UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

____________________

FORM 10-Q

(Mark one)

☑ Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended

~~June~~September 30, 2020, or

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


001-34528
(Commission File Number)

ZAGG Inc

(Exact name of registrant as specified in its charter)


Delaware			20-2559624
(State or other jurisdiction of incorporation)			(I.R.S. Employer Identification No.)

910 West Legacy Center Way, Suite 500

Midvale, Utah 84047

(Address of principal executive offices, including zip code)

(801) 263-0699

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address, and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


☐	Large Accelerated Filer	☑	Accelerated Filer
☐	Non-accelerated Filer	☐	Smaller Reporting Company
☐	Emerging Growth Company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-25 of the Exchange Act). Yes ☐ No ☑

Securities registered pursuant to Section 12(b) of the Act:


Common Stock, $0.001 par value	ZAGG	The Nasdaq Stock Market, LLC
(Title of each class)	(Trading Symbol(s))	(Name of each exchange on which registered)

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: ~~29,821,837~~29,848,506 common shares as of ~~August 4,~~November 9, 2020.

Item

Contents

Page

PART I - FINANCIAL INFORMATION

Item 1.

Financial Statements (Unaudited)

Condensed Consolidated Balance Sheets as of JSeptember ~~une~~ 30,, 2020, and December 31, 2019

Condensed Consolidated Statements of Operations for the Three and ~~and Six~~Nine Months Ended ~~June~~September 30,, 2020, and 2019

Condensed Consolidated Statements of Comprehensive ~~Loss~~Income (Loss) for the Three and ~~Six~~Nine Months Ended ~~June~~September 30,, 2020, and 2019

Condensed Consolidated Statements of Equity for the Three and ~~and Six~~Nine Months Ended ~~June~~September 30,, 2020, and 2019

Condensed Consolidated Statements of Cash Flows for the ~~Six~~Nine Months Ended ~~June~~September 30,, 2020, and 2019

Notes to Condensed Consolidated Financial Statements

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

Item 4.

Controls and Procedures

PART II - OTHER INFORMATION

Unregistered Sales of Equity Securities and Use of Proceeds

Item 3.

Defaults Upon Senior Securities

Item 4.

Mine Safety Disclosures

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

Table of Contents

ZAGG INC AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Amounts in thousands, except par value amounts)

(Unaudited)

June 30, 2020 December 31, 2019
ASSETS
Current assets:
Cash and cash equivalents $ 17,314 $ 17,801
Accounts receivable, net of allowances of $2,000 and $1,143 63,090 142,804
Income tax receivable 5,666 —
Inventories 91,328 144,944
Prepaid expenses and other current assets 4,900 6,124
Total current assets 182,298 311,673
Property and equipment, net of accumulated depreciation of $12,865 and $14,159 15,926 18,019
Intangible assets, net of accumulated amortization of $101,810 and $95,632 55,061 63,110
Deferred income tax assets, net 23,704 22,657
Operating lease right of use assets 10,456 9,636
Goodwill 24,920 43,569
Other assets 428 567
Total assets $ 312,793 $ 469,231
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable $ 44,945 $ 87,303
Income tax payable — 5,266
Sales returns liability 25,660 43,853
Accrued wages and wage related expenses 5,254 6,328
Accrued liabilities 7,087 15,164
Current portion of operating lease liabilities 2,774 2,099
Total current liabilities 85,720 160,013
Line of credit 92,040 107,140
Operating lease liabilities 10,631 10,599
Other long-term liabilities 9,444 —
Total liabilities 197,835 277,752
Commitments and contingencies (Note 12 and Note 13)
Stockholders’ equity:
Common stock, $0.001 par value; 100,000 shares authorized; 36,884 and 36,610 shares issued 37 37
Treasury stock, 7,055 and 7,055 common shares at cost (50,455) (50,455)
Additional paid-in capital 118,862 116,533
Accumulated other comprehensive loss (1,234) (1,631)
Retained earnings 47,748 126,995
Total stockholders’ equity 114,958 191,479
Total liabilities and stockholders’ equity $ 312,793 $ 469,231


		September 30, 2020		December 31, 2019
ASSETS
Current assets:
	Cash and cash equivalents	$	16,115	$	17,801
	Accounts receivable, net of allowances of $1,088 and $1,143	91,196		142,804
	Income tax receivable	7,980		0
	Inventories	80,024		144,944
	Prepaid expenses and other current assets	8,539		6,124
Total current assets		203,854		311,673

Property and equipment, net of accumulated depreciation of $14,354 and $14,159		15,759		18,019
Intangible assets, net of accumulated amortization of $105,168 and $95,632		51,704		63,110
Deferred income tax assets, net		23,680		22,657
Operating lease right of use assets		9,890		9,636
Goodwill		24,920		43,569
Other assets		243		567
Total assets		$	330,050	$	469,231

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
	Accounts payable	$	60,142	$	87,303
	Income tax payable	0		5,266
	Sales returns liability	25,668		43,853
	Accrued wages and wage-related expenses	6,225		6,328
	Accrued liabilities	5,440		15,164
	Current portion of other long-term liabilities	662		0
	Current portion of operating lease liabilities	2,786		2,099
Total current liabilities		100,923		160,013

Line of credit		87,655		107,140
Operating lease liabilities		9,915		10,599
Other long-term liabilities		8,782		0
Total liabilities		207,275		277,752
Commitments and contingencies (Note 12 and Note 13)

Stockholders’ equity:
	Common stock, $0.001 par value; 100,000 shares authorized; 36,884 and 36,610 shares issued	37		37
	Treasury stock, 7,055 and 7,055 common shares at cost	(50,455)		(50,455)
	Additional paid-in capital	120,188		116,533
	Accumulated other comprehensive loss	(962)		(1,631)
	Retained earnings	53,967		126,995
Total stockholders’ equity		122,775		191,479
Total liabilities and stockholders’ equity		$	330,050	$	469,231

See accompanying notes to condensed consolidated financial statements.

Table of Contents

ZAGG INC AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Amounts in thousands, except per share amounts)

(Unaudited)

For the Three Months Ended For the Six Months Ended
June 30, 2020 June 30, 2019 June 30, 2020 June 30, 2019
Net sales $ 77,117 $ 106,796 $ 168,098 $ 185,546
Cost of sales 53,805 69,037 163,728 123,965
Gross profit 23,312 37,759 4,370 61,581
Operating expenses:
Advertising and marketing 2,419 4,514 6,845 9,099
Selling, general and administrative 23,743 34,483 56,336 66,069
Transaction costs 51 374 396 621
Impairment of goodwill — — 18,649 —
Loss on disposal of intangible assets and equipment — 8 3,683 6
Amortization of intangible assets 3,357 4,599 6,901 9,065
Total operating expenses 29,570 43,978 92,810 84,860
Loss from operations (6,258) (6,219) (88,440) (23,279)
Other (expense) income:
Interest expense (956) (1,103) (2,490) (2,113)
Other income 217 1,192 219 676
Total other (expense) income (739) 89 (2,271) (1,437)
Loss before provision for income taxes (6,997) (6,130) (90,711) (24,716)
Income tax benefit 3,664 794 11,823 4,956
Net loss $ (3,333) $ (5,336) $ (78,888) $ (19,760)
Loss per share attributable to stockholders:
Basic loss per share $ (0.11) $ (0.18) $ (2.65) $ (0.68)
Diluted loss per share $ (0.11) $ (0.18) $ (2.65) $ (0.68)


		For the Three Months Ended				For the Nine Months Ended
		September 30, 2020		September 30, 2019		September 30, 2020		September 30, 2019

Net sales		$	115,456	$	146,488	$	283,554	$	332,034
Cost of sales		77,023		92,143		240,751		216,108
Gross profit		38,433		54,345		42,803		115,926

Operating expenses:
	Advertising and marketing	3,218		4,129		10,063		13,228
	Selling, general, and administrative	23,849		33,967		80,185		100,036
	Transaction costs	72		547		468		1,168
	Impairment of goodwill	0		0		18,649		0
	Loss on disposal of intangible assets and equipment	0		96		3,683		102
	Amortization of intangible assets	3,357		3,948		10,258		13,013
Total operating expenses		30,496		42,687		123,306		127,547

Income (loss) from operations		7,937		11,658		(80,503)		(11,621)

Other income (expense):
	Interest expense	(885)		(1,221)		(3,375)		(3,334)
	Other income (expense)	867		(462)		1,086		214
Total other expense		(18)		(1,683)		(2,289)		(3,120)

Income (loss) before provision for income taxes		7,919		9,975		(82,792)		(14,741)

Income tax (provision) benefit		(1,700)		(1,293)		10,123		3,663

Net income (loss)		$	6,219	$	8,682	$	(72,669)	$	(11,078)

Earnings (loss) per share attributable to stockholders:
	Basic earnings (loss) per share	$	0.21	$	0.30	$	(2.44)	$	(0.38)
	Diluted earnings (loss) per share	$	0.21	$	0.30	$	(2.44)	$	(0.38)

See accompanying notes to condensed consolidated financial statements.

Table of Contents

ZAGG INC AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE ~~LOSS~~INCOME (LOSS)

(Amounts in thousands)

(Unaudited)


			For the Three Months Ended									For the Six Months Ended											For the Three Months Ended						For the Nine Months Ended
			June 30, 2020			June 30, 2019			June 30, 2020			June 30, 2019					September 30, 2020			September 30, 2019			September 30, 2020			September 30, 2019

Net loss				$	(3,333)		$	(5,336)		$	(78,888)		$	(19,760)
Net income (loss)													Net income (loss)				$	6,219		$	8,682		$	(72,669)		$	(11,078)

Other comprehensive gain (loss), net of tax:	Other comprehensive gain (loss), net of tax:															Other comprehensive gain (loss), net of tax:
		Foreign currency translation gain (loss)	117			141			397			(15)			Foreign currency translation gain (loss)		272			(941)			669			(956)
Total other comprehensive income (loss)	Total other comprehensive income (loss)			117			141			397			(15)			Total other comprehensive income (loss)			272			(941)			669			(956)

Total comprehensive loss				$	(3,216)		$	(5,195)		$	(78,491)		$	(19,775)
Total comprehensive income (loss)													Total comprehensive income (loss)				$	6,491		$	7,741		$	(72,000)		$	(12,034)

See accompanying notes to condensed consolidated financial statements.

Table of Contents

ZAGG INC AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

(Amounts in thousands)

(Unaudited)


		For the Three Months Ended June 30, 2020																									For the Three Months Ended September 30, 2020
		Common Stock															Common Stock
		Shares	Amount		Additional Paid-in Capital		Accumulated Other Comprehensive Loss		Treasury Stock		Retained Earnings		Total Stockholders’ Equity			Shares	Amount		Additional Paid-in Capital		Accumulated Other Comprehensive Loss		Treasury Stock		Retained Earnings		Total Stockholders’ Equity

Balances, March 31, 2020		36,884	$	37	$	117,552	$	(1,351)	$	(50,455)	$	51,081	$	116,864
Net loss		—	—		—		—		—		(3,333)		(3,333)
Balances, June 30, 2020															Balances, June 30, 2020	36,884	$	37	$	118,862	$	(1,234)	$	(50,455)	$	47,748	$	114,958
Net income															Net income	—	—		—		—		—		6,219		6,219
Other comprehensive income	Other comprehensive income	—	—		—		117		—		—		117		Other comprehensive income	—	—		—		272		—		—		272

Stock-based compensation expense	Stock-based compensation expense	—	—		1,310		—		—		—		1,310		Stock-based compensation expense	—	—		1,326		—		—		—		1,326

Balances, June 30, 2020		36,884	$	37	$	118,862	$	(1,234)	$	(50,455)	$	47,748	$	114,958
Balances, September 30, 2020															Balances, September 30, 2020	36,884	$	37	$	120,188	$	(962)	$	(50,455)	$	53,967	$	122,775


		For the Six Months Ended June 30, 2020																									For the Nine Months Ended September 30, 2020
		Common Stock															Common Stock
		Shares	Amount		Additional Paid-in Capital		Accumulated Other Comprehensive Loss		Treasury Stock		Retained Earnings		Total Stockholders’ Equity			Shares	Amount		Additional Paid-in Capital		Accumulated Other Comprehensive Loss		Treasury Stock		Retained Earnings		Total Stockholders’ Equity

Balances, December 31, 2019	Balances, December 31, 2019	36,610	$	37	$	116,533	$	(1,631)	$	(50,455)	$	126,995	$	191,479	Balances, December 31, 2019	36,610	$	37	$	116,533	$	(1,631)	$	(50,455)	$	126,995	$	191,479
Cumulative effect of accounting change	Cumulative effect of accounting change	—	—		—		—		—		(359)		(359)		Cumulative effect of accounting change	—	—		—		—		—		(359)		(359)
Balance after cumulative effect of accounting change	Balance after cumulative effect of accounting change	36,610	37		116,533		(1,631)		(50,455)		126,636		191,120		Balance after cumulative effect of accounting change	36,610	37		116,533		(1,631)		(50,455)		126,636		191,120
Net loss	Net loss	—	—		—		—		—		(78,888)		(78,888)		Net loss	—	—		—		—		—		(72,669)		(72,669)
Other comprehensive income	Other comprehensive income	—	—		—		397		—		—		397		Other comprehensive income	—	—		—		669		—		—		669
Restricted stock release	Restricted stock release	270	—		—		—		—		—		—		Restricted stock release	270	—		—		—		—		—		—
Employee stock purchase plan release	Employee stock purchase plan release	4	—		39		—		—		—		39		Employee stock purchase plan release	4	—		39		—		—		—		39
Stock-based compensation expense	Stock-based compensation expense	—	—		2,604		—		—		—		2,604		Stock-based compensation expense	—	—		3,930		—		—		—		3,930
Payment of withholding taxes on restricted stock units	Payment of withholding taxes on restricted stock units	—	—		(314)		—		—		—		(314)		Payment of withholding taxes on restricted stock units	—	—		(314)		—		—		—		(314)
Balances, June 30, 2020		36,884	$	37	$	118,862	$	(1,234)	$	(50,455)	$	47,748	$	114,958
Balances, September 30, 2020															Balances, September 30, 2020	36,884	$	37	$	120,188	$	(962)	$	(50,455)	$	53,967	$	122,775

See accompanying notes to condensed consolidated financial statements.

Table of Contents

ZAGG INC AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY (Continued)

(Amounts in thousands)

(Unaudited)


		For the Three Months Ended June 30, 2019																									For the Three Months Ended September 30, 2019
		Common Stock															Common Stock
		Shares	Amount		Additional Paid-in Capital		Accumulated Other Comprehensive Loss		Treasury Stock		Retained Earnings		Total Stockholders’ Equity			Shares	Amount		Additional Paid-in Capital		Accumulated Other Comprehensive Loss		Treasury Stock		Retained Earnings		Total Stockholders’ Equity

Balances, March 31, 2019		36,117	$	36	$	109,870	$	(1,566)	$	(50,455)	$	98,651	$	156,536
Balances, June 30, 2019															Balances, June 30, 2019	36,140	$	36	$	111,279	$	(1,425)	$	(50,455)	$	93,315	$	152,750
Net loss	Net loss	—	—		—		—		—		(5,336)		(5,336)		Net loss	—	—		—		—		—		8,682		8,682
Other comprehensive income	Other comprehensive income	—	—		—		141		—		—		141		Other comprehensive income	—	—		—		(941)		—		—		(941)
Restricted stock release	Restricted stock release	22	—		—		—		—		—		—		Restricted stock release	19	—		—		—		—		—		—
Employee stock purchase plan release	Employee stock purchase plan release	1	—		—		—		—		—		—		Employee stock purchase plan release	4	—		48		—		—		—		48
Stock-based compensation expense	Stock-based compensation expense	—	—		1,475		—		—		—		1,475		Stock-based compensation expense	—	—		631		—		—		—		631
Payment of withholding taxes on restricted stock units	Payment of withholding taxes on restricted stock units	—	—		(66)		—		—		—		(66)		Payment of withholding taxes on restricted stock units	—	—		(41)		—		—		—		(41)
Balances, June 30, 2019		36,140	$	36	$	111,279	$	(1,425)	$	(50,455)	$	93,315	$	152,750
Balances, September 30, 2019															Balances, September 30, 2019	36,163	$	36	$	111,917	$	(2,366)	$	(50,455)	$	101,997	$	161,129


		For the Six Months Ended June 30, 2019																									For the Nine Months Ended September 30, 2019
		Common Stock															Common Stock
		Shares	Amount		Additional Paid-in Capital		Accumulated Other Comprehensive Loss		Treasury Stock		Retained Earnings		Total Stockholders’ Equity			Shares	Amount		Additional Paid-in Capital		Accumulated Other Comprehensive Loss		Treasury Stock		Retained Earnings		Total Stockholders’ Equity

Balances, December 31, 2018	Balances, December 31, 2018	34,457	$	34	$	96,486	$	(1,410)	$	(49,733)	$	113,114	$	158,491	Balances, December 31, 2018	34,457	$	34	$	96,486	$	(1,410)	$	(49,733)	$	113,114	$	158,491
Cumulative effect of accounting change	Cumulative effect of accounting change	—	—		—		—		—		(39)		(39)		Cumulative effect of accounting change	—	—		—		—		—		(39)		(39)
Balance after cumulative effect of accounting change	Balance after cumulative effect of accounting change	34,457	34		96,486		(1,410)		(49,733)		113,075		158,452		Balance after cumulative effect of accounting change	34,457	34		96,486		(1,410)		(49,733)		113,075		158,452
Net loss	Net loss	—	—		—		—		—		(19,760)		(19,760)		Net loss	—	—		—		—		—		(11,078)		(11,078)
Other comprehensive loss	Other comprehensive loss	—	—		—		(15)		—		—		(15)		Other comprehensive loss	—	—		—		(956)		—		—		(956)
Treasury stock purchase	Treasury stock purchase	—	—		—		—		(722)		—		(722)		Treasury stock purchase	—	—		—		—		(722)		—		(722)
Restricted stock release	Restricted stock release	222	—		—		—		—		—		—		Restricted stock release	241	—		—		—		—		—		—
Employee stock purchase plan release	Employee stock purchase plan release	3	—		13		—		—		—		13		Employee stock purchase plan release	7	—		61		—		—		—		61
Stock-based compensation expense	Stock-based compensation expense	—	—		2,660		—		—		—		2,660		Stock-based compensation expense	—	—		3,291		—		—		—		3,291
Payment of withholding taxes on restricted stock units	Payment of withholding taxes on restricted stock units	—	—		(848)		—		—		—		(848)		Payment of withholding taxes on restricted stock units	—	—		(887)		—		—		—		(887)
Shares issued as consideration for acquisition	Shares issued as consideration for acquisition	1,458	2		12,968		—		—		—		12,970		Shares issued as consideration for acquisition	1,458	2		12,966		—		—		—		12,968
Balances, June 30, 2019		36,140	$	36	$	111,279	$	(1,425)	$	(50,455)	$	93,315	$	152,750
Balances, September 30, 2019															Balances, September 30, 2019	36,163	$	36	$	111,917	$	(2,366)	$	(50,455)	$	101,997	$	161,129

See accompanying notes to condensed consolidated financial statements.

Table of Contents

ZAGG INC AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands)

(Unaudited)


					For the Six Months Ended															For the Nine Months Ended
					June 30, 2020		June 30, 2019											September 30, 2020		September 30, 2019

Cash flows from operating activities:	Cash flows from operating activities:																Cash flows from operating activities:
		Net loss					$	(78,888)				$	(19,760)			Net loss				$	(72,669)			$	(11,078)
		Adjustments to reconcile net loss to net cash provided by (used in) operating activities:														Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
			Stock-based compensation expense			2,604			2,660							Stock-based compensation expense			3,930			3,291
			Depreciation and amortization			10,345			12,256							Depreciation and amortization			15,435			18,007
			Deferred income tax assets			(1,043)			(2,169)							Deferred income tax assets			(762)			(1,666)
			Loss on disposal of intangible assets and equipment			3,683			6							Loss on disposal of intangible assets and equipment			3,683			102
			Amortization of deferred loan costs			302			101							Amortization of deferred loan costs			420			161
			Impairment of goodwill			18,649			—							Impairment of goodwill			18,649			0
			Right of use asset expenses			1,321			1,066							Right of use asset expenses			1,904			1,897
			Changes in operating assets and liabilities:													Changes in operating assets and liabilities:
				Accounts receivable, net	79,162		55,006									Accounts receivable, net		52,132		20,813
				Inventories	53,566		(24,313)									Inventories		65,606		(53,079)
				Prepaid expenses and other current assets	1,175		396									Prepaid expenses and other current assets		(2,519)		1,883
				Other assets	148		179									Other assets		249		381
				Accounts payable	(43,131)		(12,654)									Accounts payable		(27,304)		14,758
				Income tax payable	(10,938)		(3,555)									Income tax payable		(13,466)		(3,033)
				Sales returns liability	(18,170)		(19,627)									Sales returns liability		(18,305)		(15,751)
				Accrued wages and wage related expenses	(1,070)		(360)									Accrued wages and wage related expenses		(110)		1
				Accrued liabilities	(8,033)		(1,904)									Accrued liabilities		(6,050)		103
				Lease liabilities	(1,586)		(1,134)									Lease liabilities		(2,307)		(1,913)
				Other	373		79									Other		(641)		320
Net cash provided by (used in) operating activities	Net cash provided by (used in) operating activities								8,469					(13,727)			Net cash provided by (used in) operating activities					17,875				(24,803)

Cash flows from investing activities:	Cash flows from investing activities:																Cash flows from investing activities:
		Purchase of property and equipment					(2,790)					(4,213)				Purchase of property and equipment				(5,495)				(7,002)
		Proceeds from disposal of equipment					—					2				Proceeds from disposal of equipment				0				2
		Purchase of HALO, net of cash acquired					—					(20,368)				Purchase of HALO, net of cash acquired				0				(20,364)
Net cash used in investing activities	Net cash used in investing activities								(2,790)					(24,579)			Net cash used in investing activities					(5,495)				(27,364)

Cash flows from financing activities:	Cash flows from financing activities:																Cash flows from financing activities:
		Proceeds from revolving credit facility					63,580					176,566				Proceeds from revolving credit facility				106,130				243,140
		Payments on revolving credit facility					(78,680)					(139,566)				Payments on revolving credit facility				(125,615)				(190,140)
		Proceeds from the paycheck protection program loan					9,444					—				Proceeds from the paycheck protection program loan				9,444				0
		Purchase of treasury stock					—					(722)				Contingent liability payments for HALO				(3,724)				0
		Payment of withholding on restricted stock units					(314)					(782)				Purchase of treasury stock				0				(722)
		Payment of debt issuance costs					(257)					—				Payment of withholding on restricted stock units				(314)				(848)
		Proceeds from issuance of stock under employee stock purchase plan					39					13				Payment of debt issuance costs				(257)				(40)
											Proceeds from issuance of stock under employee stock purchase plan							39		61
Net cash (used in) provided by financing activities	Net cash (used in) provided by financing activities								(6,188)					35,509			Net cash (used in) provided by financing activities					(14,297)				51,451

Effect of foreign currency exchange rates on cash equivalents	Effect of foreign currency exchange rates on cash equivalents								22					(111)			Effect of foreign currency exchange rates on cash equivalents					231				(408)

Net decrease in cash and cash equivalents	Net decrease in cash and cash equivalents								(487)					(2,908)			Net decrease in cash and cash equivalents					(1,686)				(1,124)

Cash and cash equivalents at beginning of the period	Cash and cash equivalents at beginning of the period								17,801					15,793			Cash and cash equivalents at beginning of the period					17,801				15,793
Cash and cash equivalents at end of the period	Cash and cash equivalents at end of the period								$	17,314				$	12,885		Cash and cash equivalents at end of the period					$	16,115			$	14,669

See accompanying notes to condensed consolidated financial statements.

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ZAGG INC AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(Amounts in thousands)

(Unaudited)


			For the Six Months Ended								For the Nine Months Ended
			June 30, 2020		June 30, 2019				September 30, 2020		September 30, 2019

Supplemental disclosure of cash flow information:	Supplemental disclosure of cash flow information:							Supplemental disclosure of cash flow information:
		Cash paid during the period for interest	$	2,190	$	1,998	Cash paid during the period for interest		$	2,953	$	3,154
		Cash paid during the period for income taxes, net	157		629		Cash paid during the period for income taxes, net		4,107		1,009
		Cash paid during the period for rent expenses included in the measurement of lease liabilities	1,889		1,453		Cash paid during the period for rent expenses included in the measurement of lease liabilities		2,749		2,393

Supplemental disclosure of non-cash investing and financing activities:	Supplemental disclosure of non-cash investing and financing activities:							Supplemental disclosure of non-cash investing and financing activities:
		Purchase of property and equipment financed through accounts payable	$	1,391	$	451	Purchase of property and equipment financed through accounts payable		$	246	$	742
		Withholding tax on restricted stock units recorded in accrued wages and wage related expenses	—		66		Withholding tax on restricted stock units recorded in accrued wages and wage related expenses		0		39
		Purchase of HALO through amounts due to seller, contingent payments and common stock	—		16,985		Purchase of HALO through amounts due to seller, contingent payments and common stock		0		16,642
		Noncash change in lease asset and operating liabilities from reassessment of existing leases and addition of new leases	2,142		1,856		Noncash change in lease asset and operating liabilities from reassessment of existing leases and addition of new leases		2,159		2,473

See accompanying notes to condensed consolidated financial statements.

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ZAGG INC AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

(Unaudited)

(1) NATURE OF OPERATIONS AND BASIS OF PRESENTATION

ZAGG Inc and its subsidiaries (the “Company”) are innovation leaders in mobile tech accessories for smartphones and tablets. For over 15 years, the Company has developed creative product solutions that enhance and protect mobile devices for consumers around the world. The Company has an award-winning product portfolio that includes screen protection, power management, wireless charging, audio, mobile keyboards, protective cases, and other mobile accessories sold under the ZAGG^®, InvisibleShield^®, mophie^®, IFROGZ^®, Gear4^®, and HALO^® brands.

The accompanying unaudited condensed consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the United States (“U.S.”) Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with ~~United States~~U.S. generally accepted accounting principles (“U.S. GAAP”) have been condensed or omitted pursuant to such rules and regulations. These condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments) that, in the opinion of management, are necessary to present fairly the financial position, the results of operations, and cash flows of the Company for the periods presented. The Company recommends that these condensed consolidated financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 (the “2019 Form 10-K”). Operating results for the interim periods are not necessarily indicative of the results that may be expected for the full year.

The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting periods, with related disclosures of these amounts in the notes to the financial statements. Actual results could differ from those estimates.

Coronavirus Outbreak and Company Impact

In December 2019, a mutated strain of coronavirus (“COVID-19”) was reported to have surfaced in Wuhan, China. The outbreak, which had previously been concentrated in China, has largely spread through the U.S. and the world. ~~The recent~~This COVID-19 pandemic has materially impacted the Company's financial condition and results of operations. The Company recommends that the condensed consolidated financial statements and notes thereto in this Quarterly Report on Form 10-Q be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations in Item 2 of Part I to this Quarterly Report on Form 10-Q, and the Company's Risk Factors in Item 1A of Part II to this Quarterly Report on Form 10-Q for further information.

Significant Accounting Policies

The Company’s significant accounting policies are described in Note 1 to the Company’s consolidated financial statements included in the 2019 Form 10-K. Except for the changes below, the Company has consistently applied the accounting policies to all periods presented in these condensed consolidated financial statements.

Adoption of Accounting Standards Codification (“ASC”) Topic 326, “Financial Instruments - Credit Losses”

The Company adopted ASC Topic 326,“Financial Instruments - Credit Losses” (“Topic 326”) with a date of initial application of January 1, 2020. As a result of this adoption, the Company has changed its accounting policy for estimating allowance for credit losses on ~~trade~~its accounts receivable, as detailed below.

The Company applied Topic 326 prospectively ~~with~~by recording a cumulative effect adjustment in retained earnings beginning January 1, 2020, which allows for the application of the standard solely to the transition period in 2020 but does not require application to prior fiscal comparative periods presented. Therefore, the prior period comparative information has not been adjusted and continues to be reported under the previous incurred credit loss ~~impairment~~allowance methodology.

The adoption of Topic 326 resulted in a decrease of $359 in retained earnings as a cumulative effect of adoption. The new standard did not have a material impact in the Company’s consolidated balance sheets or condensed consolidated statements of operations. In addition, the adoption of Topic 326 had no impact to cash provided by or used in operating, financing, or investing on the condensed consolidated statements of cash flows.

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Allowance for credit losses accounting policy

The Company estimates the allowance for credit losses in relation to accounts receivable based on relevant qualitative and quantitative information about historical events, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported accounts receivable. Topic 326 permits different methods to calculate the estimate for the allowance for credit losses. The Company started with its historical loss experience as suggested by Topic 326 and evaluated its previous method of estimating the allowance for credit losses. The Company determined that its previous method of using an aging schedule to develop historical credit loss percentages, which is allowed under Topic 326, is appropriate. The historical credit loss percentages are developed for each aging category based on eight quarters of credit loss history and the Company determined that its customers in each of these aging categories share similar risk characteristics.

Additionally, as required by Topic 326, the Company adjusts the historical credit loss percentage by current and forecasted economic conditions. Due to the short-term nature of its accounts receivable and that it carries credit insurance on a significant portion of the accounts receivable balance, the Company believes changes to economic conditions may not have significant effect on the estimate of the allowance for credit losses for accounts receivable; thus, the Company determined to include a baseline credit loss percentage into the historical credit loss percentage for each aging category to reflect the potential impact of the current and future economic conditions. Such baseline credit loss is adjusted when changes in the economic environment change the Company's expectation for future credit losses.

As of ~~June~~September 30, 2020, the Company determined the baseline of credit loss percentage should be increased in response to the COVID-19 pandemic and estimated the allowance for credit losses to be ~~$2,000.~~$1,088.

(2) REVENUE

Disaggregation of revenue from contracts with customers

In the following tables, revenue from contracts with customers are disaggregated by key product lines, key distribution channels, and key geographic regions.

The percentage of net sales related to the Company’s key product lines for the three and ~~six~~nine months ended ~~June~~September 30, 2020, and 2019, was approximately as follows:


		For the Three Months Ended			For the Six Months Ended				For the Three Months Ended		For the Nine Months Ended
		June 30, 2020	June 30, 2019	June 30, 2020	June 30, 2019		September 30, 2020	September 30, 2019	September 30, 2020	September 30, 2019

Protection (screen protection and cases)	Protection (screen protection and cases)	47%	54%	58%	56%	Protection (screen protection and cases)	63%	59%	60%	57%
Power (power management and power cases)	Power (power management and power cases)	36%	34%	30%	32%	Power (power management and power cases)	26%	31%	28%	31%
Productivity (keyboards and other)	Productivity (keyboards and other)	15%	9%	10%	8%	Productivity (keyboards and other)	6%	7%	9%	8%
Audio	Audio	2%	3%	2%	4%	Audio	5%	3%	3%	4%

During the three and ~~six~~nine months ended ~~June~~September 30, 2020, the Company revised the online channel to include sales to a key direct-to-consumer customer whose sales were included within the indirect channel in prior periods. The Company also made the same change to 2019 net sales by key distribution channels to make the net sales comparable. The percentage of net sales related to the Company’s key distribution channels for the three and ~~six~~nine months ended ~~June~~September 30, 2020, and 2019, was approximately as follows:


		For the Three Months Ended			For the Six Months Ended				For the Three Months Ended		For the Nine Months Ended
		June 30, 2020	June 30, 2019	June 30, 2020	June 30, 2019		September 30, 2020	September 30, 2019	September 30, 2020	September 30, 2019

Indirect channel	Indirect channel	75%	81%	80%	79%	Indirect channel	84%	86%	82%	82%
Online	Online	22%	14%	16%	15%	Online	12%	9%	14%	12%
Franchisees	Franchisees	3%	5%	4%	6%	Franchisees	4%	5%	4%	6%

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The percentage of net sales related to the Company’s key geographic regions for the three and ~~six~~nine months ended ~~June~~September 30, 2020, and 2019, was approximately as follows:


		For the Three Months Ended			For the Six Months Ended				For the Three Months Ended		For the Nine Months Ended
		June 30, 2020	June 30, 2019	June 30, 2020	June 30, 2019		September 30, 2020	September 30, 2019	September 30, 2020	September 30, 2019

United States	United States	85%	74%	80%	72%	United States	74%	79%	78%	75%
Europe	Europe	12%	15%	14%	14%	Europe	19%	12%	16%	13%
Other	Other	3%	11%	6%	14%	Other	7%	9%	6%	12%

Contract Balances

Timing of revenue recognition may differ from timing of invoicing to customers or timing of consideration received. The following table provides information about receivables, right of return assets, contract liabilities, refund liabilities, and warranty liabilities from the Company’s contracts with customers as of ~~June~~September 30, 2020, and December 31, 2019:


		June 30, 2020		December 31, 2019			September 30, 2020		December 31, 2019

Receivables, which comprises the balance in accounts receivable, net of allowances	Receivables, which comprises the balance in accounts receivable, net of allowances	$	63,090	$	142,804	Receivables, which comprises the balance in accounts receivable, net of allowances	$	91,196	$	142,804
Right of return assets, which are included in prepaid expenses and other current assets	Right of return assets, which are included in prepaid expenses and other current assets	291		2,177		Right of return assets, which are included in prepaid expenses and other current assets	431		2,177
Refund liabilities, which are included in sales return liability	Refund liabilities, which are included in sales return liability	23,203		39,790		Refund liabilities, which are included in sales return liability	23,175		39,790
Warranty liabilities, which are included in sales return liability	Warranty liabilities, which are included in sales return liability	2,457		4,063		Warranty liabilities, which are included in sales return liability	2,493		4,063
Contract liabilities, which are included in accrued liabilities	Contract liabilities, which are included in accrued liabilities	35		39		Contract liabilities, which are included in accrued liabilities	30		39

The current balance of the right of return assets is the estimated amount of inventory to be returned that is expected to be resold. The current balance of refund liabilities is the expected amount of estimated sales returns, discounts, and other credits from sales that have occurred. The current balance of warranty liabilities is the expected amount of warranty claim returns from sales that have occurred. The current balance of contract liabilities primarily relates to the advance consideration received from customers for products for which transfer of control has not yet occurred and therefore, revenue is deferred and will be recognized when the transfer of control has been completed.

The following table summarizes the activities in the Company’s warranty liabilities for the ~~six~~nine months ended ~~June~~September 30, 2020, and 2019:


		For the Six Months Ended							For the Nine Months Ended
		June 30, 2020		June 30, 2019			September 30, 2020		September 30, 2019

Balance at beginning of period	Balance at beginning of period	$	4,063	$	4,646	Balance at beginning of period	$	4,063	$	4,646
Accrual for product warranty	Accrual for product warranty	1,902		4,744		Accrual for product warranty	3,372		7,858
Warranty claims charged	Warranty claims charged	(3,507)		(5,772)		Warranty claims charged	(4,943)		(8,581)
Foreign currency translation gain	Foreign currency translation gain	(1)		—		Foreign currency translation gain	1		0
Balance at end of period	Balance at end of period	$	2,457	$	3,618	Balance at end of period	$	2,493	$	3,923

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(3) ACQUISITION OF HALO

On January 3, 2019 (the “Acquisition Date”), ZAGG Hampton LLC, a Delaware limited liability company and wholly owned subsidiary of the Company, entered into a membership interest purchase agreement (the “Purchase Agreement”) with Halo2Cloud, LLC (“HALO”) and its equity owners to acquire all of the outstanding equity interests of HALO (the “HALO Acquisition”). HALO is a leading direct-to-consumer mobile accessories company with an extensive intellectual property portfolio that specializes in wireless charging, car and wall chargers, portable power, and other accessories. The Company acquired HALO primarily to enter into new distribution channels and to expand its product and intellectual property portfolio.

During the nine months ended September 30, 2020, the Company paid $4,089 to HALO upon the achievement of the target Adjusted EBITDA as set forth in the Purchase Agreement and also $2,130 to HALO for cash held back by the Company at the Acquisition Date in relation to HALO's indemnification obligations.

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(4) INVENTORIES

~~During the six months ended June 30, 2020, as~~As a result of current and expected 2020 demand reductions due to the COVID-19 pandemic, the Company reassessed the (1) long-term profitability of all brands and product lines, and (2) the recoverability of inventory on-hand in the first half of 2020 (the “Strategic Review”). As a result of the Strategic Review, the Company determined to discontinue the BRAVEN audio brand, exit the fitted battery case product category, and simplify the following product lines: IFROGZ audio, ZAGG keyboards, and mophie power stations. Ultimately, the demand reduction linked to COVID-19 combined with these efforts to exit less profitable categories, resulted in a write-down to inventory during the ~~six months ended June 30,~~first quarter of 2020 of $44,833, which was included in the cost of sales in the condensed consolidated statements of operations.

Inventories consisted of the following as of ~~June~~September 30, 2020, and December 31, 2019:


		June 30, 2020		December 31, 2019			September 30, 2020		December 31, 2019

Finished goods	Finished goods	$	89,435	$	142,054	Finished goods	$	78,702	$	142,054
Raw materials	Raw materials	1,893		2,890		Raw materials	1,322		2,890
Total inventories	Total inventories	$	91,328	$	144,944	Total inventories	$	80,024	$	144,944

Included in prepaid expenses and other current assets were inventory deposits with third-party manufacturers of ~~$2,176~~$4,961 and $148 as of ~~June~~September 30, 2020, and December 31, 2019, respectively.

(5) PROPERTY AND EQUIPMENT

In connection with the Strategic Review, the Company determined to dispose of certain equipment and molds that would no longer be used on go-forward brands and product lines, and wrote-off $2,535 during the ~~six months ended June 30,~~first quarter of 2020. These write-offs were included in loss on disposal of intangible assets and equipment in the condensed consolidated statements of operations.

Property and equipment, net consisted of the following as of ~~June~~September 30, 2020, and December 31, 2019:


		Useful Lives	June 30, 2020		December 31, 2019			Useful Lives	September 30, 2020		December 31, 2019

Equipment and molds	Equipment and molds	3 to 10 years	$	15,399	$	18,851	Equipment and molds	3 to 10 years	$	16,471	$	18,851
Leasehold improvements	Leasehold improvements	1 to 9 years	7,085		7,710		Leasehold improvements	1 to 8 years	7,053		7,710
Building and improvements	Building and improvements	40 years	2,429		2,429		Building and improvements	40 years	2,429		2,429
Computer equipment and software	Computer equipment and software	3 to 5 years	2,037		1,237		Computer equipment and software	3 to 5 years	2,266		1,237
Furniture and fixtures	Furniture and fixtures	7 years	1,806		1,876		Furniture and fixtures	7 years	1,858		1,876
Automobiles	Automobiles	5 years	35		75		Automobiles	5 years	36		75
Property and equipment, gross	Property and equipment, gross		28,791		32,178		Property and equipment, gross		30,113		32,178
Less accumulated depreciation and amortization	Less accumulated depreciation and amortization		(12,865)		(14,159)		Less accumulated depreciation and amortization		(14,354)		(14,159)
Property and equipment, net	Property and equipment, net		$	15,926	$	18,019	Property and equipment, net		$	15,759	$	18,019

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For the ~~six~~three months ended ~~June~~September 30, 2020, and 2019, depreciation ~~expenses~~expense was $1,733 and $1,803, respectively, which were ~~$3,444~~included as a component of selling, general, and ~~$3,191,~~administrative expense in the condensed consolidated statements of operations. For the nine months ended September 30, 2020, and 2019, depreciation expense was $5,177 and $4,994, respectively, which were included as a component of selling, general, and administrative expense in the condensed consolidated statements of operations.

(6) GOODWILL AND INTANGIBLE ASSETS

There was 0 change in goodwill during the three months ended ~~June~~September 30, 2020. There was an $18,649 impairment to goodwill during the ~~six~~nine months ended ~~June~~September 30, 2020, as the carrying value of the Company's net assets as of March 31, 2020, exceeded the Company's calculation of its diminished market capitalization caused by a decrease of the Company's stock price that occurred during the three months ended March 31, 2020. The market capitalization was determined by multiplying the total number of the Company's outstanding shares by the Company's average stock price for a determined reasonable period with an estimated additional control premium included as part of the market capitalization. This adjustment was recorded during the first quarter of 2020.

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There was 0 change in goodwill during the three months ended ~~June~~September 30, 2019. During the ~~six~~nine months ended ~~June~~September 30, 2019, goodwill ~~was~~ increased by ~~$15,922~~$15,931 in connection with the HALO Acquisition.

The following table summarizes the changes in goodwill during the ~~six~~nine months ended ~~June~~September 30, 2020, and the twelve months ended December 31, 2019:


		For the Six Months Ended		For the Twelve Months Ended			For the Nine Months Ended		For the Twelve Months Ended
		June 30, 2020		December 31, 2019			September 30, 2020		December 31, 2019

Balance at beginning of period	Balance at beginning of period	$	43,569	$	27,638	Balance at beginning of period	$	43,569	$	27,638
Addition in connection with the acquisition of HALO	Addition in connection with the acquisition of HALO	—		15,931		Addition in connection with the acquisition of HALO	0		15,931
Impairment of goodwill	Impairment of goodwill	(18,649)		—		Impairment of goodwill	(18,649)		0
Balance at end of period	Balance at end of period	$	24,920	$	43,569	Balance at end of period	$	24,920	$	43,569

There were 0 additions to intangible assets during the three and ~~six~~nine months ended ~~June~~September 30, 2020.

There were 0 additions to intangible assets for the three months ended ~~June~~September 30, 2019. For the ~~six~~nine months ended ~~June~~September 30, 2019, as a consequence of the HALO Acquisition, intangible assets increased ~~$27,554~~$28,061 for patents and technology, trade names, customer relationships, net of unfavorable leases obtained. During the ~~six~~nine months ended ~~June~~September 30, 2020, the Company discontinued its use of certain trade names, patents and technology in connection with the Strategic Review. As such, a loss of $1,148 was recorded to reduce intangible assets and was included in loss on disposal of intangible assets and equipment in the condensed consolidated statements of operations. This adjustment was recorded during the first quarter of 2020. ~~There~~Other than the previously noted loss of $1,148, there was 0 ~~impairment~~other losses and/or impairments of intangible assets for the three and ~~six~~nine months ended ~~June~~September 30, 2020, and 2019.

Intangible assets, net of accumulated amortization as of ~~June~~September 30, 2020, and December 31, 2019, were as follows:

June 30, 2020

Weighted Average Amortization Period

December 31, 2019

Weighted Average Amortization Period

September 30, 2020

Weighted Average Amortization Period

December 31, 2019

Weighted Average Amortization Period

Trade names

22,665

9.7 years

25,871

9.7 years

Trade names

21,459

9.7 years

25,871

9.7 years

Customer relationships

18,999

7.7 years

21,514

7.7 years

Customer relationships

17,742

7.7 years

21,514

7.7 years

Patents and technology

13,158

8.4 years

15,306

8.3 years

Patents and technology

12,353

8.4 years

15,306

8.3 years

Non-compete agreements

239

4.9 years

419

4.9 years

Non-compete agreements

150

4.9 years

419

4.9 years

Total intangible assets, net of accumulated amortization

55,061

8.3 years

63,110

8.3 years

Total intangible assets, net of accumulated amortization

51,704

8.3 years

63,110

8.3 years

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(7) INCOME TAXES

For interim periods, the tax provision is generally determined utilizing an estimate of the Company’s annual effective tax rate adjusted for discrete items, if any. Due to the Company's year-to-date loss and forecasted loss for the year, the tax benefit ~~for~~related to the net loss ~~for~~during the ~~six~~nine months ended ~~June~~September 30, 2020, was limited to the expected annual tax benefit for the year ended December 31, 2020. The Company’s effective tax rate was ~~52%~~21% and ~~13%~~12% for the three and ~~six~~nine months ended ~~June~~September 30, 2020, respectively. The Company’s effective tax rate was 13% and ~~20%~~25% for the three and ~~six~~nine months ended ~~June~~September 30, 2019, respectively. ~~The change~~Any changes in the effective tax rate for the ~~three~~nine months ended ~~June~~September 30, 2020, compared to the ~~three~~nine months ended ~~June 30, 2019, as well as the six months ended June 30, 2020, compared to the six months ended June~~September 30, 2019, was primarily due to the impact of the methodology used in the tax provision calculation described above, as well as an inclusion of an additional benefit related to the projected carryback of the net operating loss (“NOL”). Under the CARES Act, a temporary five-year NOL carryback enables most corporate taxpayers to offset 2015 income taxed at 35% by 2020 income taxed at 21%. This projected benefit is included in the effective tax rate for the period. The Company’s effective tax rate will generally differ from the U.S. Federal statutory rate of 21%, due to state taxes, permanent items including amounts disallowed under §162(m) of the Internal Revenue Code, the Company’s global tax strategy, and the inclusion of global intangible low taxed income and the corresponding foreign tax credit.

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(8) LONG-TERM DEBT

Long-term debt, net as of ~~June~~September 30, 2020, and December 31, 2019, was as follows:


		June 30, 2020		December 31, 2019			September 30, 2020		December 31, 2019

Line of credit	Line of credit	$	92,040	$	107,140	Line of credit	$	87,655	$	107,140
PPP Loan		9,444		—
PPP Loan (which comprises the balances in current portion of other long-term liabilities and other long-term liabilities)						PPP Loan (which comprises the balances in current portion of other long-term liabilities and other long-term liabilities)	9,444		0
Total debt outstanding						Total debt outstanding	$	97,099	$	107,140
Current portion of other long-term liabilities						Current portion of other long-term liabilities	662		0
Total long-term debt outstanding	Total long-term debt outstanding	$	101,484	$	107,140	Total long-term debt outstanding	$	96,437	$	107,140

On April 12, 2018, the Company entered into an amended and restated credit and security agreement (the “2018 Credit and Security Agreement”) with KeyBank National Association (“KeyBank”), as administrative agent, Swing Line Lender and Issuing Lender, KeyBanc Capital Markets Inc., as sole lead arranger and sole book runner, and other members of the lender group, which was subsequently amended by a first amendment agreement dated as of November 28, 2018, a second amendment agreement dated as of August 30, 2019, a third amendment agreement dated as of December 4, 2019, and a fourth amendment agreement dated as of April 13, 2020 (the “Fourth Amendment Agreement”). The maturity date of the 2018 Credit and Security Agreement, as amended, is April 11, 2023.

The Fourth Amendment Agreement temporarily increased the revolving credit amount from $125,000 to $144,800 from April 13, 2020, through March 31, ~~2021.~~2021, respectively. Under the Fourth Amendment Agreement, interest rates were revised to add an additional 50 basis points to the prior rates; the applicable interest rates are based on the Company's leverage ratio as defined in the Fourth Amendment Agreement.

In connection with the Fourth Amendment Agreement, the Company paid approximately $257 in debt issuance costs.

As of September 30, 2020, there were 0 letters of credit issued, and $57,145 was available to be issued for letters of credit under the terms of the 2018 Credit and Security Agreement, as amended.

On April 13, 2020, the Company entered into a loan agreement with KeyBank as the lender under the Paycheck Protection Program of the CARES Act administered by U.S. Small Business Administration (the “SBA”), and on April 17, 2020 (the “Disbursement Date”), received a loan in the amount of $9,444 (the “PPP Loan”) to help sustain its employee payroll costs, rent, and utilities due to the impact of the COVID-19 pandemic. Under the Paycheck Protection Program, the Company's PPP Loan is fully forgivable if the Company meets certain requirements and receives formal approval, as defined by the CARES Act, subject to an audit by the SBA. The Company intends to seek partial or full forgiveness of the PPP Loan; however, there can be no assurance that the Company will obtain forgiveness of all or part of the PPP Loan amount. The interest rate for the PPP Loan is 1% per annum, and all required payments are deferred ~~for six months from the Disbursement Date~~until August 2021 (interest will accrue over this ~~six-month~~ deferral period). Unless the PPP Loan is fully or partially forgiven, the Company must pay ~~$525~~$398 of the principal and interest every month once the deferral period is over ~~as well as accumulated interest, until~~and pay a balloon payment of $6,441 on the maturity date in April 2022, which is two years from the Disbursement Date.

Table of ~~June 30, 2020, there were 0 letters of credit issued, and $52,760 was available to be issued for letters of credit under the terms of the 2018 Credit and Security Agreement, as amended.~~Contents

(9) STOCK-BASED COMPENSATION

The grant of restricted stock units with respective weighted-average fair value per share for the three and ~~six~~nine months ended ~~June~~September 30, 2020, and 2019, is summarized as follows:


		For the Three Months Ended						For the Six Months Ended							For the Three Months Ended				For the Nine Months Ended
		June 30, 2020		June 30, 2019		June 30, 2020		June 30, 2019			September 30, 2020		September 30, 2019		September 30, 2020		September 30, 2019

Units Granted	Units Granted	107		—		727		643		Units Granted	338		75		1,065		718
Weighted average fair value per share	Weighted average fair value per share	$	3.47	$	—	$	6.90	$	9.82	Weighted average fair value per share	$	2.98	$	6.59	$	5.66	$	9.48

The fair value of the restricted stock units granted is based on the closing share price of the Company’s common stock on the date of grant. The restricted stock units vest annually on a straight-line basis over a nine-month (annual board of directors’ grant) to a three-year vesting term, depending on the terms of the individual grant.

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~~As part~~None of the ~~727~~the 338 and ~~643~~75 restricted stock units granted during the ~~six~~three months ended ~~June~~September 30, 2020, and 2019, respectively, were related to performance-based restricted stock where vesting is linked to specific performance criterion. As part of the 1,065 and 718 restricted stock units granted during the nine months ended September 30, 2020, and 2019, respectively, the Company granted 417 and 287 restricted stock units to certain executives and employees of the Company where vesting is linked to specific performance criterion. These performance-based restricted stock units only vest upon the (1) Company’s achievement of specified thresholds of net sales, Adjusted EBITDA, and other specific net sales and profitability goals, and (2) continued employment through the applicable vesting date.

The estimated fair value of the restricted stock units is recognized on a straight-line basis over the requisite service period of the award, which is generally the vesting term of the award. The following are stock-based compensation expenses related to restricted stock units recorded for the three and ~~six~~nine months ended ~~June~~September 30, 2020, and 2019, respectively, which are included as a component of selling, general, and administrative expense on the condensed consolidated statement of operations:

For the Three Months Ended For the Six Months Ended
June 30, 2020 June 30, 2019 June 30, 2020 June 30, 2019
Stock-based compensation expense $ 1,310 $ 1,475 $ 2,604 $ 2,660


	For the Three Months Ended				For the Nine Months Ended
	September 30, 2020		September 30, 2019		September 30, 2020		September 30, 2019

Stock-based compensation expense	$	1,326	$	631	$	3,930	$	3,291

Certain Company employees have elected to receive a net amount of shares upon the vesting of restricted stock unit grants in exchange for the Company paying up to the maximum statutory withholding amount of the employees’ tax liabilities for the fair value of the award on the vesting date. These elections have resulted in the Company recording $0 and $314, respectively, during the three and ~~$848~~nine months ended September 30, 2020, and $41 and $887, respectively, during the three and nine months ended September 30, 2019, reflected as a reduction of additional paid-in ~~capital during the six months ended June 30, 2020, and 2019, respectively.~~capital. All of the $314 recorded as a reduction of additional paid-in capital was paid as of ~~June~~September 30, 2020. Of the ~~$848~~$887 recorded as a reduction of additional paid-in capital, ~~$66~~$39 was included in accrued wages and wage related expenses as of ~~June~~September 30, 2019.

(10) ~~LOSS~~EARNINGS (LOSS) PER SHARE

Basic ~~loss~~earnings (loss) per common share excludes dilution and is computed by dividing net ~~loss~~earnings (loss) by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per common share, ifwhen applicable, reflects the potential dilution that could occur if stock options, restricted stock, or other common stock equivalents were exercised or converted into common stock. The dilutive effect of stock options or other common stock equivalents is calculated using the treasury stock method.

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The following is a reconciliation of the numerator and denominator used to calculate basic ~~loss~~earnings (loss) per common share and diluted ~~loss~~earnings (loss) per common share for the three and ~~six~~nine months ended ~~June~~September 30, 2020, and 2019:


		For the Three Months Ended						For the Six Months Ended							For the Three Months Ended				For the Nine Months Ended
		June 30, 2020		June 30, 2019		June 30, 2020		June 30, 2019			September 30, 2020		September 30, 2019		September 30, 2020		September 30, 2019

Net loss		$	(3,333)	$	(5,336)	$	(78,888)	$	(19,760)
Net income (loss)										Net income (loss)	$	6,219	$	8,682	$	(72,669)	$	(11,078)
Weighted average shares outstanding:	Weighted average shares outstanding:									Weighted average shares outstanding:
Basic	Basic	29,814		29,064		29,779		28,974		Basic	29,829		29,077		29,796		29,009
Dilutive effect of restricted stock units	Dilutive effect of restricted stock units	—		—		—		—		Dilutive effect of restricted stock units	2		50		0		0
Diluted	Diluted	29,814		29,064		29,779		28,974		Diluted	29,831		29,127		29,796		29,009
Loss per share:
Earnings (loss) per share:										Earnings (loss) per share:
Basic	Basic	$	(0.11)	$	(0.18)	$	(2.65)	$	(0.68)	Basic	$	0.21	$	0.30	$	(2.44)	$	(0.38)
Diluted	Diluted	$	(0.11)	$	(0.18)	$	(2.65)	$	(0.68)	Diluted	$	0.21	$	0.30	$	(2.44)	$	(0.38)

For the three months endedSeptember 30, 2020, and ~~six~~2019, respectively, 1,192 and 562 restricted stock units used to purchase shares of common stock were not considered in calculating diluted earnings per share as their effect would have been anti-dilutive. For the nine months ended ~~June~~September 30, 2020 ~~1,240~~and 2019, respectively, 1,529 and 776 restricted stock units were not considered in calculating diluted loss per share because the Company was in a loss position and, therefore, the effect would have been anti-dilutive. For the three and six months ended June 30, 2019, 966 restricted stock units were not considered in calculating diluted loss per share because the Company was in a loss position and, therefore, the effect would have been anti-dilutive.

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(11) TREASURY STOCK

During the fourth quarter of 2015, the Company’s board of directors authorized the repurchase of up to $20,000 of the Company’s outstanding common stock with no expiration date (the “2015 Stock Repurchase Program”). On March 11, 2019, the Company's board of directors authorized the cancellation of the 2015 Stock Repurchase Program, and authorized a new stock repurchase program of up to $20,000 of the Company's outstanding common stock (the “2019 Stock Repurchase Program”).

During the three and ~~six~~nine months ended ~~June~~September 30, 2020, the Company did 0t purchase any shares of the Company's common stock. During the three months ended ~~June~~September 30, 2019, the Company did 0t purchase any shares of the Company's common stock. During the ~~six~~nine months ended ~~June~~September 30, 2019, the Company purchased 72 shares of the Company's common stock under the 2015 Stock Repurchase Program for total consideration of $722 with a weighted average price of $10 per share, which included commissions and processing fees totaling $2. As of ~~June~~September 30, 2020, and December 31, 2019, a total of $20,000 remained authorized for the repurchase of the Company's outstanding common stock under the 2019 Stock Repurchase Program.

The consideration paid has been recorded within stockholders’ equity in the condensed consolidated balance sheet.

(12) LEASES

The Company has operating leases for offices, retail stores, and warehouse space that expire through 2027. The Company’s leases have remaining lease terms of 24 months to ~~7.5~~7.3 years, some of which include options to extend the leases up to 10 years. For the three and ~~six~~nine months ended ~~June~~September 30, 2020, rent expense was ~~$907~~$905 and ~~$2,019,~~$2,924, respectively. For the three and ~~six~~nine months ended ~~June~~September 30, 2019, rent expense was ~~$799~~$1,123 and ~~$1,652,~~$2,775, respectively. Rent expense is recognized on a basis which approximates straight-line over the lease term and is recorded as a component of selling, general, and administrative expense on the condensed consolidated statement of operations. As of ~~June~~September 30, 2020, the Company had a weighted-average remaining lease term of ~~4.7~~4.5 years and a weighted-average discount rate used to calculate the lease liability of 4.37%.

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


Remaining of 2020	Remaining of 2020	$	1,761	Remaining of 2020	$	879
2021	2021	3,312		2021	3,321
2022	2022	3,215		2022	3,223
2023	2023	2,789		2023	2,796
2024	2024	1,850		2024	1,858
Thereafter	Thereafter	1,971		Thereafter	1,977
Total lease payments	Total lease payments	14,898		Total lease payments	14,054
Less: imputed interest	Less: imputed interest	(1,493)		Less: imputed interest	(1,353)
Lease liabilities	Lease liabilities	$	13,405	Lease liabilities	$	12,701

No other leases have been entered into under which the Company has significant rights and obligations as the lessee except those noted above.

(13) CONTINGENCIES

Commercial Litigation

Dan Dolar, an individual and on behalf of those similarly situated, Plaintiff, v. mophie Inc., a California corporation, Defendant, Superior Court of the State of California, Orange County, Case No. 30-2019-01066228-CU-BT-CXC. On April 25, 2019, Dolar filed a complaint against mophie inc. (“mophie”) alleging, among other things, violation of California Consumers Legal Remedies Act, California False Advertising Law, breach of express warranty, violation of the Magnuson-Moss Warranty Act, violation of California Unfair Competition Law, and violation of state Consumer Protection Statutes. The complaint alleged that mophie mischaracterizes the mAh ratings of the batteries in its products, and asked the court to certify a class of Californians who purchased mophie battery-enabled products. On June 14, 2019, the court dismissed the complaint without prejudice at Dolar’s request so that Dolar’s claims could be pursued in the U.S. District Court in the case of Young v. mophie Inc., Case No. 8:19-cv-00827-JVS-DFM, discussed below.

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Michael Young and Dan Dolar, individually and on behalf of other similarly situated individuals, Plaintiff, v. mophie Inc., Defendant, U.S. District Court, Central District of California, Case No. 8:19-cv-00827-JVS-DFM. This action started with a complaint filed by Young against mophie on May 2, 2019. On June 13, 2019, Young and Dolar joined together as plaintiffs and filed a first amended complaint (the “FAC”). In the FAC, Young and Dolar allege, among other things, that mophie has engaged in unfair and deceptive acts and practices in violation of California and Florida laws, violation of purportedly material identical state consumer protection statutes in various other states, violation of the Magnuson-Moss Warranty Act, breach of express warranty, and unjust enrichment. The FAC is based on Young’s and Dolar’s allegation that mophie mischaracterizes the mAh ratings of the batteries in certain of its products. Young and Dolar seek to certify a class of consumers nationwide and in various states who purchased mophie battery-enabled products. The FAC does not specify an amount of damages claimed, but alleges that damages will be in excess of $5,000. mophie denies that it has engaged in the alleged practices, and intends to vigorously defend the lawsuit. On ~~July 15,~~October 1, 2020, the parties ~~gave joint notice to the court that they had reached a tentativesettlement of this action, subject to the parties executing~~entered into a written settlement agreement. Pursuant to this agreement, mophie will pay a nominal service award to Young and ~~on July 16,~~Dolar, reimburse their counsel for up to $325 in attorney fees, costs and expenses, and agrees to entry of a permanent injunction ordering changes to its package labeling and advertising practices for certain battery products. There is currently pending a motion for court approval of the parties’ settlement agreement.

SEC Investigation

In September 2020, the ~~court entered an order dismissing~~Company received a subpoena from the ~~action without prejudice~~SEC seeking documents related to ~~reopening~~certain sales transactions from late 2018, the ~~case if settlement is not consummated within 45 days.~~

~~Enchanted IP v. mophie, Inc., U.S. District Court, Central District of California, Case No. 8:19-cv-1648.~~ ~~On August 27, 2019, Enchanted IP LLC filed an action for patent infringement against mophie~~inventory write down disclosed in the ~~Central District of California, asserting U.S. Patent No. 6,194,871. This patent generally relates~~Company’s May 28, 2020 Form 10-Q, and related accounting practices and guidance. The Company has been cooperating and intends to a charge and discharge control circuit for an external secondary battery. The complaint identifies mophie’s juice pack reserve micro product as an accused product and seeks damages and injunctive relief. Enchanted IP does not appear to make or sell any products, and the asserted ‘871 patent expired in April 2020. ZAGG responded to the complaint on October 21, 2019 to formally assert its defenses and counterclaims. On April 21, 2020, the parties finalized a confidential settlement, and on June 1, 2020, the court dismissed the action with prejudice.

~~Shenzhen CN-iMX Technology Co., Ltd. v. Apple Electronic Products Trading (Beijing) Co., Ltd. and ZAGG (Shenzhen) Technology Development Co., Ltd. (2020) Yue 03 No. 774.~~ ~~In August 2019, Shenzhen CN-iMX~~Technology Co., Ltd. filed an action in Shenzhen Intermediate Court against ZAGG China and Apple, asserting infringement of Chinese Patent No. ZL 2012 1 0335618.4 relating to a method of wireless charging. The action identified mophie’s PowerStation wireless XL charger as an accused product and sought damages and injunctive relief. In September 2019, ZAGG filed a separate invalidation request (Case No. 4W9507)continue cooperating fully with the ~~Chinese National Intellectual Property Administration to challenge the validity~~SEC’s investigation. Following receipt of the ~~patent. On April 8, 2020,~~subpoena, the ~~parties finalized a confidential settlement~~Company began an internal investigation with the assistance of outside counsel and forensic accountants. The investigation is ongoing and is being directed by the Audit Committee. At this time, the Company is unable to ~~resolve~~predict the ~~matter. On April 20, 2020, ZAGG’s invalidation request was formally withdrawn. On June 5, 2020,~~outcome of this matter or provide meaningful quantification of how the ~~Shenzhen Intermediate Court issued a Mediation Paper confirming dismissal~~final resolution of ~~the infringement action.~~this matter may impact its future consolidated financial statements, results of operations, or cash flows.

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Other Litigation

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

The Company establishes reserves when a particular contingency is probable and estimable. The Company has accrued estimated liabilities of ~~$900~~$400 and $750 in the condensed consolidated balance sheets as of ~~June~~September 30, 2020, and December 31, 2019, respectively.

(14) CONCENTRATIONS

Concentration of credit risk

Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash and accounts receivable. The Company places its cash with high credit quality financial institutions. The Company maintains its cash in bank deposit accounts, which customarily exceed federally insured limits. The Company has not experienced any losses in cash accounts for the ~~six~~nine months ended ~~June~~September 30, 2020, and 2019.

As of ~~June~~September 30, 2020, ~~Verizon Wireless (“Verizon”)~~ and ~~Amazon.com (“Amazon”) exceeded 10% of the Company's accounts receivable. As of~~ December 31, 2019, ~~Verizon and~~accounts receivable for Best Buy Co., Inc. (“Best Buy”) and Verizon Wireless (“Verizon”) exceeded 10% of the ~~balance of~~Company's aggregate accounts receivable. The amount of accounts receivable for each of these customers are outlined as follows:

June 30, 2020 December 31, 2019
Verizon 17% 24%
Amazon 11% 3%
Best Buy 8% 14%

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	September 30, 2020	December 31, 2019

Best Buy	16%	14%
Verizon	13%	24%

Other than the customers noted in the table above, no other customer account balances exceeded 10% of the Company's aggregate accounts receivable as of ~~June~~September 30, 2020, and December 31, 2019. If one or more of the Company’s significant customers were to become insolvent or were otherwise unable to pay for the products provided, it could have a material adverse effect on the Company’s financial condition and results of operations.

Concentration of net sales

For the three and ~~six~~nine months ended ~~June~~September 30, 2020, purchases by ~~Verizon~~Best Buy exceeded 10% of net sales. For the ~~three~~nine months ended ~~June~~September 30, 2020, and for the three and nine months ended September 30, 2019, purchases by Verizon exceeded 10% of net sales. The amount of net sales for each of these customers are outlined as follows:

For the Three Months Ended For the Six Months Ended
June 30, 2020 June 30, 2019 June 30, 2020 June 30, 2019
Verizon 15% 13% 20% 9%


	For the Three Months Ended		For the Nine Months Ended
	September 30, 2020	September 30, 2019	September 30, 2020	September 30, 2019

Best Buy	14%	9%	11%	9%
Verizon	9%	23%	15%	15%

For the three and ~~six~~nine months ended ~~June~~September 30, 2020, and 2019, no other customers exceeded 10% of net sales.

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

~~(15) SUBSEQUENT EVENTS~~

In July 2020, the U.S. Trade Representative published a Notice of Product Exclusion Amendments affecting certain products imported from China on dates between September 24, 2018 and August 7, 2020. The Company is currently evaluating duties paid during that date range that may be subject to refund.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Certain statements, other than purely historical information, including estimates, projections, statements relating to our business plans, objectives, and expected operating results, and the assumptions upon which those statements are based, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements generally are identified by the words “believes,” “project,” “expects,” “anticipates,” “estimates,” “forecasts,” “intends,” “strategy,” “plan,” “may,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions. We intend such forward-looking statements to be covered by the safe-harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and are including this statement for purposes of complying with those safe-harbor provisions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. Our ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on our operations and future prospects include, but are not limited to: changes in economic conditions, legislative/regulatory changes, availability of capital, interest rates, competition, pandemic and other health-related events, and generally accepted accounting principles. These risks and uncertainties should also be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise. Further information concerning our business, including additional factors that could materially affect our financial results, is included herein and in our other filings with the SEC.

Our Business

ZAGG Inc and its subsidiaries (“we,” “us,” “our,” “ZAGG,” or the “Company”) are global innovation leaders in accessories and technologies that empower mobile lifestyles, with a commitment to enhance every aspect of performance, productivity, and durability in mobile devices with our creative product solutions. Our business was initially created from the concept of using a clear film originally designed to protect the blades of military helicopters in harsh desert conditions to protect consumers’ mobile devices. Since then, we have endeavored to continuously innovate and improve our products to meet changing customer needs, and now offer a wide array of innovative products in several product categories to protect, enhance, and create a better mobile device experience. Mobile devices are essential to modern living and our mission is to enable the optimal mobile lifestyle through the use of our products.

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

We maintain our corporate headquarters at 910 West Legacy Center Way, Suite 500, Midvale, Utah, 84047. Our telephone number is 801-263-0699, and our website address is www.ZAGG.com (the URL is included here as an inactive textual reference, and information contained on, or accessible through, our website is not a part of, and is not incorporated by reference into, this report).

We have established four Corporate Objectives and four Core Values to act as a foundation for our corporate culture:

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Corporate Objectives						Core Values
The Preferred Brand						Integrity
Creative Product Solutions						Passion
Targeted Global Distribution						Care for People
Operational Excellence						Performance

To better implement our Corporate Objectives and Core Values, we have also adopted six Cultural Beliefs that guide us daily:

•Be Brave - I respectfully listen, speak candidly, consistently exchange feedback, and communicate broadly.

•Be Accountable - I see it, own it, solve it, and do it.

•Be Better - I relentlessly pursue opportunities to improve.

•Reach Out - I reach across all boundaries to collaborate and create alignment.

•Take Charge - I make decisions, take the necessary risks, and act with no fear of failure.

•ZOOM! - I learn fast, move fast, and deliver.

These Corporate Objectives are intended to align our functional team goals and execution. Every one of our employees is trained to understand his or her role in executing these objectives. Each Core Value and Cultural Belief acts as a key component in working toward our Corporate Objectives of providing Creative Product Solutions, executing Targeted Global Distribution, achieving Operational Excellence, and being The Preferred Brand for our customers.

Our Products

Our innovative products are included in the following general categories:

•Protection (screen protection and protective cases)

•Power (power stations and wireless chargers)

•Productivity and Other (keyboards and other mobile accessory products)

•Audio (earbuds and headphones)

These four general product categories are broken down by brand as follows:

InvisibleShield Products

InvisibleShield products, including InvisibleShield Film, InvisibleShield Glass, and our InvisibleShield On Demand^®(“ISOD”) solution, are designed to provide premium, lifetime protection for mobile device screens against shattering or scratching through military-grade solutions. Our products are designed to provide peace of mind by enabling consumers to enjoy their mobile devices without the inconvenience of a shattered, cracked, or scratched screen. Our protective InvisibleShield Film and InvisibleShield Glass products offer consumers a wide array of protection types and features, all with a limited lifetime warranty.

InvisibleShield Film was originally developed to protect the leading edge of rotary blades on military helicopters in harsh environments. Through constant innovation, we continue to formulate new film that is designed to offer the highest standards in self-healing scratch and impact protection. Additionally, we provide custom-fit screen protection for thousands of device types through our automated ISOD solution. With our ISOD solution, retailers can supply consumers with screen protection for nearly any device model, all without having to hold excess inventory.

InvisibleShield Glass is designed to provide premium screen protection and clarity, along with a superior feel and compatible touch sensitivity. Beside these basic protection functions from impacts and scratches, we also provide the ~~following add-on features:~~

•~~VisionGuard™~~ - InvisibleShield Glass VisionGuard products feature ~~protective~~ EyeSafe® technology that filters out portions of the ~~harmful~~ high-energy visible blue light spectrum emanating from device screens, while maintaining the superior color performance of the device display.

•~~Anti-Microbial Technology~~ - InvisibleShield Glass with anti-microbial technology promotes physical wellness by eliminating 99.99% of harmful bacteria on the device screen. As the anti-microbial properties are infused in the glass, they will not wear away over time.

In the second quarter of 2020, we launched the InvisibleShield UV Sanitizer, an ultraviolet light that penetrates cracks and crevices of handheld items, which is designed to kill 99.99% of the most common surface bacteria found on mobile devices, keys, credit cards, earbuds, and more.

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We have maintained the leading market share in screen protection in the United States (“U.S.”) and the United Kingdom (“U.K.”) by consistently delivering innovative InvisibleShield products to the market. We continue to innovate and expand our screen protection products to meet the evolution of new technology and consumer needs in the market.

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Gear4 Products

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

With D3O technology and our expansive global distribution channels, we believe Gear4 cases can offer the best mobile device protection experience for our customers and provide us with meaningful growth opportunities in our protection product line.

mophie Products

mophie is a leading mobile power and wireless charging brand with award-winning products designed to liberate mobile users from mobile device power and charging limitations to provide more time to rock, talk, watch, game, surf, save, and send. mophie products are recognized for style and engineered for performance, providing a seamless integration of hardware, software, and design. The mophie ecosystem of mobile accessories provides power for virtually any mobile device. With groundbreaking wireless charging, universal batteries, cables, adapters, and docks, mophie products represent innovation at the forefront of design and development.

mophie’s innovative universal wireless charging pads are designed to provide an optimized charging experience with the latest Qi^® wireless charging technology for universal compatibility, and its charge stream powerstation^®products are made to ensure consumers have access to easy, fast, and convenient wireless charging anywhere and anytime for Apple, Samsung^®, Google, and other Qi-enabled mobile devices.

In the first quarter of 2020, we unveiled the mophie powerstation go™ universal battery which utilizes HALO's portable car jump starter technology; the lightweight and portable battery can jump start sport utility vehicles or full-sized cars and is also equipped with USB-A ports, an AC power outlet, and Qi wireless charging for mobile devices and laptops. In addition, in the second quarter of 2020, we launched mophie UV Sanitizer, an ultraviolet light that penetrates cracks and crevices of handheld items, which is designed to kill 99.99% of the most common surface bacteria found on mobile devices, keys, credit cards, earbuds, and more. While sanitizing a mobile device and small personal items, the mophie UV Sanitizer can simultaneously charge the mobile device through a Qi-enabled wireless charging lid.

In response to the COVID-19 pandemic, we implemented plans to simplify our business and focus on profitable growth (the “Strategic Review”). As part of the Strategic Review, we determined to discontinue participation in the fitted battery case category and to reduce our mobile power offerings under our power station product line.

We continue to innovate and expand our mobile power and wireless charging product lines under the mophie brand to provide new product experiences that are pleasing to consumers.

HALO Products

HALO is a leader in providing direct-to-consumer accessories backed by an extensive intellectual property portfolio designed to make consumers' lives easier through empowering mobile lifestyles. With a rich history of innovation that includes wireless charging, car and wall chargers, portable power, and power wallets, and with a long-standing reputation as one of the top selling electronics brands on QVC^®, HALO is a global leader in the televised home shopping and e-commerce space.

IFROGZ Products

IFROGZ products are strategically designed and positioned to bring personal audio to the value space by providing a product assortment that represents outstanding performance, active lifestyles, and dual-purpose designs that are on trend with consumers’ needs. IFROGZ refines today’s newest audio technology to deliver the features consumers want, while eliminating those that needlessly increase costs so that everyone can participate in our increasingly mobile world.

The recently launched AIRTIME™ Truly Wireless Earbuds include quick-charging and auto-pair technology that seamlessly connects both earbuds to any Bluetooth® device. Shortly following the launch of the AIRTIME Truly Wireless Earbuds, we launched AIRTIME PRO™ Truly Wireless Earbuds with the latest audio technology features, enabling consumers to enjoy audio streaming and hands-free calling free from wires.

~~Table of Contents~~

In early 2020, we unveiled the AIRTIME VIBE™ active noise cancellation headphones which reduce ambient noise by approximately twenty decibels at the push of a button, as well as the IPX5 water-resistant AIRTIME SPORT™ Truly Wireless Earbuds with around-the-ear sport wings and IPX5 water resistance built for an active lifestyle.

In connection with the Strategic Review, we determined to reduce our IFROGZ audio offerings to focus on the HSN channel.

~~BRAVEN Products~~

~~In connection with the Strategic Review, we decided to discontinue the BRAVEN audio brand.~~

ZAGG Products

Products under the ZAGG brand are designed to empower people to live their lives unleashed. Mobility is changing how consumers do everything in their lives and we seek to drive the mobile lifestyle forward with products that are designed to allow consumers to be productive and connected at work, at play, and at rest. ZAGG products, which include keyboards and cases, are designed to free consumers from the confines of the traditional workplace. We believe “getting away” shouldn’t mean being disconnected. As such, our ZAGG products feature cutting-edge design and innovation to provide portability, style, and productivity that can keep up with even the most active mobile users. We support the communicators, commuters, creators, and closers who live a mobile lifestyle. With the right ZAGG mobile accessories, we believe no one ever needs to feel tethered or held back.

In connection with the Strategic Review, we determined to reduce our ZAGG keyboard offerings to focus only on active tablets released by Apple.

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Critical Accounting Policies and Estimates

The preparation of our financial statements requires that we make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of these amounts in the notes to the financial statements. On an on-going basis, we evaluate our estimates based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Our critical accounting policies and estimates are discussed in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our 2019 Form 10-K. There have been no material changes to the critical accounting policies or estimates previously disclosed in that report.

Results of Operations

(Amounts in thousands, except per share data)

Three months ended ~~June~~September 30, 2020, and 2019


		For the Three Months Ended															For the Three Months Ended
		June 30, 2020						June 30, 2019							September 30, 2020				September 30, 2019
		Amount		% of Net Sales		Amount		% of Net Sales			Amount		% of Net Sales		Amount		% of Net Sales

Net sales	Net sales	$	77,117	100.0	%	$	106,796	100.0	%	Net sales	$	115,456	100.0	%	$	146,488	100.0	%
Gross profit	Gross profit	23,312		30.2	%	37,759		35.4	%	Gross profit	38,433		33.3		54,345		37.1
Operating expenses	Operating expenses	29,570		38.3	%	43,978		41.2	%	Operating expenses	30,496		26.4		42,687		29.1
Other (expense) income, net		(739)		(1.0)	%	89		0.1	%
Income tax benefit		3,664		4.8	%	794		0.7	%
Net loss		(3,333)		(4.3)	%	(5,336)		(5.0)	%
Other expense, net										Other expense, net	(18)		—		(1,683)		(1.1)
Income tax provision										Income tax provision	(1,700)		(1.5)		(1,293)		(0.9)
Net income										Net income	6,219		5.4		8,682		5.9

Net sales

Net sales for the three months ended ~~June~~September 30, 2020, were ~~$77,117,~~$115,456, compared to net sales of ~~$106,796~~$146,488 for the three months ended ~~June~~September 30, 2019, a decrease of ~~$29,679~~$31,032 or ~~28%~~21%. The ~~$29,679~~$31,032 decrease in net sales was primarily attributable to retail store closures and related demand reductions due to the global COVID-19 ~~pandemic. This decrease was partially offset by an increase in direct-to-consumer sales.~~

~~Table~~pandemic and the delay of ~~Contents~~the 2020 launch of Apple's newest iPhones into the early fourth quarter of 2020.

Gross profit

Gross profit for the three months ended ~~June~~September 30, 2020, was ~~$23,312~~$38,433 or approximately ~~30%~~33% of net sales, compared to ~~$37,759~~$54,345 or approximately ~~35%~~37% of net sales for the three months ended ~~June~~September 30, 2019. The decrease in gross profit margin percentage was primarily attributable to (1) increased ~~duty rates for products sourced from China, (2) increased~~ freight rates and ~~(3)~~expedited freight charges as we chased demand at the end of the third quarter, and (2) the sale of excess inventory at margins lower than our historical average. The decrease was partially offset by (1) lower duty rates from the extensions of the screen protection and wireless charging exemptions to the end of 2020, and (2) the recognition of expected duty refunds partially offset by the reduction in capitalized duties which were expensed as inventory was sold during the quarter.

Operating expenses

Total operating expenses for the three months ended ~~June~~September 30, 2020, were ~~$29,570,~~$30,496, compared to operating expenses of ~~$43,978~~$42,687 for the three months ended ~~June~~September 30, 2019, a decrease of ~~$14,408~~$12,191 or ~~33%~~29%. The ~~$14,408~~$12,191 decrease in operating expenses was primarily attributable to cost reduction initiatives in response to COVID-19, including (1) a decrease in salaries and related expenses from the furlough of certain employees, ~~elimination of bonuses in the second quarter of 2020, and reductions in salary of executives and senior management,~~ (2) reduced in-channel marketing spend, and (3) the elimination of global discretionary spend.

Other ~~(expense) income,~~expense, net

For the three months ended ~~June~~September 30, 2020, total other expense, net was ~~$739~~$18 compared to total other ~~income,~~expense, net of ~~$89~~$1,683 for the three months ended ~~June~~September 30, 2019. The change in other ~~(expense) income,~~expense, net is primarily attributable to ~~a gain recorded~~an increase of gains on ~~settlement~~foreign exchange transactions.

Table of ~~liabilities during the three months ended June 30, 2019.~~Contents

Income tax ~~benefit~~provision

We recognized an income tax ~~benefit~~provision of ~~$3,664~~$1,700 for the three months ended ~~June~~September 30, 2020, compared to an income tax ~~benefit~~provision of ~~$794~~$1,293 for the three months ended ~~June~~September 30, 2019. Our effective tax rate was ~~52%~~21% and 13% for the three months ended ~~June~~September 30, 2020, and 2019, respectively. ~~The~~Any change in the effective tax rate for the three months ended ~~June~~September 30, 2020, compared to the three months ended ~~June~~September 30, 2019, was primarily due to the impact of the methodology used in the current tax provision calculation above, as well as an inclusion of an additional benefit related to the projected carryback of the net operating loss (“NOL”). Under the CARES Act, a temporary five-year NOL carryback enables most corporate taxpayers to offset 2015 income taxed at 35% by 2020 income taxed at 21%. This projected benefit is included in the effective tax rate for the period. Due to the expected loss before taxes for the year ended December 31, 2020, the tax benefit is limited to the expected annual tax benefit for the year. The Company’s effective tax rate will generally differ from the U.S. Federal statutory rate of 21%, due to state taxes, permanent items, the Company’s global tax strategy, and the inclusion of global intangible low taxed income and the corresponding foreign tax credit.

Net ~~loss~~income

We reported net ~~loss~~income of ~~$3,333~~$6,219 or ~~$0.11~~$0.21 per share on a fully diluted basis for the three months ended ~~June~~September 30, 2020, compared to net ~~loss~~income of ~~$5,336~~$8,682 or ~~$0.18~~$0.30 per share on a fully diluted basis for the three months ended ~~June~~September 30, 2019.

~~Six~~Nine months ended ~~June~~September 30, 2020, and 2019


		For the Six Months Ended															For the Nine Months Ended
		June 30, 2020						June 30, 2019							September 30, 2020				September 30, 2019
		Amount		% of Net Sales		Amount		% of Net Sales			Amount		% of Net Sales		Amount		% of Net Sales

Net sales	Net sales	$	168,098	100.0	%	$	185,546	100.0	%	Net sales	$	283,554	100.0	%	$	332,034	100.0	%
Gross profit	Gross profit	4,370		2.6	%	61,581		33.2	%	Gross profit	42,803		15.1		115,926		34.9
Operating expenses	Operating expenses	92,810		55.2	%	84,860		45.7	%	Operating expenses	123,306		43.5		127,547		38.4
Other expense, net	Other expense, net	(2,271)		(1.4)	%	(1,437)		(0.8)	%	Other expense, net	(2,289)		(0.8)		(3,120)		(0.9)
Income tax benefit	Income tax benefit	11,823		7.0	%	4,956		2.7	%	Income tax benefit	10,123		3.6		3,663		1.1
Net loss	Net loss	(78,888)		(46.9)	%	(19,760)		(10.6)	%	Net loss	(72,669)		(25.6)		(11,078)		(3.3)

Net sales

Net sales for the ~~six~~nine months ended ~~June~~September 30, 2020, were ~~$168,098,~~$283,554, compared to net sales of ~~$185,546~~$332,034 for the ~~six~~nine months ended ~~June~~September 30, 2019, a decrease of ~~$17,448~~$48,480 or 9%15%. The ~~$17,448~~$48,480 decrease in net sales was primarily attributable to retail store closures and related demand reductions due to the global COVID-19 ~~pandemic. This decrease was partially offset by (1) improved first~~pandemic and the delay of the 2020 launch of Apple's newest iPhones into the early fourth quarter ~~screen protection, HALO product, and mophie wireless sales and (2) an increase in second quarter direct-to-consumer sales linked to retail store closures.~~

~~Table~~ of ~~Contents~~2020.

Gross profit

Gross profit for the ~~six~~nine months ended ~~June~~September 30, 2020, was ~~$4,370~~$42,803 or approximately 3%15% of net sales, compared to ~~$61,581~~$115,926 or approximately ~~33%~~35% of net sales for the ~~six~~nine months ended ~~June~~September 30, 2019. The decrease in gross profit margin percentage was primarily attributable to (1) the March 2020 inventory write-downs of $44,833 primarily linked to the discontinuation of certain brands and product lines resulting from our ~~March 2020 strategic review of long-term profitability of all brands and product lines and the recoverability of inventory on-hand,~~Strategic Review, combined with decreased demand due to the effects of COVID-19, (2) increased ~~duty rates for products sourced from China, (3) increased~~ freight rates and ~~(4)~~expedited freight charges, and (3) the sale of excess inventory at margins lower than our historical average. Excluding the impact from the inventory write-downs, the adjusted gross profit margin was ~~29%~~31% for the ~~six~~nine months ended ~~June~~September 30, 2020, compared to ~~33%~~35% for the ~~six~~nine months ended ~~June~~September 30, 2019.

Operating expenses

Total operating expenses for the ~~six~~nine months ended ~~June~~September 30, 2020, were ~~$92,810,~~$123,306, compared to operating expenses of ~~$84,860~~$127,547 for the ~~six~~nine months ended ~~June~~September 30, 2019, ~~an increase~~a decrease of ~~$7,950~~$4,241 or 9%3%. The ~~$7,950 increase~~$4,241 decrease in operating expenses was primarily attributable to cost reduction initiatives in response to COVID-19, including (1) a decrease in salaries and related expenses from the furlough of certain employees, elimination of bonuses in the second quarter of 2020, and reductions in salary of executives and senior management, (2) reduced in-channel marketing spend, and (3) the elimination of global discretionary spend. The decrease was partially offset by (1) an $18,649 impairment charge to goodwill resulting from the carrying value of our net assets exceeding our market capitalization, (2) a $2,535 charge from the write-off of product tooling linked to discontinued brands and product lines, (3) a $1,148 write-off recorded for the intangible assets resulting from discontinued brands and product lines, and (4) ~~$528~~$786 incurred in connection with the lay-off of certain employees in ~~March~~ 2020. ~~These increases were partially offset by cost reduction initiatives in response to COVID-19, including (1) a decrease in salaries and related expenses from the furlough~~

Table of ~~certain employees, elimination of bonuses in the second quarter of 2020, and reductions in salary of executives and senior management,~~ Contents~~(2) reduced in-channel marketing spend, and (3) the elimination of global discretionary spend~~.

Other expense, net

For the ~~six~~nine months ended ~~June~~September 30, 2020, total other expense, net was ~~$2,271~~$2,289 compared to total other expense, net of ~~$1,437~~$3,120 for the ~~six~~nine months ended ~~June~~September 30, 2019. The ~~increase~~decrease in total other expense, net is primarily attributable to an increase of ~~interest expense due to higher amounts of debt and a decrease of~~ gains on foreign exchange transactions.

Income tax ~~benefit~~provision

We recognized an income tax benefit of ~~$11,823~~$10,123 for the ~~six~~nine months ended ~~June~~September 30, 2020, compared to an income tax benefit of ~~$4,956~~$3,663 for the ~~six~~nine months ended ~~June~~September 30, 2019. Our effective tax rate was ~~13%~~12% and ~~20%~~25% for the ~~six~~nine months ended ~~June~~September 30, 2020, and 2019, respectively. The change in the effective tax rate for the ~~six~~nine months ended ~~June~~September 30, 2020, compared to the ~~six~~nine months ended ~~June~~September 30, 2019, was primarily due to the impact of the methodology used in the current tax provision calculation above as well as an inclusion of an additional benefit related to the projected carryback of the NOL. Under the CARES Act, a temporary five-year NOL carryback enables most corporate taxpayers to offset 2015 income taxed at 35% by 2020 income taxed at 21%. This projected benefit is included in the effective tax rate for the period. Due to the expected loss before taxes for the year ended December 31, 2020, the tax benefit is limited to the expected annual tax benefit for the year. The Company’s effective tax rate will generally differ from the U.S. Federal statutory rate of 21%, due to state taxes, permanent items, the Company’s global tax strategy, and the inclusion of global intangible low taxed income and the corresponding foreign tax credit.

Net loss

We reported net loss of ~~$78,888~~$72,669 or ~~$2.65~~$2.44 per share on a fully diluted basis for the ~~six~~nine months ended ~~June~~September 30, 2020, compared to ~~$19,760~~a net loss of $11,078 or ~~$0.68~~$0.38 per share on a fully diluted basis for the ~~six~~nine months ended ~~June~~September 30, 2019.

Liquidity and Capital Resources (Amounts in thousands)

Liquidity is a measurement of our ability to generate adequate amounts of cash to meet both our current and future obligations, including ongoing commitments to fund continuing operations and capital expenditures, repay our debt, purchase treasury shares, and acquire businesses. As of ~~June~~September 30, 2020, our principal sources of liquidity were cash generated by operations and ~~cash on-hand.~~proceeds received from the PPP Loan (as defined below). Our principal uses of cash were primarily for repayment of the 2018 Revolver (as defined below), contingent liability payments in connection with the acquisition of HALO, and working capital needs. As of December 31, 2019, our principal sources of liquidity ~~were cash on-hand and~~was net borrowings from the 2018 Revolver. Our principal uses of cash were for operating activities, purchase of property and equipment, payments for the net share settlement of restricted stock units, purchase of treasury shares, and business acquisitions.

Cash and Cash Equivalents

Cash and cash equivalents on-hand decreased to ~~$17,314~~$16,115 on ~~June~~September 30, 2020, from $17,801 on December 31, 2019, a decrease of ~~$487.~~$1,686. The decrease in cash is largely the result of ~~$15,100~~$19,485 net payments against the 2018 Revolver, partially offset by $17,875 provided by operating activities and $9,444 of proceeds received from the PPP Loan to cover employee payroll costs, rent, and ~~$8,469 provided by operating activities.~~utilities during the initial severe impact period of the COVID-19 pandemic.

Cash Flows


	For the Nine Months Ended September 30,
	2020		2019

Net cash flow provided by (used in):
Operating activities	$	17,875	$	(24,803)
Investing activities	(5,495)		(27,364)
Financing activities	(14,297)		51,451
Effect of foreign currency exchange rates on cash and cash equivalents	231		(408)
Net decrease in cash and cash equivalents	$	(1,686)	$	(1,124)

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~~Cash Flows~~

For the Six Months Ended
June 30,
2020 2019
Net cash flow provided by (used in):
Operating activities $ 8,469 $ (13,727)
Investing activities (2,790) (24,579)
Financing activities (6,188) 35,509
Effect of foreign currency exchange rates on cash and cash equivalents 22 (111)
Net decrease in cash and cash equivalents $ (487) $ (2,908)

Operating Activities

Net cash provided from operating activities was ~~$8,469~~$17,875 for the ~~six~~nine months ended ~~June~~September 30, 2020, compared to ~~$13,727~~$24,803 of net cash used in operating activities for the ~~six~~nine months ended ~~June~~September 30, 2019, a net change of ~~$22,196.~~$42,678. The change was primarily ~~driven by~~due to (1) a decrease in use of cash for inventory for the ~~six~~nine months ended ~~June~~September 30, 2020, compared to the ~~six~~nine months ended ~~June~~September 30, 2019, and (2) higher collections on accounts receivable resulting in a lower balance of receivables for the ~~six~~nine months ended ~~June~~September 30, 2020, compared to the ~~six~~nine months ended ~~June~~September 30, 2019. These increases were partially offset by an increase in cash used to pay our vendors.

Investing Activities

Net cash used in investing activities was ~~$2,790~~$5,495 for the ~~six~~nine months ended ~~June~~September 30, 2020, compared to ~~$24,579 for the six months ended June 30, 2019, a net decrease~~$27,364 of ~~$21,789. The decrease in~~ net cash used in investing activities for the nine months ended September 30, 2019, a net change of $21,869. The change was primarily due to ~~$20,368~~$20,364 of cash used in the acquisition of HALO in 2019 and decreased spending in purchases of property and equipment for the ~~six~~nine months ended ~~June~~September 30, 2020.

Financing Activities

Net cash used in financing activities was ~~$6,188~~$14,297 for the ~~six~~nine months ended ~~June~~September 30, 2020, compared to ~~$35,509~~$51,451 of net cash provided by financing activities for the ~~six~~nine months ended ~~June~~September 30, 2019, a net change of ~~$41,697.~~$65,748. The change was primarily due to a higher ratio of net payments made on the 2018 Revolver relative to net proceeds received from that revolving credit facility for the ~~six~~nine months ended ~~June~~September 30, 2020, compared to a higher ratio of net proceeds received from the 2018 Revolver relative to net payments made toon that revolving credit facility for the ~~six~~nine months ended ~~June~~September 30, 2019, partially offset by proceeds received from the PPP Loan.

Working Capital

Working capital is a non-GAAP measurement which is defined by us as current assets less current liabilities. ~~We believe working capital is a meaningful way to measure our operational efficiency and short-term financial health.~~ As of ~~June~~September 30, 2020, working capital was ~~$96,578~~$102,931 compared to $151,660 as of December 31, 2019, a decrease of ~~$55,082.~~$48,729. The decrease in the working capital position was primarily attributable to changes in accounts receivable, inventories, including a $44,833 write-down of inventory during the ~~six~~nine months ended ~~March 31,~~September 30, 2020, accounts payable and ~~accounts payable.~~sales returns liability.

Accounts receivable, net of allowances, decreased to ~~$63,090~~$91,196 on ~~June~~September 30, 2020, from $142,804 on December 31, 2019, a decrease of ~~$79,714.~~$51,608. The net decrease was primarily attributable to the collection of accounts receivable since year-end combined with lower sales during the ~~second~~third quarter of 2020 in comparison to the fourth quarter of 2019.

Inventories decreased to ~~$91,328~~$80,024 on ~~June~~September 30, 2020, from $144,944 on December 31, 2019, a decrease of ~~$53,616.~~$64,920. The net decrease was primarily attributable to a write-down of $44,833 of inventory due primarily by the effects of the COVID-19 pandemic and the Strategic Review conducted by management in ~~response.~~response, and an increased focus on driving operational efficiency in inventory management.

Accounts payable decreased to ~~$44,945~~$60,142 on ~~June~~September 30, 2020, from $87,303 on December 31, 2019, a decrease of ~~$42,358.~~$27,161. The net decrease was primarily attributable to lower seasonal inventory purchases and operating activities in the ~~first half year of~~nine months ended September 30, 2020, in comparison to the fourth quarter of 2019, and payment on accounts payable outstanding on December 31, 2019, during the ~~six~~nine months ended ~~June~~September 30, 2020.

~~Table~~ In addition, in response to COVID-19 pandemic, we implemented several initiatives to control operating costs which has decreased the accounts payable balance as of ~~Contents~~

September 30, 2020.

Share Repurchase Program

During the third quarter of 2015, our board of directors approved a stock repurchase program with no expiration date. On March 11, 2019, our board of directors authorized the cancellation of the 2015 stock repurchase program, and authorized a new stock repurchase program that grants us the right to repurchase of up to $20,000 of our outstanding common stock. As of ~~June~~September 30, 2020, we have $20,000 remaining under this program.

Debt and Credit Facilities

We entered into the 2018 Credit and Security Agreement, as amended, to obtain a secured revolving credit facility (the “2018 Revolver”) and letters of credit. We use the net borrowing from the 2018 Revolver for general corporate purposes, including funding for working capital, purchase of property and equipment, purchase of treasury shares and business acquisitions. As of ~~June~~September 30, 2020, we had ~~$92,040~~$87,655 of the 2018 Revolver outstanding, with a weighted average interest rate of ~~2.7%~~2.8%. There were no letters of credit issued as of ~~June~~September 30, 2020, and ~~$52,760~~$57,145 was available to be issued for letters of credit. In addition, we entered into a loan agreement with KeyBank National Association (“KeyBank”) under the Paycheck Protection Program of the CARES Act administered by the U.S. Small Business Administration (the “SBA”), and subsequently received a loan in the amount of ~~$9,444.~~ $9,444 (the “PPP Loan”).

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These items are further discussed in Note 8, “Long-Term Debt,” to our Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q, and are hereby incorporated by reference.

Company Actions Due to COVID-19 Pandemic

As a result of the COVID-19 pandemic, we have experienced a reduction in demand as over 84% of our sales occur through brick and mortar retail or franchise locations. In order to meet short and long-term capital needs and to comply with debt covenant requirements under the 2018 Revolver throughout 2020 and beyond, we instituted ~~in the six months ended June 30, 2020~~ a number of global cash savings and cost-cutting initiatives including the following:

•Implemented furloughs or lay-offs of approximately 20% of U.S. employees and reduced our Europe and Asia Pacific staff, excluding China, by approximately 20%. Employees on furlough ~~retain~~have retained their health insurance coverage throughout the furlough;

•Temporarily reduced salaries during the second quarter of 2020, including a 15% reduction for our Chief Executive Officer, 10% reductions for the rest of the executive team and 5% reductions for senior management;

•Temporarily reduced the cash portion of the Board of Directors’ compensation by 15% in 2020 and replaced such compensation with stock-based compensation;

•Temporarily suspended our employee bonus program for the three months ended June 30, 2020;

•Significantly reduced marketing spend throughout the remainder of 2020;

•Deferred or cancelled spending on all non-essential projects;

•Delayed or cancelled certain purchase orders to align with our adjusted demand forecast;

•Limited travel of employees internationally and domestically throughout the remainder of 2020;

•Discontinued the BRAVEN audio brand;

•Discontinued the fitted battery case product category; and

•Simplified our iFrogz audio, ZAGG keyboard and mophie power station businesses, including reducing SKU counts and discontinuing certain product lines.

The Company continues to evaluate this evolving business environment due to the COVID-19 pandemic and may institute additional cash savings and cost-cutting initiatives in future periods.

In addition to the cash savings and cost-cutting initiatives, we closed on an amendment to the 2018 Revolver to increase our line of credit capacity by $19,800 through March 31, 2021. In addition, ~~on April 13, 2020,~~ we ~~entered into a loan agreement with KeyBank as~~obtained the lender under the Paycheck Protection Program of the CARES Act administered by U.S. Small Business Administration (the “SBA”), and subsequently received a loan in the amount of $9,444 (the “PPP Loan”)PPP Loan to help ~~sustain~~cover our employee payroll costs, rent, and utilities ~~due to~~during the initial severe impact period of the COVID-19 pandemic. Under the Paycheck Protection Program, the ~~Company's~~ PPP Loan is fully forgivable if the Company meets certain requirements and receives formal approval, as defined by the CARES Act, subject to an audit by the SBA. The Company intends to seek partial or full forgiveness of the PPP Loan; however, there can be no assurance that the Company will obtain forgiveness of all or part of the PPP Loan amount. The interest rate for the PPP Loan is 1% per annum, and all required payments are deferred ~~for six months from the Disbursement Date~~until August 2021 (interest will accrue over this ~~six-month~~ deferral period). Unless the PPP Loan is fully or partially forgiven, the Company must pay ~~$525~~$398 of the principal and interest every month once the deferral period is over ~~as well as accumulated interest, until~~and pay a balloon payment of $6,441 on the maturity date in April 2022, which is two years from the Disbursement Date.

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

~~Table of Contents~~

We believe that the measures and initiatives discussed above will enable us to meet our financial obligations and continue to build our business. However, we operate in a rapidly evolving and often unpredictable business environment, which is currently exacerbated by the COVID-19 pandemic, that may change the timing or amount of expected future cash receipts and expenditures. Accordingly, we may need to raise additional funds through the sale of equity or debt securities or from debt facilities. Additional capital, if needed, may not be available on satisfactory terms, if at all.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

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

To date we have not utilized any material derivative financial instruments or derivative commodity instruments. We believe that the market risks associated with our financial instruments are immaterial, though there can be no guarantee that these market risks will be immaterial to us.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

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

At the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures in accordance with the Exchange Act requirements. Based upon that evaluation, our principal executive officer and principal financial and accounting officer concluded that as of the end of the period of this report, our disclosure controls and procedures were effective and were designed to provide reasonable assurance that information required to be included in the reports filed or submitted under the Exchange Act of 1934 is recorded, processed, summarized, and reported as specified in the SEC’s rules and forms.

Changes in Internal Control over Financial Reporting

There were no significant changes in the Company’s internal control over financial reporting during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. The process for evaluating controls and procedures is continuous and encompasses constant improvement of the design and effectiveness of established controls and procedures and the remediation of any deficiencies which may be identified during this process.

Inherent Limitations on the Effectiveness of Internal Controls

Internal control over financial reporting has inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting also can be circumvented by collusion or improper management override. Because of such limitations, there is a risk that material misstatements will not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.

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PART II - OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 1A. Risk Factors (amounts in thousands)

In addition to the other information set forth in this Quarterly Report, you should carefully consider the factors discussed in Part I, Item 1A. Risk Factors, in our 2019 Form 10-K, which could materially affect our business, financial condition, or future results. These risk factors should be read carefully in connection with evaluating our business and in connection with the forward-looking statements contained in this Quarterly Report. Any of the risks described in the 2019 Form 10-K could materially adversely affect our business, financial condition or future results and the actual outcome of matters as to which forward-looking statements are made. These are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition, and/or operating results.

There were no material changes during the period covered in this report to the risk factors previously disclosed in our 2019 Form 10-K except as follows:

Our financial condition and results of operations in future periods have been adversely affected by the recent COVID-19 pandemic.

In December 2019, a mutated strain of coronavirus was reported to have surfaced in Wuhan, China. The outbreak, which had previously been concentrated in China, has largely spread through the U.S. and the world. The pandemic has resulted in federal, state, and local restrictions, requiring or recommending social distancing, travel bans, quarantines, and other restrictions. Additionally, concerns regarding the spread and ultimate human and economic impacts have caused significant downturns in the global stock markets, including the U.S. stock markets. For these and other reasons, future demand for our products may decline for an uncertain duration of time. Our sales are mainly concentrated through the retail sale channel, which has been impacted due to the previous shutdown of many brick and mortar retail stores around the current outbreak. In addition, smartphone, tablet computers, and other similar product sales are decreasing due to the current outbreak, which also has an impact on our forecasted sales. Due to these impacts on current and future demand, our revenue and profitability is likely to be adversely impacted during the duration of the outbreak, which is currently unknown and difficult to forecast. These factors will likely negatively impact our financial results and could have an impact on our ability to continue as a going concern. In addition, the coronavirus pandemic may have an impact on our supply chain, as production is affected by current and potential future conditions, potentially forcing us to curtail, delay, or cancel product manufacturing. In response to such conditions, we have taken the following proactive measures to provide enhanced financial flexibility:

•Amended our secured revolving credit facility to increase available borrowings by $19,800 through March 2021;

•Closed on a U.S. Small Business Administration loan under the CARES Act of approximately $9,444;

•Implemented furloughs or lay-offs of approximately 20% of U.S. employees and reduced our Europe and Asia Pacific staff, excluding China, by approximately 20%. Employees on furlough retain their health insurance coverage throughout the furlough;

•Temporarily reduced the cash portion of the Board of Directors’ compensation by 15% and replaced such compensation with stock-based compensation;

•Temporarily suspended our employee bonus program for the three months ended June 30, 2020;

•Significantly reduced marketing spend throughout the remainder of 2020;

•Deferred or cancelled spending on all non-essential projects;

•Delayed or cancelled certain purchase orders to align with our adjusted demand forecast;

•Limited travel of employees internationally and domestically throughout the remainder of 2020;

•Discontinued the BRAVEN audio brand;

•Discontinued the battery case product category; and

•Simplified our iFrogz audio, ZAGG keyboard and mophie power station businesses, including reducing SKU counts and discontinuing certain product lines.

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These practices may continue into the future while the consequences of the outbreak are uncertain. Despite our efforts to proactively respond to the COVID-19 pandemic, concerns regarding the continued spread and ultimate human and economic impacts may affect our ability to obtain and retain financing for future cash-flow demands, and we may see a decrease in the value of inventory due to obsolescence and/or impairment. Material impairments with respect to goodwill, intangible assets, long-lived assets, and right of use assets may also occur in the future. We anticipate there may be increases in credit losses from our customers. Our estimates around product returns may also be impacted, with potential increases in expected returns from customers.

The extent to which the coronavirus pandemic impacts our results of operations will depend on future developments, many of which are out of our control, are highly uncertain and cannot be predicted, including new events that may occur, including additional outbreaks of COVID-19 and actions taken to contain its spread or treat its impact, among others. With the uncertainty caused by this outbreak, we may not adequately quantify or qualify the longer-term ramifications of the pandemic on our business, our customers and/or our potential investors and other stakeholders. We will continue to monitor the situation and timely communicate to our investors when necessary.

If we do not qualify for retention or forgiveness of the Paycheck Protection Program loan, our financial condition may be adversely affected.

On April 13, 2020, we entered into a loan agreement with KeyBank National Association (“KeyBank”) as the lender under the Paycheck Protection Program (the “PPP”) of the CARES Act administered by the U.S. Small Business Administration (the “SBA”), and subsequently received a loan in the amount of $9,444 (the “PPP Loan”) to help sustain our employee payroll costs, rent, and utilities due to the impact of the COVID-19 pandemic. We made good faith certifications of our necessity for the PPP Loan, and believe that we are in full compliance with the terms and conditions outlined in the CARES Act. However, as a consequence of post-PPP Loan rule-making by the SBA, shifting regulatory guidance and/or other factors that may be considered by the SBA during its audit process, we may be required to return the PPP Loan before its expected maturity date. In addition, we hope to obtain forgiveness of all or a portion of the PPP Loan, as allowed under the CARES Act. As there is still substantial uncertainty about PPP forgiveness qualifications, we make no representations that we will qualify for forgiveness of all or part of the PPP Loan. Due to the incomplete and changing regulations around the PPP, new pronouncements may also change our current compliance status under the law, and any potential allowable forgiveness of the outstanding PPP Loan amount. If we are required to repay the PPP Loan, we may need to incur other indebtedness and we cannot provide assurance that we can obtain additional indebtedness with the terms and availability needed for our ongoing operations.

U.S. tariffs and international trade disputes with China and/or others could increase the cost of our products or make our products more expensive for customers.

Between July 2018, and December 2019, the U.S. government imposed tariffs on a variety of imports from China with rates ranging from 10 ~~percent~~ to 25 ~~percent~~percentage points and the Chinese government retaliated with tariffs ranging from 5 ~~percent~~ to 10 ~~percent~~percentage points on U.S. imports. The U.S. and China have been engaging in ongoing trade talks in the last two years. However, significant trade war tariffs still remain in effect that adversely impact our business, with no clear future outlook if and/or when changes to tariffs may occur. In addition, tariffs may decrease and/or increase depending on ongoing trade negotiations. With the noted uncertainty of future trade talks, these trade disputes may impact certain product lines that were previously not impacted by recent tariffs and our business could be adversely affected by increased costs in importing our products. These factors could make our products less competitive and reduce consumer demand. We are uncertain of the potential future magnitude that these and other potential trade disputes and policies that may have, and these factors could materially adversely affect our business, financial condition, and operating results.

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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

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Item 6. Exhibits

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

Exhibit Number Exhibit Description Incorporated by Reference Filed or Furnished Herewith
Form File Number Exhibit Filing Date
10.1
Cooperation Agreement, dated as of April 15, 2020, by and among the Company, Roumell Asset Management, LLC and other parties set forth therein.
8-K 001-34528 10.1 04/16/2020
10.2
Cooperation Agreement, dated as of April 15, 2020, by and among the Company, AREX Capital Management, LP and other parties set forth therein.
8-K 001-34528 10.2 04/16/2020
10.3
Fourth Amendment Agreement, dated as of April 15, 2020, by and among ZAGG Inc, as borrower, KeyBank National Association, Zions Bancorporation, N.A. dba Zions First National Bank, and MUFG Union Bank, N.A., as lenders, and KeyBank National Association, as administrative agent.
8-K 001-34528 10.3 04/16/2020
10.4
PPP Loan, dated as of April 13, 2020
8-K 001-34528 10.4 04/16/2020
10.5
ZAGG Inc Executive Severance Plan, dated as of April 15, 2020
8-K 001-34528 10.5 04/16/2020
10.6
First Amendment to the ZAGG Inc Amended and Restated 2013 Equity Incentive Plan, dated as of April 15 , 2020
X
31.1
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, as Amended
X
31.2
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, as Amended
X
32.1
Certification of Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14(b) of the Exchange Act and 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
X
101.INS XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document X
101.SCH Inline XBRL Taxonomy Extension Schema Document X
101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document X
101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document X
101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document X
101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document X

Exhibit Number

Exhibit Description

Incorporated by Reference

Filed or Furnished Herewith

Form

File Number

Exhibit

Filing Date

10.1

Cooperation Agreement, dated as of April 15, 2020, by and among the Company, Roumell Asset Management, LLC and other parties set forth therein.

8-K

001-34528

10.1

04/16/2020

10.2

Cooperation Agreement, dated as of April 15, 2020, by and among the Company, AREX Capital Management, LP and other parties set forth therein.

8-K

001-34528

10.2

04/16/2020

10.3

Fourth Amendment Agreement, dated as of April 15, 2020, by and among ZAGG Inc, as borrower, KeyBank National Association, Zions Bancorporation, N.A. dba Zions First National Bank, and MUFG Union Bank, N.A., as lenders, and KeyBank National Association, as administrative agent.

8-K

001-34528

10.3

04/16/2020

10.4

PPP Loan, dated as of April 13, 2020

8-K

001-34528

10.4

04/16/2020

10.5

ZAGG Inc Executive Severance Plan, dated as of April 15, 2020

8-K

001-34528

10.5

04/16/2020

10.6

First Amendment to the ZAGG Inc Amended and Restated 2013 Equity Incentive Plan, dated as of April 15, 2020

10-Q

001-34528

10.6

8/4/2020

31.1

Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, as Amended

31.2

Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, as Amended

32.1

Certification of Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14(b) of the Exchange Act and 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.INS

XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL 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

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SIGNATURES

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


	ZAGG INC
	(Registrant)

Dated: ~~August 4,~~November 9, 2020	By:	/s/ CHRIS M. AHERN
		Chris M. Ahern
		Chief Executive Officer & Director
		(Principal executive officer)

Dated: ~~August 4,~~November 9, 2020	By:	/s/ TAYLOR D. SMITH
		Taylor D. Smith
		Chief Financial Officer
		(Principal financial and accounting officer)


	For the Six Months Ended June 30,
	2020		2019

Net cash flow provided by (used in):
Operating activities	$	8,469	$	(13,727)
Investing activities	(2,790)		(24,579)
Financing activities	(6,188)		35,509
Effect of foreign currency exchange rates on cash and cash equivalents	22		(111)
Net decrease in cash and cash equivalents	$	(487)	$	(2,908)