Fiee, Inc. quarterly report, Q1 FY2018

Zoom Telephonics, Inc. — Q1 2018 Form 10-Q

Reporting period: Three months ended March 31, 2018; filed May 15, 2018. The request metadata names Fiee, Inc., but the filing identifies Zoom Telephonics, Inc. as the registrant. Financial statements are unaudited.

Financial performance

MetricQ1 2018Q1 2017
Net sales$8.34 million$5.15 million
Gross profit / margin$3.28 million / 39.4%$1.73 million / 33.7%
Operating income (loss)$368,497($1.05 million)
Net income (loss)$358,878($1.09 million)
Diluted earnings (loss) per share$0.02($0.07)
Net cash from (used in) operations$140,117($276,496)
  • Sales increased 62%, primarily reflecting continued growth in Motorola-branded products. Cable modems and gateways generated $7.83 million of Q1 2018 sales. North America represented 98.2% of sales.
  • Management attributed the profit improvement to higher sales, improved gross margin—particularly on Motorola-branded cable modems and gateways—and lower operating expenses as a percentage of sales. Selling expense rose to $2.05 million, including higher trademark royalties and advertising; research and development expense declined to $410,258.
  • Cash increased by $193,968 to $423,186. Operating cash flow was positive, but working-capital uses included increases in receivables ($606,421), prepaid expenses and other assets ($487,067), and inventory ($177,628). Accounts payable and accrued expenses provided $920,752.

Financial position and liquidity

  • At March 31, 2018, total assets were $10.22 million, current assets $9.70 million, and current liabilities $6.50 million; reported working capital was approximately $3.2 million.
  • Bank debt was approximately $51,000 against a $3.0 million asset-based credit line. Approximately $1.21 million was available, after a $950,000 offset for state sales-tax liabilities. The line matures in November 2018 and automatically renews unless cancelled under its terms.
  • The company reported compliance with its working-capital and tangible-net-worth covenants. Management expected liquidity to be adequate to meet obligations for at least 12 months from the filing date.

Material changes, outlook, and risks

  • Zoom adopted ASC 606 on January 1, 2018 using the modified retrospective method; it reported no material impact requiring a transition adjustment. Revenue is generally recognized when control transfers upon shipment or delivery, depending on contract terms.
  • A state sales-tax accrual related to inventory stored through Amazon was $950,000 at quarter-end. The company recorded approximately $119,000 of additional expense in Q1 2018, following an $831,000 expense in Q4 2017.
  • Motorola trademark royalty expense was $875,000 in Q1 2018. Minimum annual royalties are $3.5 million for 2018, $4.5 million for 2019, and $5.1 million for 2020; $2.625 million of the 2018 minimum remained after Q1.
  • Customer concentration remains significant: two customers represented 27% of Q1 2018 sales, and two customers together represented 60% of accounts receivable at quarter-end. Customers generally have no long-term purchase obligations, creating exposure to order reductions or delayed payments.
  • No formal sales or earnings guidance was provided. The company reported no pending or outstanding legal proceedings and no material changes to previously disclosed risk factors or off-balance-sheet arrangements. It noted that quarterly results may not indicate full-year performance.

Important facts for investors to verify

  • Whether revenue growth and improved gross margins are sustainable, including the contribution and profitability of Motorola-branded products.
  • Customer-level sales and receivables concentration, subsequent collections, and any changes in customer ordering or payment behavior.
  • Progress in paying the sales-tax liability and how the resulting credit-line offset affects borrowing availability.
  • Ability to satisfy Motorola’s minimum royalty commitments and renew or replace the credit line before its November 2018 maturity.
  • Cash conversion and working-capital needs, particularly receivables, prepaid expenses, inventory, and accrued liabilities.