Filing summary
Business context and period: The filing is Zoom Telephonics, Inc.’s unaudited Form 10-Q for the quarter ended June 30, 2018—not a filing identified as “Fiee, Inc.” Zoom sells communications products, principally cable modems and gateways, through retailers, distributors, internet service providers and OEMs. The company reported one operating segment.
Financial performance and position
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Net sales | $7.52 million in 2018; $6.83 million in 2017 (+10.2%) | $15.86 million in 2018; $11.97 million in 2017 (+32.4%) |
| Gross profit and margin | $2.73 million; 36.3% in 2018, versus $2.19 million; 32.1% | $6.01 million; 37.9% in 2018, versus $3.93 million; 32.8% |
| Operating income (loss) | $68,253 in 2018; $(229,066) in 2017 | $436,750 in 2018; $(1.28) million in 2017 |
| Net income (loss) | $47,330 in 2018; $(268,969) in 2017 | $406,208 in 2018; $(1.36) million in 2017 |
| Diluted earnings (loss) per share | $0.00 in 2018; $(0.02) in 2017 | $0.02 in 2018; $(0.09) in 2017 |
- Cash flow: For the first six months of 2018, operating activities used $504,274, investing activities used $59,356, and financing activities provided $451,912. Cash declined $111,718, ending at $117,500.
- Liquidity and debt: At June 30, 2018, current assets were $10.46 million and current liabilities were approximately $6.91 million; reported working capital was approximately $3.6 million. Bank debt was $191,064 under a $3.0 million asset-based credit line, with approximately $1.73 million available. The line matures in November 2018 and automatically renews unless cancelled. The company said it was in compliance with its loan covenants.
- Other balance-sheet items: Inventory was $6.95 million, up from $5.20 million at December 31, 2017; finished goods included $1.44 million of consigned inventory. Accounts payable and accrued expenses also increased during the period.
Changes, outlook and risks
- Management attributed sales growth for the first half primarily to continued growth in Motorola-branded products and new product introductions. Higher online-retailer sales, which management said carry more favorable margins, were the main reason for improved gross margins. North America accounted for 98% of sales.
- Selling expense rose, primarily from advertising and Motorola trademark royalties. General and administrative expense fell partly because of a reassessment of the sales-tax liability; research and development expense also declined, principally due to lower certification costs and outside consulting.
- The company adopted ASC 606 on January 1, 2018, with no material cumulative transition adjustment. It recognizes product revenue when control transfers, generally on shipment or delivery according to contract terms.
- Management said it expected to maintain sufficient liquidity to meet obligations for at least twelve months from the filing date. The filing provides no specific revenue or earnings guidance and cautions that interim results are not necessarily indicative of full-year results.
- Customer concentration: Two customers represented 75% of second-quarter sales and 79% of first-half sales. Three customers accounted for 78% of accounts receivable at June 30. Management warned that reduced orders or delayed payments from major customers could materially harm results.
- Legal and contractual matters: Be Labs sued on July 11, 2018, alleging patent infringement involving certain AC1900 cable modem/routers and seeking injunctive relief and unspecified damages. The case was in its early stages. Minimum Motorola royalties were $3.5 million for 2018, with $1.75 million remaining for the year; minimums rise to $4.5 million in 2019 and $5.1 million in 2020.
- Trade and operating risks: The company said a proposed 25% U.S. tariff on many Chinese imports could affect most of its products, and that it might be unable to pass costs to customers. Changes to or withdrawal from NAFTA could also affect its operations because most products pass through its Tijuana facility.
- Unusual item: After settling obligations with several states and reassessing remaining exposure, the company reduced its accrued sales-tax liability by approximately $203,000 in the second quarter. It had recorded approximately $119,000 of additional related expense in the first quarter.
Important facts for investors to verify
- Confirm the issuer identity: the supplied filing is for Zoom Telephonics, Inc., while the request metadata names Fiee, Inc.
- Review customer concentration, customer credit exposure, and the sustainability of the sales and margin gains.
- Check cash conversion and inventory levels, including the growth in inventory and consigned finished goods.
- Monitor renewal or cancellation of the November 2018 credit line and covenant headroom.
- Track the Be Labs patent litigation, potential China tariffs and NAFTA-related exposure, and the company’s ability to meet rising Motorola royalty minimums.
- Assess the remaining sales-tax exposure and the effect of the liability reassessment on reported expenses.