Zoom Telephonics, Inc. — Q2 2012 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2012; filed August 14, 2012. The filing identifies the registrant as Zoom Telephonics, Inc., which differs from the “Fiee, Inc.” company name in the request metadata.
Financial results
| Metric | Q2 2012 | Q2 2011 | First half 2012 | First half 2011 |
|---|---|---|---|---|
| Net sales | $3.83 million | $3.17 million | $7.81 million | $5.97 million |
| Gross profit / margin | $920,000 / 24.0% | $748,000 / 23.6% | $1.91 million / 24.4% | $1.56 million / 26.1% |
| Operating loss | $201,000 | $398,000 | $314,000 | $681,000 |
| Net loss | $211,000 | $326,000 | $325,000 | $611,000 |
| Loss per share, diluted | $0.03 | $0.06 | $0.05 | $0.11 |
Q2 sales increased 21.0% year over year; first-half sales rose 30.7%. Cable modem and cable modem/router sales, especially DOCSIS 3.0 products in the U.S., drove growth, offsetting declines in dial-up modems and mobile broadband products. First-half gross margin fell 1.7 percentage points, primarily from a shift toward lower-margin products. Q2 margin edged up 0.4 points.
For the six months, operating cash flow was negative $1.09 million, versus negative $99,000 in 2011. Cash declined $581,000 to $63,000 at June 30. Net accounts receivable increased about $497,000, contributing to the cash use. The company reported working capital of $3.3 million and a 2.9 current ratio, compared with $3.6 million and 3.5 at year-end 2011.
Total assets were $5.05 million and stockholders’ equity $3.33 million at June 30. Current liabilities were $1.72 million, including $526,000 of bank debt; there was no bank debt at December 31, 2011. The company recorded $6,245 of depreciation and amortization in first-half cash flows.
Changes, outlook, and risks
- Operating losses narrowed year over year, helped by higher sales and lower selling expense. First-half selling expense fell to $1.03 million from $1.12 million; R&D rose to $582,000 from $511,000, mainly due to cable modem certification and new-product engineering.
- Q2 2011 included $72,000 of other income from a one-time settlement on an old Hayes/AT&T receivable claim. Q2 2012 had $9,000 of other expense, primarily interest on the new credit line.
- In April 2012, the company entered a one-year, asset-based revolving credit facility of up to $1 million with Silicon Valley Bank. Borrowings are subject to a borrowing base and covenants, bear a reported June annualized rate of 9% that may vary, and are secured by all company assets, including intellectual property. The agreement requires at least $3.0 million tangible net worth.
- Management says current resources are insufficient to fund normal operations for the next 12 months unless sales or gross margin improve significantly or the company raises capital. Financing availability is uncertain; the filing states there is substantial doubt about the company’s ability to continue as a going concern. Financial statements include no adjustments for the outcome of this uncertainty.
- Management is cutting headcount and overhead and may make further reductions. Headcount was 32 at June 30, versus 37 a year earlier. Growth may also consume cash through higher inventory and receivables; two significant accounts purchase on consignment, which can delay payment.
- Customer concentration increased: the top three customers represented 62% of Q2 sales and 66% of first-half sales, versus 46% and 51%, respectively, in the comparable 2011 periods. Customers generally have no long-term purchase commitments. Product returns were 13.3% of Q2 shipments, versus 8.7% a year earlier.
- North America generated 89% of Q2 sales. The filing reports no current lawsuits and no material changes to other capital commitments and contractual obligations beyond the credit agreement. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting.
Guidance: No specific numerical sales, earnings, or cash-flow guidance is provided. Management’s outlook depends on substantial sales or margin improvement and/or additional capital.
Important facts for investors to verify
- Whether the company can access sufficient liquidity, comply with the credit line’s borrowing-base requirements and covenants, and fund operations beyond the next 12 months.
- Whether cable modem growth can continue and improve profitability enough to offset declines in dial-up and mobile broadband products and lower-margin sales mix.
- Receivables quality, customer payment timing, consignment sell-through, return levels, and dependence on three major customers.
- The impact of secured borrowing, including the lien on intellectual property, and the status of the $3.0 million tangible-net-worth covenant.
- The filing cites the auditor’s substantial-doubt going-concern language from the 2011 audit; review the annual report and subsequent filings for updated liquidity and going-concern disclosures.