Zoom Telephonics, Inc. — Q1 2019 Form 10-Q
Filing identity: The request metadata names Fiee, Inc., but the supplied filing is for Zoom Telephonics, Inc. This summary reflects the filing. Reporting period ended March 31, 2019; filed May 15, 2019. Amounts are U.S. dollars.
Business context and reporting period
Zoom sells communications products, including cable modems and gateways, primarily through retailers and distributors. North America generated 97.3% of Q1 2019 net sales. Results are unaudited; the company cautions that quarterly results are not necessarily indicative of full-year performance.
Financial performance and liquidity
| Metric | Q1 2019 / March 31, 2019 | Comparable period / change |
|---|---|---|
| Net sales | $8.01 million | $8.34 million; down 3.9% |
| Gross profit / margin | $2.42 million / 30.2% | $3.28 million / 39.4% |
| Operating income (loss) | $(1.08) million | $368,497 income |
| Net income (loss) | $(1.12) million; $(0.07) per share | $358,878 income; $0.02 per share |
| Operating expenses | $3.50 million | $2.91 million |
| Cash from operations | $(260,608) | $140,117 provided |
| Cash and cash equivalents | $115,586 | $125,982 at Dec. 31, 2018 |
| Bank debt | $2.12 million | $1.74 million at Dec. 31, 2018 |
| Working capital | Approximately $2.2 million | Company-reported; current ratio approximately 1.27 |
At quarter-end, the company had a $3.0 million asset-based credit line, with approximately $120,000 available. The line matures in November 2019 and renews annually unless cancelled. Zoom reported compliance with its working-capital and tangible-net-worth covenants. Total liabilities were $8.27 million; stockholders’ equity was $2.94 million.
Material changes versus Q1 2018
- Sales declined, primarily due to lower brick-and-mortar retailer sales; management said online sales continued to grow.
- Gross margin fell 9.2 percentage points. Management attributed the decline mainly to a 10% tariff on products imported from China and lower sales.
- Selling expense rose $392,000, principally from higher Motorola trademark royalties and retailer marketing costs. General and administrative and research and development expenses also increased.
- Interest expense increased to $32,217 from $6,168, primarily related to the credit line.
- Inventory fell by approximately $1.4 million during the quarter, but accounts receivable rose approximately $428,000 and accounts payable and accrued liabilities decreased approximately $793,000.
Outlook, risks, contingencies, and unusual items
- Management outlook: The company expects year-over-year sales growth to continue, citing the Motorola brand, new products, increased shelf space, online sales, and international expansion. It expects liquidity to be adequate for at least 12 months from the filing date, relying on inventory sales, receivable collections, its financing arrangement, and the subsequent equity financing. These are forward-looking expectations, not guarantees.
- Subsequent financing: On May 3, 2019, Zoom completed a private placement of 4,545,455 shares at $1.10 per share for approximately $5.0 million gross proceeds. Proceeds were intended for new-product rollout, working capital, and other corporate purposes. Two investors joined the board upon closing. The financing materially increases the share count; the filing reports 20,707,636 shares outstanding as of May 14, compared with 16,162,181 issued and outstanding at March 31.
- Royalty commitment: The Motorola license carries minimum royalties of $4.5 million for 2019 and $5.1 million for 2020. Q1 2019 royalty expense was $1.125 million, with $3.375 million of the 2019 minimum remaining.
- Concentration and operating risks: Two customers represented 81% of Q1 sales; three customers represented 67% of quarter-end receivables. One supplier provided 99% of purchased inventory. The company identifies customer loss or order delays, supplier dependence, tariffs, pricing competition, demand forecasting, and inventory management as risks.
- Sales taxes: Approximately $86,000 of an original state sales-tax liability remained open; a further approximately $119,500 related to collected tax not yet remitted.
- Leases: Adoption of the lease standard added operating lease assets and liabilities. At March 31, lease liabilities totaled $291,068. The Boston office lease was due to expire June 29, 2019; a new location was planned, but its lease cost was not yet determinable. A Tijuana facility extension through at least November 2020 was subject to completion of building repairs and execution of an extension.
- Other matters: The company reported no pending or outstanding legal proceedings and no material changes to previously disclosed risk factors. It reported effective disclosure controls; lease-standard adoption prompted related changes to internal controls.
Important facts for investors to verify
- Confirm the filing issuer: the supplied document is Zoom Telephonics, Inc., not Fiee, Inc.
- Track whether gross margin recovers from tariff effects and whether the company can manage selling costs and royalty obligations.
- Review customer and supplier concentration, credit-line renewal and availability, and compliance with lending covenants.
- Assess cash generation and the pace of inventory sales and receivable collections following the quarterly operating cash outflow.
- Verify the use of the $5.0 million financing proceeds and account for the resulting share dilution.
- Monitor payment of sales-tax liabilities and completion of the Boston and Tijuana lease arrangements.