Zoom Telephonics, Inc. — Form 10-Q summary
Reporting period: Quarter ended September 30, 2019; filed November 14, 2019. The filing identifies the registrant as Zoom Telephonics, Inc., not “Fiee, Inc.” The company sells cable modems, gateways, routers, and other communications products, including Motorola-branded products.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net sales | $10.87 million | $9.00 million | $27.04 million | $24.86 million |
| Gross profit | $3.13 million | $3.27 million | $8.31 million | $9.29 million |
| Gross margin | 28.8% | 36.4% | 30.7% | 37.4% |
| Operating income (loss) | ($238,000) | $382,000 | ($2.10 million) | $819,000 |
| Net income (loss) | ($200,000) | $346,000 | ($2.13 million) | $752,000 |
| Diluted earnings (loss) per share | ($0.01) | $0.02 | ($0.11) | $0.05 |
- Cash flow: For the nine months, operating cash use was $840,000, investing cash use was $256,000, and financing provided $3.25 million. Cash increased $2.15 million to $2.28 million.
- Liquidity and debt: At September 30, cash was $2.28 million, working capital approximately $6.6 million, and bank debt was zero. The $3.0 million asset-based line had approximately $2.2 million available; its stated maturity was November 30, 2019, with annual automatic renewal unless cancelled. The company reported compliance with its covenants.
- Balance sheet: Total assets were $14.37 million and total liabilities $7.20 million. Current assets were $13.75 million and current liabilities $7.17 million.
- Equity financing: A May private placement issued 4,545,455 shares at $1.10 each and generated $4.94 million net proceeds. Shares outstanding were 20,880,136 at September 30, versus 16,124,681 at December 31, 2018.
Changes versus comparable periods
- Q3 sales grew 20.8% year over year, but the company moved from net income to a loss. Nine-month sales grew 8.8%, while results moved from net income of $752,000 to a net loss of $2.13 million.
- China tariffs were a major margin headwind: the rate on almost all products increased from 10% to 25% effective June 15, 2019. The filing attributes approximately $1.03 million of Q3 cost and $1.9 million over nine months to tariffs. Nine-month gross margin fell 6.7 percentage points.
- Operating expenses rose year over year. Nine-month selling expense increased $859,000, general and administrative expense increased $798,000, and research and development expense increased $285,000.
- Cash improved substantially, supported principally by the private placement, despite operating cash use, debt repayment, and higher receivables. Accounts receivable rose to $4.75 million from $2.76 million at year-end.
- Adoption of lease accounting brought operating lease assets and liabilities onto the balance sheet; the company said adoption did not materially affect operating results or liquidity.
Outlook, risks, and unusual items
- Management expected year-over-year sales growth to continue, citing the Motorola brand, new products, increased retail shelf space, online sales, and international expansion. It gave no quantified earnings or revenue guidance.
- Management expected adequate liquidity for at least 12 months from the filing date, relying on anticipated sales, balance-sheet strength, and unused credit availability. It noted liquidity depends partly on selling inventory and collecting receivables.
- The company was seeking manufacturing capability outside China in response to tariffs. Its largest supplier was developing production in Vietnam, but management did not expect that to affect the company until approximately Q1 2020.
- Customer concentration is significant: two customers accounted for 86% of Q3 sales and 83% of nine-month sales. Three customers held 86% of receivables at September 30. One supplier accounted for 95% of purchased inventory during both the quarter and nine-month period.
- The Motorola license requires minimum annual royalties of $4.5 million for 2019 and $5.1 million for 2020. The filing reported $3.39 million of royalty expense for the first nine months of 2019 and $1.125 million remaining committed royalty expense for 2019.
- Approximately $51,000 of an original state sales-tax liability remained open; a further approximately $138,000 of collected but unremitted sales tax was included in accrued expenses.
- The company reported no pending or outstanding legal proceedings and no material off-balance-sheet arrangements. Management said there were no material changes to previously disclosed risk factors. Disclosure controls were assessed as effective; internal controls were updated for lease-accounting implementation.
Important facts for investors to verify
- Whether tariff costs ease, and whether the planned Vietnam production transition occurs on the anticipated timeline and at viable cost.
- Whether sales growth translates into improved margins and operating profitability after tariffs, royalties, and higher operating expenses.
- Customer and supplier concentration, including the effect of any order reduction, delayed payment, or supply disruption.
- Credit-line renewal status after its November 30, 2019 maturity date, availability under the borrowing base, and ongoing covenant compliance.
- Receivables collection, inventory sell-through, and the company’s ability to fund ongoing cash use without further equity financing.
- Future royalty obligations and the status of sales-tax liabilities and remittances.