Business context and reporting period
The supplied filing is Zoom Telephonics, Inc.’s unaudited Form 10-Q for the quarter ended September 30, 2017, filed November 9, 2017. This does not match the request metadata identifying “Fiee, Inc.” The company sells communications hardware, including cable modems, routers, and related products; growth in the period was primarily attributed to Motorola-branded products.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net sales | $8.58 million | $5.99 million | $20.56 million | $12.69 million |
| Gross profit / margin | $3.07 million / 35.7% | $1.93 million / 32.1% | $6.99 million / approximately 34.0% | $3.96 million / approximately 31.2% |
| Operating income (loss) | $413,000 | $(255,000) | $(868,000) | $(1.95 million) |
| Net income (loss) | $377,000 | $(244,000) | $(980,000) | $(1.94 million) |
| Diluted EPS | $0.02 | $(0.02) | $(0.07) | $(0.14) |
Q3 sales rose 43.3% year over year; nine-month sales rose 62.0%. Higher sales drove gross-profit improvement. Selling expense increased with Motorola royalties, advertising, and freight; research and development costs also rose, primarily from product certification and consulting. Nine-month general and administrative expense declined.
Cash flow, debt, and liquidity
- For the nine months, operating cash flow was positive $689,000, versus cash used of $3.74 million in 2016. Investing activities used $169,000 and financing activities used $609,000; cash declined $89,000 to $91,000.
- At September 30, 2017, bank debt was $595,000 under a $3.0 million asset-based credit line. Cash was $91,000, working capital was approximately $2.9 million, and the current ratio was 1.5, versus 1.7 at year-end 2016.
- Total liabilities were $5.57 million and stockholders’ equity was $3.45 million. The company reported compliance with its working-capital and tangible-net-worth covenants; tangible net worth was approximately $3.1 million.
- Management expected liquidity to remain adequate to meet obligations for at least 12 months from the filing date, citing projected sales growth, improved earnings, and the credit facility.
Material changes, outlook, and risks
- The company expanded its Motorola trademark license in August 2017 to cover MoCa adapters and cellular sensors. The license runs through 2020 and requires minimum annual royalties of $3.0 million in 2017, $3.5 million in 2018, $4.5 million in 2019, and $5.1 million in 2020. Remaining 2017 royalty expense commitment at September 30 was $750,000.
- Management believed year-over-year growth was likely to continue, citing the Motorola brand, new products, increased shelf space, online sales, and international expansion. This is management’s expectation, not quantified formal guidance.
- Customer concentration is high: three customers represented 92% of Q3 sales and 90% of nine-month sales; three customers represented 83% of accounts receivable at September 30. Customers generally have no long-term purchase commitments, creating exposure to order reductions, delays, or nonpayment.
- Inventory was $5.31 million, up from $4.93 million at year-end. Nine-month inventory-reserve expense rose to $186,000 from $10,000 in 2016. Finished goods included $836,000 of consigned inventory.
- The company reported a 100% valuation allowance against deferred tax assets. The Magnacross patent case was dismissed with prejudice in February 2017. Management said there were no material changes to previously disclosed risk factors, commitments, or off-balance-sheet arrangements.
Important facts for investors to verify
- Confirm the filing is for Zoom Telephonics, Inc., not the company named in the request metadata.
- Assess whether sales growth and gross-margin improvement are sustainable and whether the company can convert growth into consistent net income and cash.
- Review customer concentration, receivable collectability, inventory levels and reserves, and the effects of consigned inventory.
- Verify the company’s capacity to meet rising Motorola minimum royalties and maintain credit-facility covenant compliance and adequate liquidity.
- Consider dilution: shares outstanding increased to 15.04 million from 14.69 million at year-end 2016; Q3 diluted weighted-average shares were 16.42 million.