ITEM
1. FINANCIAL STATEMENTS
ZOOM TELEPHONICS, INC.
Condensed Consolidated Balance Sheets
|
ASSETS
|
September 30,
2017
(Unaudited)
|
|
|
Current assets
|
|
|
|
Cash
and cash equivalents
|
$
90,853
|
$
179,846
|
|
Accounts
receivable, net of allowances of $661,892 at September 30, 2017 and
$507,296 at December 31, 2016
|
2,104,555
|
2,498,259
|
|
Inventories,
net
|
5,306,662
|
4,926,612
|
|
Prepaid
expenses and other current assets
|
935,984
|
652,402
|
|
Total
current assets
|
8,438,054
|
8,257,119
|
|
|
|
|
|
Other
assets
|
398,824
|
588,907
|
|
Equipment,
net
|
187,374
|
175,743
|
|
Total
assets
|
$
9,024,252
|
$
9,021,769
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
Current liabilities
|
|
|
|
Bank
debt
|
$
594,778
|
$
1,306,620
|
|
Accounts
payable
|
3,761,662
|
2,502,323
|
|
Accrued
expenses
|
1,214,240
|
1,051,616
|
|
Total
liabilities
|
5,570,680
|
4,860,559
|
|
|
|
|
|
Commitments
and contingencies (Note 4)
|
|
|
|
|
|
|
|
Stockholders' equity
|
|
|
|
Common
stock: Authorized: 25,000,000 shares at $0.01 par
value
|
|
|
|
Issued
and outstanding: 15,037,790 shares at September 30, 2017 and
14,685,290 shares at December 31, 2016
|
150,378
|
146,853
|
|
Additional
paid-in capital
|
40,163,143
|
39,893,919
|
|
Accumulated
deficit
|
(36,859,949
)
|
(35,879,562
)
|
|
Total
stockholders' equity
|
3,453,572
|
4,161,210
|
|
Total
liabilities and stockholders' equity
|
$
9,024,252
|
$
9,021,769
|
See
accompanying notes to condensed consolidated financial
statements.
2
ZOOM TELEPHONICS, INC.
Condensed Consolidated Statements of Operations
(Unaudited)
|
|
Three Months Ended September 30,
|
Nine Months Ended September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
$
8,582,076
|
$
5,990,432
|
$
20,556,157
|
$
12,688,142
|
|
Cost
of goods sold
|
5,515,753
|
4,064,834
|
13,561,520
|
8,727,755
|
|
Gross
profit
|
3,066,323
|
1,925,598
|
6,994,637
|
3,960,387
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
Selling
|
1,812,921
|
1,473,787
|
5,341,239
|
3,520,030
|
|
General
and administrative
|
383,475
|
354,237
|
1,153,753
|
1,236,239
|
|
Research
and development
|
457,309
|
352,849
|
1,367,718
|
1,154,789
|
|
|
2,653,705
|
2,180,873
|
7,862,710
|
5,911,058
|
|
|
|
|
|
|
|
Operating
income (loss)
|
412,618
|
(255,275
)
|
(868,073
)
|
(1,950,671
)
|
|
|
|
|
|
|
|
Other
income (expense):
|
|
|
|
|
|
Interest
income
|
22
|
21
|
59
|
238
|
|
Interest
expense
|
(30,636
)
|
(27,778
)
|
(87,178
)
|
(32,115
)
|
|
Other,
net
|
65
|
41,482
|
(11,072
)
|
42,232
|
|
Total
other income (expense)
|
(30,549
)
|
13,725
|
(98,191
)
|
10,355
|
|
|
|
|
|
|
|
Income
(loss) before income taxes
|
382,069
|
(241,550
)
|
(966,264
)
|
(1,940,316
)
|
|
|
|
|
|
|
|
Income
taxes
|
4,984
|
2,034
|
14,123
|
3,312
|
|
|
|
|
|
|
|
Net
income (loss)
|
$
377,085
|
$
(243,584
)
|
$
(980,387
)
|
$
(1,943,628
)
|
|
|
|
|
|
|
|
Net
income (loss) per share:
|
|
|
|
|
|
Basic
|
$
0.03
|
$
(0.02
)
|
$
(0.07
)
|
$
(0.14
)
|
|
Diluted
|
$
0.02
|
$
(0.02
)
|
$
(0.07
)
|
$
(0.14
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
weighted average common and common equivalent shares
|
14,953,285
|
13,877,407
|
14,851,229
|
13,722,680
|
|
Diluted
weighted average common and common equivalent shares
|
16,419,374
|
13,877,407
|
14,851,229
|
13,722,680
|
See
accompanying notes to condensed consolidated financial
statements.
3
ZOOM TELEPHONICS, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
|
|
Nine Months Ended
September 30,
|
|
|
|
|
|
Cash flows from operating
activities
:
|
|
|
|
Net
income (loss)
|
$
(980,387
)
|
$
(1,943,628
)
|
|
|
|
|
|
Adjustments
to reconcile net income (loss) to net cash provided by (used in)
operating activities:
|
|
|
|
Depreciation
and amortization
|
391,181
|
389,487
|
|
Stock
based compensation
|
170,074
|
164,795
|
|
Provision
for accounts receivable allowances
|
540
|
8,988
|
|
Provision
for inventory reserves
|
186,440
|
10,450
|
|
Changes
in operating assets and liabilities:
|
|
|
|
Accounts
receivable
|
393,164
|
(1,801,446
)
|
|
Inventories
|
(566,490
)
|
(1,454,910
)
|
|
Prepaid
expenses and other assets
|
(327,462
)
|
(193,245
)
|
|
Accounts
payable and accrued expenses
|
1,421,963
|
1,084,228
|
|
Net
cash provided by (used in) operating activities
|
689,023
|
(3,735,281
)
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
Cost
of other assets
|
(75,000
)
|
(295,000
)
|
|
Additions
to plant and equipment
|
(93,849
)
|
(32,303
)
|
|
Net
cash provided by (used in) investing activities
|
(168,849
)
|
(327,303
)
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
Net
funds received from (to) bank credit lines
|
(711,842
)
|
2,141,799
|
|
Proceeds
from stock option exercises
|
102,675
|
249,389
|
|
Net
cash provided by (used in) financing activities
|
(609,167
)
|
2,391,188
|
|
|
|
|
|
Net
change in cash
|
(88,993
)
|
(1,671,396
)
|
|
|
|
|
|
Cash
and cash equivalents at beginning of period
|
179,846
|
1,846,704
|
|
|
|
|
|
Cash
and cash equivalents at end of period
|
$
90,853
|
$
175,308
|
|
|
|
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
|
Cash
paid during the period for:
|
|
|
|
Interest
|
$
87,178
|
$
32,115
|
|
Income
taxes
|
$
14,123
|
$
3,312
|
See
accompanying notes to condensed consolidated financial
statements.
4
ZOOM TELEPHONICS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(1)
Summary of Significant Accounting Policies
The
accompanying condensed consolidated financial statements
(“financial statements”) are unaudited. However, the
condensed consolidated balance sheet as of December 31, 2016
was derived from audited financial statements. In the opinion of
management, the accompanying financial statements include all
necessary adjustments to present fairly the condensed consolidated
financial position, results of operations and cash flows of Zoom
Telephonics, Inc. (the “Company” or
“Zoom”). The adjustments are of a normal, recurring
nature.
The
results of operations for the periods presented are not necessarily
indicative of the results to be expected for the entire year. The
Company has evaluated subsequent events from September 30, 2017
through the date of this filing and determined that there are no
such events requiring recognition or disclosure in the financial
statements.
The
financial statements of the Company presented herein have been
prepared pursuant to the rules of the Securities and Exchange
Commission for quarterly reports on Form 10-Q and do not
include all of the information and disclosures required by
accounting principles generally accepted in the United States of
America. These financial statements should be read in conjunction
with the audited financial statements and notes thereto for the
year ended December 31, 2016 included in the Company's 2016
Annual Report on Form 10-K for the year ended December 31,
2016.
Recently Adopted Accounting Standards
In
March 2016, the Financial Accounting Standards Board
(“FASB”) issued Accounting Standards Update
(“ASU”) 2016-09, Improvements to Employee Share-Based
Payment Accounting ("ASU 2016-09"). ASU 2016-09 simplifies several
aspects of the accounting for share-based payment transactions,
including the income tax consequences, classification of awards as
either equity or liabilities, and classification on the statement
of cash flows. The Company adopted ASU 2016-09 as of January 1,
2017 and elected an accounting policy to record forfeitures as they
occur. The impact of this change in accounting policy had an
insignificant effect on accumulated deficit as of January 1, 2017.
ASU 2016-09 also provides that companies no longer record excess
tax benefits or certain tax deficiencies in additional paid-in
capital. Instead, all excess tax benefits and tax deficiencies are
recorded as income tax expense or benefit in the statement of
operations. There was no financial statement impact of adopting
this provision of ASU 2016-09 as the Company is currently in a net
operating loss position and the excess tax benefits that existed
from options previously exercised had a full valuation allowance.
The effects of adopting the remaining provisions in ASU 2016-09
affecting the classification of awards as either equity or
liabilities when an entity partially settles the award in cash in
excess of the employer’s minimum statutory withholding
requirements and classification in the statement of cash flows did
not have a significant impact on the Company’s financial
position, results of operations or cash flows.
Recently Issued Accounting Standards
In
May 2014, the FASB issued ASU 2014-09, “Revenue from
Contracts with Customers (Topic 606)” (“ASU
2014-09”). ASU 2014-09 supersedes the revenue recognition
requirements in ASC Topic 605, “Revenue Recognition”
and some cost guidance included in ASC Subtopic 605-35,
“Revenue Recognition - Construction-Type and Production-Type
Contracts.” The core principle of ASU 2014-09 is that revenue
is recognized when the transfer of goods or services to customers
occurs in an amount that reflects the consideration to which the
Company expects to be entitled in exchange for those goods or
services. ASU 2014-09 requires the disclosure of sufficient
information to enable readers of the Company’s financial
statements to understand the nature, amount, timing and uncertainty
of revenue and cash flows arising from customer contracts. ASU
2014-09 also requires disclosure of information regarding
significant judgments and changes in judgments, and assets
recognized from costs incurred to obtain or fulfill a contract. ASU
2014-09 provides two methods of retrospective application. The
first method would require the Company to apply ASU 2014-09 to each
prior reporting period presented. The second method would require
the Company to retrospectively apply ASU 2014-09 with the
cumulative effect recognized at the date of initial
application.
There
have been four new ASUs issued amending certain aspects of ASU
2014-09, ASU 2016-08, "Principal versus Agent Considerations
(Reporting Revenue Gross Versus Net)," was issued in March 2016 to
clarify certain aspects of the principal versus agent guidance in
ASU 2014-09. In addition, ASU 2016-10, "Identifying Performance
Obligations and Licensing," issued in April 2016, amends other
sections of ASU 2014-09 including clarifying guidance related to
identifying performance obligations and licensing implementation.
ASU 2016-12, "Revenue from Contracts with Customers - Narrow Scope
Improvements and Practical Expedients" provides amendments and
practical expedients to the guidance in ASU 2014-09 in the areas of
assessing collectability, presentation of sales taxes received from
customers, noncash consideration, contract modification and
clarification of using the full retrospective approach to adopt ASU
2014-09. Finally, ASU 2016-20, "Technical Corrections and
Improvements to Topic 606, Revenue from Contracts with Customers,"
was issued in December 2016, and provides elections regarding the
disclosures required for remaining performance obligations in
certain cases and also makes other technical corrections and
improvements to the standard. With its evaluation of the impact of
ASU 2014-09, the Companu will also consider the impact on its
financial statements related to the updated guidance provided by
these four new ASUs. The Company will adopt the new guidance in
fiscal 2018, and anticipates using the modified retrospective
method. The Company is in the final process of evaluating the new
standard against its existing accounting policies, including the
timing of revenue recognition and its contracts with customers to
determine the effect the guidance will have on its financial
statements and what changes to systems and controls may be
warranted.
In March 2016, the FASB issued ASU 2016-02,
“Leases (Topic 842).” ASU 2016-02 requires that a
lessee recognize the assets and liabilities that arise from
operating leases. A lessee should recognize in the balance sheets,
a liability to make lease payments (the lease liability) and a
right-of-use asset representing its right to use the underlying
asset for the lease term (the lease asset). For leases with a term
of 12 months or less, a lessee is permitted to make an accounting
policy election by class of underlying asset not to recognize lease
assets and lease liabilities. In transition, lessees and lessors
are required to recognize and measure leases at the beginning of
the earliest period presented using a modified retrospective
approach. Public business entities should apply the amendments in
ASU 2016-02 for fiscal years beginning after December 15, 2018,
including interim periods within those fiscal years. Early
application is permitted.
The
Company is currently evaluating the potential impact that the
adoption of ASU 2016-02 may have on its consolidated financial
statements.
In
June 2016, the FASB issued ASU No. 2016-13, "Financial Instruments
Credit Losses —Measurement of Credit Losses on Financial
Instruments." ASU 2016-13 requires a financial asset (or group of
financial assets) measured at amortized cost basis to be presented
at the net amount expected to be collected. ASU 2016-13 is
effective for public business entities that are SEC filers for
fiscal years beginning after December 15, 2019, including interim
periods within those fiscal years. Early adoption is permitted in
any interim or annual period for fiscal years beginning after
December 15, 2018. An entity should apply the amendments in ASU
2016-13 through a cumulative-effect adjustment to retained earnings
as of the beginning of the first reporting period in which the
guidance is effective (modified-retrospective approach). The
Company is currently evaluating the potential impact that the
adoption of ASU 2016-13 may have on its consolidated financial
statements.
In
May 2017, the FASB issued ASU No. 2017-09,
“Compensation-Stock Compensation (Topic 718), Scope of
Modification Accounting.” ASU 2017-09 provides guidance about
which changes to the terms or conditions of a share-based payment
award require an entity to apply modification accounting. An entity
should account for the effects of a modification unless all of the
following criteria are met: (1) The fair value of the modified
award is the same as the fair value of the original award
immediately before the original award is modified. If the
modification does not affect any of the inputs to the valuation
technique that the entity uses to value the award, the entity is
not required to estimate the value immediately before and after the
modification. (2) The vesting conditions of the modified award are
the same as the vesting conditions of the original award
immediately before the original award is modified. (3) The
classification of the modified award as an equity instrument or a
liability instrument is the same as the classification of the
original award immediately before the original award is modified.
Disclosure requirements remain unchanged. ASU 2017-09 is effective
for all entities for annual periods, and interim periods within
those annual periods, beginning after December 15, 2017. Early
adoption is permitted as described in ASU 2017-09. The Company is
currently evaluating the potential impact that the adoption of ASU
2017-09 will have on its consolidated financial
statements.
(2) Liquidity
The
Company’s cash and cash equivalents balance on September 30,
2017 was approximately $91 thousand, down from $180 thousand on
December 31, 2016. Major uses of cash were a $980 thousand loss for
the nine months ended September 30, 2017, a decrease of
approximately $712 thousand in bank debt, an increase of
approximately $380 thousand in inventory, and an increase of
approximately $284 thousand in prepaid expenses. These were offset
by an increase of approximately $1.4 million in accounts payable
and accrued expenses, a decrease of approximately $394 thousand in
accounts receivable, and a decrease of approximately $190 thousand
in other assets.
On
September 30, 2017 the Company had approximately $595 thousand in
bank debt for a $3.0 million asset-based credit line and had
working capital of approximately $2.9 million, including
approximately $91 thousand in cash and cash equivalents. On
December 31, 2016 the Company had working capital of approximately
$3.4 million including approximately $180 thousand in cash and cash
equivalents. The Company’s current ratio at September 30,
2017 was 1.5 compared to 1.7 at December 31, 2016.
Although the Company
has experienced losses in the past, the Company has experienced
dramatic growth over the last year and one-half. Sales in 2016 were
up 65% over sales in 2015 and sales in the first nine months of
2017 were up 62% over sales in the first nine months of 2016. The
Company believes that year-over-year growth is likely to continue
for the foreseeable future due to a number of factors including the
strength of the Motorola brand, new product introductions,
increased shelf space, growing online retailer sales, and
international expansion. Because of projected sales increases, the
associated improved net income, and its Financing Agreement (as
defined below) with
Rosenthal
& Rosenthal, Inc.
, the Company expects
to maintain acceptable levels of liquidity to meet its obligations
as they become due for at least twelve months from the date of our
quarterly filing of this Form 10-Q with the Securities Exchange
Commission.
(3) Inventories
|
Inventories
consist of :
|
|
|
|
Materials
|
$
1,287,621
|
$
888,830
|
|
Work
in process
|
209,694
|
27,708
|
|
Finished
goods
|
3,809,347
|
4,010,074
|
|
Total
|
$
5,306,662
|
$
4,926,612
|
Finished
goods includes consigned inventory held by our customers of
$835,800 at September 30, 2017 and $442,300 at December 31, 2016.
The Company reviews inventory for obsolete and slow moving products
each quarter and makes provisions based on its estimate of the
probability that the material will not be consumed or that it will
be sold below cost. The provision for inventory reserves was
$60,096 for the three months ended September 30, 2017 and $7,838
for the three months ended September 30, 2016. The provision for
inventory reserves was $186,440 for the nine months ended September
30, 2017 and $10,450 for the nine months ended September 30,
2016.
(4)
Commitments and Contingencies
(a) Contingencies
From
time to time the Company is party to various lawsuits and
administrative proceedings arising in the ordinary course of
business. The Company evaluates such lawsuits and proceedings on a
case-by-case basis, and its policy is to vigorously contest any
such claims that it believes are without merit. The Company's
management believes that the ultimate resolution of such matters
will not materially and adversely affect the Company's business,
financial position, or results of operations.
On
May 17, 2016, Magnacross LLC ("Magnacross") filed a complaint in
the U.S. District Court for the Eastern District of Texas
(U.S.D.C., E.D.Tex.) against the Company alleging infringement of
U.S. Patent No. 6,917,304 (“the ’304 patent”)
entitled “Wireless Multiplex Data Transmission System.”
Magnacross alleged that the Company’s wireless routers,
including its Model 5363, 5360, and 5354 (N300, N600, and AC1900)
Routers, infringe the '304 patent. In its complaint, Magnacross
sought injunctive relief and unspecified compensatory damages. The
case was resolved on February 2, 2017 with the entry by the judge
of an Order of Dismissal with Prejudice.
(b) Commitments
In
May 2015 Zoom entered into a License Agreement with Motorola
Mobility LLC (the “License Agreement”). The
License Agreement provides Zoom with an exclusive license to use
certain trademarks owned by Motorola Trademark Holdings, LLC. for
the manufacture, sale and marketing of consumer cable modem
products in the United States and Canada through certain authorized
sales channels.
In
August 2016 Zoom entered into an amendment to the License Agreement
with Motorola Mobility LLC (the “2016
Amendment”). The 2016 Amendment expands
Zoom’s exclusive license to use the Motorola trademark to a
wide range of authorized channels worldwide, and expands the
license from cable modems and gateways to also include consumer
routers, WiFi range extenders, home powerline network adapters, and
access points.
In
August 2017 Zoom entered into an amendment to the License Agreement
with Motorola Mobility LLC (the “2017
Amendment”). The 2017 Amendment expands
Zoom’s exclusive license to use the Motorola trademark to a
wide range of authorized channels worldwide, and expands the
license from cable modems, gateways, consumer routers, WiFi range
extenders, home powerline network adapters, and access points to
also include MoCa adapters, and cellular sensors. The License
Agreement, as amended, has a five-year term beginning January 1,
2016 through December 31, 2020 and increased the minimum royalty
payments as outlined below.
In
connection with the License Agreement, the Company has committed to
reserve a certain percentage of wholesale prices for use in
advertising, merchandising and promotion of the related products.
Additionally, the Company is required to make quarterly royalty
payments equal to a certain percentage of the preceding
quarter’s net sales with minimum annual royalty payments as
follows:
|
Year
ending December 31,
|
|
|
2017
|
$
3,000,000
|
|
2018
|
$
3,500,000
|
|
2019
|
$
4,500,000
|
|
2020
|
$
5,100,000
|
Royalty
expense under the License Agreement was $583,333 for the third
quarter of 2016 and $750,000 for the third quarter of 2017, and
royalty expense is included in selling expense on the accompanying
condensed consolidated statements of operations. The balance of the
committed royalty expense for 2017 amounts to $750,000 for the
remaining quarter of 2017.
In
order to facilitate the Company’s current and planned
increase in production demand, driven in part by the launch of
Motorola branded products, the Company has committed with North
American Production Sharing, Inc. (“NAPS”) to extend
its existing lease used in connection with the Production Sharing
Agreement (“PSA”) entered into between the Company and
NAPS. The extension term is December 1, 2015 through November 30,
2018 and allows the Company to contract additional Mexican
personnel to work in the Tijuana facility.
The
Company moved its headquarters on June 29, 2016 from its long time
location at 207 South Street, Boston, MA. to a nearby location at
99 High Street, Boston, MA. The Company signed a lease for 11,480
square feet that terminates on June 29, 2019. Payments under the
lease are zero for the first 2 months, an aggregate of $413,280 for
the next 12 months, an aggregate of $424,760 for the next 12
months, and an aggregate of $363,533 for the remaining term of the
lease ending June 29, 2019. Rent expense was $102,338 for the third
quarter of 2017.
(5)
Customer Concentrations
The
Company sells its products primarily through high-volume retailers
and distributors, Internet service providers, value-added
resellers, Personal Computer (“PC”) system integrators,
and original equipment manufacturers ("OEMs"). The Company supports
its major accounts in their efforts to offer a well-chosen
selection of attractive products and to maintain appropriate
inventory levels.
Relatively
few customers account for a substantial portion of the
Company’s revenues. In the third quarter of 2017, three
customers accounted for 10% or greater separately and 92% combined
of the Company’s total net sales. In the first nine months of
2017, three customers accounted for 10% or greater separately and
90% combined of the Company’s total net sales. At September
30, 2017, three customers with an accounts receivable balance of
10% or greater accounted for a combined 83% of the Company’s
accounts receivable. In the third quarter of 2016, three customers
accounted for 10% or greater separately and 86% combined of the
Company’s total net sales. In the first nine months of 2016,
three customers accounted for 10% or greater separately and 81%
combined of the Company’s total net sales. At September 30,
2016 three customers with an accounts receivable balance of 10% or
greater accounted for a combined 88% of the Company’s
accounts receivable.
The
Company’s customers generally do not enter into long-term
agreements obligating them to purchase products. The Company may
not continue to receive significant revenues from any of these or
from other large customers. A reduction or delay in orders from any
of the Company’s significant customers, or a delay or default
in payment by any significant customer could materially harm the
Company’s business and prospects. Because of the
Company’s significant customer concentration, its net sales
and operating income could fluctuate significantly due to changes
in political or economic conditions, or the loss, reduction of
business, or less favorable terms for any of the Company's
significant customers.
(6) Bank Credit Lines
On December 18, 2012, the Company entered into a
Financing Agreement with Rosenthal & Rosenthal, Inc. (the
“Financing Agreement”). The Financing Agreement
originally provided for up to $1.75 million of revolving credit,
subject to a borrowing base formula and other terms and conditions.
The Financing Agreement continued until November 30, 2014 with
automatic renewals from year to year thereafter, unless sooner
terminated by either party. The lender has the right to terminate
the Financing Agreement at any time on 60 days’ prior written
notice.
Borrowings
are secured by all of the Company assets including intellectual
property. The Financing Agreement contains several covenants,
including a requirement that the Company maintain tangible net
worth of not less than $2.5 million and working capital of not less
than $2.5 million.
On
March 25, 2014, the Company entered into an amendment to the
Financing Agreement (the “Amendment”) with an effective
date of January 1, 2013. The Amendment clarified the definition of
current assets in the Financing Agreement, reduced the size of the
revolving credit line to $1.25 million, and revised the financial
covenants so that Zoom is required to maintain tangible net worth
of not less than $2.0 million and working capital of not less than
$1.75 million.
On
October 29, 2015, the Company entered into a second amendment to
the Financing Agreement (the “Second Amendment”).
Retroactive to October 1, 2015, the Second Amendment eliminated
$2,500 in monthly charges for the Financing Agreement. Effective
December 1, 2015, the Second Amendment reduces the effective rate
of interest to 2.25% plus an amount equal to the higher of prime
rate or 3.25%.
On
July 19, 2016, the Company entered into a third amendment to the
Financing Agreement. The Amendment increased the size of the
revolving credit line to $2.5 million effective as of date of the
amendment.
On
September 1, 2016, the Company entered into a fourth amendment to
the Financing Agreement. The Amendment increased the size of the
revolving credit line to $3.0 million effective with the date of
this amendment.
The
Company is required to calculate its covenant compliance on a
quarterly basis. As of September 30, 2017, the Company was in
compliance with both its working capital and tangible net worth
covenants. At September 30, 2017, the Company’s tangible net
worth was approximately $3.1 million, while the Company’s
working capital was approximately $2.9 million.
(7) Earnings (Loss) Per Share
Basic
earnings (loss) per share is calculated by dividing net income
(loss) attributable to common stockholders by the weighted-average
number of common shares, except for periods with a loss from
operations. Diluted earnings (loss) per share reflects
additional common shares that would have been outstanding if
dilutive potential shares of common stock had been issued.
Potential shares of common stock that may be issued by the Company
include shares of common stock that may be issued upon exercise of
outstanding stock options. Under the treasury stock method, the
unexercised options are assumed to be exercised at the beginning of
the period or at issuance, if later. The assumed proceeds are then
used to purchase shares of common stock at the average market price
during the period.
Diluted
earnings (loss) per common share for the three-month period ended
September 30, 2017 includes the effects of 1,466,089 common share
equivalents. Diluted earnings (loss) per common share for the
three-month period ended September 30, 2016 excludes the effects of
2,015,825 common share equivalents, since such inclusion would be
anti-dilutive. Diluted earning (loss) per common share for the
nine-month periods ended September 30, 2017 and 2016 excludes the
effects of 1,466,089 and 2,015,825 common share equivalents,
respectively, since such inclusion would be anti-dilutive. The
common share equivalents consist of common shares issuable upon
exercise of outstanding stock options.
ITEM
2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
"Safe Harbor" Statement under the Private Securities Litigation
Reform Act of 1995.
Some of the statements contained in this report are forward-looking
statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of
1934. These statements involve known and unknown risks,
uncertainties and other factors which may cause our or our
industry's actual results, performance or achievements to be
materially different from any future results, performance or
achievements expressed or implied by the forward-looking
statements. Forward-looking statements include, but are not limited
to statements regarding: Zoom's plans, expectations and intentions,
including statements relating to Zoom's prospects and plans
relating to sales of and markets for its products; and Zoom's
financial condition or results of operations.
In some cases, you can identify forward-looking statements by terms
such as "may," "will, " "should," "could," "would," "expects,"
"plans," "anticipates," "believes," "estimates," "projects,"
"predicts," "potential" and similar expressions intended to
identify forward-looking statements. These statements are only
predictions and involve known and unknown risks, uncertainties, and
other factors that may cause our actual results, levels of
activity, performance, or achievements to be materially different
from any future results, levels of activity, performance, or
achievements expressed or implied by such forward-looking
statements. Given these uncertainties you should not place undue
reliance on these forward-looking statements. Also, these
forward-looking statements represent our estimates and assumptions
only as of the date of this report. We expressly disclaim any
obligation or undertaking to release publicly any updates or
revisions to any forward-looking statement contained in this report
to reflect any change in our expectations or any change in events,
conditions or circumstances on which any of our forward-looking
statements are based. Factors that could cause or contribute to
differences in our future financial results include those discussed
in the risk factors set forth in Item 1A of Part II of this
Quarterly Report on Form 10-Q, in our Annual Report on
Form 10-K for the year ended December 31, 2016, filed with the
Securities and Exchange Commission on March 22, 2017 and in our
other filings with the Securities and Exchange Commission. Readers
should also be cautioned that results of any reported period are
often not indicative of results for any future period.
Overview
We
derive our net sales primarily from sales of Internet access and
other communications-related products, including cable modems,
cable modem / routers, Digital Subscriber Line (“DSL”)
modems and dial-up modems to retailers, distributors, Internet
Service Providers and original equipment manufacturers
(“OEMs”). We sell our products through a direct sales
force and through independent sales agents. All of our employees
are located at our headquarters in Boston,
Massachusetts. We are experienced in electronics
hardware, firmware, and software design and test, regulatory
certifications, product documentation, and packaging; and we use
that experience in developing each product in-house or in
partnership with suppliers who are typically based in Asia.
Electronic assembly and testing of our products in accordance with
our specifications is typically done in Asia.
Last
year Zoom headquarters moved from our long time location at 207
South Street to 99 High Street in Boston. The lease for this new
location terminates June 29, 2019. We also lease a
test/warehouse/ship facility in Tijuana, Mexico. In November 2014
we signed a one-year lease with five one-year renewal options
thereafter for an 11,390 square foot facility in Tijuana Mexico. In
September 2015, Zoom extended the term of the lease from December
1, 2015 through November 30, 2018. In September 2015, Zoom also
signed a new lease for additional space in the adjacent building,
which doubled the existing capacity. The term of the lease is from
March 1, 2016 through November 30, 2018.
We
continually seek to improve our product designs and manufacturing
approach in order to improve product performance and reduce our
costs. We pursue a strategy of outsourcing rather than internally
developing our modem chipsets, which are application-specific
integrated circuits that form the technology base for our modems.
By outsourcing the chipset technology, we are able to concentrate
our research and development resources on modem system design,
leverage the extensive research and development capabilities of our
chipset suppliers, and reduce our development time and associated
costs and risks. As a result of this approach, we are able to
quickly develop new products while maintaining a relatively low
level of research and development expense as a percentage of
net sales. We also outsource aspects of our manufacturing to
contract manufacturers as a means of reducing our costs of
production, and to provide us with greater flexibility in our
production capacity.
Our
gross margin for a given product generally depends on a number of
factors including the type of customer to whom we are selling. The
gross margin for retailers tends to be higher than for some of our
other customers; but the sales, support, returns, and overhead
costs associated with retailers tend to be higher. Our sales to
certain countries are currently handled by a single master
distributor for each country, who handles the support and marketing
costs within the country. Gross margin for sales to these master
distributors tends to be low, since lower pricing to these
distributors helps them to cover the support and marketing costs
for their country.
As of
September 30, 2017 we had 32 employees,
27 working full-time and 5 working less than five
days per week. Twelve employees were engaged in research and
development and quality control. Five employees were involved in
operations, which m
anages production, inventory, purchasing,
warehousing, freight, invoicing, shipping, collections, and
returns. Nine employees were engaged in sales, marketing, and
customer support. The remaining six employees performed executive,
accounting, administrative, and management information systems
functions. Our dedicated personnel in Tijuana, Mexico are employees
of our Mexican service provider and are not included in our
headcount.
Critical Accounting Policies and Estimates
Following
is a discussion of what we view as our more significant accounting
policies and estimates. As described below, management judgments
and estimates must be made and used in connection with the
preparation of our financial statements. We have identified areas
where material differences could result in the amount and timing of
our net sales, costs, and expenses for any period if we had made
different judgments or used different estimates.
Revenue Recognition.
We primarily sell hardware products to
our customers. The hardware products include dial-up modems, DSL
modems, cable modems, and local area networking
equipment.
We
derive our net sales primarily from the sales of hardware products
to four types of customers:
●
Computer peripherals
retailers;
●
Computer product distributors;
●
Internet service providers;
and
●
OEMs.
We
recognize hardware net sales for our customers at the point when
the customers take legal ownership of the delivered products. Legal
ownership passes from Zoom to the customer based on the contractual
Free on Board (“FOB”) point specified in signed
contracts and purchase orders, which are both used extensively.
Many of our customer contracts or purchase orders specify FOB
destination, which means that title and risk remain with the seller
until it has delivered the goods to the location specified in the
contract. We verify the delivery date on all significant FOB
destination shipments made during the last 10 business days of each
quarter.
Our
net sales of hardware include reductions resulting from certain
events which are characteristic of the sales of hardware to
retailers of computer peripherals. These events are product
returns, certain sales and marketing incentives, price protection
refunds, and consumer mail-in and in-store rebates. Each of these
is accounted for as a reduction of net sales based on detailed
management estimates, which are reconciled to actual customer or
end-consumer credits on a monthly or quarterly basis.
Product
Returns
. Products are returned
by retail stores and distributors for inventory balancing,
contractual stock rotation privileges, and warranty repair or
replacements. We estimate the sales and cost value of expected
future product returns of previously sold products. Our estimates
for product returns are based on recent historical trends plus
estimates for returns prompted by, among other things, announced
stock rotations and announced customer store closings. Management
reviews historical returns, current economic trends, and changes in
customer demand and acceptance of our products when estimating
sales return allowances. The estimate for future returns is
recorded as a reserve against accounts receivable, a reduction in
our net sales, and the corresponding change to inventory reserves
and cost of sales.
Price Protection
Refunds.
We have a policy of
offering price protection to certain of our retailer and
distributor customers for some or all their inventory. Under the
price protection policies, when we reduce our prices for a product,
the customer receives a credit for the difference between the
original purchase price and our reduced price for their unsold
inventory of that product. Our estimates for price protection
refunds are based on a detailed understanding and tracking by
customer and by sales program. Estimated price protection refunds
are recorded in the same period as the announcement of a pricing
change. Information from customer inventory-on-hand reports or from
direct communications with the customers is used to estimate the
refund, which is recorded as a reduction of net sales and a reserve
against accounts receivable.
Sales and Marketing
Incentives
. Many of our
retailer customers require sales and marketing support funding,
usually set as a percentage of our sales in their stores. The
incentives are reported as reductions in our net
sales.
Consumer Mail-In and In-Store
Rebates
. Our estimates for
consumer mail-in and in-store rebates are based on a detailed
understanding and tracking by customer and sales program, supported
by actual rebate claims processed by the rebate redemption centers
plus an accrual for an estimated lag in processing at the
redemption centers. The estimate for mail-in and in-store rebates
is recorded as a reserve against accounts receivable and a
reduction of net sales in the same period that the rebate
obligation was triggered.
Accounts Receivable
Valuation
. We establish
accounts receivable valuation allowances equal to the
above-discussed net sales adjustments for estimates of product
returns, price protection refunds, consumer rebates, and general
bad debt reserves. These allowances are reduced as actual credits
are issued to the customer's accounts.
Inventory Valuation and Cost of
Goods Sold.
Inventory is valued
at the lower of cost, determined by the first-in, first-out method,
or its net realizable value. We review inventories for obsolete
slow moving products each quarter and make provisions based on our
estimate of the probability that the material will not be consumed
or that it will be sold below cost. Additionally, material product
certification costs on new products are capitalized and amortized
over the expected period of value of the respective
products.
Valuation and Impairment of
Deferred Tax Assets.
As part of
the process of preparing our financial statements we estimate our
income tax expense and deferred income tax position. This process
involves the estimation of our actual current tax exposure together
with assessing temporary differences resulting from differing
treatment of items for tax and accounting purposes. These
differences result in deferred tax assets and liabilities, which
are included in our balance sheet. We then assess the likelihood
that our deferred tax assets will be recovered from future taxable
income. To the extent we believe that recovery is not likely, we
establish a valuation allowance. Changes in the valuation allowance
are reflected in the statement of operations.
Significant
management judgment is required in determining our provision for
income taxes and any valuation allowances. We have recorded a 100%
valuation allowance against our deferred income tax assets. It is
management's estimate that, after considering all available
objective evidence, historical and prospective, with greater weight
given to historical evidence, it is more likely than not that these
assets will not be realized. If we establish a record of continuing
profitability, at some point we will be required to reduce the
valuation allowance and recognize an equal income tax benefit which
will increase net income in that period(s).
As
of December 31, 2016 we had federal net operating loss carry
forwards of approximately $54.0 million which are available to
offset future taxable income. They are due to expire in
varying amounts from 2018 to 2036. As of December 31, 2016, we
had Massachusetts state net operating loss carry forwards of
approximately $7.3 million which are available to offset future
taxable income. They are due to expire in varying amounts from 2031
through 2036. A valuation allowance has been established for the
full amount of deferred income tax assets as management has
concluded that it is more-likely than-not that the benefits from
such assets will not be realized.
Results of Operations
Comparison of the three months ended September 30, 2017 to the
three months ended September 30, 2016
Summary
. Net sales were $8.58 million
for the third quarter ended September 30, 2017 (“Q3
2017”), up 43.3% from $5.99 million for the third quarter
ended September 30, 2016 (“Q3 2016”). We reported net
income of $377 thousand for Q3 2017, compared to a net loss of $244
thousand for Q3 2016.
Net Sales
. Our total net sales for Q3
2017 increased $2.59 million or 43.3% from Q3 2016, primarily due
to sales increases on Motorola branded cable modems and cable modem
routers.
Concentration.
In Q3 2017 three
customers accounted for 10% or greater separately and 92% combined
of the Company’s total net sales. At September 30, 2017 three
customers with an accounts receivable balance of 10% or greater
accounted for a combined 83% of the Company’s accounts
receivable. In Q3 2016, three customers accounted for 10% or
greater separately and 86% combined of the Company’s total
net sales. At September 30, 2016 three customers with an accounts
receivable balance of 10% or greater accounted for a combined 88%
of the Company’s accounts receivable.
Gross Profit.
Gross profit was $3.07
million or 35.7% of net sales in Q3 2017, up from $1.93 million or
32.1% of net sales in Q3 2016. Improvement in gross profit was
primarily due to increased sales.
Selling Expense.
Selling expense was
$1.81 million or 21.1% of net sales in Q3 2017, up from $1.47
million or 24.6% of net sales in Q3 2016. The increase of $339
thousand was primarily due to Motorola brand royalty payments, and
increased advertising costs and freight expenses.
General and Administrative
Expense.
General and
administrative expense was $383 thousand or 4.5% of net sales in Q3
2017, up 8.3% from $354 thousand or 5.9% of net sales in Q3 2016.
The increase of $29 thousand was primarily due to increases in
stock option expenses, which were partially offset by reduced legal
expenses.
Research and Development Expense.
Research and development expense was $457 thousand or 5.3% of net
sales in Q3 2017, up from $353 thousand or 5.9% of net sales in Q3
2016. The increase of $104 thousand was primarily due to higher
product certification costs.
Other Income (Expense).
Other expense
was $31 thousand in Q3 2017 due to interest expense related to our
bank credit line. Other income was $14 thousand in Q3 2016, driven
by a one-time favorable settlement on a class action lawsuit for
approximately $41 thousand, reduced by loan interest costs of
approximately $27 thousand.
Net Income (Loss).
Net income was $377
thousand for Q3 2017, compared to a net loss of $244 thousand for
Q3 2016.
Comparison of the nine months ended September 30, 2017 to the nine
months ended September 30, 2016
Summary
. Net sales of $20.56 million for
the first nine months of 2017 were up 62.0% from net sales of
$12.69 million for the first nine months of 2016. Our net loss was
$0.98 million for the first nine months of 2017, down from a net
loss of $1.94 million for the first nine months of 2016. Loss per
diluted share was $0.07 in the nine months ended September 30, 2017
compared to $0.14 for the nine months ended September 30,
2016.
Net Sales
. Our total net sales for the
first nine months of 2017 increased $7.87 million or 62.0% from the
first nine months of 2016, primarily due to continued expansion of
Motorola branded products and increased sales.
Concentration.
In the first nine months
of 2017, three customers accounted for 10% or greater separately
and 90% combined of the Company’s total net sales. In the
first nine months of 2016, three customers accounted for 10% or
greater separately and 81% combined of the Company’s total
net sales.
Gross Profit.
Gross profit was $6.99
million for the first nine months of 2017, up $3.03 million or
76.6% from gross profit of $3.96 million for the first nine months
of 2016.
Improvement in
gross profit was primarily due to increased sales. The improvement
in gross margin was due to the increase in total sales, which
reduced our fixed overhead as a percentage of sales.
Selling Expense.
Selling expense was
$5.34 million or 26.0% of net sales in the first nine months of
2017, up from $3.52 million or 27.7% of net sales in the first nine
months of 2016. The increase of $1.82 million was primarily due to
increased advertising costs, Motorola royalty payments, and freight
expenses.
General and Administrative
Expense.
General and
administrative expense was $1.15 million or 5.6% of net sales for
the first nine months of 2017, down 6.7% from $1.24 million or 9.7%
of net sales for the first nine months of 2016. The decrease of $82
thousand was due primarily to lower personnel, legal, and audit
costs, partially offset by increased consulting
expenses.
Research and Development Expense.
Research and development expense was $1.37 million or 6.7% of net
sales in the first nine months of 2017, up 18.4% from $1.15 million
or 9.1% of net sales in the first nine months of 2016. The increase
of $213 thousand was due primarily to increased certification and
outside consultant costs.
Other Income (Expense).
Other expense
was $98 thousand in the first nine months quarter of 2017, of which
$87 thousand is interest expense on our bank credit line. Other
income was $10 thousand in the first nine months of 2016, driven by
a one-time favorable settlement on a class action lawsuit for
approximately $41 thousand, reduced by loan interest costs of
approximately $32 thousand.
Net Income (Loss).
The net loss was
$0.98 million for the first nine months of 2017, compared to the
net loss of $1.94 million for the first nine months of
2016.
Liquidity and Capital Resources
Our
cash and cash equivalents balance on September 30, 2017 was
approximately $91 thousand, a decrease from a balance of $180
thousand on December 31, 2016. Major uses of cash were a $980
thousand loss for the nine months ended September 30, 2017, a
decrease of approximately $712 thousand in bank debt, an increase
of approximately $380 thousand in inventory, and an increase of
approximately $284 thousand in prepaid expenses. These were offset
by an increase of approximately $1.4 million in accounts payable
and accrued expenses, a decrease of approximately $394 thousand in
accounts receivable, and a decrease of approximately $190 thousand
in other assets.
On
September 30, 2017 we had approximately $595 thousand in bank debt
for a $3.0 million asset-based credit line and had working capital
of approximately $2.9 million, including approximately $91 thousand
in cash and cash equivalents. On December 31, 2016 we had working
capital of approximately $3.4 million, including approximately $180
thousand in cash and cash equivalents. Our current ratio at
September 30, 2017 was 1.5 compared to 1.7 at December 31,
2016.
On May 18, 2015, we
announced licensing of the Motorola trademark for cable modems and
gateways for the U.S. and Canada for five years starting January
2016.
In order to support
anticipated sales growth, we raised approximately $1.5 million in
net proceeds from the private placement offering of 619,231
unregistered shares of our common stock that closed on October 24,
2016.
Although the Company
has experienced losses in the past, the Company has experienced
dramatic growth over the last year and one-half. Sales in 2016 were
up 65% over sales in 2015 and sales in the first nine months of
2017 were up 62% over sales in the first nine months of 2016. The
Company believes that year-over-year growth is likely to continue
for the foreseeable future due to a number of factors including the
strength of the Motorola brand, new product introductions,
increased shelf space, growing online retailer sales, and
international expansion. Because of projected sales increases, the
associated improved net income, and its Financing Agreement (as
defined below) with
Rosenthal
& Rosenthal, Inc.
, the Company expects
to maintain acceptable levels of liquidity to meet its obligations
as they become due for at least twelve months from the date of our
quarterly filing of this Form 10-Q with the Securities Exchange
Commission.
Commitments
During
the nine months ended September 30, 2017, there were no material
changes to our capital commitments and contractual obligations from
those disclosed in our Form 10-K for the year ended December
31, 2016.
Off-Balance Sheet Arrangements
During
the nine months ended September 30, 2017, there were no material
changes to our off-balance sheet arrangements from those disclosed
in our Form 10-K for the year ended December 31,
2016.