Notes to Condensed Consolidated Financial Statements
(Unaudited)
(1)
Summary of Significant Accounting Policies
Basis of Presentation
The
accompanying condensed consolidated financial statements (the
“financial statements”) are unaudited. However, the
condensed consolidated balance sheet as of December 31, 2019 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
accompanying financial statements have been prepared assuming that
the Company will continue as a going concern and contemplates
continuity of operations, realization of assets and satisfaction of
liabilities and commitments in the normal course of business. The
Company’s ability to continue as a going concern is
contingent upon, among other factors, the Company’s ability
to generate sufficient cash flow from operations, decrease
operating costs, obtain additional equity or debt financing and
comply with the financial and other covenants contained in the
Company’s Financing Agreement, as amended, with Rosenthal
& Rosenthal, Inc. as described in Note 7. These financial
statements do not include any adjustments to the recoverability and
classification of recorded asset amounts and classification of
liabilities that might be necessary should the Company be unable to
continue as a going concern.
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, 2019 included in the Company's 2019 Annual Report on
Form 10-K for the year ended December 31, 2019.
Subsequent Events
Due to
requirements of the United States Department of Homeland Security,
and resulting from the continued 25% tariff on imports from China,
the Company was required to commit to a $250 thousand letter of
credit in April 2020.
The
Company applied for and received approval for a SBA Paycheck
Protection Plan Loan with Primary Bank under the CARES Act. The
loan from the US government in the amount of $0.6 million was
approved in mid-April and funded in late April 2020.
On May
11, 2020, Joseph L. Wytanis notified the Company of his decision to
step down from the positions of President and Chief Executive
Officer of the Company. Mr. Wytanis will serve as an advisor to the
Company’s Board of Directors. The Company’s Board of
Directors has formed a search committee to fill the
position.
The
Company has evaluated subsequent events from March 31, 2020 through
the date of this filing and other than above events, has determined
that there are no other such events requiring recognition or
disclosure in the financial statements.
Sales Tax
The
Company has a state sales tax liability stemming from the
Company’s ‘Fulfilled By Amazon’ sales agreement
which allows Amazon to warehouse the Company’s inventory
throughout a number of states. Sales tax is collected in states
where the Company is required to collect and the Company is
registered in each of these states. Sales and Use Tax filings are
completed and filed and tax remitted back to the states is
consistent with the individual state filing requirements. Changes
to state sales tax regulations are monitored to stay current with
the law. As of March 31, 2020, approximately $51 thousand of the
original state sales tax liability remains open. The additional
liability of approximately $36 thousand relates to sales tax that
has been collected and not yet remitted to the respective
states.
Revenue Recognition
Revenue
recognition is evaluated through the following five steps: (i)
identification of the contract, or contracts, with a customer; (ii)
identification of the performance obligations in the contract;
(iii) determination of the transaction price; (iv) allocation of
the transaction price to the performance obligations in the
contract; and (v) recognition of revenue when or as a performance
obligation is satisfied.
● Identification of the
contract, or contracts, with a customer — a contract with a customer exists when the Company
enters into an enforceable contract with a customer, typically a
purchase order initiated by the customer, that defines each
party’s rights regarding the goods to be transferred,
identifies the payment terms related to these goods, and that the
customer has both the ability and intent to
pay.
● Identification of the
performance obligations in the contract — performance obligations promised in a contract are
identified based on the goods that will be transferred to the
customer that are distinct, whereby the customer can benefit from
the goods on their own or together with other resources that are
readily available from third parties or from
us.
● Determination of the
transaction price —the
transaction price is determined based on the consideration to which
the Company will be entitled in exchange for transferring goods to
the customer. This would be the agreed upon quantity and price per
product type in accordance with the customer purchase order, which
is aligned with the Company’s internally approved pricing
guidelines.
● Allocation of the transaction
price to the performance obligations in the contract
— if the contract contains a
single performance obligation, the entire transaction price is
allocated to the single performance obligation. This applies to the
Company as there is only one performance obligation, which is to
provide the goods.
● Recognition of revenue when,
or as, the Company satisfies a performance obligation
— the Company satisfies
performance obligations at a point in time when control of the
goods transfers to the customer. Determining the point in time when
control transfers requires judgment. Indicators considered in
determining whether the customer has obtained control of a good
include:
●
The Company has a present right to payment
●
The customer has legal title to the goods
●
The Company has transferred physical possession of the
goods
●
The customer has the significant risks and rewards of ownership of
the goods
●
The customer has accepted the goods
The
Company has concluded that transfer of control substantively
transfers to the customer upon shipment or delivery, depending on
the delivery terms of the purchase agreement.
Other considerations of Topic 606 include the
following:
● Warranties - the Company does not offer customers the option
to purchase a warranty separately. Therefore, there is not a
separate performance obligation. The Company does account for
warranties as a cost accrual and the warranties do not include any
additional distinct services other than the assurance that the
goods comply with agreed-upon specifications. Warranties are
variable and under Topic 606 are estimated and recognized as a
reduction of revenue as performance obligations are satisfied
(e.g., upon shipment of goods). The estimates due to warranties are
historically not material.
● Returned Goods
- analyses of actual returned product
are compared to that of the product return estimates and
historically have resulted in no material difference between the
two. The Company has concluded that the current process of
estimating the return reserve represents a fair measure with which
to adjust revenue. Returned goods are variable and under Topic 606
are estimated and recognized as a reduction of revenue as
performance obligations are satisfied (e.g., upon shipment of
goods). Under implementation of Topic 606, the Company will monitor
pending authorized returns of goods and, if deemed appropriate,
record the right of return asset accordingly.
● Price protection
- price protection provides that if
the Company reduces the price on any products sold to the customer
for eventual resale to an end-user, the Company will guarantee an
account credit for the price difference for all quantities of that
product that the customer still holds. Price protection is variable
and under Topic 606 are estimated and recognized as a reduction of
revenue as performance obligations are satisfied (e.g., upon
shipment of goods). The estimates due to price protection are
historically not material.
● Volume Rebates and Promotion
Programs - volume rebates are
variable dependent upon the volume of goods sold-through the
Company’s customers to end-users variable and under Topic 606
are estimated and recognized as a reduction of revenue as
performance obligations are satisfied (e.g., upon shipment of
goods). The estimates due to rebates and promotions are
historically not material.
Accounts
receivable, net:
|
|
|
|
|
Gross
accounts receivable
|
$6,218,898
|
$4,346,810
|
|
Allowance
for doubtful accounts
|
(272,031)
|
(276,234)
|
|
|
|
|
|
Total
accounts receivable, net
|
$5,946,867
|
$4,070,576
|
Accrued
other expenses:
|
|
|
|
|
Audit,
legal, payroll
|
$242,219
|
$256,966
|
|
Royalty
costs
|
1,275,000
|
1,125,000
|
|
Sales
and use tax
|
86,796
|
148,836
|
|
Sales
allowances *
|
879,916
|
901,196
|
|
Other
|
236,770
|
234,473
|
|
Total
accrued other expenses
|
$2,720,701
|
$2,666,471
|
* A related inventory contract
asset stemming from the sales return reserve of $399 thousand and
$376 thousand is included within inventories on the accompanying
condensed consolidated balance sheets as of March 31, 2020 and
December 31, 2019, respectively.
Company
revenues are primarily from the selling of products that are
shipped and billed. Consistent with the revenue recognition
accounting standard, revenues are recognized when control is
transferred to customers, in an amount that reflects the
consideration the Company expects to be entitled to in exchange for
those goods and services. Sales are earned at a point in time
through ship-and-bill performance obligations.
Regarding
disaggregated revenue disclosures, as previously noted, the
Company’s business is controlled as a single operating
segment that consists of the manufacture and sale of Internet
access and other communications-related products. Most of the
Company’s transactions are very similar in nature, contract,
terms, timing, and transfer of control of goods.
Disaggregated
revenue by distribution channel for three months
ended:
|
Through
:
|
|
|
|
Retailers
|
$10,974,290
|
$7,227,364
|
|
Distributors
|
597,529
|
529,391
|
|
Other
|
383,784
|
253,334
|
|
Total
|
$11,955,603
|
$8,010,089
|
Disaggregated
revenue by product for three months ended:
|
|
|
|
|
Cable
Modems & gateways
|
$11,170,010
|
$7,073,277
|
|
Other
|
785,593
|
936,812
|
|
Total
|
$11,955,603
|
$8,010,089
|
Revenue
is recognized when obligations under the terms of a contract with
customers are satisfied. Revenue is measured as the amount of
consideration the Company expects to receive in exchange for
transferring the products. Based on the nature of the
Company’s products and customer contracts, the Company has
not recorded any deferred revenue. Any agreements with customers
that could impact revenue such as rebates or promotions are
recognized in the period of agreement.
Amended and Restated Certificate of Incorporation
On
July 25, 2019, the Company filed a Certificate of Amendment to the
Amended and Restated Certificate of Incorporation of the Company
which increased the number of authorized common shares from
25,000,000 to 40,000,000.
Recently Issued Accounting Standards
In June 2016, the Financial Accounting Standards
Board (“FASB”) issued Accounting Standards Update
(“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, which includes the Company’s accounts
receivable. This ASU is effective for the Company for reporting
periods beginning after December 15, 2022. The Company is currently
assessing the potential impact that the adoption of this ASU will
have on its condensed consolidated financial
statements.
In December 2019, the FASB issued ASU 2019-12
“Income Taxes (Topic 740):
Simplifying the Accounting for Income Taxes”, which is intended to improve consistent
application and simplify the accounting for income taxes. This ASU
removes certain exceptions to the general principals in Topic 740
and clarifies and amends existing guidance. This standard is
effective for annual reporting periods beginning after December 15,
2020, including interim reporting periods within those annual
reporting periods, with early adoption permitted. The Company is
currently assessing the potential impact that the adoption of this
ASU and does not expect the adoption of this new standard will have
a material impact on its condensed consolidated financial
statements.
(2) Liquidity
The
Company’s cash balance on March 31, 2020 was $577.6 thousand
of which $550 thousand was restricted. This compares to $1.4
million on December 31, 2019 of which $150 thousand was restricted.
On March 31, 2020, the Company had $387.3 thousand outstanding on
its $4.0 million bank credit line, working capital of $5.0 million,
and a current ratio of 1.8.
The
Company closed on a $5 million private placement and issued an
aggregate of 4,545,455 shares on May 3, 2019, and in connection
with the closing of the offering two designees of an investor in
the private placement joined Zoom’s Board of
Directors.
The
Company’s net losses of $3.3 million in 2019, $74 thousand in
2018, and recent quarterly loss of $752 thousand for the quarter
ended March 31, 2020 along with cash used in operations of $1.5
million in 2019 and $1.3 million for the period ended March 31,
2020 have raised management concerns as to the Company’s
ability to continue as going concern within one year
from the date of filing these financial statements.
The
Company’s financial statements have been prepared assuming
that the Company will continue as a going concern and contemplates
continuity of operations, realization of assets and satisfaction of
liabilities and commitments in the normal course of business. The
Company’s ability to continue as a going concern is
contingent upon, among other factors, the Company’s ability
to generate sufficient cash flow from operations, decrease
operating costs, obtain additional equity or debt financing and
comply with the financial and other covenants contained in the
Company’s Financing Agreement, as amended, with Rosenthal
& Rosenthal, Inc. as described in Note 7. These financial
statements do not include any adjustments to the recoverability and
classification of recorded asset amounts and classification of
liabilities that might be necessary should the Company be unable to
continue as a going concern.
In
addition, the assessment of US tariffs and the COVID-19 pandemic
has created potential disruptions to the Company’s
operations. The 25% US tariffs assessed on products imported from
China had a significant impact on cash and net loss for 2019
and
the first quarter of 2020.
In the first quarter of 2020, these tariffs were $1.5 million and
were the primary reason for the Company recording a net loss of
$752 thousand for the quarter. These tariffs will continue to have
an impact on our financial performance until we have fully
transitioned all of our production supply out of China. In late
2019, we made the decision to move our outsourced manufacturing
operations from China to Vietnam, primarily to end the exposure to
the trade-war imposed tariffs with China. While the COVID-19
pandemic caused delays in the original transition plan, the Company
is working actively working with it primary outsourced development
partner to establish manufacturing operations in Haiphong, Vietnam.
The transition to Vietnam has begun, the Company has reached full
production in Vietnam on one of its top models and expects to have
all manufacturing of existing models fully transitioned to Vietnam
by the end of June 2020. Zoom signed an agreement with Foxconn, one
of the leading global outsourced manufacturers to the high-tech
industry, to manufacture several of the new models the Company
plans to introduce to the market during 2020.
While
the COVID-19 pandemic disrupted sales and production for a short
period of time during mid-March 2020, the Company worked through
the disruption. In mid-March 2020, sales initially decreased in
response to a key distributor focusing its distribution logistics
on essential healthcare products. The Company’s products,
which are instrumental to businesses and consumers establishing
remote and home-based offices, have since been designated as
essential and are once again being offered and are selling at
normal levels and certain models are currently selling above their
average run rates before COVID-19 had a global impact on business
and the economy. The Company continues to work closely with its
manufacturing partners and distributors to ensure that the
Company’s products remain consistently available for sale to
end-users.
The
Company has implemented cost cutting measures to conserve cash, put
a hold on all new hiring during 2020, and has given notice that it
will not renew the same footprint of its headquarters office lease
when it expires in June 2020, retaining just a few offices in the
current co-work space office suite for research and testing
purposes. During the COVID-19 pandemic, the Company’s work
force continues to work remotely, and is continuing operations. We
have negotiated extended and improved payment terms through the end
of June 2020 with our primary outsourced manufacturing
partner.
On
April 13, 2020, the Company entered into a sixth amendment to the
Financing Agreement with Rosenthal & Rosenthal, Inc. This
amendment increased the size of the Company’s revolving
credit line to $4.0 million effective on the date of this
amendment. The Company’s credit line has a maturity date of
November 2020, and automatically renews from year to year unless
cancelled under the terms of Financing Agreement, as
amended.
The
Company entered into an extension of its networking product license
agreement with Motorola through 2025 and also entered into a new
license agreement with Motorola to sell consumer grade home
security and monitoring products and to provide related services.
The Company continues to develop new products and expects to
introduce several new models to the market during 2020 and
2021.
The
Company’s ability to maintain adequate levels of liquidity
depends in part on its ability to sell inventory on hand, to
continue to manufacture and import more inventory to meet existing
demand, and to collect related receivables. The Company continues
to execute its plan to move the manufacture of its products to
outside of China by the end of June 2020. The Company also
continues to work with its distribution partners in North America
to deliver inventory to its customers. The current environment is
difficult, particularly due to the COVID-19 pandemic, and the
outcome of these matters cannot be predicted with any certainty at
this time and raises challenges to the Company’s ability to
continue as a going concern. There can be no assurance that the
Company’s ongoing efforts will continue to be
successful.
(3)
Inventories
|
Inventories
consist of :
|
|
|
|
Materials
|
$897,973
|
$911,054
|
|
Work
in process
|
77,255
|
10,284
|
|
Finished
goods
|
3,203,506
|
6,519,012
|
|
Total
|
$4,178,734
|
$7,440,350
|
Finished
goods includes consigned inventory of approximately $848 thousand
at March 31, 2020 and approximately $1.8 million at December 31,
2019. 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
negligible for both three months ended March 31, 2020 and 2019,
respectively.
(4) Commitments and Contingencies
(a) Contingencies
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 which it believes
are without merit.
The
Company reviews the status of its legal proceedings and records a
provision for a liability when it is considered probable that both
a liability has been incurred and the amount of the loss can be
reasonably estimated. This review is updated periodically as
additional information becomes available. If either or both of the
criteria are not met, the Company reassesses whether there is at
least a reasonable possibility that a loss, or additional losses,
may be incurred. If there is a reasonable possibility that a loss
may be incurred, the Company discloses the estimate of the amount
of the loss or range of losses, that the amount is not material, or
that an estimate of the loss cannot be made. The Company expenses
its legal fees as incurred.
On
January 23, 2020, William Schulze filed a complaint, and
subsequently filed an amended complaint on April 3, 2020
(collectively the “Schulze Complaint”) as lead
plaintiff on behalf of purchasers of Zoom modems in a putative
class action lawsuit against Zoom in the U.S. District Court for
the District of Massachusetts. The Schulze Complaint alleges that
Zoom modems were sold as new despite containing refurbished parts.
The Company is preparing to file its answer to the Schulze
Complaint and intends to vigorously defend itself against these
claims.
The
Company does not have any other pending or outstanding material
legal proceedings beyond that referenced above.
(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
March 2020, Zoom entered into an amendment to the License Agreement
with Motorola Mobility LLC. The 2020 Amendment expands Zoom’s
exclusive license to use the Motorola trademark to a wide range of
authorized channels worldwide, including Service Provider Channels.
The License Agreement, as amended, has a ten-year term beginning
January 1, 2016 through December 31, 2025 and modified 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,
|
2020
|
$5,100,000
|
|
2021
|
$4,300,000
|
|
2022
|
$4,300,000
|
|
2023
|
$4,300,000
|
|
2024
|
$4,300,000
|
|
2025
|
$4,300,000
|
Due to
requirements of the United States Department of Homeland Security,
and resulting from the continued 25% tariff on imports from China,
the Company was required to commit to a $150 thousand letter of
credit in July 2019, a $400 thousand letter of credit in January
2020, and a $250 thousand letter of credit in April 2020, to secure
a bond on the import of these products. These funds will be
reported as restricted cash, consistent with accounting reporting
guidance.
(5)
Lease Obligations
In June 2016, the Company signed a three-year
sub-lease agreement for 11,480 square feet on the
28th
floor of 99 High Street, Boston, MA
02110. The lease for this facility expired on June 30, 2019. The
Company signed a twelve-month lease agreement for offices at 225
Franklin Street, Boston, MA and completed the move to this location
on June 28, 2019. The lease has an automatic renewal option
provision and renews unless cancelled under the terms of the
agreement. The lease for these offices expires on June 30, 2020.
The Company has elected to apply the short-term lease exception
under ASC 842 which does not require the recognition of an
operating lease liability or right-of-use asset on the condensed
consolidated balance sheet in relation to the lease at 225 Franklin
Street. Rent expense was $127.2 for the first quarter of 2020 and
$109.2 thousand for the first quarter of 2019.
The
Company performs most of the final assembly, testing, packaging,
warehousing and distribution at a production and warehouse facility
in Tijuana, Mexico. In November 2014, the Company 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 its
capacity. The term of this lease was from March 1, 2016 through
November 30, 2018. The Company currently has signed a lease
extension to stay in the existing facilities through at least
November 30, 2020. Rent expense was $26.6 thousand for both the
first quarter of 2020 and the first quarter of 2019.
The
Company also has a lease for approximately 1,550 square feet in
Boston, MA that expired on October 31, 2019 and has been renewed
for an additional 12 -month period starting November 1, 2019. The
Company has another one-year lease signed in December 2019 for
approximately 1,500 square feet in Boston. The Company has elected
to apply the short-term lease exception for both of these leases
under ASC 842 which does not require the recognition of an
operating lease liability or right-of-use asset on the condensed
consolidated balance sheet in relation to this lease. Rent expense
for these leases was approximately $35.7 thousand for the first
quarter of 2020 and $18.0 thousand for the first quarter of
2019.
At
inception of a lease the Company determines whether that lease
meets the classification criteria of a finance or operating lease.
Some of the Company’s lease arrangements contain lease
components (e.g., minimum rent payments) and non-lease components
(e.g., maintenance, labor charges, etc.). The Company generally
accounts for each component separately based on the estimated
standalone price of each component.
As
of March 31, 2020, the Company's estimated future minimum committed
rental payments, excluding executory costs, under the operating
leases described above to their expiration or the earliest possible
termination date, whichever is sooner, were $452 thousand for 2020.
There are no future minimum committed rental payments that extend
beyond 2020.
Operating Leases
Operating
leases are included in operating lease right-of-use assets,
operating lease liabilities, and long-term operating lease
liabilities on the condensed consolidated balance sheets. These
assets and liabilities are recognized at the commencement date
based on the present value of remaining lease payments over the
lease term using the Company’s secured incremental borrowing
rates or implicit rates, when readily determinable. Based on the
Company's financial position and ability to obtain financing at the
time ASC 842 was adopted, 10% was considered by management to be a
reasonable incremental borrowing rate when calculating the present
value of remaining lease payments over the lease term. Short-term
operating leases, which have an initial term of 12 months or less,
are not recorded on the balance sheet.
Lease
expense for operating leases is recognized on a straight-line basis
over the lease term. Lease expense is included in general and
administrative expenses on the condensed consolidated statements of
operations.
The
following table presents information about the amount and timing of
the Company’s operating leases as of March 31,
2020.
|
|
|
|
Maturity of Lease Liabilities
|
|
|
2020
(remaining)
|
$79,670
|
|
|
Less:
Imputed interest
|
(2,036)
|
|
|
Present value of operating lease liabilities
|
$77,634
|
|
|
|
|
|
Balance Sheet Classification
|
|
|
|
Operating
lease liabilities
|
$77,634
|
|
|
|
|
|
Other Information
|
|
|
|
Weighted-average
remaining lease term for operating leases
|
0.75
|
|
|
Weighted-average
discount rate for operating leases
|
10.0%
|
|
Cash Flows
Upon
adoption of the new lease standard, the Company recorded a lease
liability in the amount of $420,899, right-of-use assets of
$395,565, and reclassified deferred rent of $25,334 as a reduction
of the right-of-use assets. During the three months-ended March 31,
2020, the operating lease liability was reduced by $25,082 and we
recorded amortization of our right-of-use assets of
$25,082.
Supplemental
cash flow information and non-cash activity related to our
operating leases are as follows:
|
|
Three Months Ended
March 31,
|
|
|
|
|
|
Operating cash flow information:
|
|
|
Amounts
included in measurement of lease liabilities
|
$26,557
|
$135,617
|
|
Non-cash
activities:
|
|
|
|
Right-of-use
assets obtained in exchange for lease obligations
|
$0
|
$395,565
|
(6)
Customer and Vendor Concentrations
The
Company sells its products primarily through high-volume retailers
and distributors, Internet service providers, value-added
resellers, 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 companies account for a substantial portion of the
Company’s revenues. In the first quarter of 2020, two
companies accounted for 10% or greater individually and 86% in the
aggregate of the Company’s total net sales. At March 31,
2020, two companies with an accounts receivable balance of 10% or
greater individually accounted for a combined 73% of the
Company’s accounts receivable. In the first quarter of 2019,
two companies accounted for 10% or greater individually and 81% in
the aggregate of the Company’s total net sales. At March 31,
2019, three companies with an accounts receivable balance of 10% or
greater individually accounted for a combined 67% 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.
The
Company participates in the PC peripherals industry, which is
characterized by aggressive pricing practices, continually changing
customer demand patterns and rapid technological developments. The
Company's operating results could be adversely affected should the
Company be unable to successfully anticipate customer demand
accurately; manage its product transitions, inventory levels and
manufacturing process efficiently; distribute its products quickly
in response to customer demand; differentiate its products from
those of its competitors or compete successfully in the markets for
its new products.
The
Company depends on many third-party suppliers for key components
contained in its product offerings. For some of these components,
the Company may only use a single source supplier, in part due to
the lack of alternative sources of supply. During the first quarter
of 2020, the Company had two suppliers that provided 99% of the
Company's purchased inventory. During the first quarter of 2019,
the Company had one supplier that provided 99% of the Company's
purchased inventory.
(7) Credit Lines
On December 18, 2012, the Company entered into a
Financing Agreement with Rosenthal & Rosenthal, Inc. (the
“Financing Agreement”). The Financing Agreement
provided for up to $1.75 million of revolving credit, subject to a
borrowing base formula and other terms and conditions as specified
in the Financing Agreement. The Financing Agreement continued until
November 30, 2014 and automatically renews from year to year
thereafter, unless sooner terminated by either party as specified
in the Financing Agreement. The Lender has the right to terminate
the Financing Agreement at any time by giving the Company 60
days’ prior written notice. Borrowings are secured by all of the Company
assets including intellectual property. The Financing Agreement
contained 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.
On
November 2, 2018, the Company entered into a fifth amendment to the
Financing Agreement. The Amendment reduced the effective interest
rate by 1 percentage point and reduced the annual facility fee by
0.25 percent.
On
April 13, 2020, the Company entered into a sixth amendment to the
Financing Agreement. The Amendment increased the size of the
revolving credit line to $4.0 million effective with the date of
this amendment.
The
Company is required to calculate its covenant compliance on a
quarterly basis and as of March 31, 2020, the Company was in
compliance with both its working capital and tangible net worth
covenants. At March 31, 2020, the Company’s tangible net
worth was approximately $5.3 million, while the Company’s
working capital was approximately $5.0 million. Loan availability
is based on certain eligible receivables. Loan availability is
based on eligible receivables less offsets, if any. Approximately
$2.6 million was available on this credit line as of March 31,
2020, consisting of $3 million as 75% of eligible receivables,
which is limited to the $3 million loan limit, less an offset of
$51 thousand for state tax liabilities and further reduced by the
$387 thousand outstanding bank debt balance as of March 31, 2020.
The sales tax offset will be reduced as the sales tax liability is
paid down.
(8) 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.
Basic
and diluted loss per common share for the three-month period ended
March 31, 2020 was $0.04, and diluted loss per common share
excludes the effects of 394,846 common share equivalents, since
such inclusion would be anti-dilutive. Basic and diluted loss per
common share for the three-month period ended March 31, 2019 was
$0.07, and diluted loss per common share excludes the effects of
496,028 common share equivalents, since such inclusion would be
anti-dilutive. The common share equivalents consist of common
shares issuable upon exercise of outstanding stock
options.
(9) Related Party
Disclosures
On July
25, 2019, the Company entered into a Master Partnership Agreement
with Minim Inc. (“Minim”), together with a related
Statement of Work, License, Collaborative Agreement,
Software/Service Availability Agreement and Software/Service
Support Level Agreement (collectively, the “Partnership
Agreement”). Under the Partnership Agreement, the
Company will integrate Minim software and services into certain
hardware products distributed by the Company, and Minim will be
entitled to certain fees and a portion of revenue received from the
end users of such services and software. The Company and
Minim entered into an additional Statement of Work on December 31,
2019 providing for further integration of Minim services, with a
monthly minimum payment of $5,000 payable by the Company to Minim
starting in January 2020 for a period of thirty-six months and a
requirement for Minim to purchase at least $90,000 of the
Company’s hardware by December 2022. As of March 31, 2020,
the Company has made payments of $10,000 on February 21, 2020, and
$5,000 on March 12, 2020 to Minim under the Partnership
Agreement.
Jeremy
Hitchcock, who serves as Executive Chairman of the Company’s
Board of Directors, is the co-founder, Chief Executive Officer and
a stockholder of Minim. During the fiscal year ended December
31, 2019, no payments were made by either the Company or Minim
under the Partnership Agreement other than nominal payments, and no
services were provided or expenses incurred in connection with the
Partnership Agreement. As of December 31, 2019, no amounts
were due from or to the Company under the Partnership
Agreement.
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 or discussed 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, 2019, filed with the
Securities and Exchange Commission on April 15, 2020 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 and
modem/routers, Digital Subscriber Line (“DSL”) modems
and modem/routers, routers and other local area network products,
and dial-up modems through retailers, distributors, and other
customers. We sell our products through a direct sales force and
through independent sales agents. Most 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, and we do further
testing, warehousing, and shipping in our Tijuana
facility.
The
Company has been headquartered in Boston, Massachusetts since its
founding in 1977. Our current headquarters is at 225 Franklin
Street, Boston, MA 02110. The Company entered into a twelve-month
lease agreement for offices at 225 Franklin Street, Boston, MA and
completed the move to this location on June 28, 2019. The lease
will expire on June 30, 2020. We also lease a test/warehouse/ship
facility in Tijuana, Mexico. In November 2014, we entered into a
one-year lease with five one-year renewal options thereafter for an
11,390 square foot facility in Tijuana, Mexico. In September 2015,
we extended the term of the Tijuana lease from December 1, 2015
through November 30, 2018. In September 2015, we also signed a new
lease for additional space in the adjacent building, which doubled
the existing capacity of our Tijuana facility. The term of the
lease was from March 1, 2016 through November 30, 2018. The Company
currently has signed a lease extension to stay in the existing
facilities through at least November 30, 2020.
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 tariffs and the type of customer to whom we are
selling. The gross margin for sales through 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.
As
of March 31, 2020, Zoom had 38 full-time and part-time employees.
Twelve employees were engaged in research and development and
quality control. Six employees were involved in operations, which
manages production, inventory, purchasing, warehousing, freight,
invoicing, shipping, collections, and returns. Fourteen employees
were engaged in sales, marketing, and customer technical 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 not included in our headcount. On March 31,
2020, Zoom had two consultants, one in sales and one in information
systems, who are not included in our headcount.
Recent Developments
On May 7, 2020, the Company's Board of Directors approved the
Company's Amended and Restated Bylaws (the "Amended and Restated
Bylaws"), effective immediately. The Amended and Restated
Bylaws amend and restate in their entirety the Company's bylaws to,
among other things: (i) amend the description of certain
information a stockholder must provide with respect to a proposal
to nominate a person for election or reelection as a Company
director or other business to be considered at a stockholders
meeting and the procedure for making such proposal; (ii) provide
that the forum for the resolution of internal corporate claims
shall be the Court of Chancery in the State of Delaware; (iii)
revise the description and powers of the officer positions for
Chief Executive Officer and the President, and (iii) make other
technical amendments. The foregoing summary is subject to, and
qualified in its entirety by, the full text of the Amended and
Restated Bylaws, a copy of which was filed as Exhibit 3.1 to the
Company’s Form 8-K filed on May 13, 2020 and is incorporated
by reference into this Item 2.
On
May 11, 2020, Joseph L. Wytanis notified the Company of his
decision to step down from the positions of President and Chief
Executive Officer of the Company. Mr. Wytanis will serve as an
advisor to the Company’s Board of Directors. The
Company’s Board of Directors has formed a search committee to
fill the position.
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.
Leases. We adopted ASU 2016-02, “Leases (Topic
842)”, which requires
lessees to recognize most leases on their balance sheets as a
right-of-use asset with a corresponding lease liability. Lessor
accounting under the standard is substantially unchanged.
Additional qualitative and quantitative disclosures are also
required. The Company adopted the standard effective January 1,
2019 using the alternative transition approach, which required the
Company to apply the new lease standard to (i) all new lease
contracts entered into after January 1, 2019 and (ii) all existing
lease contracts as of January 1, 2018 through a cumulative
adjustment to retained earnings. See Footnote 1 and 5 to the
accompanying condensed consolidated financial statements for
additional disclosure.
Revenue Recognition.
Revenue
recognition is evaluated through the following five steps: (i)
identification of the contract, or contracts, with a customer; (ii)
identification of the performance obligations in the contract;
(iii) determination of the transaction price; (iv) allocation of
the transaction price to the performance obligations in the
contract; and (v) recognition of revenue when or as a performance
obligation is satisfied.
● Identification of the
contract, or contracts, with a customer — a contract with a customer exists when we enter
into an enforceable contract with a customer, typically a purchase
order initiated by the customer, that defines each party’s
rights regarding the goods to be transferred, identifies the
payment terms related to these goods, and that the customer has
both the ability and intent to pay.
● Identification of the
performance obligations in the contract — performance obligations promised in a contract are
identified based on the goods that will be transferred to the
customer that are distinct, whereby the customer can benefit from
the goods on their own or together with other resources that are
readily available from third parties or from
us.
● Determination of the
transaction price — the
transaction price is determined based on the consideration to which
we will be entitled in exchange for transferring goods to the
customer. This would be the agreed upon quantity and price per
product type in accordance with the customer purchase order, which
is aligned with our internally approved pricing
guidelines.
● Allocation of the transaction
price to the performance obligations in the contract
— if the contract contains a
single performance obligation, the entire transaction price is
allocated to the single performance obligation. This applies to us
as there is only one performance obligation, which is to provide
the goods.
● Recognition of revenue when,
or as, we satisfy a performance obligation — we satisfy performance obligations at a
point in time when control of the goods transfers to the customer.
Determining the point in time when control transfers requires
judgment. Indicators considered in determining whether the customer
has obtained control of a good include:
●
We have a present right to payment
●
The customer has legal title to the goods
●
We have transferred physical possession of the goods
●
The customer has the significant risks and rewards of ownership of
the goods
●
The customer has accepted the goods
We
have concluded that transfer of control substantively transfers to
the customer upon shipment or delivery, depending on the delivery
terms of the purchase agreement.
We
primarily sell hardware products to our customers. The hardware
products include cable modems and gateways, local area networking
equipment including routers and MoCA adapters, DSL gateways, and
dial-up modems.
We
derive our net sales primarily from the sales of hardware products
through four types of customers:
●
Internet
and local area network product retailers;
●
Internet
and local area network product distributors;
●
Internet
service providers; and
●
Original
equipment manufacturers
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 us 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. Product returns are variable and under
Topic 606 are estimated and recognized as a reduction of revenue as
performance obligations are satisfied (e.g., upon shipment of
goods). Under implementation of Topic 606, the Company monitors
pending authorized returns of goods and, if deemed appropriate,
record the right of return asset accordingly.
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. Information from customer
inventory-on-hand reports or from direct communications with the
customers is used to estimate the refund. Price protection refunds
are variable and under Topic 606 are estimated and recognized as a
reduction of revenue as performance obligations are satisfied
(e.g., upon shipment of goods). The estimates due to price
protection are historically not material.
Sales and Marketing
Incentives. Many of our
retailer customers require sales and marketing support funding,
which is an expense item in selling expense, unless the funding is
a function of sales activity and therefore variable. Under Topic
606, sales and marketing incentives are estimated and recognized as
a reduction of revenue as performance obligations are satisfied
(e.g., upon shipment of goods). The estimates due to sales and
marketing incentives are historically not
material.
Rebates and
Promotions. Our rebates are
based on a detailed understanding and tracking by customer and
sales program. Rebates and promotions are variable and under Topic
606 are estimated and recognized as a reduction of revenue as
performance obligations are satisfied (e.g., upon shipment of
goods). The estimates due to rebates and promotions are
historically not material.
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
and 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 and
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, 2019 we had federal net operating loss carry
forwards of approximately $56.3 million which are available to
offset future taxable income. They are due to expire in varying
amounts from 2020 to 2038. As of December 31, 2019, we had state
net operating loss carry forwards of approximately $11.4 million
which are available to offset future taxable income. They are due
to expire in varying amounts from 2031 through 2038. 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 March 31, 2020 to the three
months ended March 31, 2019
Summary. Net sales were $12.0 million
for the first quarter ended March 31, 2020 (“Q1 2020”),
up 49.3% from $8.0 million for the first quarter ended March 31,
2019 (“Q1 2019”). Zoom reported a net loss of $0.8
million or $0.04 per share for Q1 2020 compared to a net loss of
$1.1 million or $0.07 per share for Q1 2019.
The
addition of US tariffs and the COVID-19 pandemic has created
potential disruptions to the Company’s operations. The 25% US
tariffs assessed on products imported from China had a significant
impact on cash and net loss for 2019. In the first quarter of 2020,
these tariffs were $1.5 million and were the primary reason for the
Company recording a net loss of $752 thousand for the quarter.
These tariffs will continue to have an impact on our financial
performance until we have fully transitioned all of our production
supply out of China. In late 2019, we made the decision to move our
outsourced manufacturing operations from China to Vietnam,
primarily to end the exposure to the trade-war imposed tariffs with
China. While the COVID-19 pandemic caused delays in the original
transition plan, the Company is working actively working with it
primary outsourced development partner to establish manufacturing
operations in Haiphong, Vietnam. The transition to Vietnam has
begun, the Company has reached full production in Vietnam on one of
its top models and expects to have all manufacturing of existing
models fully transitioned to Vietnam by the end of June 2020. We
expect that this will save the Company approximately $500,000 per
month in tariff cost, plus release an additional $800,000 in
restricted cash over the next year related to performance bonds
required to be posted related to the tariffs. The Company is also
further diversifying its relationships with outsourced
manufacturers. Zoom signed an agreement with Foxconn, one of the
leading global outsourced manufacturers to the high-tech industry,
to manufacture several of the new models the Company plans to
introduce to the market during 2020.
The
Company has implemented cost cutting measures to conserve cash, put
a hold on all new hiring during 2020, and has given notice that it
will not renew the same footprint of its headquarters office lease
when it expires in June 2020, retaining just a few offices in the
current co-work space office suite for research and testing
purposes. Despite the COVID-19 pandemic, the Company’s work
force continues to work remotely, and is continuing operations. We
have negotiated extended and improved payment terms through the end
of June 2020 with our primary outsourced manufacturing
partner.
Net Sales. The Company reported net
sales of $12.0 million for Q1 2020, up 49.3% from $8.0 million for
Q1 2019. The increase was led by strong sales through
brick-and-motor retailers, and online sales. Geographically, our
North American sales continue to represent the dominant share of
our overall sales at 98.1% of our net sales in Q1 2020 compared to
97.3% in Q1 2019.
In Q1
2020, two companies accounted for 10% or greater individually and
86% in the aggregate of the Company’s total net sales. In Q1
2019 two companies accounted for 10% or greater individually and
81% in the aggregate of the Company’s total net sales.
Because of our significant customer concentration, our net sales
and operating income has fluctuated and could in the future
fluctuate significantly due to changes in political or economic
conditions or the loss, reduction of business, or less favorable
terms for any of our significant customers.
While
the COVID-19 pandemic disrupted sales and production for a short
period of time during mid-March 2020, the Company worked through
the disruption. In mid-March 2020, sales initially decreased in
response to a key distributor focusing its distribution logistics
on essential healthcare products. Our products, which are
instrumental to businesses and consumers establishing remote and
home-based offices, have since been designated as essential and are
once again being offered and are selling at normal levels and
certain models are currently selling above their average run rates
before COVID-19 had a global impact on business and the economy. We
continue to work closely with our manufacturing partners and
distributors to ensure that our products remain consistently
available for sale to end-users. Our sales throughout the first
quarter of 2020 were tracking higher the level booked in the fourth
quarter of 2019 except for the short-term reduction experienced in
the middle of March 2020.
Gross Profit. Gross profit was $3.1
million, up from $2.4 million in Q119. Gross profit margin was
25.9% of net sales in Q1 2020, down from 30.2% of net sales in Q1
2019. The decrease in gross profit in Q1 2020 was primarily due to
$1.5 million in tariff costs on imported products from
China.
Selling Expense. Selling expense was
$2.35 million or 19.7% of net sales in Q1 2020 compared to $2.45
million or 30.6% of net sales in Q1 2019. The decrease of $93
thousand in selling expense was primarily due to decreases in
advertising costs, offset by increases in trademark royalty costs
and brick-and-mortar retailer marketing expenses.
General and Administrative
Expense. General and
administrative expense was $828 thousand or 6.9% of net sales in Q1
2020, up from $568 thousand or 7.1% of net sales in Q1 2019. The
increase of $260 thousand was primarily due to increased salary and
related costs.
Research and Development Expense.
Research and development expense was $653 thousand or 5.5% of net
sales in Q1 2020 up from $482 thousand or 6.0% of net sales in Q1
2019. The increase of $170 thousand was due primarily to increased
salary costs, and product testing and compliance
expenses.
Other Income (Expense). Other expense was approximately $6 thousand in Q1
2020, and $34 thousand in Q1 2019, consisting primarily of interest
expense related to the line of credit
agreement.
Liquidity and Capital Resources
The
Company’s cash balance on March 31, 2020 was $577.6 thousand
of which $550 thousand was restricted. This compares to $1.4
million on December 31, 2019 on which $150 thousand was restricted.
On March 31, 2020, the Company had $387.3 thousand outstanding on a
$3.0 million bank credit line, working capital of $5.0 million, and
a current ratio of 1.8.
The
Company closed on a $5 million private placement and issued an
aggregate of 4,545,455 shares on May 3, 2019, and in connection
with the closing of the offering two designees of an investor in
the private placement joined Zoom’s Board of
Directors.
The
Company’s net losses of $3.3 million in 2019, $74 thousand in
2018, and recent quarterly loss of $752 thousand for the quarter
ended March 31, 2020 along with cash used in operations of $1.5
million in 2019 and $1.8 million in 2018 have raised management
concerns as to the Company’s ability to continue as going
concern. The accompanying financial statements have been prepared
assuming that the Company will continue as a going concern and
contemplates continuity of operations, realization of assets and
satisfaction of liabilities and commitments in the normal course of
business. Our ability to continue as a going concern is contingent
upon, among other factors, our ability to generate sufficient cash
flow from operations, decrease operating costs, obtain additional
equity or debt financing and comply with the financial and other
covenants contained in the Company’s Financing Agreement, as
amended, with Rosenthal & Rosenthal, Inc. as described in Note
7 in the notes to the accompanying financial statements. The
accompanying financial statements do not include any adjustments to
the recoverability and classification of recorded asset amounts and
classification of liabilities that might be necessary should the
Company be unable to continue as a going concern.
The
Company has implemented cost cutting measures to conserve cash, put
a hold on all new hiring during 2020, and has given notice that it
will not renew the same footprint of its headquarters office lease
when it expires in June 2020, retaining just a few offices in the
current co-work space office suite for research and testing
purposes. Despite the COVID-19 pandemic, the Company’s work
force continues to work remotely, and is continuing operations. We
have negotiated extended and improved payment terms through the end
of June 2020 with our primary outsourced manufacturing
partner.
On
April 13, 2020, the Company entered into a sixth amendment to the
Financing Agreement with Rosenthal & Rosenthal, Inc. This
amendment increased the size of the Company’s revolving
credit line to $4.0 million effective on the date of this
amendment. The Company’s credit line has a maturity date of
November 2020, and automatically renews from year to year unless
cancelled under the terms of Financing Agreement, as
amended.
The
Company entered into an extension of its networking product license
agreement with Motorola through 2025 and also entered into a new
license agreement with Motorola to sell consumer grade home
security and monitoring products and to provide related services.
The Company continues to develop new products and expects to
introduce several new models to the market during 2020 and 2021.
The Company continues to work closely with its manufacturing
partners and distributors to ensure that the Company’s
products remain consistently available for sale to end-users. The
Company’s sales throughout the first quarter of 2020 were
tracking higher the level booked in the fourth quarter of 2019
except for the short-term reduction experienced in the middle of
March 2020.
Due
to our low unrestricted cash position, the Company continues to
puruse strategies designed to generate additional cash flow from
operations, decrease operating costs, and obtain additional equity
or debt financing. The Company’s ability to maintain adequate
levels of liquidity depends in part on its ability to sell
inventory on hand, to continue to manufacture and import more
inventory to meet existing demand, and to collect related
receivables. Partly due to the COVID-19 pandemic, the Company
recently completed a strong sales quarter, limited only by the
availability of inventory. The Company continues to execute its
plan to move the manufacture of its products to outside of China by
the end of June 2020. The Company also continues to work with its
distribution partners in North America to deliver inventory to its
customers. The current environment is difficult, particularly due
to the COVID-19 pandemic, and the outcome of these matters cannot
be predicted with any certainty at this time and raises challenges
to the Company’s ability to continue as a going concern.
There can be no assurance that the Company’s ongoing efforts
will continue to be successful.
Commitments
During
the three months ended March 31, 2020, except as otherwise
disclosed in this Form 10-Q, 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,
2019.
Off-Balance Sheet Arrangements
We did
not have any material off-balance sheet arrangements as of March
31, 2020. With the adoption of ASU 2016-02, “Leases (Topic 842)”, which
requires lessees to recognize most leases on their balance sheets
as a right-of-use asset with a corresponding lease liability,
effective January 1, 2019, off-balance sheet lease arrangements are
now reported on the Company balance sheet. See Footnote 5 to the
accompanying condensed consolidated financial statements for
additional disclosure.
ITEM
3.
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are
a smaller reporting company as defined by Rule 12b-2 of the
Securities Exchange Act of 1934, as amended (the “Exchange
Act”) and are not required to provide the information under
this Item.
ITEM
4.
CONTROLS
AND PROCEDURES
We
maintain disclosure controls and procedures that are designed to
ensure that information required to be disclosed in our reports
pursuant to the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the rules and forms
of the Securities and Exchange Commission, and that such
information is accumulated and communicated to our management,
including our Chief Executive Officer and our Chief Financial
Officer, as appropriate, to allow timely decisions regarding
required disclosure. In designing and evaluating the disclosure
controls and procedures, management recognizes that any controls
and procedures, no matter how well designed and operated, can
provide only reasonable assurance of achieving the desired control
objectives, as ours are designed to do, and management necessarily
was required to apply its judgment in evaluating the cost-benefit
relationship of possible controls and procedures.
In
connection with the preparation of this Quarterly Report on the
Form 10-Q, we carried out an evaluation, under the supervision and
with the participation of our management including our Chief
Executive Officer and Chief Financial Officer, of the effectiveness
of the design and operation of our disclosure controls and
procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the
Exchange Act as of March 31, 2020. Based upon that evaluation, our
Chief Executive Officer and Chief Financial Officer concluded that
our disclosure controls and procedures were effective as of the end
of the period covered by this report.
There
were no changes in our internal control over financial reporting
during the quarter ended March 31, 2020 that have affected, or are
reasonably likely to affect, our internal control over financial
reporting.
