Business context and reporting period
The filing is Zoom Telephonics, Inc.’s unaudited Form 10-Q for the quarter and six months ended June 30, 2015; the filing does not identify Fiee, Inc. Zoom sells internet-communications hardware, including cable modems, broadband products and routers, primarily in North America. Results are not necessarily indicative of full-year performance.
Key financial metrics
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Net sales | $2.592 million | $2.641 million | $5.652 million | $5.787 million |
| Gross profit / margin | $852,000 / 32.9% | $800,000 / 30.3% | $1.809 million / 32.0% | $1.732 million / 29.9% |
| Operating loss | $79,000 | $84,000 | $51,000 | $105,000 |
| Net loss | $106,000 | $107,000 | $101,000 | $144,000 |
| Loss per share, diluted | $0.01 | $0.01 | $0.01 | $0.02 |
First-half operating cash use was $84,000, versus $644,000 in the prior-year period. Investing cash use was $9,000; financing provided $208,000, including $199,000 of net additional bank borrowing and $9,000 from stock-option exercises. Cash increased $115,000 to $252,000.
At June 30, 2015, current assets were $3.960 million, current liabilities $2.183 million, working capital approximately $1.8 million, and the current ratio 1.8. Bank debt was $1.039 million under a $1.25 million revolving line secured by company assets, including intellectual property; there was no long-term debt. Total assets were $4.259 million and stockholders’ equity $2.076 million.
Material changes versus prior comparable periods
- Q2 sales declined 1.8% year over year; first-half sales declined 2.3%. Management attributed the decreases mainly to lower dial-up sales, with cable-modem growth partly offsetting declines.
- Gross margin improved in both periods, primarily reflecting lower cost for one cable-modem product.
- Q2 operating expenses rose to $931,000 from $883,000, with higher selling and general and administrative costs. First-half expenses were $1.860 million versus $1.837 million.
- First-half net loss narrowed by $43,000 year over year. Working capital fell from $2.1 million at year-end 2014 to $1.8 million, while the current ratio declined from 2.1 to 1.8.
Outlook, risks and unusual items
- Zoom licensed the Motorola trademark exclusively for specified consumer cable-modem products in the United States and Canada for 2016–2020. Management expects the launch to increase sales and plans new Motorola-branded modems and gateways for early 2016. The agreement requires a setup fee and royalties, including minimum annual royalties; amounts are not stated in this filing.
- Management expects sales growth to require more inventory and receivables and says it expects to raise funds. It believes existing resources and the credit line can fund operations for the foreseeable future if sales and operating-profit expectations are met. Additional financing may be difficult to obtain.
- Zoom breached its $2.0 million tangible-net-worth covenant: reported tangible net worth was approximately $1.839 million, a $161,000 shortfall. The lender waived the breach for the period ended June 30, 2015. Zoom remained compliant with the working-capital covenant.
- Customer concentration is significant: three customers represented 76% of Q2 sales and the largest customer 45%; three customers represented 88% of gross receivables at quarter-end. Customers generally have no long-term purchase commitments.
- A patent-infringement case brought by Concinnitas was settled, with dismissal papers expected. A separate Wetro LAN patent case was in its early stages. Management said ordinary-course legal matters were not expected to materially affect the company, but patent litigation can entail costs and distraction.
- Product returns were 15.8% of Q2 shipments, up from 12.7% a year earlier. Inventory was $2.206 million, including a $257,000 reserve for slow-moving and obsolete inventory.
Most important facts for investors to verify
- Whether the Motorola product launch achieves forecast sales and profitability after minimum royalties, and whether the setup fee and royalty commitments are funded.
- Availability and covenant compliance of the revolving credit line, particularly after the temporary tangible-net-worth waiver.
- Customer order continuity, receivable collection and the effects of concentrated sales and receivables.
- Inventory quality and product-return trends as Zoom prepares for anticipated growth.
- Developments and potential costs in the outstanding patent case and the agreed Concinnitas dismissal.