Business context and reporting period
Zoom Telephonics, Inc. filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2013. The filing describes sales of broadband and dial-up modems, wireless networking, and related communications products. The request metadata names “Fiee, Inc.,” but the registrant identified in the filing is Zoom Telephonics, Inc.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net sales | $2.55 million | $3.43 million | $8.36 million | $11.24 million |
| Gross profit | $640,000 | $859,000 | $2.38 million | $2.77 million |
| Gross margin | 25.1% | 25.0% | 28.4% | 24.6% |
| Operating loss | $234,000 | $134,000 | $485,000 | $448,000 |
| Net loss | $252,000 | $155,000 | $536,000 | $480,000 |
| Loss per share, basic and diluted | $0.03 | $0.02 | $0.07 | $0.07 |
For the nine months, cash provided by operating activities was $257,000, compared with cash used of $1.25 million in 2012. Investing activities used $33,000; financing activities used $370,000, including a $618,000 net reduction in bank credit-line borrowings and $249,000 net proceeds from a rights offering. Cash declined $145,000 to $51,000.
At September 30, 2013, current assets were $4.21 million and current liabilities were $1.65 million, giving working capital of $2.6 million and a current ratio of 2.6. Bank debt was $292,000, versus $911,000 at December 31, 2012. Total assets were $4.26 million; stockholders’ equity was $2.61 million. The Rosenthal revolving facility allowed borrowings up to $1.75 million, subject to borrowing-base terms and covenants; the company reported covenant compliance at quarter-end.
Changes versus comparable periods
- Sales fell 25.8% in Q3 and 25.6% for the first nine months year over year. Management attributed the declines mainly to the shrinking dial-up modem market, increased cable-modem competition in North America, and weak UK and other international sales.
- Q3 gross margin was broadly stable year over year; nine-month margin rose to 28.4% from 24.6%, primarily due to lower standard costs for some products.
- Nine-month net loss widened by approximately $57,000. Lower selling and R&D costs were more than offset by higher G&A, principally increased patent- and trademark-related legal costs.
- North America accounted for 95% of Q3 sales, compared with 91% a year earlier. Three customers represented 68% of Q3 sales and 67% of nine-month sales; one customer represented 65% of accounts receivable at quarter-end.
Outlook, risks, and unusual items
Management said the company’s recurring losses and liquidity position leave it without sufficient resources to fund normal operations for the next 12 months unless sales or gross margin improves significantly or additional capital is raised. Financing may not be available on acceptable terms, or at all; management warned of substantial doubt about the company’s ability to continue as a going concern. The financial statements include no adjustments for this uncertainty. The company reported $51,000 in cash despite $2.6 million of working capital and said it may make further cost reductions; headcount was 27, down from 32 a year earlier.
Management is developing products and seeking to increase sales, but provided no quantified financial guidance. It cautioned that growth may require more inventory and receivables, and that consignment arrangements with two significant accounts can delay payment. Major customers generally have no long-term purchase commitments, creating concentration and order-timing risks.
The company issued 1,009,000 shares through a June 2013 rights offering at $0.28 per share, receiving $282,520 gross proceeds. Marketable securities declined in value: the disclosed share price for Zoom Technologies fell from $0.55 at year-end 2012 to $0.25 at September 30, 2013; nine-month unrealized loss was $24,000. Product returns were 17.3% of shipments in Q3 2013 versus 15.9% in Q3 2012. A patent complaint from Voice Integration Technologies was dismissed with prejudice after resolution. A separate Telecomm Innovations patent complaint remained a potential risk; Zoom said it expected dismissal and refiling after an asserted patent-title issue.
Important facts for investors to verify
- Whether Zoom can raise capital or improve sales and margins enough to address the stated going-concern uncertainty and fund the next 12 months.
- Availability and borrowing-base capacity under the $1.75 million secured credit facility, and continued compliance with its covenants.
- Sales trends, gross margins, and exposure to the declining dial-up market and stronger cable-modem competition.
- Dependence on a small number of customers, including the concentration of receivables and the payment effects of consigned inventory.
- Progress and potential exposure related to the Telecomm Innovations patent matter, as well as the effects of ongoing intellectual-property legal costs.