MINIM, INC. - Quarter Report: 2019 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

______________

FORM 10-Q

______________

(Mark One)

☑ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2019

or

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from________ to ________

Commission File Number 0-53722

———————

ZOOM TELEPHONICS, INC.

(Exact Name of Registrant as Specified in its Charter)

———————

 

Delaware	04-2621506
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)

 

225 Franklin Street, Boston, Massachusetts	02110
(Address of Principal Executive Offices)	(Zip Code)

Registrant’s Telephone Number, Including Area Code: (617) 423-1072

 

__________________________________________________________________________

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

Securities Registered Pursuant to Section 12 (b) of the Act: None.

 

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). YES ☑ NO ☐

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

Large accelerated filer ☐		Accelerated filer  ☐
Non-accelerated filer ☑		Smaller Reporting Company ☑
Emerging growth company  ☐

 

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

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ☐ NO ☑

The number of shares outstanding of the registrant’s Common Stock, $.01 par value, as of November 11, 2019, was 20,880,136 shares.

 

 

ZOOM TELEPHONICS, INC.

INDEX

Part I. - Financial Information
ITEM 1. FINANCIAL STATEMENTS	3
Condensed Consolidated Balance Sheets	3
Condensed Consolidated Statements of Operations (Unaudited)	4
Condensed Consolidated Statements of Stockholders’ Equity (Unaudited)	5
Condensed Consolidated Statements of Cash Flows (Unaudited)	6
Notes to Condensed Consolidated Financial Statements (Unaudited)	7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	16
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	22
ITEM 4. CONTROLS AND PROCEDURES	22
Part II. - Other Information
ITEM 1. LEGAL PROCEEDINGS	23
ITEM 1A. RISK FACTORS	23
ITEM 6. EXHIBITS	23
SIGNATURES	24
EXHIBIT INDEX	25

  

 

PART I - FINANCIAL INFORMATION

ZOOM TELEPHONICS, INC.

Condensed Consolidated Balance Sheets

ASSETS	September 30, 2019 (Unaudited)	December 31, 2018
Current assets
Cash and cash equivalents	$2,279,820	$125,982
Accounts receivable, net	4,747,507	2,760,606
Inventories	6,341,792	7,927,678
Deposits on inventory purchases	28,728	723,639
Prepaid expenses and other current assets	356,371	194,946
Total current assets	13,754,218	11,732,851
Other assets	202,894	222,160
Operating lease right-of-use assets, net	127,410	––
Equipment, net	283,986	261,476
Total assets	$14,368,508	$12,216,487
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Bank debt	$––	$1,741,272
Accounts payable	4,361,223	4,369,309
Operating lease liabilities	101,127	––
Accrued other expenses	2,706,534	2,229,561
Total current liabilities	7,168,884	8,340,142
Long-term operating lease liabilities	26,283	––
Total liabilities	$7,195,167	$8,340,142
Commitments and contingencies (Note 4)
Stockholders' equity
Common stock: Authorized: 40,000,000 shares at $0.01 par value
Issued and outstanding: 20,880,136 shares at September 30, 2019 and 16,124,681 shares at December 31, 2018	208,801	161,247
Additional paid-in capital	46,411,235	41,035,936
Accumulated deficit	(39,446,695)	(37,320,838)
Total stockholders' equity	7,173,341	3,876,345
Total liabilities and stockholders' equity	$14,368,508	$12,216,487

 

 

 

ZOOM TELEPHONICS, INC.

Condensed Consolidated Statements of Operations

(Unaudited)

 

	Three Months Ended September 30,		Nine Months Ended September 30,
	2019	2018	2019	2018
Net sales	$10,874,149	$9,000,060	$27,042,961	$24,859,173
Cost of goods sold	7,746,821	5,726,970	18,728,928	15,572,098
Gross profit	3,127,328	3,273,090	8,314,033	9,287,075
Operating expenses:
Selling expenses	2,067,728	2,032,486	7,068,841	6,209,842
General and administrative expenses	733,486	438,326	1,858,043	1,059,613
Research and development expenses	563,881	420,475	1,484,160	1,199,067
	3,365,095	2,891,287	10,411,044	8,468,522
Operating income (loss)	(237,767)	381,803	(2,097,011)	818,553
Other income (expense):
Interest income	5,626	39	9,627	230
Interest expense	––	(33,051)	(48,405)	(44,763)
Other, net	36,156	(320)	34,251	(385)
Total other income (expense)	41,782	(33,332)	(4,527)	(44,918)
Income (loss) before income taxes	(195,985)	348,471	(2,101,538)	773,635
Income taxes	3,641	2,537	24,319	21,493
Net income (loss)	$(199,626)	$345,934	$(2,125,857)	$752,142
Net income (loss) per share:
Basic	$(0.01)	$0.02	$(0.11)	$0.05
Diluted	$(0.01)	$0.02	$(0.11)	$0.05
Basic weighted average common and common equivalent shares	20,832,174	16,050,540	18,696,083	15,905,348
Diluted weighted average common and common equivalent shares	20,832,174	16,775,498	18,696,083	16,630,306

 

See accompanying notes to condensed consolidated financial statements.

 

 

ZOOM TELEPHONICS, INC.

Condensed Consolidated Statements of Stockholders’ Equity

(Unaudited)

 

For the nine-month period ended September 30, 2019

 

	Common Stock		Additional Paid In	Accumulated
	Shares	Amount	Capital	Deficit	Total
Balance at December 31, 2018	16,124,681	$161,247	$41,035,936	$(37,320,838)	$3,876,345
Net income (loss)	––	––	––	(1,121,118)	(1,121,118)
Stock option exercise	37,500	375	4,725	––	5,100
Stock based compensation	––	––	175,012	––	175,012
Balance at March 31, 2019	16,162,181	$161,622	$41,215,673	$(38,441,956)	$2,935,339

 

Net income (loss)	––	––	––	(805,113)	(805,113)
Private investment offering, net of expenses of $57,391	4,545,455	45,454	4,897,155	––	4,942,609
Stock option exercise	35,000	350	8,400	––	8,750
Stock based compensation	––	––	138,756	––	138,756
Balance at June 30, 2019	20,742,636	$207,426	$46,259,984	$(39,247,069)	$7,220,341

 

Net income (loss)	––	––	––	(199,626)	(199,626)
Stock option exercise	137,500	1,375	32,975	––	34,350
Stock based compensation	––	––	118,276	––	118,276
Balance at September 30, 2019	20,880,136	$208,801	$46,411,235	$(39,446,695)	$7,173,341

 

For the nine-month period ended September 30, 2018

 

	Common Stock		Additional Paid In	Accumulated
	Shares	Amount	Capital	Deficit	Total
Balance at December 31, 2017	15,286,540	$152,865	$40,265,282	$(37,246,561)	$3,171,586
Net income (loss)	––	––	––	358,878	358,878
Stock option exercise	591,250	5,913	146,550	––	152,463
Stock based compensation	––	––	33,798	––	33,798
Balance at March 31, 2018	15,877,790	$158,778	$40,445,630	$(36,887,683)	$3,716,725

 

Net income (loss)	––	––	––	47,330	47,330
Stock option exercise	128,891	1,289	197,356	––	198,645
Stock based compensation	––	––	22,229	––	22,229
Balance at June 30, 2018	16,006,681	$160,067	$40,665,215	$(36,840,353)	$3,984,929

 

Net income (loss)	––	––	––	345,934	345,934
Stock option exercise	100,000	1,000	22,650	––	23,650
Stock based compensation	––	––	170,133	––	170,133
Balance at September 30, 2018	16,106,681	$161,067	$40,857,998	$(36,494,419)	$4,524,646

 

See accompanying notes to condensed consolidated financial statements.

 

 

ZOOM TELEPHONICS, INC.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

	Nine Months Ended September 30,
	2019	2018
Cash flows from operating activities:
Net income (loss)	$(2,125,857)	$752,142
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization	252,471	274,339
Amortization of right-of-use assets	268,155	––
Stock based compensation	432,044	226,160
Provision for (recovery of) accounts receivable allowances	8,549	5,651
Provision for (recovery of) inventory reserves	19,983	(120,420)
Changes in operating assets and liabilities:
Accounts receivable	(1,996,450)	(2,176,171)
Inventories	1,565,903	(978,071)
Prepaid expenses and other current assets	533,486	(102,005)
Operating lease liabilities	(293,489)	––
Accounts payable and accrued expenses	494,221	123,722
Net cash provided by (used in) operating activities	(839,984)	(1,994,653)
Cash flows from investing activities:
Cost of other assets	(135,000)	(23,560)
Purchases of plant and equipment	(120,715)	(207,181)
Net cash provided by (used in) investing activities	(255,715)	(230,741)
Cash flows from financing activities:
Net proceeds from (payments to) bank credit lines	(1,741,272)	1,859,590
Net proceeds from private placement offering	4,942,609	––
Proceeds from stock option exercises	48,200	374,758
Net cash provided by (used in) financing activities	3,249,537	2,234,348
Net change in cash	2,153,838	8,954
Cash and cash equivalents at beginning of period	125,982	229,218
Cash and cash equivalents at end of period	$2,279,820	$238,172
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest	$48,405	$44,763
Income taxes	$24,319	$21,493

 

  See accompanying notes to condensed consolidated financial statements.

 

 

ZOOM TELEPHONICS, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

(1) Summary of Significant Accounting Policies

Basis of Presentation

 

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

 

Subsequent Events

 

The Company has evaluated subsequent events from September 30, 2019 through the date of this filing and has determined that there are no 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, and this inventory is warehoused in a number of states. During 2018 the Company put policies and procedures in place to collect and remit sales tax for Amazon sales in states where the Company believes it has nexus and is required to charge sales tax. Sales tax is now collected by the Company in states where the Company is required to collect and the Company has registered with the state. Sales and Use Tax filings are completed and filed and tax remitted back to the states consistent with the individual state filing requirements. Changes to state sales tax regulations are monitored to stay current with the law. Many states have adopted regulations which require marketplace facilitators, such as Amazon, to collect and remit sales and use tax. This has eased the burden on the Company of filing and remitting sales tax returns for those states that have enacted such laws. As of September 30, 2019, approximately $51 thousand of the original state sales tax liability remains open. An additional liability of approximately $138 thousand relates to sales tax that has been collected and not yet remitted to the respective states, and is included in Accrued other expenses on the accompanying condensed consolidated balance sheets as of September 30, 2019.

 

Revenue Recognition

 

The Company adopted Accounting Standards Codification (“ASC”) Topic 606 using the modified retrospective method provision of this standard effective January 1, 2018, which required the Company to apply the new revenue standard to (i) all new revenue contracts entered into after January 1, 2018 and (ii) all existing revenue contracts as of January 1, 2018 through a cumulative adjustment to retained earnings. In accordance with this approach, there was no material impact which required a cumulative effect adjustment.

 

 

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.

 

 

 

 

 

 

 

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:

 

 

 

 

 

 

Accounts receivable, net:

 

	September 30, 2019	December 31, 2018
Gross accounts receivable	$4,770,069	$2,774,619
Allowance for doubtful accounts	(22,562)	(14,013)
Total accounts receivable, net	$4,747,507	$2,760,606

 

Accrued other expenses:

 

	September 30, 2019	December 31, 2018
Audit, legal, payroll	$179,762	$234,119
Royalty costs	1,125,000	875,000
Sales and use tax	188,630	219,286
Sales allowances *	969,961	611,719
Other	243,182	289,437
Total accrued other expenses	$2,706,534	$2,229,561

 

------------------------------------------------------------------------------------------------------------------------------------------------------------

* Upon adoption of ASC 606 on January 1, 2018, certain sales allowances (warranties, returned goods, price protection, volume rebates, and promotion programs) were reclassified as accrued other expenses. Furthermore, a related inventory contract asset stemming from the sales return reserve of $439 thousand and $318 thousand is included within inventories on the accompanying condensed consolidated balance sheets as of September 30, 2019 and December 31, 2018, 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:

 

	Three Months Ended September 30,		Nine Months Ended September 30,
	2019	2018	2019	2018
Retailers	$10,479,310	$7,998,492	$25,140,598	$22,745,719
Distributors	122,111	552,346	1,095,335	1,255,259
Other	272,728	449,222	807,028	858,195
Total	$10,874,149	$9,000,060	$27,042,961	$24,859,173

 

 

Disaggregated revenue by product:

 

	Three Months Ended September 30,		Nine Months Ended September 30,
	2019	2018	2019	2018
Cable Modems & gateways	$10,004,676	$8,162,319	$24,291,501	$22,782,715
Other	869,473	837,741	2,751,460	2,076,458
Total	$10,874,149	$9,000,060	$27,042,961	$24,859,173

 

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 Adopted Accounting Standards

 

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting standards Update (“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.

 

Adoption of this standard resulted in the recognition of operating lease right-of-use assets and corresponding lease liabilities of $396 thousand and $421 thousand, respectively, on the consolidated balance sheet as of January 1, 2019. The standard did not materially impact operating results or liquidity. Disclosures related to the amount, timing and uncertainty of cash flows arising from leases are included in Note 5, Leases.

 

Recently Issued Accounting Standards

 

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.

 

 (2) Liquidity

 

On September 30, 2019 the Company had no bank debt on a $3.0 million asset-based credit line, approximately $2.3 million in cash and cash equivalents, and working capital of approximately $6.6 million. The Company’s credit line has a maturity date of November 30, 2019, and automatically renews on November 30 of each year unless cancelled under the terms of the agreement.

 

 

The Company closed on a $5 million private placement and issued an aggregate of 4,545,455 shares on May 3, 2019, and soon after the closing of the offering Jeremy Hitchcock and Jonathan Seelig joined Zoom’s Board of Directors. Other major changes of cash during the first nine months of 2019 were decreases of approximately $1.6 million in inventory and $533 thousand in prepaid expenses; and increases in accounts payable and accrued expenses of approximated $494 thousand. Major items that decreased cash were a net loss of approximately $2.1 million, a reduction in debt of approximately $1.7 million, and an accounts receivable increase of approximately $2.0 million.

 

The Company’s ability to maintain adequate levels of liquidity depends in part on our ability to sell inventory on hand and collect related receivables. The Company was profitable for the first nine months of 2018. Effective September 24, 2018, almost all of our products were subject to a 10% tariff because they are produced in China and they are in product categories subject to a 10% tariff on our cost of goods at the time of entry into the US. Effective June 15, 2019 almost all of our products have been subject to the tariff increase from 10% to 25%. This has a significant impact on our cost of inventory and profitability. Because these tariffs may not be reduced and may even be increased, we are actively working on finding production capability outside China. Our largest supplier is actively working on setting up a major production capability in Vietnam. Although the Company has recently experienced losses, it has continued to experience sales growth. The Company expects year-over-year growth due to a number of factors including the strength of the Motorola brand, new product introductions, increased shelf space, growing online retailer sales, and international expansion. Because of projected sales increases, the strength of its balance sheet, its unused line of credit, and efforts to move production capability outside of China, the Company expects to maintain acceptable levels of liquidity to meet its obligations as they become due for at least twelve months from the date of issuance of the Company’s Quarterly filing of this Form 10-Q with the Securities Exchange Commission.

 

 (3) Inventories

Inventories consist of :	September 30, 2019	December 31, 2018
Materials	$1,032,815	$2,043,843
Work in process	94,491	121,624
Finished goods	5,214,486	5,762,211
Total	$6,341,792	$7,927,678

 

Finished goods includes consigned inventory of $1,516,500 at September 30, 2019 and $1,537,300 at December 31, 2018. 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 the three and nine months ended September 30, 2019. The provision for inventory reserves was negligible for the three months ended September 30, 2018. The provision for inventory reserves recognized a recovery of approximately $120 thousand for the nine months ended September 30, 2018.

 

(4) Commitments and Contingencies

 

(a)  Contingencies

 

From time to time the Company is party to various lawsuits and administrative proceedings arising in the ordinary course of business. The Company evaluates such lawsuits and proceedings on a case-by-case basis, and its policy is to vigorously contest any such claims that it believes are without merit. The Company's management believes that the ultimate resolution of such matters will not materially and adversely affect the Company's business, financial position, or results of operations.

 

 

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

 

(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 exclusive license from cable modems and gateways to also include consumer routers, WiFi range extenders, home powerline network adapters, and wireless 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 on an exclusive basis and cellular sensors on a non-exclusive basis. The License Agreement, as amended, has a five-year term beginning January 1, 2016 through December 31, 2020 and increases the minimum royalty payments as outlined below.

In connection with the License Agreement, the Company has committed to reserve a certain percentage of wholesale sales 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,

 

2019:	$4,500,000
2020:	$5,100,000

Royalty expense under the License Agreement was $1,125,000 for the third quarter of 2019 and $875,000 for the third quarter of 2018. Royalty expense under the License Agreement was $3.39 million for nine months ended September 30, 2019 and $2.64 million for the nine months ended September 30, 2018. Included in the royalty expense is $5 thousand per quarter, and $15 thousand for nine months in both 2019 and 2018 related to the amortization of start-up costs of the Motorola agreement. These costs are included in selling expense on the accompanying condensed consolidated statements of operations. The remaining balance of the committed royalty expense for 2019 amounts to $1,125,000.

 

The Company prefunded a $150,000 letter of credit to a third party pursuant to an arrangement that expedites inventory shipping time. The letter of credit expires on July 8, 2020 and the amount is included within Prepaid expenses and other current assets on the accompanying condensed  consolidated balance sheets as of September 30, 2019.

 

(5) Leases

 

In September 2015 the Company agreed with North American Production Sharing, Inc. (“NAPS”) to extend the Company’s Tijuana facility’s lease in connection with the Production Sharing Agreement (“PSA”) entered into between the Company and NAPS. That extension went through November 30, 2018 and also facilitated the Company’s contracting with Mexican personnel to work in our Tijuana facility. 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 third quarter of 2019 and the third quarter of 2018. Rent expense was $79.7 thousand for both the first nine months of 2019 and the first nine months of 2018.

 

The Company had a lease for 11,480 square feet at 99 High Street, Boston, MA that expired on June 29, 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 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 $117.6 thousand for the third quarter of 2019 and $104.6 thousand for the third quarter of 2018. Rent expense was $325.4 thousand for the first nine months of 2019 and $319.0 thousand for the first nine months of 2018.

 

 

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 starting November 1, 2019.   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 this lease.  Rent expense was approximately $18 thousand for the third quarter of 2019 and 2018.  Rent expense for this lease was approximately $54 thousand for the first nine months of 2019 and approximately $18 thousand for the first nine months of 2018.

 

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.

 

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. The Company used 10% as its secured 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 September 30, 2019.

 

	September 30, 2019
Maturity of Lease Liabilities	Lease Payments
2019 (remaining)	$26,557
2020	106,226
Total undiscounted operating lease payments	$132,783
Less: Imputed interest	(5,373)
Present value of operating lease liabilities	$127,410
Balance Sheet Classification
Operating lease liabilities	$101,127
Long-term operating lease liabilities	26,283
Total operating lease liabilities	$127,410
Other Information
Weighted-average remaining lease term for operating leases	1.17
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 $399,565, and reclassified deferred rent of $25,334 as a reduction of the right-of-use assets. During the nine months ended September 30, 2019, the operating lease liability was reduced by $293,489 and we recorded amortization of our right-of-use assets of $268,155.

 

Supplemental cash flow information and non-cash activity related to our operating leases are as follows:

 

	Nine Months Ended September 30,
	2019	2018
Operating cash flow information:
Amounts included in measurement of lease liabilities	$297,790	$––
Non-cash activities:
Right-of-use assets obtained in exchange for lease obligations	$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 third quarter of 2019 two companies accounted for 10% or greater individually, and 86% in the aggregate of the Company’s total net sales. In the first nine months of 2019 two companies accounted for 10% or greater individually, and 83% in the aggregate of the Company’s total net sales. At September 30, 2019 three companies with an accounts receivable balance of 10% or greater individually accounted for a combined 86% of the Company’s accounts receivable. In the third quarter of 2018 two companies accounted for 10% or greater individually, and 77% in the aggregate of the Company’s total net sales. In the first nine months of 2018 two companies accounted for 10% or greater individually, and 78% in the aggregate of the Company’s total net sales. At September 30, 2018, three companies with an accounts receivable balance of 10% or greater individually accounted for a combined 72% 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, 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 third quarter of 2019, the Company had one supplier that provided 95% of the Company's purchased inventory. During the third quarter of 2018, the Company had one supplier that provided 98% of the Company's purchased inventory. During the first nine months of 2019, the Company had one supplier that provided 95% of the Company's purchased inventory. During the first nine months of 2018, 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 originally provided for up to $1.75 million of revolving credit, subject to a borrowing base formula and other terms and conditions. The Financing Agreement continued until November 30, 2014 with automatic renewals from year to year thereafter, unless sooner terminated by either party. The lender has the right to terminate the Financing Agreement at any time on 60 days’ prior written notice. Borrowings are secured by all of the Company assets including intellectual property. The Financing Agreement contains several covenants, including a requirement that the Company maintain tangible net worth of not less than $2.5 million and working capital of not less than $2.5 million.

 

On March 25, 2014, the Company entered into an amendment to the Financing Agreement (the “Amendment”) with an effective date of January 1, 2013. The Amendment clarified the definition of current assets in the Financing Agreement, reduced the size of the revolving credit line to $1.25 million, and revised the financial covenants so that Zoom is required to maintain tangible net worth of not less than $2.0 million and working capital of not less than $1.75 million.

 

On October 29, 2015, the Company entered into a second amendment to the Financing Agreement (the “Second Amendment”). Retroactive to October 1, 2015, the Second Amendment eliminated $2,500 in monthly charges for the Financing Agreement. Effective December 1, 2015, the Second Amendment reduces the effective rate of interest to 2.25% plus an amount equal to the higher of prime rate or 3.25%.

 

On July 19, 2016, the Company entered into a third amendment to the Financing Agreement. The Amendment increased the size of the revolving credit line to $2.5 million effective as of date of the amendment.

 

On September 1, 2016, the Company entered into a fourth amendment to the Financing Agreement. The Amendment increased the size of the revolving credit line to $3.0 million effective with the date of this amendment.

 

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.

 

The Company is required to calculate its loan covenant compliance on a quarterly basis. At September 30, 2019, the Company was in compliance with both its working capital and tangible net worth covenants. At September 30, 2019, the Company’s tangible net worth was approximately $6.9 million, well above the $2 million requirement; and the Company’s working capital was approximately $6.6 million, well above the $1.75 million requirement. Loan availability is based on eligible receivables less offsets, if any. Approximately $2.2 million was available on this line on September 30, 2019, consisting of $2.3 million as 75% of eligible receivables less an offset of $54 thousand for state tax liabilities.  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 September 30, 2019 was $0.01, and diluted loss per common share excludes the effects of 496,319 common share equivalents, since such inclusion would be anti-dilutive. Basic earnings per common share for the three-month period ended September 30, 2018 was $0.02. Diluted earnings per common share for the three-month period ended September 30, 2018 was $0.02 and includes the dilutive effects of 724,958 common share equivalents. Basic and diluted loss per common share for the nine-month period ended September 30, 2019 was $0.11, and diluted loss per common share excludes the effects of 496,319 common share equivalents, since such inclusion would be anti-dilutive. Diluted earnings per common share for the nine-month period ended September 30, 2018 was $0.05 and includes the dilutive effects of 724,958 common share equivalents. The common share equivalents consist of common shares issuable upon exercise of outstanding stock options.

 

(9) Private Placement

On May 3, 2019, the Company entered into a Stock Purchase Agreement with certain accredited investors, including certain independent investment funds, members of Zoom management and Zoom’s Board of Directors, and certain co-founders of Zoom, in a private placement pursuant to which the Company sold an aggregate of 4,545,455 shares of common stock, par value $0.01 per share, at a purchase price of $1.10 per share.  In connection with the Stock Purchase Agreement the Company incurred $57,391 of expenses which has been recorded as a reduction of additional paid in capital as presented in the condensed consolidated statements of stockholders’ equity. The net proceeds to the Company at the closing of the private placement were $4.94 million.

 

 

"Safe Harbor" Statement under the Private Securities Litigation Reform Act of 1995.

Some of the statements contained in this report are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements involve known and unknown risks, uncertainties and other factors which may cause our or our industry's actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Forward-looking statements include, but are not limited to statements regarding: Zoom's plans, expectations and intentions, including statements relating to Zoom's prospects and plans relating to sales of and markets for its products; and Zoom's financial condition or results of operations.

In some cases, you can identify forward-looking statements by terms such as "may," "will," "should," "could," "would," "expects," "plans," "anticipates," "believes," "estimates," "projects," "predicts," "potential" and similar expressions intended to identify forward-looking statements. These statements are only predictions and involve known and unknown risks, uncertainties, and other factors that may cause our actual results, levels of activity, performance, or achievements to be materially different from any future results, levels of activity, performance, or achievements expressed or implied by such forward-looking statements. Given these uncertainties you should not place undue reliance on these forward-looking statements. Also, these forward-looking statements represent our estimates and assumptions only as of the date of this report. We expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statement contained in this report to reflect any change in our expectations or any change in events, conditions or circumstances on which any of our forward-looking statements are based. Factors that could cause or contribute to differences in our future financial results include those discussed in the risk factors set forth in Item 1A of Part II of this Quarterly Report on Form 10-Q, in our Annual Report on Form 10-K for the year ended December 31, 2018, filed with the Securities and Exchange Commission on April 1, 2019 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 cable modem/routers, Digital Subscriber Line (“DSL”) modems and modem/routers, routers and other local area network products, cellular modems, and dial-up modems through retailers, distributors, and other customers. We sell our products through a direct sales force and through independent sales agents. All of our employees work at our headquarters in Boston, Massachusetts.  We are experienced in electronics hardware, firmware, and software design and test, cloud services, 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.

In July 2016 Zoom headquarters moved from our long-time location at 207 South Street to 99 High Street in Boston. The lease for this location terminated June 29, 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. 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, we extended the term of the 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. 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 September 30, 2019 we had thirty-six 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. Twelve employees were engaged in sales, marketing, and customer support. The remaining six employees performed executive, accounting, administrative, and management information systems functions. We currently have thirty-three full-time employees and three employees working less than 5 days per week, typically 4 days per week. Our dedicated personnel in Tijuana, Mexico are employees of our Mexican service provider and not included in our headcount. As of September 30, 2019, we had two consultants, one in sales and one in information systems, neither of which is included in our employee headcount.

 

Critical Accounting Policies and Estimates

Following is a discussion of what we view as our more significant accounting policies and estimates. As described below, management judgments and estimates must be made and used in connection with the preparation of our financial statements. We have identified areas where material differences could result in the amount and timing of our net sales, costs, and expenses for any period if we had made different judgments or used different estimates.

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. We adopted ASC 606 using the modified retrospective method provision of this standard effective January 1, 2018, which required us to apply the new revenue standard to (i) all new revenue contracts entered into after January 1, 2018 and (ii) all existing revenue contracts as of January 1, 2018 through a cumulative adjustment to retained earnings. In accordance with this approach, there was no material impact which required a cumulative effect adjustment.

 

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.

 

 

 

 

 

 

 

 

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:

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, 2018 we had federal net operating loss carry forwards of approximately $55.0 million which are available to offset future taxable income. They are due to expire in varying amounts from 2019 to 2038. As of December 31, 2018, we had state net operating loss carry forwards of approximately $9.7 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 September 30, 2019 to the three months ended September 30, 2018

Summary. Net sales were $10.9 million for the third quarter ended September 30, 2019 (“Q3 2019”), up 20.8% from $9.0 million for the third quarter of 2018 (“Q3 2018”). We reported a net loss of $200 thousand or $0.01 per share for Q3 2019 compared to net income of $346 thousand or $0.02 per share for Q3 2018.

 

Net Sales. Our total net sales for Q3 2019 increased $1.9 million or 20.8% from Q3 2018. Most of this growth was driven by increases in cable modem and cable modem/routers, DSL products, and local area network products.

Concentration. In Q3 2019 two companies accounted for 10% or greater individually, and 86% in the aggregate of our total net sales. In Q3 2018 two companies accounted for 10% or greater individually, and 77% in the aggregate of our total net sales.

 

 

Gross Profit. Gross profit was $3.1 million or 28.8% of net sales in Q3 2019, compared to $3.3 million or 36.4% of net sales in Q3 2018. China tariff expense of approximately $1.03 million in Q3 2019 reduced gross margin by 9.5% of net revenues, whereas we had no China tariff expense in Q3 2018.

Selling Expense. Selling expense was $2.1 million or 19.0% of net sales in Q3 2019, up from $2.0 million or 22.6% of net sales in Q3 2018. The increase of $35 thousand was primarily due to increases in trademark royalty costs and brick-and mortar marketing expenses, offset by a reduction in advertising costs.

General and Administrative Expense. General and administrative expense was $733 thousand or 6.7% of net sales in Q3 2019, up from $438 thousand or 4.9% of net sales in Q3 2018. The increase of $295 thousand was due salary and fringe benefit expenses for new hires, recruiting costs, and audit and consulting expenses.

 

Research and Development Expense. Research and development expense was $564 thousand or 5.2% of net sales in Q3 2019, up from $420 thousand or 4.7% of net sales in Q3 2018. The increase of $143 thousand was primarily due to increased salary and related costs to support accelerated product development.

Other Income (Expense). Other income was $42 thousand in Q3 2019 and other expense was $33 thousand in Q3 2018.

Net Income (Loss). Net loss was $200 thousand for Q3 2019, compared to net income of $346 thousand for Q3 2018, primarily due to a tariff-related reduction of gross profit and increased operating expenses.

Comparison of the nine-months ended September 30, 2019 to the nine-months ended September 30, 2018

Summary. Net sales were $27.0 million for the nine-months ended September 30, 2019, up 8.8% from $24.9 million for the nine-months ended September 30, 2018. We reported a net loss of $2.1 million for the nine-months ended September 30, 2019 compared to net income of $0.75 million for the nine-months ended September 30, 2018. Loss per diluted share was $0.11 for the nine-months ended September 30, 2019 compared to income per diluted share of $0.05 for the nine-months ended September 30, 2018.

 

Net Sales. Our total net sales for the nine-months ended September 30, 2019 increased $2.2 million or 8.8% from the nine-months ended September 30, 2018, primarily due to Motorola brand products’ continued revenue growth, particularly through e-tail; and increased shelf space at retail. Geographically, our North American sales continued their dominant share of our overall sales, representing 97.5% and 98.1% of our net sales through nine-months ended September 30, 2019 and 2018 respectively.

Concentration. In the nine-months ended September 30, 2019, two companies accounted for 10% or greater individually, and 83% in the aggregate of our total net sales. In the nine-months ended September 30, 2018, two companies accounted for 10% or greater individually, and 78% in the aggregate of our total net sales.

Gross Profit. Gross profit was $8.3 million for the nine-months ended September 30, 2019, down from gross profit of $9.3 million for the nine-months ended September 30, 2018. Our gross margin for the first nine-months of 2019 was 30.7%, down from our gross margin of 37.4% for the nine-months ended September 30, 2018, primarily due to China tariffs increasing cost of goods by approximately $1.9 million or 7.0% of net revenues.

Selling Expense. Selling expense was $7.1 million or 26.1% of net sales in the nine-months ended September 30, 2019, up from $6.2 million or 25.0% of net sales in the nine-months ended September 30, 2018. The increase of $859 thousand was primarily due to increased Motorola trademark royalty costs and retailer-focused marketing expenses, partially offset by a reduction in advertising expenses.

General and Administrative Expense. General and administrative expense was $1.9 million or 6.9% of net sales for the nine-months ended September 30, 2019, up from $1.1 million or 4.3% of net sales for the nine-months ended September 30, 2018. The increase of $798 thousand was primarily due to salary and fringe benefit cost, recruitment expenses, and consulting costs, partially reduced by a $124 thousand reduction in expense in 2018 from reassessment of sales tax liabilities.

 

Research and Development Expense. Research and development expense was $1.5 million or 5.5% of net sales in the nine-months ended September 30, 2019, up from $1.2 million or 4.8% of net sales in the nine-months ended September 30, 2018. The increase of $285 thousand was primarily due to increased salary and fringe benefit costs.

 

 

Other Income (Expense). Other expense for the nine-months ended September 30, 2019 was $5 thousand versus $45 thousand in the nine-months ended September 30, 2018. The difference is primarily due to one-time other income offsetting interest expense incurred on our bank credit line in 2019

Net Income (Loss). Net loss was $2.1 million for the nine-months ended September 30, 2019, compared to net income of $752 thousand for nine-months ended September 30, 2018.

 

Liquidity and Capital Resources

On September 30, 2019 the Company had no bank debt on a $3.0 million asset-based credit line, approximately $2.3 million in cash and cash equivalents, and working capital of approximately $6.6 million. The Company’s credit line has a maturity date of November 30, 2019, and automatically renews on November 30 of each year unless cancelled under the terms of the agreement.

 

The Company closed on a $5 million private placement and issued an aggregate of 4,545,455 shares on May 3, 2019, and soon after the closing of the offering Jeremy Hitchcock and Jonathan Seelig joined Zoom’s Board of Directors. Other major sources of cash during the first nine months of 2019 were decreases of approximately $1.6 million in inventory and $533 thousand in prepaid expenses; and increases in accounts payable and accrued expenses of approximated $494 thousand. Major items that decreased cash were a net loss of approximately $2.1 million, a reduction in debt of approximately $1.7 million, and an accounts receivable increase of approximately $2.0 million.

 

The Company’s ability to maintain adequate levels of liquidity depends in part on our ability to sell inventory on hand and collect related receivables. The Company was profitable for the first nine months of 2018. Effective September 24, 2018, almost all of our products were subject to a 10% tariff because they are produced in China and they are in product categories subject to a 10% tariff on our cost of goods at the time of entry into the US. Effective June 15, 2019 almost all of our products have been subject to the tariff increase from 10% to 25%. This has a significant impact on our cost of inventory and profitability. Because these tariffs may not be reduced and may even be increased, we are actively working on finding production capability outside China. Our largest supplier is actively working on setting up a major production capability in Vietnam, but we do not expect that to affect us until approximately the first quarter of 2020. Although the Company has recently experienced losses, it has continued to experience sales growth. The Company expects year-over-year growth to continue for an unpredictable number of years due to a number of factors including the strength of the Motorola brand, new product introductions, increased shelf space, growing online retailer sales, and international expansion. Because of projected sales increases, the strength of its balance sheet, and its unused line of credit, the Company expects to maintain acceptable levels of liquidity to meet its obligations as they become due for at least twelve months from the date of issuance of the Company’s Quarterly filing of this Form 10-Q with the Securities Exchange Commission.

 

Commitments

During the nine months ended September 30, 2019, 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, 2018.

Off-Balance Sheet Arrangements

 

We did not have any material off-balance sheet arrangements as of September 30, 2019. 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.

 

 

Not Required.

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports pursuant to the Securities Exchange Act of 1934, as amended (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 who is also our Acting 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 Acting 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 September 30, 2019. Based upon that evaluation, our Chief Executive Officer and Acting Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.

 

There has been a change in our internal controls over financial reporting during the quarter ended September 30, 2019 that has materially affected, or is reasonably likely to materially affect our internal control over financial reporting. Effective January 1, 2019, we adopted ASU 2016-02, “Leases (Topic 842)”, which requires management to make significant judgement and estimates. As a result, we implemented changes to our internal controls related to lease evaluation for the nine months ended September 30, 2019. These changes include updated accounting policies affected by ASC Topic 842 as well as redesigned internal controls over financial reporting related to ASC Topic 842 implementation. Additionally, management has expanded data gathering procedures to comply with the additional disclosure requirements and ongoing contract review requirements.

 

 

PART II OTHER INFORMATION

 

For a description of our material pending legal proceedings, please refer to Note 4, “Contingencies – Legal Matters” of the Notes to Condensed Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q, which is incorporated herein by reference.

 

This report contains forward-looking statements that involve risks and uncertainties, such as statements of our objectives, expectations and intentions. The cautionary statements made in this report are applicable to all forward-looking statements wherever they appear in this report. Our actual results could differ materially from those discussed herein. Factors that could cause or contribute to such differences include the risk factors contained in our Annual Report on Form 10-K for the year ended December 31, 2018, filed with the SEC on April 1, 2019, as well as those discussed in this report and in our other filings with the SEC.

There have not been any material changes from the risk factors previously disclosed under Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2018.

 

Exhibit No.		Exhibit Description
3.1		Certificate of Amendment to Amended and Restated Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed with the SEC on July 30, 2019).
31.1		Certification of Chief Executive Officer and Acting Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 (1)		Certifications of Chief Executive Officer and Acting Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS		XBRL Instance Document
101.SCH		XBRL Taxonomy Extension Schema Document
101.CAL		XBRL Taxonomy Calculation Linkbase Document
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document
101.LAB		XBRL Taxonomy Label Linkbase Document
101.PRE		XBRL Taxonomy Presentation Linkbase Document

______________

 

 

SIGNATURES

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

 

	ZOOM TELEPHONICS, INC. (Registrant)
Date: November 14, 2019	By:	/s/  Frank B. Manning
		Frank B. Manning, Chief Executive Officer and Acting Chief Financial Officer (Principal Executive Officer and Principal Financial and Accounting Officer)

 

 

 

EXHIBIT INDEX

 

Exhibit No.		Exhibit Description
3.1		Certificate of Amendment to Amended and Restated Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed with the SEC on July 30, 2019).
31.1		Certification of Chief Executive Officer and Acting Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 (1)		Certifications of Chief Executive Officer and Acting Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS		XBRL Instance Document
101.SCH		XBRL Taxonomy Extension Schema Document
101.CAL		XBRL Taxonomy Calculation Linkbase Document
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document
101.LAB		XBRL Taxonomy Label Linkbase Document
101.PRE		XBRL Taxonomy Presentation Linkbase Document