UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

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FORM 10-Q

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(Mark One)

 

For the quarterly period ended September 30, 2017March 31, 2018

 

 

 

For the transition period from________ to ________

 

Commission File Number 0-53722

 

 

 

 

 

 

 

 

 

 

INDEX

 

PART I - FINANCIAL INFORMATION

 

 

ZOOM TELEPHONICS, INC.

Condensed Consolidated Balance Sheets

 

 

ZOOM TELEPHONICS, INC.

Condensed Consolidated Statements of Operations

 

 

 

ZOOM TELEPHONICS, INC.

Notes to Condensed Consolidated Financial Statements

 

 

The accompanying condensed consolidated financial statements (“financial statements”) are unaudited. However, the condensed consolidated balance sheet as of December 31, 20162017 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, 2017March 31, 2018 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, 20162017 included in the Company's 20162017 Annual Report on Form 10-K for the year ended December 31, 2016.2017.

 

Recently Adopted Accounting Standards

 

 

● The Company will adopthas a present right to payment

● The customer has legal title to the new guidance in fiscal 2018, and anticipates using the modified retrospective method.goods

● The Company has transferred physical possession of the goods

 

 

 

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.

 

 

Major uses of cash during the first quarter of 2018 were increases of approximately $180$487 thousand in prepaid expenses, approximately $178 thousand in inventory, and approximately $606 thousand in accounts receivable. Major contributors to cash were $921 thousand in accounts payable and cash equivalents. The Company’s current ratio at September 30, 2017 was 1.5 compared to 1.7 at December 31, 2016.accrued expenses, net income of approximately $359 thousand, and approximately $152 thousand from stock option exercises.

 

 

 

 

Finished goods includes consigned inventory held by our customers of $835,800$905,700 at September 30, 2017March 31, 2018 and $442,300$958,500 at December 31, 2016.2017. 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 $60,096negligible for theboth three months ended September 30,March 31, 2018 and 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.respectively.

 

 

 

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.

 

 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.does not currently have any pending or outstanding legal proceedings.

 

 

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 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:

 

Royalty expense under the License Agreement was $583,333$875,000 for the thirdfirst quarter of 20162018 and $750,000 for the thirdfirst 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 20172018 amounts to $750,000 for the remaining quarter of 2017.$2,625,000.

 

 

 

 

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 thirdfirst quarter of 2017, three2018 two customers accounted for 10% or greater separatelyindividually and 92% combined of27% in the Company’s total net sales. In the first nine months of 2017, three customers accounted for 10% or greater separately and 90% combinedaggregate of the Company’s total net sales. At September 30, 2017, threeMarch 31, 2018, two customers with an accounts receivable balance of 10% or greater individually accounted for a combined 83%60% of the Company’s accounts receivable. In the thirdfirst quarter of 2016, three2017, two customers accounted for 10% or greater separatelyindividually and 86% combined of47% in the Company’s total net sales. In the first nine months of 2016, three customers accounted for 10% or greater separately and 81% combinedaggregate of the Company’s total net sales. At September 30, 2016 threeMarch 31, 2017 two customers with an accounts receivable balance of 10% or greater individually accounted for a combined 88%79% 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.

 

 

 

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 loan covenant compliance on a quarterly basis. As of September 30, 2017,At March 31, 2018, the Company was in compliance with both its working capital and tangible net worth covenants. At September 30, 2017,March 31, 2018, the Company’s tangible net worth was approximately $3.1$3.4 million, whileabove the $2 million requirement; and the Company’s working capital was approximately $2.9 million.$3.2 million, above the $1.75 million requirement. Loan availability is based on eligible receivables less offsets, if any. Approximately $1.21 million was available on this line on March 31, 2018, consisting of $2.16 million as 75% of eligible receivables less an offset of $0.95 million for state tax liabilities.  The sales tax offset will be reduced as the sales tax liability is paid down.

 

 

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, 2017March 31, 2018 was $0.02, and includes the dilutive effects of 1,466,089783,469 common share equivalents. Diluted earnings (loss)loss per common share for the three-month period ended September 30, 2016March 31, 2017 excludes the effects of 2,015,8251,695,047 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.

 

 

 

 

 

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, 2016,2017, filed with the Securities and Exchange Commission on March 22, 201730, 2018 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 / and modem/routers, Digital Subscriber Line (“DSL”) modems and modem/routers, routers, 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.Asia, and we do further testing, warehousing, and shipping in our Tijuana facility.

 

Last yearIn July 2016 Zoom headquarters moved from our long timelong-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 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. 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.

 

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.