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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
____________________
FORM 10-Q
(Mark one)
☑ Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended
September 30, 2019, 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: 29,086,402 common shares as of November 5, 2019.



Item Contents Page
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)

ZAGG INC AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except par value amounts)
(Unaudited)
September 30, 2019 December 31, 2018
ASSETS
Current assets:
Cash and cash equivalents $ 14,669    $ 15,793   
Accounts receivable, net of allowances of $879 and $885
135,345    156,667   
Income tax receivable    3,007    375   
Inventories 138,452    82,919   
Prepaid expenses and other current assets    4,871    5,473   
Total current assets 296,344    261,227   
Property and equipment, net of accumulated depreciation of $14,801 and $11,844
18,644    16,118   
Intangible assets, net of accumulated amortization of $91,640 and $78,627
67,102    52,054   
Deferred income tax assets 13,994    19,403   
Operating lease right of use assets    10,067    —   
Goodwill    43,569    27,638   
Other assets 1,103    1,571   
Total assets $ 450,823    $ 378,011   
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable $ 97,978    $ 80,908   
Sales returns liability    41,244    54,432   
Accrued wages and wage related expenses    6,934    6,624   
Accrued liabilities 18,911    13,723   
Current portion of operating lease liabilities    2,129    —   
Total current liabilities 167,196    155,687   
Line of credit 111,363    58,363   
Operating lease liabilities    11,135    —   
Other long-term liabilities —    5,470   
Total liabilities 289,694    219,520   
Commitments and contingencies (Note 1 and Note 11)
Stockholders’ equity:
Common stock, $0.001 par value; 100,000 shares authorized; 36,163 and 34,457 shares issued
36    34   
Treasury stock, 7,055 and 6,983 common shares at cost
(50,455)   (49,733)  
Additional paid-in capital 111,917    96,486   
Accumulated other comprehensive loss (2,366)   (1,410)  
Retained earnings 101,997    113,114   
Total stockholders’ equity 161,129    158,491   
Total liabilities and stockholders’ equity $ 450,823    $ 378,011   

See accompanying notes to condensed consolidated financial statements.
1
ZAGG INC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except per share amounts)
(Unaudited)
For the Three Months Ended For the Nine Months Ended
September 30, 2019 September 30, 2018 September 30, 2019 September 30, 2018
Net sales $ 146,488    $ 141,087    $ 332,034    $ 371,718   
Cost of sales 92,143    88,916    216,108    244,297   
Gross profit 54,345    52,171    115,926    127,421   
Operating expenses:
Advertising and marketing 4,129    3,089    13,228    8,322   
Selling, general and administrative 34,063    27,349    100,138    78,692   
Transaction costs 547    618    1,168    635   
Amortization of intangible assets 3,948    2,859    13,013    8,404   
Total operating expenses 42,687    33,915    127,547    96,053   
Income (loss) from operations 11,658    18,256    (11,621)   31,368   
Other (expense) income:
Interest expense (1,221)   (286)   (3,334)   (1,132)  
Other (expense) income (462)   (176)   214    (362)  
Total other expense (1,683)   (462)   (3,120)   (1,494)  
Income (loss) before provision for income taxes 9,975    17,794    (14,741)   29,874   
Income tax (provision) benefit (1,293)   (3,168)   3,663    (5,003)  
Net income (loss) $ 8,682    $ 14,626    $ (11,078)   $ 24,871   
Earnings (loss) per share attributable to stockholders:
Basic earnings (loss) per share $ 0.30    $ 0.52    $ (0.38)   $ 0.88   
Diluted earnings (loss) per share $ 0.30    $ 0.51    $ (0.38)   $ 0.87   

See accompanying notes to condensed consolidated financial statements.
2
ZAGG INC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Amounts in thousands)
(Unaudited)
For the Three Months Ended For the Nine Months Ended
September 30, 2019 September 30, 2018 September 30, 2019 September 30, 2018
Net income (loss) $ 8,682    $ 14,626    $ (11,078)   $ 24,871   
Other comprehensive (loss) gain, net of tax:
Foreign currency translation (loss) gain (941)   175    (956)   (505)  
Total other comprehensive (loss) income (941)   175    (956)   (505)  
Total comprehensive income (loss) $ 7,741    $ 14,801    $ (12,034)   $ 24,366   

See accompanying notes to condensed consolidated financial statements.
3
ZAGG INC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(Amounts in thousands)
(Unaudited)
For the Three Months Ended September 30, 2019
Common Stock
Shares Amount Additional Paid-in Capital Accumulated Other Comprehensive Loss Treasury Stock Retained Earnings Total Stockholders’ Equity
Balances, July 01, 2019 36,140    $ 36    $ 111,279    $ (1,425)   $ (50,455)   $ 93,315    $ 152,750   
Net income —    —    —    —    —    8,682    8,682   
Other comprehensive loss —    —    —    (941)   —    —    (941)  
Restricted stock release 19    —    —    —    —    —    —   
Employee stock purchase plan release 4    —    48    —    —    —    48   
Stock-based compensation expense —    —    631    —    —    —    631   
Payment of withholding taxes on restricted stock units —    —    (41)   —    —    —    (41)  
Balances, September 30, 2019 36,163    $ 36    $ 111,917    $ (2,366)   $ (50,455)   $ 101,997    $ 161,129   
For the Nine Months Ended September 30, 2019
Common Stock
Shares Amount Additional Paid-in Capital Accumulated Other Comprehensive Loss Treasury Stock Retained Earnings Total Stockholders’ Equity
Balances, December 31, 2018 34,457    $ 34    $ 96,486    $ (1,410)   $ (49,733)   $ 113,114    $ 158,491   
Cumulative effect of accounting change —    —    —    —    —    (39)   (39)  
Balance after cumulative effect of accounting change 34,457    34    96,486    (1,410)   (49,733)   113,075    158,452   
Net loss —    —    —    —    —    (11,078)   (11,078)  
Other comprehensive loss —    —    —    (956)   —    —    (956)  
Treasury stock purchase —    —    —    —    (722)   —    (722)  
Restricted stock release 241    —    —    —    —    —    —   
Employee stock purchase plan release 7    —    61    —    —    —    61   
Stock-based compensation expense —    —    3,291    —    —    —    3,291   
Payment of withholding taxes on restricted stock units —    —    (887)   —    —    —    (887)  
Shares issued as consideration for acquisition 1,458    2    12,966    —    —    —    12,968   
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.
4
ZAGG INC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY (Continued)
(Amounts in thousands)
(Unaudited)
For the Three Months Ended September 30, 2018
Common Stock
Shares Amount Additional Paid-in Capital Accumulated Other Comprehensive Loss Treasury Stock Retained Earnings Total Stockholders’ Equity
Balances, July 01, 2018 34,423    $ 34    $ 94,977    $ (1,028)   $ (40,643)   $ 84,170    $ 137,510   
Net income —    —    —    —    —    14,626    14,626   
Other comprehensive income —    —    —    175    —    —    175   
Treasury stock purchase —    —    —    —    (3,091)   —    (3,091)  
Restricted stock release 9    —    —    —    —    —    —   
Employee stock purchase plan release 1    —    —    —    —    —    —   
Stock-based compensation expense —    —    757    —    —    —    757   
Payment of withholding taxes on restricted stock units —    —    (92)   —    —    —    (92)  
Balances, September 30, 2018 34,433    $ 34    $ 95,642    $ (853)   $ (43,734)   $ 98,796    $ 149,885   
For the Nine Months Ended September 30, 2018
Common Stock
Shares Amount Additional Paid-in Capital Accumulated Other Comprehensive Loss Treasury Stock Retained Earnings Total Stockholders’ Equity
Balances, December 31, 2017 34,104    $ 34    $ 96,145    $ (348)   $ (37,637)   $ 77,805    $ 135,999   
Cumulative effect of accounting change —    —    —    —    —    (3,880)   (3,880)  
Balance after cumulative effect of accounting change 34,104    34    96,145    (348)   (37,637)   73,925    132,119   
Net income —    —    —    —    —    24,871    24,871   
Other comprehensive loss —    —    —    (505)   —    —    (505)  
Treasury stock purchase —    —    —    —    (6,097)   —    (6,097)  
Restricted stock release 327    —    —    —    —    —    —   
Employee stock purchase plan release 2    —    55    —    —    —    55   
Stock-based compensation expense —    —    2,165    —    —    —    2,165   
Payment of withholding taxes on restricted stock units —    —    (2,723)   —    —    —    (2,723)  
Balances, September 30, 2018 34,433    $ 34    $ 95,642    $ (853)   $ (43,734)   $ 98,796    $ 149,885   

See accompanying notes to condensed consolidated financial statements.
5
ZAGG INC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
For the Nine Months Ended
September 30, 2019 September 30, 2018
Cash flows from operating activities:
Net (loss) income $ (11,078)   $ 24,871   
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:
Stock-based compensation expense 3,291    2,165   
Depreciation and amortization 18,007    13,330   
Deferred income tax assets (1,666)   2,266   
Loss on disposal of property and equipment 102    9   
Loss on deferred loan costs with debt modification —    243   
Amortization of deferred loan costs 161    147   
Right of use asset costs 1,897    —   
Changes in operating assets and liabilities:
Accounts receivable, net 20,813    7,735   
Inventories (53,079)   (1,751)  
Prepaid expenses and other current assets 1,883    (694)  
Other assets 381    1,618   
Accounts payable 14,758    (30,469)  
Income tax receivable (3,033)   (3,153)  
Sales returns liability (15,751)   3,831   
Accrued wages and wage related expenses 1    58   
Accrued and other long-term liabilities 103    (539)  
Lease liabilities (1,913)   —   
Other 320    191   
Net cash (used in) provided by operating activities (24,803)   19,858   
Cash flows from investing activities:
Purchase of property and equipment (7,002)   (4,444)  
Proceeds from disposal of equipment 2    26   
Purchase of BRAVEN —    (3,951)  
Purchase of HALO, net of cash acquired (20,364)   —   
Net cash used in investing activities (27,364)   (8,369)  
Cash flows from financing activities:
Proceeds from revolving credit facility 243,140    238,994   
Payments on revolving credit facility (190,140)   (246,448)  
Payments on term loan facility —    (2,084)  
Purchase of treasury stock (722)   (6,097)  
Payment of withholding on restricted stock units (848)   (2,630)  
Payment of deferred loan costs (40)   (294)  
Proceeds from issuance of stock under employee stock purchase plan 61    55   
Net cash provided by (used in) financing activities 51,451    (18,504)  
Effect of foreign currency exchange rates on cash equivalents (408)   (194)  
Net decrease in cash and cash equivalents (1,124)   (7,209)  
Cash and cash equivalents at beginning of the period 15,793    24,989   
Cash and cash equivalents at end of the period $ 14,669    $ 17,780   

See accompanying notes to condensed consolidated financial statements.
6
ZAGG INC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Amounts in thousands)
(Unaudited)
For the Nine Months Ended
September 30, 2019 September 30, 2018
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 3,154    $ 1,127   
Cash paid during the period for income taxes, net 1,009    5,729   
Cash paid during the period for rent expenses included in the measurement of lease liabilities 2,393    —   
Supplemental disclosure of non-cash investing and financing activities:
Purchase of property and equipment financed through accounts payable $ 742    $ 1,036   
Withholding tax on restricted stock units recorded in accrued wages and wage related expenses 39    93   
Purchase of HALO through amounts due to seller, contingent payments and common stock 16,642    —   
Modification of debt that resulted in payment of existing term loan balance —    11,991   
Noncash change in lease asset and operating liabilities from remeasurement of existing leases and addition of new leases 2,473    —   
Indemnity Holdback of BRAVEN Acquisition included in accrued liabilities —    500   

See accompanying notes to condensed consolidated financial statements.
7
ZAGG INC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars, units, and shares in thousands, except per share amounts)
(Unaudited)
(1) NATURE OF OPERATIONS AND BASIS OF PRESENTATION
ZAGG Inc and its subsidiaries (the “Company”) are innovation leaders in mobile tech accessories for smartphones and tablets. For over 15 years, the Company has developed creative product solutions that enhance and protect mobile devices for consumers around the world. The Company has an award-winning product portfolio that includes screen protection, power cases, power management, wireless charging, audio, mobile keyboards, protective cases, and other mobile accessories sold under the ZAGG®, InvisibleShield®, mophie®, IFROGZ®, BRAVEN®, Gear4®, and HALO® brands.
The accompanying unaudited condensed consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the United States Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“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 suggests 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, 2018 (the “2018 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.
Significant Accounting Policies
The Company’s significant accounting policies are described in Note 1 to the Company’s consolidated financial statements included in the 2018 Form 10-K. Except for the changes below, the Company has consistently applied the accounting policies to all periods presented in these condensed consolidated financial statements.
Adoption of Accounting Standards Codification (“ASC”) Topic 842, “Leases” (In thousands, except lease terms and discount rates)
The Company adopted ASC Topic 842,“Leases” (“Topic 842”) with a date of initial application of January 1, 2019. As a result of this adoption, the Company has changed its accounting policy for leases as detailed below.
The Company applied Topic 842 on January 1, 2019, using the modified retrospective approach. The adoption of Topic 842 includes the cumulative effect of adopting the new standard being recognized in retained earnings at January 1, 2019, which allows for the application of the standard solely to the transition period in 2019 but does not require application to prior fiscal comparative periods presented. Therefore, the prior period comparative information has not been adjusted and continues to be reported under the previous ASC Topic 840, “Leases” (“Topic 840”) standard. The Company also elected the package of available practical expedients allowable under Topic 842 guidelines in its adoption approach.
The adoption of Topic 842 resulted in an increase in long-term lease liabilities of $10,684 which was included in operating lease liabilities; an increase in short-term lease liabilities of $2,362 which was included in current portion of operating lease liabilities; an initial recognition of right of use (“ROU”) assets of $8,842 which was included in operating lease right of use assets; an increase of deferred tax assets, net of $1,424; a derecognition of $3,346 related to lease liabilities under Topic 840 which was included in accrued liabilities; a decrease in deferred rent of $819 which was included in accrued liabilities; and a decrease of $39 in retained earnings as a cumulative effect of adoption.
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As the Company did not have any finance leases upon adoption of Topic 842 at January 1, 2019, the largest driver of changes for the adoption of Topic 842 was the addition of the Company’s operating leases to the condensed consolidated balance sheet, creating ROU assets and lease liabilities on the condensed consolidated balance sheet as of September 30, 2019. Under Topic 840, operating leases were not included on the condensed consolidated balance sheets, whereas under Topic 842, ROU assets and lease liabilities are calculated and recorded on the lease commencement date. The standard had a material impact in the Company’s consolidated balance sheets, but did not have a significant impact in its condensed consolidated statements of operations. In addition, the adoption of Topic 842 had no impact to cash provided by or used in operating, financing, or investing on the condensed consolidated statements of cash flows.
Lease accounting policy
The Company determines if an arrangement is a lease at contract inception and then determines if such qualifying lease is classified as an operating lease or a finance lease. As of September 30, 2019, the Company only has operating leases. For operating leases, the Company measures lease liabilities based on the present value of the future minimum lease payments over the lease term at commencement date. As most of its leases do not provide an implicit rate, the Company uses an incremental borrowing rate (“IBR”) based on relevant information available at each leases' commencement date in determining the present value of future payments for each individual lease. The IBR is obtained by request from the Company's banking partners, who apply a collateralized rate of borrowing based on each leases’ specific term and based on the Company’s credit worthiness. ROU assets are measured as the sum of the amount of the initial measurement of the lease liability, plus any prepaid lease payments made minus any lease incentives received, and any initial direct costs incurred. The Company’s lease terms may include options to extend or terminate leases that will be recognized when it is reasonably certain that the Company will exercise that option. Lease expense for operating leases is recognized on a straight-line basis over the lease term.
The Company has lease agreements with lease and non-lease components under the definition of Topic 842. Upon adoption of Topic 842, the Company elected a practical expedient not to separate the lease and non-lease components for its leases for physical space and equipment and accounts for them as a single lease component.
Lease information
The Company has operating leases for offices, retail stores, and warehouse space that expire through 2027. The Company’s leases have remaining lease terms of 4 months to 8 years, some of which include options to extend the leases up to 10 years. The following summarizes the activities in the Company’s ROU assets and lease liabilities for the nine months ended September 30, 2019:
Beginning Balance as of January 1, 2019 Adoption of Topic 842 Additions Costs Ending Balance as of September 30, 2019
Operating lease ROU assets $ —    $ 8,842    $ 3,122    $ (1,897)   $ 10,067   
Beginning Balance as of January 1, 2019 Adoption of Topic 842 Additions Payments, less accretion Ending Balance as of September 30, 2019
Operating lease liabilities $ —    $ 13,046    $ 2,131    $ (1,913)   $ 13,264   
For the three and nine months ended September 30, 2019, rent expense was $1,123 and $2,775, respectively. For the three and nine months ended September 30, 2018, rent expense was $768 and $2,314, respectively. Rent expense is recognized on a basis which approximates straight-line over the lease term and is recorded as a component of selling, general and administrative expense on the condensed consolidated statement of operations. As of September 30, 2019, the Company had a weighted-average remaining lease term of 5.2 years and a weighted-average discount rate used to calculate the lease liability of 4.42%.
9
Future maturities of lease liabilities as of September 30, 2019 were as follows:
Remaining 2019 $ 906   
2020 3,208   
2021 2,718   
2022 2,735   
2023 2,199   
Thereafter 3,136   
Total lease payments 14,902   
Less: imputed interest (1,638)  
Lease liabilities $ 13,264   
No other leases have been entered into under which the Company has significant rights and obligations as the lessee except those noted above.
Minimum rental payments for operating leases required under Topic 840 as of December 31, 2018, are as follows:
2019 $ 3,198   
2020 2,842   
2021 2,457   
2022 2,517   
2023 1,976   
Thereafter 2,098   
Total operating lease commitments $ 15,088   
Recent Accounting Pronouncements
In June 2016, the Financial Accounting Standards Board issued Accounting Standard Update No. 2016-13, “Measurement of Credit Losses on Financial Instruments” (“Topic 326”), which replaces the incurred loss impairment methodology under the current guidance with an expected loss methodology that requires consideration of forward-looking information to estimate credit losses, with reasonable and supportable documentation. Topic 326 is effective for annual and interim periods beginning after December 15, 2019. The Company plans to adopt the guidance prospectively with recording a cumulative effect adjustment in retained earnings beginning January 1, 2020. The Company notes that Topic 326 will impact its short-term credit receivables, and is currently evaluating new credit loss models and its processes and controls in preparation for the adoption of Topic 326. The Company does not expect the adoption to have a material impact on the consolidated statement of operations or the beginning balance of retained earnings.
10
(2) REVENUE
Disaggregation of revenue from contracts with customers
In the following tables, revenue from contracts with customers are disaggregated by key product lines, key distribution channels, and key geographic regions.
The percentage of net sales related to the Company’s key product lines for the three and nine months ended September 30, 2019, and 2018, was approximately as follows:
For the Three Months Ended For the Nine Months Ended
September 30, 2019 September 30, 2018 September 30, 2019 September 30, 2018
Protection (screen protection and cases) 59%    64%    57%    57%   
Power (power management and power cases) 31%    27%    31%    33%   
Audio 3%    3%    4%    4%   
Productivity (keyboards and other) 7%    6%    8%    6%   
The percentage of net sales related to the Company’s key distribution channels for the three and nine months ended September 30, 2019, and 2018, was approximately as follows:
For the Three Months Ended For the Nine Months Ended
September 30, 2019 September 30, 2018 September 30, 2019 September 30, 2018
Indirect channel 88%    88%    85%    88%   
Website 7%    7%    10%    8%   
Franchisees 5%    5%    5%    4%   
The percentage of net sales related to the Company’s key geographic regions for the three and nine months ended September 30, 2019, and 2018, was approximately as follows:
For the Three Months Ended For the Nine Months Ended
September 30, 2019 September 30, 2018 September 30, 2019 September 30, 2018
United States 79%    85%    75%    84%   
Europe 12%    8%    13%    9%   
Other 9%    7%    12%    7%   
Contract Balances
Timing of revenue recognition may differ from timing of invoicing to customers or timing of consideration received. The following table provides information about receivables, right of return assets, contract liabilities, refund liabilities, and warranty liabilities from the Company’s contracts with customers as of September 30, 2019, and December 31, 2018:
September 30, 2019 December 31, 2018
Receivables, which comprises the balance in accounts receivable, net of allowances $ 135,345    $ 156,667   
Right of return assets, which are included in prepaid expenses and other current assets 800    999   
Refund liabilities, which are included in sales return liability 37,321    49,786   
Warranty liabilities, which are included in sales return liability 3,923    4,646   
Contract liabilities, which are included in accrued liabilities 50    96   
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The current balance of the right of return assets is the estimated amount of inventory to be returned that is expected to be resold. The current balance of refund liabilities is the expected amount of estimated sales returns, discounts and other credits from sales that have occurred. The current balance of warranty liabilities is the expected amount of warranty claim returns from sales that have occurred. The current balance of contract liabilities primarily relates to the advance consideration received from customers for products for which transfer of control has not yet occurred and therefore, revenue is deferred and will be recognized when the transfer of control has been completed.
During the three and nine months ended September 30, 2019, revenue recognized that was included in the contract liability balance as of December 31, 2018, was $10 and $46, respectively.
The following summarizes the activities in the Company’s warranty liabilities for the nine months ended September 30, 2019:
Balance as of December 31, 2018 $ 4,646   
Additions 7,858   
Warranty claims charged (8,581)  
Balance as of September 30, 2019 $ 3,923   

(3) ACQUISITIONS
Acquisition of HALO
On January 3, 2019, (the “HALO 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 to expand its product and intellectual property portfolio, and to enter into new distribution channels.
The total purchase consideration for the HALO Acquisition was $23,649 in cash, 1,458 shares of the Company’s common stock valued at $12,968, and contingent consideration estimated at $1,544 (the “HALO Earnout Consideration”). The initial purchase price was subject to adjustment within 90 days of the HALO Acquisition Date based upon the final determination of HALO’s (i) working capital, (ii) indebtedness, and (iii) transaction expenses as set forth in the Purchase Agreement.
As noted in the Purchase Agreement, the Company retained $2,130 from the cash due to the sellers and will hold this amount for 18 months following the HALO Acquisition Date as security for HALO’s indemnification obligations. The $2,130 retained by the Company that is due HALO is recorded in accrued liabilities in the condensed consolidated balance sheets.
HALO is also entitled to the HALO Earnout Consideration from the Company if HALO achieves the target Adjusted EBITDA set forth in the Purchase Agreement for the year ending December 31, 2019. If, however, HALO’s actual Adjusted EBITDA is less than the target Adjusted EBITDA for the year ending December 31, 2019, the HALO Earnout Consideration will be reduced by the difference between the actual Adjusted EBITDA and the target Adjusted EBITDA.
The following summarizes the components of the purchase consideration for HALO:
Preliminary Allocation
January 3, 2019  		  Adjustments to Working Capital and Fair Value    Final Allocation January 3, 2019   
Cash consideration $ 23,943    $ (294)   $ 23,649   
Company common stock 12,968    —    12,968   
Contingent consideration 1,593    (49)   1,544   
Total purchase price $ 38,504    $ (343)   $ 38,161   
The total purchase price of $38,161 has been allocated to identifiable assets acquired and liabilities assumed based on their respective fair values. The excess of the purchase price over the fair value of the tangible and intangible assets acquired and liabilities assumed is recorded as goodwill.
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The following table summarizes the fair values of the identifiable assets acquired and liabilities assumed as of September 30, 2019:
Preliminary Allocation
January 3, 2019  		  Adjustments to Working Capital and Fair Value    Final Allocation January 3, 2019   
Cash $ 1,151    $ 4    $ 1,155   
Accounts receivable 2,436    (219)   2,217   
Inventory 2,889    —    2,889   
Inventory step up 494    —    494   
Prepaid expenses and other assets 1,310    17    1,327   
Property and equipment 627    —    627   
Amortizable identifiable intangible assets 27,554    507    28,061   
Goodwill 15,922    9    15,931   
Operating lease right of use assets —    649    649   
Other assets 546    (546)   —   
Accounts payable (2,867)   126    (2,741)  
Income tax payable (501)   119    (382)  
Accrued expenses (217)   36    (181)  
Notes payable —    (42)   (42)  
Accrued wages and wage related expenses (324)   55    (269)  
Sales return liability (2,728)   —    (2,728)  
Deferred tax liability, net (6,177)   (894)   (7,071)  
Lease liabilities —    (1,775)   (1,775)  
Other long-term liabilities (1,611)   1,611    —   
Total $ 38,504    $ (343)   $ 38,161   
Identifiable Intangible Assets
Classes of acquired intangible assets include technologies, trade names, and customer relationships. The fair value of the identifiable intangible assets was determined using the income valuation method. For assets valued under the income approach, the estimate of the present value of expected future cash flows for each identifiable asset was based on discount rates which incorporate a risk premium to take into account the risks inherent in those expected cash flows. The expected cash flows were estimated using available historical data adjusted based on the Company’s historical experience and the expectations of market participants.
The amounts assigned to each class of intangible asset and the related weighted average amortization periods are as follows:
Intangible Asset Class Weighted Average Amortization Period
Patents and technology $ 11,307    8.9 years
Trade names 4,408    10.0 years
Customer relationships 12,346    8.0 years
Total $ 28,061   
Goodwill
Goodwill represents the excess of the HALO purchase price over the fair value of the assets acquired and liabilities assumed. The Company believes that the primary factors supporting the amount of goodwill recognized are the significant growth opportunities and expected synergies of the combined entity.
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Acquisition Costs
As part of the HALO Acquisition, the Company incurred legal, accounting, and other due diligence fees that were expensed when incurred. Total fees incurred related to the HALO Acquisition for the three and nine months ended September 30, 2019 was $453 and $736, respectively, which were included as a component of operating expenses on the consolidated statements of operations.
Results of Operations
The results of operations of HALO were included in the Company’s results of operations beginning on January 4, 2019. For HALO’s results of operations from January 4, 2019 through September 30, 2019, HALO generated net sales of $15,126 and had a net loss before tax of $2,103.
Acquisition of Gear4
On November 30, 2018, Patriot Corporation Unlimited Company, an entity registered and incorporated in Ireland and a wholly-owned subsidiary of the Company, entered into a share purchase agreement with STRAX Holding GmbH, an entity registered and incorporated in Germany (“STRAX”), and Gear4 HK Limited, an entity registered and incorporated in Hong Kong and a wholly-owned subsidiary of STRAX (“Gear4”), to acquire from STRAX all of the issued and outstanding equity securities of Gear4 (the “Gear4 Acquisition”).
Pro Forma Results of Operations for HALO and Gear4
The following pro-forma results of operations for the three months ended September 30, 2018, and for the nine months ended September 30, 2019, and 2018, give pro forma effect as if the acquisitions of HALO and Gear4 and the related borrowings used to finance the acquisition had occurred on January 1, 2018, after giving effect to certain adjustments including the amortization of intangible assets, interest expense, tax adjustments, specific transaction related expenses incurred prior to the execution date, and assumes the purchase price was allocated to the assets purchased and liabilities assumed based on their fair market values at the date of purchase.
For the Three Months Ended For the Nine Months Ended
September 30, 2018 September 30, 2019 September 30, 2018
Net sales $ 159,060    $ 332,034    $ 398,433   
Net income (loss)   $ 15,626    $ (9,953)   $ 17,371   
Basic earnings (loss) per share $ 0.55    $ (0.34)   $ 0.61   
Diluted earnings (loss) per share $ 0.55    $ (0.34)   $ 0.61   
The pro forma information is presented for illustrative purposes only and is not necessarily indicative of the operating results that would have occurred had the transaction been consummated as of January 1, 2018. Furthermore, such pro forma information is not necessarily indicative of future operating results of the combined companies, due to changes in operating activities following the purchase, and should not be construed as representative of the operating results of the combined companies for any future dates or periods.
The nonrecurring pro forma adjustments attributable to the pro forma results of operations are as follows:
For the Three Months Ended For the Nine Months Ended
September 30, 2018 September 30, 2019 September 30, 2018
Amortization expense $ 1,666    $ 89    $ 4,999   
Transaction costs $ 422    $ (736)   $ 1,028   
Amortization of fair value adjustment to inventory $ —    $ (494)   $ 589   
Interest from the amended credit facility and amortization of debt issuance costs $ 433    $ —    $ 1,299   
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The pro forma results do not reflect events that either have occurred or may occur after the HALO Acquisition and Gear4 Acquisition, including, but not limited to, the anticipated realization of ongoing savings from operating synergies in subsequent periods.
(4) INVENTORIES
Inventories consisted of the following as of September 30, 2019, and December 31, 2018:
September 30, 2019 December 31, 2018
Finished goods $ 133,406    $ 81,397   
Raw materials 5,046    1,522   
Total inventories $ 138,452    $ 82,919   
Included in prepaid expenses and other current assets were inventory deposits with third-party manufacturers of $345 and $382 as of September 30, 2019, and December 31, 2018, respectively.
(5) GOODWILL AND INTANGIBLE ASSETS
There was no additions to goodwill during the three months ended September 30, 2019. During the nine months ended September 30, 2019, goodwill increased in connection with the HALO Acquisition. The following table summarizes the changes in goodwill during the nine months ended September 30, 2019:
Goodwill balance as of December 31, 2018 $ 27,638   
Addition in connection with HALO Acquisition 15,931   
Goodwill balance as of September 30, 2019 $ 43,569   
There was no change in goodwill during the three months ended September 30, 2018, and there was $298 change in goodwill during the nine months ended September 30, 2018.
There were no additions to intangible assets for the three months ended September 30, 2019. During the nine months ended September 30, 2019, intangible assets increased in connection with the HALO Acquisition. The following table summarizes the changes in intangible assets during the nine months ended September 30, 2019:
Intangible assets balance as of December 31, 2018 $ 130,681   
Addition in connection with HALO Acquisition 28,061   
Intangible assets balance as of September 30, 2019 $ 158,742   
There were $1,774 additions to intangible assets for the three and nine months ended September 30, 2018. Additionally, there were no impairments of intangible assets for the three and nine months ended September 30, 2019, and 2018.
Intangible assets, net of accumulated amortization as of September 30, 2019, and December 31, 2018, were as follows:
September 30, 2019 Weighted Average Amortization Period December 31, 2018 Weighted Average Amortization Period
Trade names $ 27,253    9.7 years $ 26,988    9.9 years
Patents and technology 16,486    8.3 years 8,723    8.0 years
Customer relationships 22,854    7.7 years 15,560    7.6 years
Non-compete agreements 509    4.9 years 778    4.9 years
Other —    1.8 years 5    1.8 years
Total intangible assets, net of accumulated amortization $ 67,102    8.3 years $ 52,054    8.3 years

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(6) INCOME TAXES
For interim periods, the tax provision is determined utilizing an estimate of the Company’s annual effective tax rate adjusted for discrete items, if any. The Company's effective tax rate for the three and nine months ended September 30, 2019, was 13% and 25%, respectively. The Company’s effective tax rate for the three and nine months ended September 30, 2018, was 18% and 17%, respectively. The change in the effective tax rate for the three months ended September 30, 2019, compared to the three months ended September 30, 2018, was primarily due to the mix of projected income by jurisdiction, as well as the impact of discrete return-to-provision items relative to book income for the quarter. The increase in the effective tax rate for the nine months ended September 30, 2019, compared to the nine months ended September 30, 2018, was due to several factors including but not limited to the effect of favorable discrete items that increase the effective rate in the current year versus an opposite effect in the prior year given the Company’s financial position. The Company is currently in a book loss position for the nine months ended September 30, 2019 versus a book income position during the same period in the prior 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 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.
(7) LINE OF CREDIT
Long-term debt, net as of September 30, 2019 and December 31, 2018, was as follows:
September 30, 2019 December 31, 2018
Line of credit $ 111,363    $ 58,363   
Total long-term debt outstanding $ 111,363    $ 58,363   
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, as administrative agent, Swing Line Lender and Issuing Lender, KeyBanc Capital Markets Inc., as sole lead arranger and sole book runner, and other members of the lender group, which was subsequently amended by a first amendment agreement dated as of November 28, 2018 (as amended, the “2018 Credit and Security Agreement”). On August 30, 2019 (“Amendment Date”), the Company entered into a second amendment agreement to amend the 2018 Credit Agreement and the first amendment agreement by temporarily increasing the revolving credit amount from $125,000 to $136,800 from the Amendment Date through December 31, 2019.
In connection with the second amendment of the 2018 Credit and Security Agreement, the Company capitalized approximately $40 in debt issuance costs to be amortized through December 31, 2019, which was included in other assets in the condensed consolidated balance sheets.
(8) STOCK-BASED COMPENSATION
The grant of restricted stock units with respective weighted-average fair value per share for the three and nine months ended September 30, 2019, and 2018, is summarized as follows:
For the Three Months Ended For the Nine Months Ended
September 30, 2019 September 30, 2018 September 30, 2019 September 30, 2018
Granted 75    14    718    293   
Weighted average fair value per share $ 6.59    $ 15.80    $ 9.48    $ 12.64   
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 of the 718 and 293 restricted stock units granted during the nine months ended September 30, 2019, and 2018, the Company granted 287 and 182 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/or specific goals for the individual executive over a given fiscal year, and (2) continued employment through the applicable vesting date. As of September 30, 2019, the Company's management does not expect that it will meet the performance criterion for this fiscal year. As such, no amounts have been recorded in stock-based compensation expense for performance-based restricted stock for the nine months ended September 30, 2019.
The estimated fair value of the restricted stock units is recognized on a straight-line basis over the requisite service period of the award, which is generally the vesting term of the award. The following are stock-based compensation expenses related to restricted stock units recorded for the three and nine months ended September 30, 2019, and 2018, 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 Nine Months Ended
September 30, 2019 September 30, 2018 September 30, 2019 September 30, 2018
Stock-based compensation expense related to restricted stock units $ 631    $ 757    $ 3,291    $ 2,165   
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 $887 and $2,723 reflected as a reduction of additional paid-in capital during the nine months ended September 30, 2019, and 2018, respectively. Of the $887 recorded as a reduction of additional paid-in capital, $39 was included in accrued wages and wage related expenses as of September 30, 2019.
(9) EARNINGS (LOSS) PER SHARE:
Basic earnings (loss) per common share excludes dilution and is computed by dividing net earnings (loss) by the weighted average number of shares of common stock outstanding during the period. Diluted earnings (loss) per common share reflects the potential dilution that could occur if stock options and restricted stock, or other common stock equivalents were exercised or converted into common stock. The dilutive effect of stock options or other common stock equivalents is calculated using the treasury stock method.
The following is a reconciliation of the numerator and denominator used to calculate basic earnings (loss) per common share and diluted earnings (loss) per common share for the three and nine months ended September 30, 2019, and 2018:

For the Three Months Ended For the Nine Months Ended
September 30, 2019 September 30, 2018 September 30, 2019 September 30, 2018
Net income (loss) $ 8,682    $ 14,626    $ (11,078)   $ 24,871   
Weighted average shares outstanding:
  Basic 29,077    28,241    29,009    28,250   
  Dilutive effect of restricted stock units 50    322    —    390   
  Diluted 29,127    28,563    29,009    28,640   
Earnings (loss) per share:
  Basic $ 0.30    $ 0.52    $ (0.38)   $ 0.88   
  Diluted $ 0.30    $ 0.51    $ (0.38)   $ 0.87   
For the three months ended September 30, 2019, 562 restricted stock units used to purchase shares of common stock were not considered in calculating diluted earnings per share as their effect would have been anti-dilutive. For the nine months ended September 30, 2019, 776 restricted stock units were not considered in calculating diluted loss per share because the Company was in a loss position and, therefore, the effect would have been anti-dilutive.
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For the three and nine months ended September 30, 2018, 65 and 98 restricted stock units used to purchase shares of common stock were not considered in calculating diluted earnings per share as their effect would have been anti-dilutive.
(10) 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. 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.
As of September 30, 2019, and December 31, 2018, a total of $20,000 and $5,462 remained authorized under the respective stock repurchase programs.
The Company repurchased shares for the three and nine months ended September 30, 2019, and 2018, as follows:
For the Three Months Ended For the Nine Months Ended
September 30, 2019 September 30, 2018 September 30, 2019 September 30, 2018
Shares repurchased —    201    72    383   
Cash consideration paid $ —    $ 3,091    $ 722    $ 6,097   
Commissions to brokers included in cash consideration paid $ —    $ 8    $ 2    $ 15   
Weighted average price per share repurchased $ —    $ 15.36    $ 10.00    $ 15.90   
The consideration paid has been recorded within stockholders’ equity in the condensed consolidated balance sheet.
(11) CONTINGENCIES
Commercial Litigation
ZAGG Inc and mophie, Inc. v. Anker Technology Co. Ltd. and Fantasia Trading LLC, United States District Court for the Central District of California, Case No. 8:17-CV-2193-DOC-DFM (the “Anker Lawsuit”). On December 15, 2017, ZAGG and mophie filed the Anker Lawsuit alleging that Anker Technology Co. Ltd. (“Anker”) and Fantasia Trading LLC (“Fantasia”) infringe U.S. Patent Nos. 8,971,039, 9,077,013, 9,088,028, 9,088,029, 9,172,070, and 9,406,913 in connection with protective battery cases for smartphones. The Anker products accused of infringement include Anker’s Ultra Slim Extended Battery Case for iPhone® 6 / 6s (4.7 inch) with 2850mAh capacity; Premium Extended Battery Case for iPhone 6 / 6s (4.7 inch) with 3100mAh Capacity; PowerCore Case for iPhone 7 (4.7 inch), 80% Extra Battery; PowerCore Case for iPhone 7 (4.7 inch), 95% Extra Battery; and 2400mAh MFI Certified Rubber-Feel Premium Rechargeable Extended Battery Case for iPhone 5s, 5. The complaint filed by ZAGG and mophie seeks monetary damages and an injunction against Anker. On March 12, 2018, Anker and Fantasia filed answers and counterclaims in the lawsuit. In their answers, Anker and Fantasia denied infringement of any valid claim and asserted counterclaims for non-infringement and invalidity of the patents at issue. The parties have reached a confidential settlement, and Anker and Fantasia have ceased sales of the battery cases accused of infringement. The Anker Lawsuit was dismissed in June 2019.
Best Case and Accessories, Inc. v. Zagg, Inc. United States District Court for the Eastern District of New York, Case No. 1:18-CV-04048-LDH-RML (the “New York Best Case Lawsuit”). On July 13, 2018, Best Case and Accessories, Inc. (“Best Case”) filed a complaint against the Company. The Company had previously sent a letter to Best Case alleging that it was using product packaging and display trade dress that is confusingly similar to the Company's trade dress. In the complaint, Best Case alleged that it does not infringe the Company's trade dress and that the Company interfered with Best Case's business relationships, which the Company disputes. To respond to these allegations and defend against the claims of the New York Best Case Lawsuit, the Company filed a complaint for trade dress infringement against Best Case on February 8, 2019 in the United States District Court for the District of Utah, Case No. 2:19-CV-00090-PMW (the “Utah Best Case Lawsuit”). In October 2019, the parties reached a settlement in which Best Case agreed to make changes to its packaging and display trade dress, as well as dismiss with prejudice the tortious interference claim. Both the New York Best Case Lawsuit and the Utah Best Case Lawsuit were dismissed in October 2019.

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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 United States District Court in the case of Young v. Mophie Inc., Case No. 8:19-cv-00827-JVS-DFM, discussed below.
Michael Young and Dan Dolar, individually and on behalf of other similarly situated individuals, Plaintiff, v. Mophie Inc., Defendant, United States District Court, Central District of California, Case No. 8:19-cv-00827-JVS-DFM. This action started with a complaint filed by Young against mophie on May 2, 2019. On June 13, 2019, Young and Dolar joined together as plaintiffs and filed a first amended complaint (the “FAC”). In the FAC, Young and Dolar allege, among other things, that mophie has engaged in unfair and deceptive acts and practices in violation of the California Consumer Legal Remedies Act, violation of California’s False Advertising Law, violation of California’s Unfair Competition Law, violation of the Florida Deceptive and Unfair Trade Practices Act, 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 consumer nationwide and in various states who purchased mophie battery-enabled products. The FAC does not specify an amount of damages claimed, but alleges that damages will be in excess of $5,000. On July 11, 2019, mophie filed a motion to dismiss all of the claims asserted in the action. On October 9, 2019, the court entered an order granting in part and denying in part mophie's motion to dismiss. In its order, the court dismissed Young’s and Dolar’s Multi-State class of claims brought under the laws of states other than California and Florida, and the court denied the other relief requested in mophie’s motion to dismiss. mophie denies that it has engaged in the alleged practices, and intends to vigorously defend the lawsuit.
Enchanted IP v. mophie, Inc., United States District Court, Central District of California, Case No. 8:19-cv-1648. On August 27, 2019, Enchanted IP LLC filed an action for patent infringement against mophie in the Central District of California, asserting U.S. Patent No. 6,194,871. This patent generally relates to a charge and discharge control circuit for an external secondary battery. The complaint identifies mophie’s juice pack reserve micro product as an accused product and seeks damages and injunctive relief. Enchanted IP does not appear to make or sell any products, and the asserted ‘871 patent expires in April 2020. On October 21, 2019, ZAGG responded to the Complaint, formally asserting its defenses and counterclaims. No schedule for the case has been set.
Shenzhen CN-iMX Technology Co., Ltd. v. Apple Electronic Products Trading (Beijing) Co., Ltd. and ZAGG (Shenzhen) Technology Development Co., Ltd. (2019) Yue 03 Pre-docketing Mediation No. 3234. On or about August 29, 2019, Shenzhen CN-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 identifies mophie’s powerStation wireless XL charger as an accused product and seeks damages and injunctive relief. Because the infringement action has not yet been formally docketed, the Company has not yet filed a substantive response. On or about September 16, 2019, the Company filed a separate invalidation request (Case No. 4W9507) to challenge the validity of the patent, and that action is currently pending.
SEC Investigation
The Company previously disclosed an investigation by the SEC related to facts and circumstances surrounding former Chief Executive Officer Robert Pedersen’s pledge and subsequent sale of Company shares and the fact that such pledges and sales were not disclosed in the Company’s 2011 10-K filed on March 15, 2012, or 2012 Proxy filed on April 27, 2012. On March 7, 2019, the Staff of the SEC informed the Company that, after additional consideration and analysis, it decided to terminate the investigation and dismiss the matter.
Other Litigation
The Company is not a party to any other material litigation or claims at this time. While the Company currently believes that the amount of any ultimate probable loss for known matters would not be material to the Company’s financial condition, the outcome of these actions is inherently difficult to predict. In the event of an adverse outcome, the ultimate potential loss could have a material adverse effect on the Company’s financial condition or results of operations in a particular period.
The Company records a liability when a particular contingency is probable and estimable. The Company has not accrued for any losses in the condensed consolidated financial statements as of September 30, 2019, due to the fact that either the losses are immaterial or the losses are not considered probable or estimable. The Company faces contingencies that are reasonably possible to occur; however, the reasonably possible exposure to losses cannot currently be estimated.
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(12) CONCENTRATIONS
Concentration of credit risk
Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash and accounts receivable. The Company places its cash with high credit quality financial institutions. The Company maintains its cash in bank deposit accounts, which customarily exceed federally insured limits. The Company has not experienced any losses in cash accounts for the nine months ended September 30, 2019, and 2018.
As of September 30, 2019, and December 31, 2018, two separate customers were equal to or exceeded 10% of the balance of accounts receivable, respectively, as follows:
September 30, 2019 December 31, 2018
Verizon Wireless (“Verizon”) 30%    1%   
Best Buy Co., Inc. (“Best Buy”) 11%    15%   
Superior Communications, Inc. (“Superior”) 8%    50%   
The Company began transitioning to a direct sales relationship with Verizon during the second half of 2018, which has continued to progress throughout 2019. Previous to the Company's direct sales relationship with Verizon, Verizon purchased the Company's products through Superior.
Other than the customers noted in the table above, no other customer account balances were more than 10% of accounts receivable as of September 30, 2019, and December 31, 2018. 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 would have a material adverse effect on the Company’s financial condition and results of operations.
Concentration of net sales
For the three and nine months ended September 30, 2019, Verizon accounted for over 10% of net sales, and for the three and nine months ended September 30, 2018, Superior and Best Buy accounted for over 10% of net sales, as follows:
For the Three Months Ended For the Nine Months Ended
September 30, 2019 September 30, 2018 September 30, 2019 September 30, 2018
Verizon 23%    1%    15%    1%   
Best Buy 9%    12%    9%    11%   
Superior 3%    36%    5%    33%   
For the three and nine months ended September 30, 2019, and 2018, no other customers accounted for greater than 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 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.
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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, and generally accepted accounting principles. These risks and uncertainties should also be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise. Further information concerning our business, including additional factors that could materially affect our financial results, is included herein and in our other filings with the SEC.
Our Business
ZAGG Inc and its subsidiaries (“we,” “us,” “our,” “ZAGG,” or the “Company”) are global innovation leaders in accessories and technologies that empower mobile lifestyles, with a commitment to enhance every aspect of performance, productivity, and durability in mobile devices with our creative product solutions. Our business was initially created from the concept of using a clear film originally designed to protect the blades of military helicopters in harsh desert conditions to protect consumers’ mobile devices. Since then, we have endeavored to continuously innovate and improve our products to meet changing customer needs, and now offer a wide array of innovative products in several product categories to protect, enhance, and create a better mobile device experience. Mobile devices are essential to modern living and our mission is to enable the optimal mobile lifestyle through the use of our products.
In addition to our home-grown brands, 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 empower a mobile lifestyle. We have an award-winning product portfolio that includes screen protection, power cases, power management, wireless charging, audio, mobile keyboards, protective cases, and other mobile accessories sold under the ZAGG®, InvisibleShield®, mophie®, IFROGZ®, BRAVEN®, Gear4®, and HALO® brands.
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 addresses are www.ZAGG.com and www.BestHALO.com (the URLs are included here as inactive textual references, and information contained on, or accessible through, our websites is not a part of, and is not incorporated by reference into, this report).
We have established four corporate objectives and seven core values to act as a foundation for our corporate culture and guide us daily:
ZAGG-20190930_G1.JPG
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Corporate Objectives
Core Values
Creative Product Solutions
Integrity
Targeted Global Distribution
Ownership
Operational Excellence
Care for People
The Preferred Brand
Passion
Continuous Improvement
Performance
Sense of Urgency
The corporate objectives are intended to align our functional teams’ goals and execution. Every one of our employees is trained to understand his or her role in executing these objectives. Each core value 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, wireless chargers, and power cases)
•Audio (earbuds, headphones, and speakers)
•Productivity and Other (keyboards and other mobile accessory products)
These products are broken down by brand as follows:
InvisibleShield Products
InvisibleShield products, including InvisibleShield Film, InvisibleShield Glass, and the 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. Through constant innovation, we continue to formulate new film that is designed to offer the highest standards in self-healing scratch and impact protection. Additionally, we provide custom-fit screen protection for thousands of device types through our automated ISOD solution. With our ISOD solution, retailers can supply consumers with screen protection for nearly any device model, all without having to hold excess inventory.
InvisibleShield Glass is designed to provide premium screen protection and clarity, along with a superior feel and compatible touch sensitivity. In 2018 and 2019, we launched the following products to provide add-on features beside the basic protection functions from impacts and scratches:
•VisionGuard™ - InvisibleShield Glass + VisionGuard™ was launched for Apple® iPhone® smartphones, Apple iPad® tablets and Google® Pixel® smartphones, which features 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.
•Ultra Clear™ - InvisibleShield Ultra VisionGuard™ and Ultra Clear™ was introduced for select smartphone models that offer maximum clarity and shatter protection with an advanced glass-like surface that feels as smooth as the smartphone’s original screen.
•Anti-Microbial Technology - InvisibleShield Glass Elite VisionGuard™ + with anti-microbial technology was launched for the Apple iPhone XS, XS Max and XR to promote digital wellness by eliminating 99.99% of harmful bacteria on the device screen. As the anti-microbial properties are infused in the glass, they will not wear away over time.
•Glass Elite Family - InvisibleShield Glass + VisionGuard™ + with anti-microbial technology, Glass Elite Anti-Glare, Glass Elite Privacy and Glass Elite was unveiled for the Apple iPhone 11 series and Google Pixel 4 series. The Glass Elite family of products features our most advanced technologies to date and comprises of InvisibleShield's strongest screen protection ever.
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We have maintained the leading market share in screen protection in the United States (“U.S.”) and the United Kingdom (“U.K.”) by consistently delivering innovative InvisibleShield products to the market. We continue to innovate and expand our screen protection products to meet the evolution of new technology and consumer needs in the market.
Gear4 Products
Gear4 is one of the top selling smartphone case brands in the U.K. Gear4 protective cases exclusively feature D3O® technology, which is designed to provide the thinnest and most advanced impact and shock absorption - the same material used in many professional sports, industrial, and military equipment applications. In their raw states, D3O materials can flow freely when manipulated slowly, but on shock lock together to absorb and disperse energy before instantly returning to their flexible state. In early 2019, we released the Chelsea product line which is a new-to-market concept that allows consumers to express their personal style by swapping the design of their case with ease. With this new Gear4 innovation, consumers can easily insert the design between a Gear4 clear case and the device for the perfect combination of style and impact protection.
With D3O technology and our expansive global distribution channels, we believe Gear4 cases will offer the best mobile device protection experience for our customers and provide us with meaningful growth opportunities in our protection product line.
mophie Products
mophie is a leading battery case, mobile power, and wireless charging brand with award-winning products designed to liberate mobile users from the power and charging limitations of mobile devices by providing more time to rock, talk, watch, game, surf, save, and send. Notably, the original juice pack® was designed to provide device-specific protection as well as additional battery power to many of the most popular mobile phones. mophie products are recognized for style and engineered for performance, providing a seamless integration of hardware, software, and design. The mophie ecosystem of mobile accessories provides both power and protection for virtually any mobile device. With groundbreaking battery cases, wireless charging, universal batteries, cables, adapters, and docks, mophie products represent innovation at the forefront of design and development.
mophie’s innovative universal wireless charging pads are designed to provide an optimized charging experience with the latest Qi wireless charging technology for universal compatibility. During 2018, new charge stream powerstation® products were launched to ensure consumers have access to easy, fast and convenient wireless charging anywhere and anytime for Apple, Samsung®, and other Qi-enabled mobile devices. In 2019, we launched the following products:
•the new juice pack access battery cases to provide advanced impact protection for Apple’s latest smartphones that feature extra battery life, wireless charging and full access to the iPhone Lightning® port;
•a new line of universal batteries with four capacities, featuring multiple charging ports including a shared USB-C input and output port, and the powerstation hub portable battery with convenient foldable AC power prongs that can be used as a wall outlet hub or as a portable battery;
•new charging accessories, including a new wireless charging pad, two car chargers and a variety of USB cables for Apple products; and
•two multi-device wireless charging pads and two car chargers designed to work with a variety of Apple products.
We continue to innovate and expand our power case and power management 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, with a long-standing reputation as one of the top selling electronics brands on QVC®, HALO is a global leader in the televised home shopping and e-commerce space.
We believe that products under the HALO brand will continue to lead in providing the most innovative mobile lifestyle solutions available on the market today and that these products will continue to be positioned to address the evolving needs of consumers around the world.
IFROGZ Products
IFROGZ products are strategically designed and positioned to bring personal audio to the value space by providing a product assortment that represents outstanding performance, active lifestyles, and dual-purpose designs that are on trend with consumers’ needs. IFROGZ refines today’s newest audio technology to deliver the features consumers want, while eliminating those that needlessly increase costs so that everyone can participate in our increasingly mobile world.
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IFROGZ EarPollution® product line of earbuds and headphones specifically target a younger demographic while still appealing to a wide spectrum of consumers. In the first half of 2019, we launched the AIRTIMETM Truly Wireless Earbuds, which include quick-charging and an auto-pair technology that connects both earbuds to any Bluetooth® device seamlessly. In the third quarter of 2019, we launched AIRTIMETM PRO Truly Wireless Earbuds with an add on feature of the latest audio technology, enabling consumers to enjoy audio streaming and hands-free calling free from wires.
We continue to innovate and expand our headphone and earbud product lines under the IFROGZ brand to include offerings for all ages under both the iFrogz and EarPollution product lines.
BRAVEN Products
BRAVEN products innovate the rugged Bluetooth audio category by combining unparalleled design with cutting-edge technology to produce premium Bluetooth audio solutions for the outdoor adventurer and modern audio enthusiast. BRAVEN’s intelligently designed products include robust craftsmanship and world-class engineering to create a thrilling audio experience. In 2019, we launched BRV® rugged speaker collection to feature its biggest and loudest Bluetooth speakers that are designed to be durable, shockproof and waterproof.
We anticipate that the combination of high audio quality, ease of use, and superior features will enable us to continue to expand the BRAVEN brand.
ZAGG Products
Products under the ZAGG brand are designed to empower people to live their lives unleashed. Mobility is changing how consumers do everything in their lives and we seek to drive the mobile lifestyle forward with products that are designed to allow consumers to be productive and connected at work, at play, and at rest. ZAGG products, which include keyboards and cases, are designed to free consumers from the confines of the traditional workplace. We believe “getting away” shouldn’t mean being disconnected. As such, our ZAGG products are designed to feature cutting-edge design and innovation to provide portability, style, and productivity that can keep up with even the most active mobile users. We support the communicators, commuters, creators, and closers who live a mobile lifestyle. With the right ZAGG mobile accessories, we believe no one ever needs to feel tethered or held back.
ZAGG keyboards are designed to offer consumers an enhanced and innovative productivity experience. Since entering this category, we have continually reinvented the ZAGG line of keyboards while also providing timely, curated solutions for new devices released by Apple, Microsoft®, and Samsung, as well as other leading mobile device providers. In addition to device-specific keyboards and folio keyboard cases, the ZAGG line of universal full-size Bluetooth keyboards are designed to be compatible with virtually any device and mobile operating system. In early 2019, we unveiled the Slim Book™ Go, Rugged Book™ Go, and Messenger Folio™ keyboards for iPad and iPad Pro models which feature a protective, yet lightweight design that boasts backlit, laptop-style keys for ultimate productivity in today’s on-the-go world.
We continue to innovate and expand our wireless keyboard product lines as end users’ requirements evolve in this rapidly changing market.
Critical Accounting Policies and Estimates
The preparation of our financial statements requires that we make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of these amounts in the notes to the financial statements. On an on-going basis, we evaluate our estimates based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Our critical accounting policies and estimates are discussed in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our 2018 Form 10-K. There have been no material changes to the critical accounting policies or estimates previously disclosed in that report.
Recent Accounting Pronouncements
Information regarding recent accounting pronouncements is contained in Note 1, “Nature of Operations and Basis of Presentation” of the Notes to Condensed Consolidated Financial Statements, which is incorporated herein by reference.
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Results of Operations (Amounts in thousands, except per share data)
Three months ended September 30, 2019, and 2018
For the Three Months Ended
September 30, 2019 September 30, 2018
Amount % of Net Sales Amount % of Net Sales
Net sales $ 146,488    100.0  % $ 141,087    100.0  %
Gross profit 54,345    37.1  % 52,171    37.0  %
Operating expenses 42,687    29.1  % 33,915    24.0  %
Other expense, net (1,683)   (1.1) % (462)   (0.3) %
Income tax provision (1,293)   (0.9) % (3,168)   (2.2) %
Net income 8,682    5.9  % 14,626    10.4  %
Net sales
Net sales for the three months ended September 30, 2019, were $146,488, compared to net sales of $141,087 for the three months ended September 30, 2018, an increase of $5,401 or 4%. The $5,401 increase in net sales was primarily attributable to (1) increased sales of protective cases under our Gear4 brand and (2) increased power management sales driven primarily by HALO product sales and new mophie product launches during the quarter. This was partially offset by lower sales of screen protection products.
Gross profit
Gross profit for the three months ended September 30, 2019, was $54,345 or approximately 37% of net sales, compared to $52,171 or approximately 37% of net sales for the three months ended September 30, 2018. Gross profit margin has not changed significantly due to decreases in our screen protection sales offset by an increase in sales of Gear4 brand cases, HALO branded power products, and InvisibleShield VisionGuard products.
Operating expenses
Total operating expenses for the three months ended September 30, 2019, were $42,687, compared to operating expenses of $33,915 for the three months ended September 30, 2018, an increase of $8,772 or 26%. The $8,772 increase in operating expenses was primarily attributable to (1) additional selling, general and administrative expense associated with the newly acquired BRAVEN, Gear4, and HALO brands, (2) severance charges of $1,818 associated with a corporate restructuring during the third quarter of 2019, (3) increased marketing investments to support our growing portfolio of brands and products, and (4) higher amortization of long-lived intangibles related to the BRAVEN, Gear4, and HALO acquisitions.
Other expense, net
For the three months ended September 30, 2019, total other expense, net was $1,683 compared to total other expense, net of $462 for the three months ended September 30, 2018. The increase in other expense is primarily attributable to an increase of interest expense due to higher amounts of debt and a loss on foreign exchange transactions.
Income tax provision
We recognized an income tax provision of $1,293 for the three months ended September 30, 2019, compared to an income tax provision of $3,168 for the three months ended September 30, 2018. Our effective tax rate was 13% and 18% for the three months ended September 30, 2019, and 2018, respectively. The change in the effective tax rate for the three months ended September 30, 2019, compared to the three months ended September 30, 2018, was due primarily to the mix of projected income by jurisdiction, as well as the impact of discrete return-to-provision items relative to book income for the quarter. Our effective tax rate will generally differ from the U.S. Federal statutory rate of 21%, due to state taxes, permanent items, our global tax strategy, and the inclusion of global intangible low taxed income and the corresponding foreign tax credit (“FTC”).
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Net income
We reported net income of $8,682 or $0.30 per share on a fully diluted basis for the three months ended September 30, 2019, compared to net income of $14,626 or $0.51 per share on a fully diluted basis for the three months ended September 30, 2018.
Nine months ended September 30, 2019, and 2018
For the Nine Months Ended
September 30, 2019 September 30, 2018
Amount % of Net Sales Amount % of Net Sales
Net sales $ 332,034    100.0  % $ 371,718    100.0  %
Gross profit 115,926    34.9  % 127,421    34.3  %
Operating expenses 127,547    38.4  % 96,053    25.8  %
Other expense, net (3,120)   (0.9) % (1,494)   (0.4) %
Income tax benefit (provision) 3,663    1.1  % (5,003)   (1.3) %
Net (loss) income (11,078)   (3.3) % 24,871    6.7  %
Net sales
Net sales for the nine months ended September 30, 2019, were $332,034, compared to net sales of $371,718 for the nine months ended September 30, 2018, a decrease of $39,684 or 11%. The $39,684 decrease in net sales was primarily attributable to (1) a decrease in sales of screen protection products due to a pull forward of shipments into the fourth quarter of 2018 ahead of a then-expected tariff increase and (2) decreased sales of mophie power management due to challenging sell-in comparisons during the first half of 2019. These decreases were partially offset by increased sales of Gear4 cases and HALO products.
Gross profit
Gross profit for the nine months ended September 30, 2019, was $115,926 or approximately 35% of net sales, compared to $127,421 or approximately 34% of net sales for the nine months ended September 30, 2018. Gross profit margin has not changed significantly due to decreases in our screen protection sales offset by an increase in sales of Gear4 brand cases, HALO branded power products, and InvisibleShield VisionGuard products.
Operating expenses
Total operating expenses for the nine months ended September 30, 2019, were $127,547, compared to operating expenses of $96,053 for the nine months ended September 30, 2018, an increase of $31,494 or 33%. The $31,494 increase in operating expenses was primarily attributable to (1) additional selling, general and administrative expense associated with the newly acquired BRAVEN, Gear4 and HALO brands, (2) severance charges of $2,225 associated with corporate restructurings during the second and third quarter of 2019, (3) increased marketing investments to support our growing portfolio of brands and products, and (4) higher amortization of long-lived intangibles related to the BRAVEN, Gear4 and HALO acquisitions.
Other expense, net
For the nine months ended September 30, 2019, total other expense, net was $3,120 compared to total other expense, net of $1,494 for the nine months ended September 30, 2018. The increase in other expense is primarily attributable to an increase of interest expense due to higher amounts of debt and partially offset by a gain recorded on settlement of liabilities.
Income tax benefit (provision)
We recognized an income tax benefit of $3,663 for the nine months ended September 30, 2019, compared to an income tax provision of $5,003 for the nine months ended September 30, 2018. Our effective tax rate was 25% and 17% for the nine months ended September 30, 2019, and 2018, respectively. The increase in the effective tax was due to several factors including but not limited to the effect of favorable discrete items that increase the effective rate in the current year versus an opposite effect in the prior year given our financial position. We are currently in a book loss position versus a book income position during the same period in the prior year. Our effective tax rate will generally differ from the U.S. Federal statutory rate of 21%, due to state taxes, permanent items, our global tax strategy, and the inclusion of global intangible low taxed income and the corresponding FTC.
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Net (loss) income
We reported net loss of $11,078 or $(0.38) per share on a fully diluted basis for the nine months ended September 30, 2019, compared to net income of $24,871 or $0.87 per share on a fully diluted basis for the nine months ended September 30, 2018.
Liquidity and Capital Resources (Amounts in thousands)
As of September 30, 2019, our principal sources of liquidity were cash on hand and net borrowings from revolving credit facilities. Our principal uses of cash for the nine months ended September 30, 2019, was for cash used in operations, a business acquisition, purchase of property and equipment, payments for the net share settlement of restricted stock, and purchase of treasury shares.
Cash and cash equivalents on-hand decreased to $14,669 on September 30, 2019, from $15,793 on December 31, 2018, a decrease of $1,124. The net decrease was primarily attributable to (1) $24,803 used in operating activities, (2) $20,364 net cash paid for the HALO Acquisition, (3) $7,002 paid for property and equipment purchases, (4) $848 of payments for the net share settlement of restricted stock, and (5) $722 of payments for treasury stock. These expenditures are partially offset by $53,000 net proceeds from revolving credit facilities.
Accounts receivable, net of allowances, decreased to $135,345 on September 30, 2019, from $156,667 on December 31, 2018, a decrease of $21,322. The net decrease was primarily attributable to lower sales for the third quarter of 2019 in comparison to the fourth quarter of 2018, as well as strong cash collections during the nine months ended September 30, 2019.
Inventories increased to $138,452 on September 30, 2019, from $82,919 on December 31, 2018, an increase of $55,533. The net increase was primarily attributable to lower sales in the first nine months of 2019, an increase in inventory levels needed to support new product launches, and an increase in inventory from the acquisition of HALO.
Accounts payable increased to $97,978 on September 30, 2019, from $80,908 on December 31, 2018, an increase of $17,070. The net increase was primarily attributable to increased operating expenses to support higher sales/ anticipated sales during the third and fourth quarters of 2019, partially driven by our newly acquired brands: Gear4, HALO, and BRAVEN.
As of September 30, 2019, we achieved working capital of $129,148 compared to $105,540 as of December 31, 2018, an increase of $23,608. The net increase in the working capital position was primarily attributable to the changes in inventories, a decrease in the sales return liability due to decreased sales during the nine months ended September 30, 2019, and accounts payable previously noted; partially offset by accounts receivable, net of allowances.
Based on the current level of operations, we believe that cash on hand and available borrowings under our current credit arrangement will be adequate to fund expected capital expenditures and working capital needs for the next 12 months.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to certain market risks in the ordinary course of our business. These risks result primarily from changes in foreign currency exchange rates, changes in interest rates, and changes in tariffs. In addition, our international operations are subject to risks related to differing economic conditions, changes in political climate, differing tax structures, and other regulations and restrictions.
To date we have not utilized derivative financial instruments or derivative commodity instruments.
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 officer, as appropriate to allow for timely decisions regarding required disclosures.
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At the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures in accordance with the Exchange Act requirements. Based upon that evaluation, our principal executive officer and principal financial officer concluded that as of the end of the period of this report, our disclosure controls and procedures were effective and were designed to provide reasonable assurance that information required to be included in the reports filed or submitted under the Exchange Act of 1934 is recorded, processed, summarized, and reported as specified in the SEC’s rules and forms.
Changes in Internal Control over Financial Reporting
The acquisition of HALO on January 3, 2019, represents a material change in internal control over financial reporting since management’s last assessment of our internal control over financial reporting which was completed as of December 31, 2018. The HALO business utilizes separate information and accounting systems and processes. We intend to exclude the operations of HALO from the scope of our Sarbanes-Oxley Section 404 report on internal controls over financial reporting for the year ended December 31, 2019. Furthermore, we intend to extend our Sarbanes-Oxley Section 404 compliance program to include the HALO business beginning in 2020.
We acquired Gear4 on November 30, 2018, and excluded Gear4 from our assessment of internal control over financial reporting as of December 31, 2018. We are in the process of integrating the Gear4 and HALO businesses into our information and accounting systems and processes, and expect that Gear4's integration will be completed before the end 2019 and HALO's integration will be completed in 2020.
There were no significant changes in the Company’s internal control over financial reporting during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. The process for evaluating controls and procedures is continuous and encompasses constant improvement of the design and effectiveness of established controls and procedures and the remediation of any deficiencies which may be identified during this process.
Inherent Limitations on the Effectiveness of Internal Controls
Internal control over financial reporting has inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting also can be circumvented by collusion or improper management override. Because of such limitations, there is a risk that material misstatements will not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Certain of the legal proceedings in which we are involved are discussed in Note 11, “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
In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the factors discussed in Part I, Item 1A. Risk Factors, in our 2018 Form 10-K, which could materially affect our business, financial condition, or future results. These risk factors should be read carefully in connection with evaluating our business and in connection with the forward-looking statements contained in this Quarterly Report on Form 10-Q. Any of the risks described in the 2018 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 2018 Form 10-K except as follows:
U.S. tariffs and international trade disputes could increase the cost of our products or make our products more expensive for customers.
On August 1, 2019, the U.S. Government announced a 10 percent tariff on an additional $300 billion worth of Chinese imports effective on September 1, 2019. Chinese Government retaliated with tariffs ranging from 5 percent to 10 percent on $75 billion worth of U.S. imports in two batches effective on September 1, 2019 and December 15, 2019. The U.S. Government immediately responded by increasing the tariff rate to 15 percent on the $300 billion worth of Chinese imports announced in August 2019 with a portion effective on September 1, 2019 and the rest on December 15, 2019. Additionally, the U.S. Government increased the existing tariffs on the $250 billion worth of Chinese products from 25 percent to 30 percent effective on October 15, 2019. Prior to October 15, 2019, the U.S. and China resumed trade discussions; after the meeting, the U.S. suspended the scheduled tariff increase on the $250 billion worth of Chinese products that were supposed to take effect on October 15, 2019. Both the U.S. and China plan to meet again and work together to reach a phased agreement on canceling the tariffs. However, there is no predictability of when these meetings will occur and if such meetings will be effective. With this noted uncertainty of these trade talks, these trade disputes will impact certain product lines that were previously not impacted by recent tariffs and our business could be adversely affected by increased costs in importing our products. These factors could make our products less competitive and reduce consumer demand. We are uncertain of the potential future magnitude that these and other potential trade disputes and policies that may occur, and these factors could materially adversely affect our business, financial condition, and operating results.
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
8-K 001-34528 10.1 9/5/2019
8-K 001-34528 10.2 09/05/2019
X
X
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

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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
ZAGG INC
(Registrant)
Dated: November 6, 2019 By: /s/ CHRIS M. AHERN
Chris M. Ahern
Chief Executive Officer & Director
(Principal executive officer)
Dated: November 6, 2019 By: /s/ TAYLOR D. SMITH
Taylor D. Smith
Chief Financial Officer
(Principal financial and accounting officer)

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