Zoom Telephonics, Inc. — Form 10-Q Summary
Reporting period: Quarter ended September 30, 2018; filed November 13, 2018. The filing identifies Zoom Telephonics, Inc. as the registrant.
Business context and financial performance
Zoom sells Internet access and communications products, including cable modems, gateways, routers, and related equipment. It relies on contract manufacturers, imports nearly all products from China, and conducts testing, warehousing, and shipping through its Tijuana facility.
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net sales | $9.00 million | $8.58 million | $24.86 million | $20.56 million |
| Gross profit / margin | $3.27 million / 36.4% | $3.07 million / 35.7% | $9.29 million | $6.99 million |
| Operating income (loss) | $382,000 | $413,000 | $819,000 | $(868,000) |
| Net income (loss) | $346,000 | $377,000 | $752,000 | $(980,000) |
| Diluted earnings (loss) per share | $0.02 | $0.02 | $0.05 | $(0.07) |
Nine-month revenue increased 20.9%, primarily from Motorola-branded product growth. Q3 revenue grew 4.9%, also attributed primarily to Motorola-branded products. Management cited higher etailer sales and increased volume as contributors to improved gross margins and gross profit. Q3 net income declined despite higher sales, with increased selling and administrative expenses among the factors.
Cash flow, debt, and liquidity
- For the first nine months of 2018, operating cash flow was negative $1.99 million, compared with positive $689,000 in 2017. Accounts receivable growth used approximately $2.17 million and inventory growth approximately $978,000 of cash.
- Investing cash outflow was $231,000; financing cash inflow was $2.23 million, including $1.86 million net borrowings on credit lines and $375,000 from stock-option exercises. Cash increased by $9,000 to $238,000.
- At September 30, 2018, total assets were $12.13 million, current assets $11.62 million, total liabilities $7.60 million, and stockholders’ equity $4.52 million. Working capital was approximately $4.0 million.
- Bank debt was $1.95 million under a $3.0 million asset-based line, with approximately $960,000 of unused availability. The line matures in November 2018 and automatically renews unless cancelled. The company reported compliance with its working-capital and tangible-net-worth covenants.
- Management expected liquidity to be adequate to meet obligations for at least twelve months from the filing date. The filing does not provide formal financial guidance.
Material changes, outlook, and risks
- Nine-month results moved from a $980,000 net loss in 2017 to $752,000 net income in 2018. Gross profit rose 32.8%; selling expense increased, while general and administrative and research and development expenses declined.
- Motorola trademark licensing expense was $2.625 million for the first nine months. Minimum annual payments are $3.5 million in 2018, $4.5 million in 2019, and $5.1 million in 2020; $875,000 remained for 2018 at quarter-end. The license term runs through December 2020.
- Two customers represented 77% of Q3 sales and 78% of nine-month sales. Three customers accounted for 72% of accounts receivable at quarter-end. The filing warns that lost, reduced, delayed, or unpaid orders from major customers could harm results.
- The company reported that a 10% U.S. tariff affected close to 100% of its U.S. imports and that a proposed 25% tariff could begin in January 2019. Management warned that tariffs could materially hurt results; passing costs to customers could reduce demand, while shifting production could be difficult, time-consuming, or more costly. Changes to NAFTA were also identified as a risk because most products pass through Mexico.
- A patent-infringement case filed by Be Labs in July 2018 was dismissed with prejudice in September. Management stated that it had no other pending or outstanding legal proceedings. Approximately $86,000 of the previously recorded state sales-tax liability remained at September 30.
- ASC 606 adoption in January 2018 had no material impact requiring a transition adjustment. The company planned to adopt the lease standard effective January 1, 2019 and did not expect a material impact.
Important facts for investors to verify
- Whether the credit line renewed after its November 2018 maturity and whether borrowing availability and covenant compliance remained adequate.
- Actual tariff implementation, the company’s ability to mitigate import costs, and any effects on pricing, demand, and margins.
- Customer concentration, receivable collections, and the cash required to support rising receivables and inventory.
- Sales growth and gross-margin trends, particularly by product and distribution channel, and the effect of Motorola royalties and minimum payments.
- Whether the company’s liquidity outlook was borne out, given negative operating cash flow during the first nine months of 2018.