 47.82% 41.00% 47.82% 41.00%
Expected life in years 3.25 4.25 3.25 4.25

~~Table of Contents~~

~~UNIVERSAL ELECTRONICS INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~SEPTEMBER 30, 2019~~

~~(Unaudited)~~

The impact to net sales recorded in connection with the warrants and the related income tax benefit were as follows:



	Three Months Ended June 30,				Six Months Ended June 30,
(In thousands)	2020		2019		2020		2019
Reduction to net sales	$	154	$	236	$	338	$	670
Income tax benefit	$	38	$	59	$	84	$	167

Three Months Ended September 30, Nine Months Ended September 30,
(In thousands) 2019
2018 2019 2018
Reduction to net sales $ 711
$ 404
$ 1,381
$ 747
Income tax benefit 177
100
345
186

We estimate the number of warrants that will vest based on projected future purchases that will be made by Comcast and its affiliates. These estimates may increase or decrease based on actual future purchases. The aggregate estimated fair value of the warrants is recognized as a reduction to revenue over the related two-year vesting period. At June 30, 2020, the aggregate unrecognized estimated fair value of ~~unvested~~ warrants ~~at September 30, 2019~~we estimate will vest was ~~$6.4~~$1.0 million.

Table of Contents

UNIVERSAL ELECTRONICS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2020

(Unaudited)

Note 16 — Other Income (Expense), Net

Other income (expense), net consisted of the following:


	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended June 30,						Six Months Ended June 30,
(In thousands)	2019			2018			2019			2018			2020			2019			2020			2019
Net gain (loss) on foreign currency exchange contracts ⁽¹⁾	$	368		$	69		$	(8	)	$	603		$	(703	)	$	(105	)	$	(451	)	$	(376	)
Net gain (loss) on foreign currency exchange transactions	(689		)	(2,377		)	(662		)	(4,617		)	1,208			158			660			27
Other income	173			26			244			63			226			135			174			71
Other (expense), net	$	(148	)	$	(2,282	)	$	(426	)	$	(3,951	)	$	731		$	188		$	383		$	(278	)


⁽¹⁾	This represents the gains (losses) incurred on foreign currency hedging derivatives (see Note 18 for further details).

Note 17 — Earnings (Loss) Per Share

Earnings (loss) per share was calculated as follows:



	Three Months Ended June 30,					Six Months Ended June 30,
(In thousands, except per-share amounts)	2020		2019			2020		2019
BASIC
Net income (loss)	$	14,400	$	(5,061	)	$	20,246	$	(6,066	)
Weighted-average common shares outstanding	13,915		13,863			13,938		13,845
Basic earnings (loss) per share	$	1.03	$	(0.37	)	$	1.45	$	(0.44	)

DILUTED
Net income (loss)	$	14,400	$	(5,061	)	$	20,246	$	(6,066	)
Weighted-average common shares outstanding for basic	13,915		13,863			13,938		13,845
Dilutive effect of stock options, restricted stock and common stock warrants	236		—			243		—
Weighted-average common shares outstanding on a diluted basis	14,151		13,863			14,181		13,845
Diluted earnings (loss) per share	$	1.02	$	(0.37	)	$	1.43	$	(0.44	)

Three Months Ended September 30, Nine Months Ended September 30,
(In thousands, except per-share amounts) 2019 2018 2019 2018
BASIC
Net income (loss) $ 2,669
$ 959
$ (3,397 ) $ 23,031
Weighted-average common shares outstanding 13,894
13,836
13,861
13,997
Basic earnings (loss) per share $ 0.19
$ 0.07
$ (0.25 ) $ 1.65

DILUTED
Net income (loss) $ 2,669
$ 959
$ (3,397 ) $ 23,031
Weighted-average common shares outstanding for basic 13,894
13,836
13,861
13,997
Dilutive effect of stock options, restricted stock and common stock warrants 276
123
—
119
Weighted-average common shares outstanding on a diluted basis 14,170
13,959
13,861
14,116
Diluted earnings (loss) per share $ 0.19
$ 0.07
$ (0.25 ) $ 1.63

~~Table of Contents~~

~~UNIVERSAL ELECTRONICS INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~SEPTEMBER 30, 2019~~

~~(Unaudited)~~

The following number of stock options, shares of restricted stock and common stock warrants were excluded from the computation of diluted earnings per common share as their inclusion would have been anti-dilutive:



	Three Months Ended June 30,		Six Months Ended June 30,
(In thousands)	2020	2019	2020	2019
Stock options	511	382	486	462
Restricted stock awards	3	31	27	129
Performance-based warrants	275	175	275	175

Three Months Ended September 30, Nine Months Ended September 30,
(In thousands) 2019 2018 2019 2018
Stock options 382
382
436
365
Restricted stock awards 9
59
89
134
Performance-based warrants 175
175
175
175

Note 18 — Derivatives

The following table sets forth the total net fair value of derivatives:



	June 30, 2020										December 31, 2019
	Fair Value Measurement Using							Total Balance			Fair Value Measurement Using							Total Balance
(In thousands)	Level 1		Level 2			Level 3		Total Balance			Level 1		Level 2			Level 3		Total Balance
Foreign currency exchange contracts	$	—	$	(73	)	$	—	$	(73	)	$	—	$	(172	)	$	—	$	(172	)

Table of Contents

UNIVERSAL ELECTRONICS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2020

(Unaudited)

September 30, 2019 December 31, 2018
Fair Value Measurement Using Total Balance Fair Value Measurement Using Total Balance
(In thousands) Level 1 Level 2 Level 3 Level 1 Level 2 Level 3
Foreign currency exchange contracts $ —
$ 57
$ —
$ 57
$ —
$ (249 ) $ —
$ (249 )

We held foreign currency exchange contracts, which resulted in a net pre-tax ~~gain~~loss of ~~$0.4~~$0.7 million and a net pre-tax loss of $0.1 million for the three months ended ~~September~~June 30, ~~2019~~2020 and ~~2018,~~2019, respectively. For the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~2018,~~2019, we had a net pre-tax loss of ~~$8.0 thousand~~$0.5 million and a net pre-tax ~~gain~~loss of ~~$0.6~~$0.4 million, respectively (see Note 16).

Details of foreign currency exchange contracts held were as follows:

Date Held Currency Position Held
Notional Value
(in millions)
Forward Rate
Unrealized Gain/(Loss) Recorded at Balance Sheet
Date
(in thousands)⁽¹⁾
Settlement Date
September 30, 2019 USD/Chinese Yuan Renminbi USD $ 33.0
7.1253
$ (71 ) October 8, 2019
September 30, 2019 USD/Brazilian Real USD $ 1.0
4.1565
$ (3 ) October 25, 2019
September 30, 2019 USD/Euro USD $ 29.0
1.0971
$ 131
October 25, 2019
December 31, 2018 USD/Euro USD $ 20.0
1.1421
$ (97 ) January 25, 2019
December 31, 2018 USD/Chinese Yuan Renminbi USD $ 27.0
6.8969
$ (116 ) January 25, 2019
December 31, 2018 USD/Chinese Yuan Renminbi USD $ 5.0
6.9245
$ (41 ) January 25, 2019
December 31, 2018 USD/Brazilian Real USD $ 1.0
3.8651
$ 5
January 25, 2019



Date Held	Currency	Position Held	Notional Value (in millions)		Forward Rate	Unrealized Gain/(Loss) Recorded at Balance Sheet Date (in thousands)⁽¹⁾			Settlement Date
June 30, 2020	USD/Chinese Yuan Renminbi	CNY	$	42.0	7.0741	$	(22	)	July 24, 2020
June 30, 2020	USD/Euro	USD	$	37.0	1.1219	$	(71	)	July 24, 2020
June 30, 2020	USD/Brazilian Real	USD	$	1.0	5.3634	$	13		July 24, 2020
June 30, 2020	USD/Mexican Peso	USD	$	3.2	23.0015	$	7		July 24, 2020
December 31, 2019	USD/Chinese Yuan Renminbi	USD	$	35.0	6.9867	$	100		January 23, 2020
December 31, 2019	USD/Brazilian Real	USD	$	0.5	4.0560	$	(6	)	January 24, 2020
December 31, 2019	USD/Euro	USD	$	28.0	1.1133	$	(253	)	January 24, 2020
December 31, 2019	USD/Brazilian Real	USD	$	0.7	4.0870	$	(13	)	January 24, 2020


⁽¹⁾	Unrealized gains on foreign currency exchange contracts are recorded in prepaid expenses and other current assets. Unrealized losses on foreign currency exchange contracts are recorded in other accrued liabilities.

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

The following discussion should be read in conjunction with the Consolidated Financial Statements and the related notes that appear elsewhere in this document.

Overview

We design, develop, manufacture and ship control and sensor technology solutions and ~~manufacture~~ a broad line of pre-programmed and universal ~~remote~~ control products, AVaudio-video ("AV") accessories, and intelligent wireless security and smart home products ~~dedicated to redefining~~that are used by the ~~home entertainment, automation and security experience. Our customers operate primarily~~world's leading brands in the consumer electronics, ~~market~~subscription broadcast, home entertainment, automation, security, hospitality and ~~include~~climate control markets. Our offerings include:

easy-to-use, pre-programmed universal infrared ("IR") and radio frequency ("RF") remote controls that are sold primarily to subscription ~~broadcasters, OEMs,~~broadcast providers (cable, satellite and Internet Protocol television ("IPTV") and Over the Top services), original equipment manufacturers ("OEMs"), retailers, and private label ~~brands, pro-security installers and companies in the computing industry. We also sell~~ customers;

integrated circuits, on which our software and universal device control database is embedded, ~~and license our device control database~~sold primarily to OEMs, subscription broadcast providers, and private label customers;

software, firmware and technology solutions that ~~manufacture televisions, digital audio and video players, streamer boxes, cable converters, satellite receivers,~~can enable devices such as TVs, set-top boxes, ~~room air conditioning equipment,~~audio systems, smartphones, tablets, game ~~consoles,~~controllers and ~~wireless mobile phones~~other consumer electronic devices to wirelessly connect and ~~tablets.~~interact with home networks and interactive services to control and deliver digital entertainment and information;

intellectual property which we license primarily to OEMs, software development companies, private label customers, and subscription broadcast providers;

proprietary and standards-based RF sensors designed for residential security, safety and automation applications;

wall-mount and handheld thermostat controllers and connected accessories for intelligent energy management systems, primarily to OEM customers as well as hospitality system integrators; and

AV accessories sold, directly and indirectly, to consumers.

Since our beginning in 1986, we have compiled an extensive device control ~~code database~~knowledge library that ~~covers~~includes nearly 12,000 brands comprising over ~~one~~905,000 device models across AV and smart home platforms, supported by many common smart home protocols, including IR, HDMI-CEC, Zigbee, and Home Network or Cloud Control.

This device knowledge graph is backed by our unique device fingerprinting technology which includes nearly 4.3 million ~~individual~~unique device ~~functions~~fingerprints across both AV and ~~approximately 8,900 unique consumer electronic brands. QuickSet®, our proprietary software, can automatically detect, identify and enable the appropriate control commands for~~smart home ~~entertainment, automation and appliances like air conditioners.~~ devices.

Our library is regularly updated with new control functions captured directly from devices, remote controls and manufacturer specifications to ensure the accuracy and integrity of our database and control engine. Our universal remote control library contains device codes that are capable of controlling virtually all set-top boxes, televisions, audio components, DVD players, Blu-Ray players, and CD players, as well as mosttechnology also includes other remote controlled home entertainment devices and home automation control modules, ~~worldwide.~~

~~With~~as well as wired Consumer Electronics Control ("CEC") and wireless Internet Protocol ("IP") control protocols commonly found on many of the ~~wider adoption~~latest HDMI and internet connected devices. Our proprietary software automatically detects, identifies and enables the appropriate control commands for any given home entertainment, automation and air conditioning device in the home. Our libraries are continuously updated with device control codes used in newly introduced AV and Internet of Things ("IOT") devices. These control codes are captured directly from original remote control devices or from the manufacturer's written specifications to ensure the accuracy and integrity of the library. Our proprietary software and know-how permit us to offer a device control code database that is more ~~advanced control technologies, emerging radio frequency ("RF") technologies, such as RF4CE, Bluetooth,~~robust and ~~Bluetooth Smart, have increasingly become a focus in~~efficient than similarly priced products of our ~~development efforts. Several new recently released platforms utilize RF to effectively implement popular features like voice search.~~competitors.

We have developed a comprehensive patent portfolio of over ~~500~~560 issued and pending ~~United States~~U.S. patents related to remote control, home security, safety and automation as well as hundreds of foreign counterpart patents and applications in various territories around the world.

We operate as one business segment. We have 242 domestic subsidiaries and 25 international subsidiaries located in Argentina, Brazil, British Virgin Islands, Cayman Islands, France, Germany, Hong Kong (3), India, Italy, Japan, Korea, Mexico, the Netherlands, People's Republic of China (the "PRC") ~~(6)~~(7), Singapore, Spain and the United Kingdom.

To recap our results for the three months ended ~~September~~June 30, ~~2019:~~2020:

Net sales ~~increased 9.9%~~decreased 21.0% to ~~$200.7~~$153.1 million for the three months ended ~~September~~June 30, ~~2019~~2020 from ~~$182.7~~$193.9 million for the three months ended ~~September~~June 30, ~~2018.~~2019.

Our gross margin percentage increased ~~from 22.1%~~to 24.9% for the three months ended ~~September~~June 30, ~~2018 to 23.2%~~2020 from 17.5% for the three months ended ~~September~~June 30, 2019.

Operating expenses, as a ~~percent~~percentage of net sales, increased to 20.7% for the three months ended June 30, 2020 from 19.5% for the three months ended ~~September~~June 30, ~~2018 to 20.2% for the three months ended September 30,~~ 2019.

Our operating income increased ~~from $4.7~~to $6.5 million for the three months ended ~~September~~June 30, ~~2018 to $6.1~~2020 from a loss of $3.9 million for the three months ended ~~September~~June 30, 2019. Our operating income percentage increased ~~from 2.6%~~to 4.2% for the three months ended ~~September~~June 30, ~~2018 to 3.0%~~2020 from a loss of 2.0% for the three months ended ~~September~~June 30, 2019.

Income tax expense increased ~~from $0.3~~to $1.9 million for the three months ended ~~September~~June 30, ~~2018 to $2.5~~2020 from $0.2 million for the three months ended ~~September~~June 30, 2019.

Our strategic business objectives for ~~2019~~2020 include the following:

continue to develop and market the advanced remote control products and technologies that our customer base is adopting;

continue to broaden our home control and automation product offerings;

further penetrate international subscription ~~broadcasting~~broadcast markets;

acquire new customers in historically strong regions;

increase our share with existing customers; and

continue to seek acquisitions or strategic partners that complement and strengthen our existing business.

We intend for the following discussion of our financial condition and results of operations to provide information that will assist in understanding our consolidated financial statements, the changes in certain key items in those financial statements from period to period, and the primary factors that accounted for those changes, as well as how certain accounting principles, policies and estimates affect our consolidated financial statements.

COVID-19 Impact

The COVID-19 pandemic has caused, and is expected to continue to cause, a global slowdown of economic activity (including the decrease in demand for goods and services), and significant volatility in and disruption to financial markets. Because the severity, magnitude and duration of the COVID-19 pandemic are uncertain, rapidly changing and difficult to predict, the pandemic’s impact on our operations and financial performance, as well as its impact on our ability to successfully execute our business strategy and initiatives, remains uncertain. As COVID-19 has spread to other jurisdictions and has been declared a global pandemic, the full extent of this outbreak and the related governmental, business and travel restrictions in order to contain COVID-19 are continuing to evolve globally. In response, we have created a COVID-19 taskforce, which includes a cross-functional group of senior level executives, to manage and respond to the everchanging health and safety requirements across the globe and communicate our response to the pandemic to our global factory and office leaders.

Local government mandates required us, in the first quarter of 2020, to keep our China factories closed for a period of approximately two weeks beyond the end of the Chinese Lunar New Year. Our Mexico factory was closed for more than one week due to local health ordinance requirements during the second quarter of 2020. As a part of our response to this pandemic, our COVID-19 taskforce has developed and we have implemented additional safety measures for all factory employees across the globe including temperature scans upon entry, hand sanitizer stations located throughout the facilities, mandatory mask wearing, social distancing measures in gathering places and restricting all visitor access. All factories are up to or near labor capacity as of the issuance of this report.

We have also taken measures to safeguard the health and well-being of our employees in our office locations throughout the world including implementing work from home arrangements and a moratorium on all travel, except where essential and approved in advance. We have implemented enhanced safety measures upon the reopening of our office locations including more frequent office sanitation, temperature scans upon arrival, mandatory mask wearing, additional hand sanitizer locations, social distancing measures throughout locations and restricted visitor access. The reopening of our offices continues to follow suggested guidelines by the Centers for Disease Control and Prevention, the World Health Organization, and local governmental orders and recommendations. The continued safety and welfare of our employees will remain at the forefront of all decision-making.

We anticipate that these actions and the global health crisis caused by COVID-19 will continue to negatively impact business activity across the globe, including our business. We expect our sales demand to be negatively impacted for the third quarter and possibly the remainder of 2020 given the global reach and economic impact of COVID-19 and the various quarantine and social distancing measures put in place to contain the spread of COVID-19. We have also seen some disruptions in our supply chain that, if continued, may cause us difficulty in fulfilling customer orders. A closure of one of our factories for a sustained period of time would, in the short run, impact our ability to meet customer demand and would negatively impact our results.

We will continue to actively monitor the situation and may take further actions altering our business operations as necessary or as required by federal, state, or local authorities. The potential effects of any such alterations or modifications may have a material adverse impact on our business for the remainder of 2020 or future periods.

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and judgments that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, we evaluate our estimates and judgments, including those related to revenue ~~recognition, allowances~~recognition; allowance for ~~doubtful accounts,~~bad debts; inventory ~~valuation,~~valuation; our review for impairment of long-lived assets, intangible assets and ~~goodwill,~~goodwill; leases; business ~~combinations,~~combinations; income ~~taxes,~~taxes; stock-based compensation expense and performance-based common stock warrants. Actual results may differ from these judgments and estimates, and they may be adjusted as more information becomes available. Any adjustment may be significant and may have a material impact on our consolidated financial position or results of operations.

An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, if different estimates reasonably may have been used, or if changes in the estimate that are reasonably likely to occur may materially impact the financial statements. We do not believe that there have been any significant changes during the ~~three and nine~~six months ended ~~September~~June 30, ~~2019~~2020 to the items that we disclosed as our critical accounting policies and estimates in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained in our Annual Report on Form 10-K for our fiscal year ended December 31, ~~2018.~~2019.

Recent Accounting Pronouncements

See Note 1 contained in the "Notes to Consolidated Financial Statements" for a discussion of recent accounting pronouncements.

Results of Operations

The following table sets forth our reported results of operations expressed as a percentage of net sales for the periods indicated.


	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended June 30,				Six Months Ended June 30,
	2019		2018		2019		2018		2020		2019		2020		2019
Net sales	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%
Cost of sales	76.8		77.9		79.2		79.6		75.1		82.5		73.4		80.5
Gross profit	23.2		22.1		20.8		20.4		24.9		17.5		26.6		19.5
Research and development expenses	4.0		3.1		3.8		3.5		4.8		3.7		5.0		3.7
Selling, general and administrative expenses	16.2		16.4		16.3		17.7		15.9		15.8		16.8		16.4
Operating income (loss)	3.0		2.6		0.7		(0.8	)	4.2		(2.0	)	4.8		(0.6	)
Interest income (expense), net	(0.4	)	(0.6	)	(0.5	)	(0.7	)	(0.2	)	(0.6	)	(0.3	)	(0.6	)
Gain on sale of Guangzhou factory	—		—		—		7.3
Accrued social insurance adjustment									6.2		—		3.1		—
Other income (expense), net	0.0		(1.3	)	(0.1	)	(0.8	)	0.4		0.1		0.1		(0.1	)
Income (loss) before provision for income taxes	2.6		0.7		0.1		5.0		10.6		(2.5	)	7.7		(1.3	)
Provision for income taxes	1.3		0.2		0.6		0.5		1.2		0.1		1.1		0.3
Net income (loss)	1.3	%	0.5	%	(0.5	)%	4.5	%	9.4	%	(2.6	)%	6.6	%	(1.6	)%

Three Months Ended ~~September~~June 30, ~~2019~~2020 versus Three Months Ended ~~September~~June 30, ~~2018~~2019

Net sales. Net sales for the three months ended ~~September~~June 30, ~~2019~~2020 were ~~$200.7~~$153.1 million, ~~an increase~~a decrease of ~~9.9%~~21.0% compared to ~~$182.7~~$193.9 million for the three months ended ~~September~~June 30, ~~2018.~~2019. The ~~increase~~decrease in net sales ~~was~~occurred primarily ~~due~~with our traditional home entertainment and security customers. The COVID-19 pandemic had an adverse effect on demand and on our supply chain which ultimately resulted in a decrease in net sales. Certain of our key suppliers continued to be impacted by the ~~recent launches~~close orders of ~~higher end platforms by existing~~local authorities and certain customers reduced order quantities. We expect the COVID-19 pandemic to continue to negatively impact our net sales in the ~~subscription broadcasting channel, a newly acquired customer~~third quarter and ~~continued strength in home automation.~~possibly the remainder of 2020.

Gross profit. Gross profit for the three months ended ~~September~~June 30, ~~2019~~2020 was ~~$46.5~~$38.1 million compared to ~~$40.3~~$34.0 million for the three months ended ~~September~~June 30, ~~2018.~~2019. Gross profit as a ~~percent~~percentage of sales increased to ~~23.2%~~24.9% for the three months ended ~~September~~June 30, ~~2019~~2020 from ~~22.1%~~17.5% for the three months ended ~~September~~June 30, ~~2018. The gross margin~~2019. Gross profit as a percentage of sales was favorably impacted by ~~product mix due to small to medium sized subscription broadcasters launching advanced platforms and~~a reduction in U.S. tariff expense, improved operational efficiencies in our Mexico-based manufacturing facility as it was no longer in a start-up phase, an increase in royalty

revenue as certain consumer electronic companies are embedding our technology in their devices ~~lower raw material costs during~~and the ~~three months ended September 30, 2019 and foreign currency as~~strengthening of the U.S. Dollar ~~strengthened by approximately 300 basis points~~ versus both the Chinese ~~Yuan. These savings~~Yuan Renminbi and the Mexican Peso. Our manufacturing costs were partially offset by higher U.S tariffs on many of our products that are manufactured in China and imported into the U.S. In an effort to mitigate the effect of the increased tariffs, we are in the process of transitioning the production of goods destined for the U.S. from our China factories to our factory in Mexico. In connection with this transition, which began in the fourth quarter of 2018, we have incurred costs related to the movement of materials, duplicative labor efforts and indirect costs including unabsorbed duplicative overhead. We expect this manufacturing transition to be substantially completed in 2019. Until then, we expect that our gross margin rate will continue to be negatively impacted by ~~increased U.S.~~the COVID-19 pandemic as our Mexico-based manufacturing facility experienced a more than one

week closure. The potential impact of the COVID-19 pandemic on our gross profit as a percentage of net sales in future periods is unknown to us at this time; however, the closure of any of our factories may result in excess manufacturing costs, additional tariffs if we were to import goods from China into North America and ~~manufacturing transition inefficiencies.~~additional expenses to meet the demand of our customers.

Research and development ("R&D") expenses. R&D expenses increased ~~41.8%~~3.1% to ~~$7.9~~$7.4 million for the three months ended ~~September~~June 30, ~~2019~~2020 from ~~$5.6~~$7.2 million for the three months ended ~~September~~June 30, ~~2018~~2019 primarily due to our continued investment in the development of new products that enhance the user experience in home entertainment and home automation.

Selling, general and administrative ("SG&A") expenses. SG&A expenses ~~were $32.4~~decreased to $24.2 million for the three months ended ~~September~~June 30, ~~2019 compared to $30.0~~2020 from $30.8 million for the three months ended ~~September~~June 30, ~~2018,~~2019, primarily due to ~~increases~~a reduction in incentive compensation expense, ~~and an increase~~a decrease in contingent consideration recorded in connection with our acquisition of the net assets of Ecolink Intelligent Technology, Inc. ("Ecolink")~~. Partially offsetting these increases was payroll expense, which decreased~~ and a decrease in freight costs. We also reduced certain discretionary expenses as a result of ~~our ongoing corporate restructuring initiatives.~~the COVID-19 pandemic and expect this to continue through the remainder of the year.

Interest income (expense), net. Net interest expense decreased to ~~$0.8~~$0.4 million for the three months ended ~~September~~June 30, ~~2019~~2020 from ~~$1.2~~$1.1 million for the three months ended ~~September~~June 30, ~~2018~~2019 as a result of a lower average quarterly loan ~~balance.~~balance and a lower interest rate.

Accrued social insurance adjustment. During the three months ended June 30, 2020, we reversed approximately $9.5 million of accrued social insurance. In June 2018, we sold our Guangzhou entity via a stock deal and the terms of the agreement included a two-year indemnification period. In June 2020, the indemnification period expired and we determined we were no longer legally liable for any liabilities associated with our Guangzhou entity. Accordingly, we reversed the accrued social insurance amount associated with the Guangzhou entity which was approximately $9.5 million.

Other income (expense), net. Net other income was ~~$0.1~~$0.7 million for the three months ended ~~September~~June 30, ~~2019~~2020, as a result of net foreign currency gains, compared to ~~net other~~ expense of ~~$2.3~~$0.2 million for the three months ended ~~September~~June 30, ~~2018. This change was driven primarily by~~2019, as a result of net foreign currency ~~losses associated with fluctuations in the Chinese Yuan Renminbi and Euro exchange rates versus the U.S. Dollar in the prior year period.~~losses.

Provision for income taxes. Income tax expense was ~~$2.5~~$1.9 million for the three months ended ~~September~~June 30, ~~2019 compared to $0.3~~2020, representing an effective tax rate of 11.6%. During the three months ended June 30, 2020, we received two incentive tax refunds in China totaling approximately $1.1 million and we reversed a tax reserve of approximately $1.3 million that was no longer required. Partially offsetting these items is a pre-tax loss without benefit in the U.S. Income tax expense was $0.2 million for the three months ended ~~September~~June 30, ~~2018.~~2019. The ~~$2.5 million tax expense~~U.S. pre-tax loss incurred induring the three months ~~ending September~~ended June 30, 2019 was not benefited as a result of a full valuation allowance being applied against the U.S. deferred tax assets. The $0.2 million of tax expense relates to pre-tax income generated in foreign jurisdictions. The U.S. incurred a pre-tax loss for the same period; however, because of a full valuation allowance begin applied to its deferred tax assets, this loss was not benefited, resulting in an increase in our effective tax rate.

~~Nine~~Six Months Ended ~~September~~June 30, ~~2019~~2020 versus ~~Nine~~Six Months Ended ~~September~~June 30, ~~2018~~2019

Net sales. Net sales for the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 were ~~$578.8~~$304.9 million, ~~an increase~~a decrease of ~~13.5%~~19.3% compared to ~~$509.9~~$378.1 million for the ~~nine~~six months ended ~~September~~June 30, ~~2018.~~2019. The ~~increase~~decrease in net sales ~~was~~occurred primarily ~~due~~with our traditional home entertainment and security customers as we experienced supply, production and demand disruptions caused by the COVID-19 pandemic. Our China-based manufacturing facilities were delayed in re-opening after the Lunar New Year holiday, certain of our key suppliers were ordered to close by local authorities, and certain customers reduced order quantities. We expect the ~~recent launches of higher end platforms by existing customers~~COVID-19 pandemic to negatively impact our net sales in the ~~subscription broadcasting channel, a newly acquired customer~~third quarter and ~~continued strength in home automation.~~possibly the remainder of 2020.

Gross profit. Gross profit for the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 was ~~$120.3~~$81.0 million compared to ~~$104.3~~$73.9 million for the ~~nine~~six months ended ~~September~~June 30, ~~2018.~~2019. Gross profit as a percent of sales increased to 26.6% for the six months ended June 30, 2020 from 19.5% for the six months ended June 30, 2019. Gross profit as a percent of sales was ~~increased to 20.8% for the nine months ended September 30, 2019 compared to 20.4% for the nine months ended September 30, 2018. The gross margin percentage was~~ favorably impacted by ~~product mix due to small to medium sized subscription broadcasters launching advanced platforms and~~a reduction in U.S. tariff expense, improved operational efficiencies in our Mexico-based manufacturing facility as it was no longer in a start-up phase, an increase in royalty revenue as certain consumer electronic companies are embedding our technology in their devices, ~~lower raw material costs during~~and the ~~nine months ended September 30, 2019 and foreign currency as~~strengthening of the U.S. Dollar ~~strengthened by approximately 500 basis points~~ versus the Chinese ~~Yuan. The gross margin percentage was unfavorably impacted by higher U.S tariffs on many of our products that are manufactured in China~~Yuan Renminbi and ~~imported into~~ the U.S. In an effort to mitigate the effect of the increased tariffs, we are in the process of transitioning the production of goods destined for the U.S. from our China factories to our factory in Mexico. In connection with this transition, which began in the fourth quarter of 2018, we have incurredMexican Peso. Our manufacturing costs related to the movement of materials, duplicative labor efforts and indirect costs including unabsorbed duplicative overhead. We expect this manufacturing transition to be substantially completed by 2019. Until then, we expect that our gross margin rate will continue to bewere negatively impacted by ~~increased U.S.~~the COVID-19 pandemic as our China-based manufacturing facilities were delayed in re-opening after the Lunar New Year holiday and our Mexico-based manufacturing facility experienced a more than one week closure. The potential impact of the COVID-19 pandemic on our gross profit as a percentage of net sales in future periods is unknown to us at this time; however, the closure of any of our factories may result in excess manufacturing costs, additional tariffs if we were to import goods from China into North America and ~~manufacturing transition inefficiencies.~~additional expenses to meet the demand of our customers.

Research and development expenses. R&D expenses increased ~~23.6%~~9.5% to ~~$21.9~~$15.3 million for the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 from ~~$17.7~~$14.0 million for the ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 primarily due to our continued investment in the development of new products that enhance the user experience in home entertainment and home automation.

Selling, general and administrative expenses. SG&A expenses ~~increased~~decreased to ~~$94.6~~$51.2 million for the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 from ~~$90.8~~$62.2 million for the ~~nine~~six months ended ~~September~~June 30, ~~2018,~~2019, primarily due to ~~increases~~a reduction in incentive compensation expense, ~~and an increase~~a decrease in contingent consideration recorded in connection with our acquisition of the net assets of Ecolink ~~Intelligent Technology, Inc. Partially offsetting these increases was payroll expense, which decreased~~and a decrease in freight costs. We also reduced certain discretionary expenses as a result of ~~our ongoing corporate restructuring initiatives.~~the COVID-19 pandemic and expect this to continue for the remainder of the year.

Interest income (expense), net. Net interest expense ~~was $3.1~~decreased to $1.0 million for the ~~nine~~six months ended ~~September~~June 30, ~~2019 and $3.5~~2020 from $2.3 million for the ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 as a result of a lower average ~~quarterly~~ loan ~~balance.~~balance and a lower interest rate.

~~Gain on sale~~Accrued social insurance adjustment. During the six months ended June 30, 2019, we reversed approximately $9.5 million of ~~Guangzhou factory~~.accrued social insurance. In June 2018, we ~~completed the sale of~~sold our Guangzhou ~~manufacturing facility in exchange~~entity via a stock deal and the terms of the agreement included a two-year indemnification period. In June 2020, the indemnification period expired and we determined we were no longer legally liable for ~~cash proceeds of $51.3 million, resulting in a pre-tax gain of $37.0~~any liabilities associated with our Guangzhou entity. Accordingly, we reversed the accrued social insurance amount associated with the Guangzhou entity which was approximately $9.5 million.

Other income (expense), net. Net other ~~expense~~income was $0.4 million for the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020, as a result of net foreign currency gains, compared to ~~$4.0~~expense of $0.3 million for the ~~nine~~six months ended ~~September~~June 30, ~~2018. This change was driven primarily by~~2019, as a result of net foreign currency ~~losses associated with fluctuations in the Chinese Yuan Renminbi, Argentinian Peso, and Euro exchange rates versus the U.S. Dollar in the prior year period.~~losses.

Provision for income taxes. Income tax expense was ~~$3.7~~$3.1 million for the ~~nine~~six months ended ~~September~~June 30, ~~2019 compared to $2.2~~2020, representing an effective tax rate of 13.3%. During the six months ended June 30, 2020, we received two incentive tax refunds in China totaling approximately $1.1 million and we reversed a tax reserve of approximately $1.3 million that was no longer required. Partially offsetting these items is a pre-tax loss without benefit in the U.S. Income tax expense was $1.2 million for the ~~nine~~six months ended ~~September~~June 30, ~~2018. Income tax expense~~2019. We incurred a pre-tax loss for the ~~nine~~six months ended ~~September~~June 30, ~~2019 includes~~2019; however, losses were not benefited in the U.S. ~~as a result of a valuation allowance being applied against its deferred~~and we recognized tax ~~assets and~~expense resulting from the ~~net effect (expense) of a~~ remeasurement of deferred taxes ~~at our Yangzhou entity~~ in China ~~resulting from a lower tax rate that was achieved via~~and the ~~High Technology Exemption ("HTE") approval. The majority~~recording of pre-tax income ~~earned~~ in the nine months ended September 30, 2018 was a result of the gain on sale of our Guangzhou factory located in southern China. The tax rate applicable to this transaction was lower than our blended consolidated tax rate.foreign jurisdictions.

Liquidity and Capital Resources

Sources and Uses of Cash


(In thousands)	Nine Months Ended September 30, 2019			Increase (Decrease)			Nine Months Ended September 30, 2018			Six Months Ended June 30, 2020			Increase (Decrease)			Six Months Ended June 30, 2019
Cash provided by (used for) operating activities	$	39,921		$	44,495		$	(4,574	)	$	4,487		$	(15,746	)	$	20,233
Cash provided by (used for) investing activities	(17,359		)	(44,848		)	27,489			(9,787		)	1,566			(11,353		)
Cash provided by (used for) financing activities	(19,081		)	30,977			(50,058		)	(4,496		)	7,659			(12,155		)
Effect of exchange rate changes on cash, cash equivalents and restricted cash	(1,959		)	(3,758		)	1,799
Net increase (decrease) in cash, cash equivalents and restricted cash	$	1,522		$	26,866		$	(25,344	)
Effect of exchange rate changes on cash and cash equivalents										(5,674		)	(5,307		)	(367		)
Net increase (decrease) in cash and cash equivalents										$	(15,470	)	$	(11,828	)	$	(3,642	)


	September 30, 2019		Increase (Decrease)		December 31, 2018		June 30, 2020		Increase (Decrease)			December 31, 2019
Cash and cash equivalents	$	54,729	$	1,522	$	53,207	$	58,832	$	(15,470	)	$	74,302
Working capital	102,894		2,297		100,597		128,701		16,405			112,296

Net cash provided by operating activities was ~~$39.9~~$4.5 million during the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 compared to ~~$4.6~~$20.2 million ~~of net cash used for operating activities~~ during the ~~nine~~six months ended ~~September~~June 30, ~~2018.~~2019. Net income was $20.2 million for the six months ended June 30, 2020 compared to a net loss of $6.1 million for the six months ended June 30, 2019. Accounts payable and accrued liabilities ~~produced~~resulted in net cash outflows of $40.9 million during the six months ended June 30, 2020 compared to cash inflows of ~~$11.7~~$16.8 million during the ~~nine~~six months ended ~~September~~June 30, 2019, ~~versus cash outflows of $13.1 million during the nine months ended September 30, 2018,~~ largely as a result of timing of ~~payments. Accounts receivable~~payments for accounts payable, accrued compensation and ~~contract assets produced cash outflows of $11.1~~contingent consideration. Inventories decreased by $9.6 million during the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 compared to ~~$1.3~~an increase of $4.4 million during the ~~nine~~six months ended ~~September~~June 30, ~~2018 largely due to strong sales growth partially offset by a decrease in days sales outstanding of 67 days at September 30, 2019 compared to 74 days at September 30, 2018.~~2019. Inventory turns were ~~consistent~~3.0 turns at June 30, 2020 compared to 3.5 turns at ~~September~~June 30, ~~2019 and September~~2019. Days sales outstanding were 79 days at June 30, ~~2018.~~2020 compared to 69 days at June 30, 2019.

Net cash used for investing activities during the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 was ~~$17.4~~$9.8 million, of which ~~$15.9~~$6.2 million was utilized for capital expenditures. Net cash ~~provided by~~used for investing activities during the ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 was ~~$27.5 million which included cash proceeds relating to the sale of our Guangzhou factory of $51.3 million offset partially by $16.9~~$11.4 million of which $10.1 million was utilized for capital expenditures.

Net cash used for financing activities was ~~$19.1~~$4.5 million during the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 compared to ~~$50.1~~$12.2 million during the ~~nine~~six months ended ~~September~~June 30, ~~2018.~~2019. The decrease in cash used infor financing activities was driven primarily by borrowing

and repayment activity on our line of ~~credit and fewer shares repurchased on the open market.~~credit. During the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 we had net ~~repayments~~borrowings of ~~$13.5~~$5.0 million compared to ~~$34.5~~net repayments of $6.5 million during the ~~nine~~six months ended ~~September~~June 30, ~~2018.~~2019. This was partially offset by an increase in treasury share repurchases in the current period.

During the ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, we repurchased ~~54,403~~172,274 shares of our common stock at a cost of ~~$1.7~~$6.4 million compared to our repurchase of ~~373,511~~47,100 shares at a cost of ~~$12.6~~$1.4 million during the ~~nine~~six months ended ~~September~~June 30, ~~2018.~~2019. We hold these shares as treasury stock and they are available for reissue. Presently, we have no plans to distribute these shares, although we may change these plans if necessary to fulfill our on-going business objectives. In addition, while we have suspended repurchasing shares under our 2020 Plan due in part to the uncertainties surrounding the COVID-19 pandemic, management may resume such repurchasing when market and business conditions warrant. See Note 12 contained in "Notes to Consolidated Financial Statements" for further information regarding our share repurchase programs.

Contractual Obligations

The following table summarizes our contractual obligations and the effect these obligations are expected to have on our liquidity and cash flow in future periods.


	Payments Due by Period										Payments Due by Period
(In thousands)	Total		Less than 1 year		1 - 3 years		4 - 5 years		After 5 years		Total		Less than 1 year		1 - 3 years		4 - 5 years		After 5 years
Operating lease obligations	$	26,344	$	6,220	$	12,420	$	4,991	$	2,713	$	22,758	$	6,877	$	10,660	$	3,763	$	1,458
Purchase obligations ⁽¹⁾	5,162		5,162		—		—		—		3,467		3,467		—		—		—
Contingent consideration⁽²⁾	10,143		5,411		4,564		168		—		2,234		2,000		234		—		—
Total contractual obligations	$	41,649	$	16,793	$	16,984	$	5,159	$	2,713	$	28,459	$	12,344	$	10,894	$	3,763	$	1,458


⁽¹⁾	Purchase obligations primarily consist of contractual payments to purchase property, plant and equipment.


⁽²⁾	Contingent consideration consists of contingent payments related to our purchases of the net assets of Ecolink and RCS Control Systems, Inc. ("RCS").

Liquidity

Historically, we have utilized cash provided from operations as our primary source of liquidity, as internally generated cash flows have been sufficient to support our business operations, capital expenditures and discretionary share repurchases. More recently, we have utilized our revolving line of credit to fund an increased level of share repurchases and our acquisitions of the net assets of Ecolink and RCS. We anticipate that we will continue to utilize both cash flows from operations and our revolving line of credit to support ongoing business operations, capital expenditures and future discretionary share repurchases. We believe our current cash balances, anticipated cash flow to be generated from operations and available borrowing resources will be sufficient to cover expected cash outlays during the next twelve months; however, because our cash is located in various jurisdictions throughout the world, we may at times need to increase borrowing from our revolving line of credit or take on additional debt until we are able to transfer cash among our various entities.

Our liquidity is subject to various risks including the risks discussed under "Item 3. Quantitative and Qualitative Disclosures about Market Risk."


(In thousands)	September 30, 2019		December 31, 2018		June 30, 2020		December 31, 2019
Cash and cash equivalents	$	54,729	$	53,207	$	58,832	$	74,302
Available borrowing resources	34,300		28,500		49,300		54,300

Our cash balances are held in numerous locations throughout the world. The majority of our cash is held outside of the United States and may be repatriated to the United States but, under current law, may be subject to state income ~~taxes~~ and foreign withholding taxes. Additionally, repatriation of some foreign balances is restricted by local laws. We have provided for the state income tax ~~liability~~ and the foreign withholding tax liabilities on these amounts for financial statement purposes.

On ~~September~~June 30, ~~2019~~2020, we had ~~$7.2~~$8.6 million, ~~$12.8~~$14.8 million, ~~$11.1~~$9.8 million, ~~$12.2~~$15.2 million and ~~$11.4~~$10.4 million of cash and cash equivalents in the United States, the PRC, Asia (excluding the PRC), Europe, and South America, respectively. On December 31, ~~2018,~~2019,we had ~~$1.2~~$16.8 million, ~~$20.9~~$13.7 million, ~~$2.4~~$21.7 million, ~~$19.9~~$9.1 million, and ~~$8.9~~$13.0 million of cash and cash equivalents in the United States, the PRC, Asia (excluding the PRC), Europe and South America, respectively. We attempt to mitigate our exposure to liquidity, credit and other relevant risks by placing our cash and cash equivalents with financial institutions we believe are high quality.

All obligations under the Credit Line are secured by substantially all of our U.S. personal property and tangible and intangible assets as well as 65% of our ownership interest in Enson Assets Limited, our wholly-owned subsidiary that controls our manufacturing factories in the PRC.

The Second Amended Credit Agreement includes financial covenants requiring a minimum fixed charge coverage ratio and a maximum cash flow leverage ratio. In addition, the Second Amended Credit Agreement contains other customary affirmative and negative covenants and events of default. As of ~~September~~June 30, ~~2019,~~2020, we were in compliance with the covenants and conditions of the Second Amended Credit Agreement.

At ~~September~~June 30, ~~2019,~~2020, we had an outstanding balance of ~~$88.0~~$73.0 million on our Credit Line and ~~$34.3~~$49.3 million of availability.

Off-Balance Sheet Arrangements

We do not participate in any material off-balance sheet arrangements.

Factors That May Affect Financial Condition and Future Results

Forward-Looking Statements

We caution that the following important factors, among others (including but not limited to factors discussed in "Management's Discussion and Analysis of Financial Condition and Results of Operations," as well as those discussed in our ~~2018~~2019 Annual Report on Form 10-K, or in our other reports filed from time to time with the Securities and Exchange Commission), may affect our actual results and may contribute to or cause our actual consolidated results to differ materially from those expressed in any of our forward-looking statements. The factors included here are not exhaustive. Further, any forward-looking statement speaks only as of the date on which such statement is made, and we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events. New factors emerge from time to time, and it is not possible for management to predict all such factors, nor can we assess the impact of each such factor on the business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statement. Therefore, forward-looking statements should not be relied upon as a prediction of actual future results.

While we believe that the forward-looking statements made in this report are based on reasonable assumptions, the actual outcome of such statements is subject to a number of risks and uncertainties, including the ultimate impact of the COVID-19 pandemic on our business, results of operations, financial position and liquidity; the significant percentage of our revenue attributable to a limited number of customers; the failure of our markets to continue growing and expanding in the manner we anticipated; the loss of market share due to competition; the delay by or failure of our customers to order products from us due to delays by them of their new product rollouts, their decision to purchase their products from an alternative or second source supplier, their efforts to refocus their operations to broadband and ~~OTT~~over-the-top ("OTT") versus traditional linear video, their failure to grow as we anticipated, their internal inventory control measures, including to mitigate effects due to increases in tariffs, or their loss of market share; the effects of natural or other events beyond our control, including the effects political unrest, war or terrorist activities may have on us or the economy; the economic environment's effect on us or our customers; the effects of doing business internationally, including the effects that changes in laws, regulations and policies may have on our business including the impact of new or additional tariffs and surcharges; the growth of, acceptance of and the demand for our products and technologies in various markets and geographical regions, including cable, satellite, consumer electronics, retail, and digital media and interactive technology; our inability to add profitable complementary products which are accepted by the marketplace; our inability to attract and retain a quality workforce at adequate levels in all regions of the world, and particularly those jurisdictions where we are moving our operations; our inability to continue to maintain our operating costs at acceptable levels through our cost containment efforts including moving our operations and manufacturing facilities to lower cost jurisdictions; an unfavorable ruling in any or all of the litigation matters to which we are party; our inability to continue selling our products or licensing our technologies at higher or

profitable margins; our inability to obtain orders or maintain our order volume with new and existing customers; our inability to develop new and innovative

technologies and products that are accepted by our customers; our inability to successfully, timely and profitably restructure and/or relocate our manufacturing facilities and activities; the possible dilutive effect our stock incentive programs may have on our earnings per share and stock price; the continued ability to identify and execute on opportunities that maximize stockholder value, including the effects repurchasing the ~~company's~~Company's shares have on the ~~company's~~Company's stock value; our inability to continue to obtain adequate quantities of component parts or secure adequate factory production capacity on a timely basis; and other factors listed from time to time in our press releases and filings with the Securities and Exchange Commission.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to various market risks, including interest rate and foreign currency exchange rate fluctuations. We have established policies, procedures and internal processes governing our management of these risks and the use of financial instruments to mitigate our risk exposure.

Interest Rate Risk

We are exposed to interest rate risk related to our debt. From time to time we borrow amounts on our Credit Line for working capital and other liquidity needs. Under our Second Amended Credit Agreement, we may elect to pay interest on outstanding borrowings on our Credit Line based on LIBOR or a base rate (based on the prime rate of U.S. Bank) plus an applicable margin as defined in the Second Amended Credit Agreement. Accordingly, changes in interest rates would impact our results of operations in future periods. A 100 basis point increase in interest rates would have an approximately ~~$0.7~~$0.5 million annual impact on net income based on our outstanding ~~line of credit~~Credit Line balance at ~~September~~June 30, ~~2019.~~2020.

We cannot make any assurances that we will not need to borrow additional amounts in the future or that funds will be extended to us under comparable terms or at all. If funding is not available to us at a time when we need to borrow, we would have to use our cash reserves, including potentially repatriating cash from foreign jurisdictions, which may have a material adverse effect on our operating results, financial position and cash flows.

Foreign Currency Exchange Rate Risk

At ~~September~~June 30, ~~2019,~~2020, we had wholly-owned subsidiaries in Argentina, Brazil, the British Virgin Islands, Cayman Islands, France, Germany, Hong Kong, India, Italy, Japan, Korea, Mexico, the Netherlands, the PRC, Singapore, Spain and the United Kingdom. We are exposed to foreign currency exchange rate risk inherent in our sales commitments, anticipated sales, anticipated purchases, operating expenses, assets and liabilities denominated in currencies other than the U.S. Dollar. The most significant foreign currencies to our operations are the Chinese Yuan Renminbi, ~~Euro,~~Mexican Peso, British Pound, Euro, Argentinian ~~Peso, Mexican~~ Peso, Brazilian Real, Indian Rupee, Japanese Yen and Philippine ~~Peso and Japanese Yen.~~Peso. Our most significant foreign currency exposure is to the Chinese Yuan Renminbi as this is the functional currency of our China-based factories where the majority of our products are manufactured. If the Chinese Yuan Renminbi were to strengthen against the U.S. Dollar, our manufacturing costs would increase. We are generally a net payor of the ~~Euro,~~ Mexican Peso, Euro, Indian Rupee, Japanese Yen and Philippine Peso ~~and Japanese Yen~~ and therefore benefit from a stronger U.S. Dollar and are adversely affected by a weaker U.S. Dollar relative to the foreign currency. For the British Pound, Argentinian Peso and Brazilian Real, we are generally a net receiver of the foreign currency and therefore benefit from a weaker U.S. Dollar and are adversely affected by a stronger U.S. Dollar relative to the foreign currency. Even where we are a net receiver, a weaker U.S. Dollar may adversely affect certain expense figures taken alone.

From time to time, we enter into foreign currency exchange agreements to manage the foreign currency exchange rate risks inherent in our forecasted income and cash flows denominated in foreign currencies. The terms of these foreign currency exchange agreements normally last less than nine months. We recognize the gains and losses on these foreign currency contracts in the same period as the re-measurement losses and gains of the related foreign currency-denominated exposures.

It is difficult to estimate the impact of fluctuations on ~~reported~~ income, as it depends on the opening and closing rates, the average net balance sheet positions held in a foreign currency and the amount of income generated in local currency. We routinely forecast what these balance sheet positions and income generated in local currency may be and we take steps to minimize exposure as we deem appropriate. Alternatively, we may choose not to hedge the foreign currency risk associated with our foreign currency exposures, primarily if such exposure acts as a natural foreign currency hedge for other offsetting amounts denominated in the same currency or the currency is difficult or too expensive to hedge. We do not enter into any derivative transactions for speculative purposes.

The sensitivity of earnings and cash flows to variability in exchange rates is assessed by applying an approximate range of potential rate fluctuations to our assets, obligations and projected results of operations denominated in foreign currency with all other variables held constant. The analysis includes all of our foreign currency contracts offset by the underlying exposures. Based on our overall foreign currency rate exposure at ~~September~~June 30, ~~2019,~~2020, we believe that movements in foreign currency rates may have a material effect on our financial position and results of operations. We estimate that if the exchange rates for the Chinese Yuan Renminbi, ~~Euro,~~Mexican Peso, British Pound, Euro, Argentinian ~~Peso, Mexican~~ Peso, Brazilian Real, Indian Rupee, Japanese Yen and Philippine Peso ~~and Japanese Yen~~ relative to the U.S. Dollar fluctuate 10% from ~~September~~June 30, ~~2019,~~2020, net income in the third quarter of ~~2019~~2020 would fluctuate by approximately ~~$9.1~~$6.4 million.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Exchange Act Rule 13a-15(d) defines "disclosure controls and procedures" to mean controls and procedures of a company that are designed to ensure that information required to be disclosed by the company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. The definition further states that disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that the information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company's management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

An evaluation was performed under the supervision and with the participation of our management, including our principal executive and principal financial officers, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, our principal executive and principal financial officers have concluded that our disclosure controls and procedures were effective, as of the end of the period covered by this report, to provide reasonable assurance that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and is accumulated and communicated to our management to allow timely decisions regarding required disclosures.

Changes in Internal Control Over Financial Reporting

During the first quarter of 2019, we implemented the provisions of ASU 2016-02, which impacted certain of our accounting processes and polices around accounting for leases. As a result, we added and/or enhanced certain internal controls around the accumulation of accounting information and recording of right-of-use lease assets and lease liabilities.

~~Except as described above, there~~There have been no ~~other~~ changes in our internal control over financial reporting during the fiscal quarter covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

We are subject to lawsuits arising out of the conduct of our business. The discussion of our litigation matters contained in "Notes to Consolidated Financial Statements - Note 11" is incorporated herein by reference.

ITEM 1A. RISK FACTORS

The reader should carefully consider, in connection with the other information in this report, the risk factors discussed in "Part I, Item 1A: Risk Factors" of the Company's ~~2018~~2019 Annual Report on Form 10-K incorporated herein by ~~reference.~~reference, as well as the risk factors set forth below. These factors may cause our actual results to differ materially from those stated in forward-looking statements contained in this document and elsewhere.

The COVID-19 pandemic has adversely affected and is expected to continue to pose risks to our business, results of operations, financial condition and cash flows, and other epidemics or outbreaks of infectious diseases may have a similar impact.

As previously disclosed, we face risks related to outbreaks of infectious diseases, including the ongoing COVID-19 pandemic. COVID-19 has spread across the globe during 2020 and is impacting economic activity worldwide. COVID-19 has caused disruption and volatility in the global capital markets and has authored an economic slowdown. The COVID-19 pandemic and its associated economic uncertainty negatively impacted our sales volumes in the first six months of 2020 in most geographies and across a variety of customers. In response to COVID-19, national and local governments around the world have instituted certain measures, including travel bans, prohibitions on group events and gatherings, shutdowns of certain businesses, curfews, shelter-in-place orders and recommendations to practice social distancing. The measures we have taken to follow the COVID-19 guidelines from the Centers for Disease Control and Prevention ("CDC") and the various local governments where our facilities and operations are located concerning the health and safety of our personnel, have resulted in attenuating activity and, in some cases, required

temporary closures of certain of our facilities, among other impacts. The duration of these measures is unknown, may be extended and additional measures may be imposed.

We further expect that the ultimate significance of the impact of the COVID-19 pandemic on our business will vary but will generally depend on the extent of measures taken affecting day-to-day life and the length of time that such measures remain in place to respond to the COVID-19 pandemic. At this point, it is impossible to predict such extent and duration and the degree to which supply and demand for our products and services will be affected. This uncertainty makes it challenging for management to estimate with precision the future performance of our business.

Among the potential effects of the COVID-19 pandemic and other similar outbreaks on the company include, but are not limited to, the following:

Reduced consumer and investor confidence, instability in the credit and financial markets, volatile corporate profits, and reduced business and consumer spending, which may adversely affect our results of operations by reducing our sales, margins and/or net income as a result of a slowdown in customer orders or order cancellations. In addition, volatility in the financial markets may increase the cost of capital and/or limit its availability.

Economic uncertainty as a result of the COVID-19 pandemic is expected to make it difficult for us and our customers and suppliers to accurately forecast and plan future business activities.

The potential to weaken the financial position of some of our customers. If circumstances surrounding our customers’ financial capabilities were to deteriorate, write-downs or write-offs may negatively affect our operating results and, if large, may have a material adverse effect on our business, financial condition, results of operations and cash flows.

As a result of governmental orders, we may experience disruptions in our manufacturing operations and in our supply chain in connection with the sourcing of materials from geographic areas that continue to be impacted by the COVID-19 pandemic and by efforts to contain its spread.

To the extent the COVID-19 pandemic adversely affects our business, results of operations, financial condition and cash flows, it may also heighten many of the other risks described in this section and in the "Risk Factors" section of our Annual Report on Form 10-K for the fiscal year ended December 31, 2019. The ultimate impact of COVID-19 on our business, results of operations, financial condition and cash flows is dependent on future developments, including the duration of the pandemic and the related length of its impact on the global economy, which are uncertain and cannot be predicted at this time.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The following table sets forth, for the three months ended ~~September~~June 30, ~~2019,~~2020, our total stock repurchases, average price paid per share and the maximum number of shares that may yet be purchased on the open market under our plans or programs:

Period
Total Number of Shares Purchased ⁽¹⁾

Weighted
Average
Price Paid
per Share
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
Total Dollar Value of Shares Purchased as Part of Publicly Announced Plans or Programs ⁽²⁾

Maximum Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs ⁽³⁾
July 1, 2019 - July 31, 2019 —
$ —
—
$ —
$ 3,934,261
August 1, 2019 - August 31, 2019 4,747
43.52
—
—
3,934,261
September 1, 2019 - September 30, 2019 2,556
51.09
—
—
3,934,261
Total 7,303
$ 46.17
—
$ —



Period	Total Number of Shares Purchased ⁽¹⁾	Weighted Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs ⁽²⁾
April 1, 2020 - April 30, 2020	—	$	—	—	175,127
May 1, 2020 - May 31, 2020	3,107	36.87		—	175,127
June 1, 2020 - June 30, 2020	—	—		—	175,127
Total	3,107	$	36.87	—	175,127


⁽¹⁾	Of the repurchases in ~~August and September, 4,747 and 2,556~~May, 3,107 shares ~~respectively,~~ represent common shares of the Company that were owned and tendered by employees to satisfy tax withholding obligations in connection with the vesting of restricted shares.


⁽²⁾	~~Amounts~~ On March 10, 2020, our Board of Directors replaced the repurchase plan approved in ~~this column reflect the weighted average price paid for shares purchased under our share repurchase authorizations, inclusive of commissions paid to brokers.~~

⁽³⁾

~~On October 30,~~ 2018 ~~our board of directors approved~~with a new repurchase plan authorizing the repurchase of up to ~~$5.0 million~~300,000 of our common ~~stock. Under these authorizations,~~ stock ("2020 Plan"). As of June 30, 2020, we had 175,127shares of common stock authorized for repurchase remaining under the 2020 Plan. We may ~~be repurchased~~repurchase shares of common stock in privately negotiated and/or ~~open market~~open-market transactions, including ~~under~~pursuant to plans complying with Rule 10b5-1 promulgated under the Securities Exchange ~~Act. As~~Act of ~~September 30, 2019,~~1934. While we ~~had $3.9 million of authorized repurchases remaining~~have suspended repurchasing under our 2020 Plan due in part to the ~~Board's authorizations.~~uncertainties surrounding the COVID-19 pandemic, management may resume such repurchasing when market and business conditions warrant.

ITEM 6. EXHIBITS

EXHIBIT INDEX



31.1		Rule 13a-14(a) Certifications of Paul D. Arling, Chief Executive Officer (principal executive officer) of Universal Electronics Inc.

31.2		Rule 13a-14(a) Certifications of Bryan M. Hackworth, Chief Financial Officer (principal financial officer and principal accounting officer) of Universal Electronics Inc.

32		Section 1350 Certifications of Paul D. Arling, Chief Executive Officer (principal executive officer) of Universal Electronics Inc., and Bryan M. Hackworth, Chief Financial Officer (principal financial officer and principal accounting officer) of Universal Electronics Inc., pursuant to 18 U.S.C. Section 1350

101.INS		Inline XBRL Instance Document

101.SCH		Inline XBRL Taxonomy Extension Schema Document

101.CAL		Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF		Inline XBRL Taxonomy Extension Definition Linkbase Document

101.LAB		Inline XBRL Taxonomy Extension Label Linkbase Document

101.PRE		Inline XBRL Taxonomy Extension Presentation Linkbase Document

104		Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

SIGNATURES

Pursuant to the requirement of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.




Dated:	~~November 8, 2019~~August 6, 2020	UNIVERSAL ELECTRONICS INC.

		By:	/s/ Bryan M. Hackworth
			Bryan M. Hackworth
			Chief Financial Officer (principal financial officer
			and principal accounting officer)

3736



	Page Number
PART I. FINANCIAL INFORMATION	3
Item 1. Consolidated Financial Statements (Unaudited)	3
Consolidated Balance Sheets	3
Consolidated Statements of Operations	4
Consolidated Comprehensive Income (Loss) Statements	5
Consolidated Statements of Stockholders' Equity	6
Consolidated Statements of Cash Flows	8
Notes to Consolidated Financial Statements	9
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations	2625
Item 3. Quantitative and Qualitative Disclosures About Market Risk	32
Item 4. Controls and Procedures	3433
PART II. OTHER INFORMATION	3433
Item 1. Legal Proceedings	3433
Item 1A. Risk Factors	3433
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	34
Item 6. Exhibits	35
~~Item 6. Exhibits~~Signatures	36
~~Signatures~~	37



(In thousands)	Three Months Ended September 30, 2019		Nine Months Ended September 30, 2019
Cost of sales	$	574	$	1,627
Selling, general and administrative expenses	1,036		3,324
Total operating lease expense	$	1,610	$	4,951
Operating cash outflows from operating leases	$	1,537	$	5,197
Operating lease right-of-use assets obtained in exchange for lease obligations	$	1,131	$	2,655



(In thousands)	September 30, 2019
2019 (remaining 3 months)	$	1,190
2020	5,482
2021	5,493
2022	4,523
2023	2,306
Thereafter	3,366
Total lease payments	22,360
Less: imputed interest	(2,279		)
Total lease liabilities	$	20,081



(In thousands)
2019 (remaining 3 months)	$	1,791
2020	6,045
2021	2,555
2022	2,443
2023	2,298
Thereafter	5,355
Total	$	20,487



	Shares (in 000's)		Weighted-Average Grant Date Fair Value
Non-vested at December 31, 2018	204		$	49.23
Granted	263		30.26
Vested	(124	)	47.43
Forfeited	(19	)	36.29
Non-vested at September 30, 2019	324		$	35.23



	Incremental Warrants That Will Vest
Aggregate Level of Purchases by Comcast and Affiliates	January 1, 2016 - December 31, 2017	January 1, 2018 - December 31, 2019	January 1, 2020 - December 31, 2021
$260 million	100,000	100,000	75,000
$300 million	75,000	75,000	75,000
$340 million	75,000	75,000	75,000
Maximum Potential Warrants Earned by Comcast	250,000	250,000	225,000