Zoom Telephonics, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; filed May 15, 2018. The request metadata names Fiee, Inc., but the filing identifies Zoom Telephonics, Inc. as the registrant. Financial statements are unaudited.
Financial performance
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Net sales | $8.34 million | $5.15 million |
| Gross profit / margin | $3.28 million / 39.4% | $1.73 million / 33.7% |
| Operating income (loss) | $368,497 | ($1.05 million) |
| Net income (loss) | $358,878 | ($1.09 million) |
| Diluted earnings (loss) per share | $0.02 | ($0.07) |
| Net cash from (used in) operations | $140,117 | ($276,496) |
- Sales increased 62%, primarily reflecting continued growth in Motorola-branded products. Cable modems and gateways generated $7.83 million of Q1 2018 sales. North America represented 98.2% of sales.
- Management attributed the profit improvement to higher sales, improved gross margin—particularly on Motorola-branded cable modems and gateways—and lower operating expenses as a percentage of sales. Selling expense rose to $2.05 million, including higher trademark royalties and advertising; research and development expense declined to $410,258.
- Cash increased by $193,968 to $423,186. Operating cash flow was positive, but working-capital uses included increases in receivables ($606,421), prepaid expenses and other assets ($487,067), and inventory ($177,628). Accounts payable and accrued expenses provided $920,752.
Financial position and liquidity
- At March 31, 2018, total assets were $10.22 million, current assets $9.70 million, and current liabilities $6.50 million; reported working capital was approximately $3.2 million.
- Bank debt was approximately $51,000 against a $3.0 million asset-based credit line. Approximately $1.21 million was available, after a $950,000 offset for state sales-tax liabilities. The line matures in November 2018 and automatically renews unless cancelled under its terms.
- 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 12 months from the filing date.
Material changes, outlook, and risks
- Zoom adopted ASC 606 on January 1, 2018 using the modified retrospective method; it reported no material impact requiring a transition adjustment. Revenue is generally recognized when control transfers upon shipment or delivery, depending on contract terms.
- A state sales-tax accrual related to inventory stored through Amazon was $950,000 at quarter-end. The company recorded approximately $119,000 of additional expense in Q1 2018, following an $831,000 expense in Q4 2017.
- Motorola trademark royalty expense was $875,000 in Q1 2018. Minimum annual royalties are $3.5 million for 2018, $4.5 million for 2019, and $5.1 million for 2020; $2.625 million of the 2018 minimum remained after Q1.
- Customer concentration remains significant: two customers represented 27% of Q1 2018 sales, and two customers together represented 60% of accounts receivable at quarter-end. Customers generally have no long-term purchase obligations, creating exposure to order reductions or delayed payments.
- No formal sales or earnings guidance was provided. The company reported no pending or outstanding legal proceedings and no material changes to previously disclosed risk factors or off-balance-sheet arrangements. It noted that quarterly results may not indicate full-year performance.
Important facts for investors to verify
- Whether revenue growth and improved gross margins are sustainable, including the contribution and profitability of Motorola-branded products.
- Customer-level sales and receivables concentration, subsequent collections, and any changes in customer ordering or payment behavior.
- Progress in paying the sales-tax liability and how the resulting credit-line offset affects borrowing availability.
- Ability to satisfy Motorola’s minimum royalty commitments and renew or replace the credit line before its November 2018 maturity.
- Cash conversion and working-capital needs, particularly receivables, prepaid expenses, inventory, and accrued liabilities.