Zoom Telephonics, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; filed May 15, 2020. The filing identifies the registrant as Zoom Telephonics, Inc. (not “Fiee, Inc.”). The company sells internet-access and communications products, including cable modems and gateways, primarily through retailers and distributors.
Financial performance
| Metric | Q1 2020 | Q1 2019 | Change / context |
|---|---|---|---|
| Net sales | $11.96 million | $8.01 million | Up 49.3% |
| Gross profit / margin | $3.10 million / 25.9% | $2.42 million / 30.2% | Profit increased, but margin fell, primarily due to China tariffs |
| Operating loss | $740,000 | $1.08 million | Improved |
| Net loss | $752,000 | $1.12 million | Loss per share was $0.04 versus $0.07 |
| Operating cash flow | $(1.34) million | $(261,000) | Cash used increased |
| Cash, cash equivalents and restricted cash | $578,000 | $116,000 | At March 31, 2020, $550,000 was restricted; unrestricted cash was $28,000 |
At March 31, 2020, total assets were $11.64 million, current liabilities were $5.96 million, and stockholders’ equity was $5.68 million. Working capital was approximately $5.0 million and the current ratio was 1.8. Bank-line borrowings were $387,000. The filing reports approximately $2.6 million of availability under the line at quarter-end; an April amendment subsequently increased the facility to $4.0 million. The company was in compliance with its working-capital and tangible-net-worth covenants at March 31.
Material changes and operating drivers
- Sales growth was led by retail and online sales. Cable modems and gateways generated $11.17 million of Q1 2020 revenue, versus $7.07 million a year earlier.
- Tariff costs on China imports were $1.5 million in Q1 and were described as the primary reason for the quarterly net loss. Gross margin declined despite higher sales.
- Selling expense fell by $93,000, while general and administrative expense rose by $260,000 and research and development expense rose by $170,000, mainly reflecting higher salary-related costs and product testing/compliance expense.
- Two customers each represented at least 10% of sales and together accounted for 86% of Q1 revenue. Two customers represented 73% of accounts receivable at quarter-end.
- Two suppliers provided 99% of purchased inventory in Q1, highlighting supplier concentration.
Outlook, risks and notable items
- Going concern and liquidity: Management stated that losses and operating cash outflows raise substantial concerns about the company’s ability to continue as a going concern within one year. Continued operations depend on generating cash, reducing costs, obtaining financing, and complying with financing covenants. The filing cautions that there is no assurance these efforts will succeed.
- Manufacturing transition and tariffs: The company was moving production from China to Vietnam, with full transition of existing models expected by the end of June 2020. Management estimated the transition could save approximately $500,000 per month in tariffs and release $800,000 of restricted cash over the following year. COVID-19 had delayed the transition. Foxconn was engaged to manufacture several planned new models.
- COVID-19: A mid-March sales and production disruption was described as temporary; management reported sales returning to normal and some models selling above prior average rates. However, the duration and economic effects of the pandemic remained uncertain, and inventory availability constrained sales.
- Financing and cash measures: The company negotiated improved supplier payment terms through June, froze hiring, and planned to reduce its Boston office footprint. A $4.0 million credit-line amendment was signed April 13, 2020. A $0.6 million SBA Paycheck Protection Program loan was approved and funded in April.
- Commitments and contingencies: Minimum Motorola royalties were $5.1 million for 2020 and $4.3 million annually for 2021–2025 under the extended license. A putative class action alleges that modems were sold as new despite containing refurbished parts; the company said it intended to defend itself. The filing also reports approximately $51,000 of an original state sales-tax liability remaining open, plus about $36,000 collected but not yet remitted.
- Leadership: On May 11, 2020, the CEO and president notified the company of his decision to step down and serve as a board advisor; a search committee was formed.
Important facts for investors to verify
- Whether the Vietnam transition was completed on schedule and delivered the stated tariff savings and release of restricted cash.
- Whether sales, inventory availability, customer collections and operating cash flow improved sufficiently to address the going-concern uncertainty.
- Available borrowing capacity and compliance with the amended credit facility’s covenants, including its November 2020 maturity.
- Exposure to major customers and suppliers, and the financial outcome of the modem class action and remaining tax liabilities.
- Actual royalty expense and obligations under the Motorola agreements, and the funding and any forgiveness status of the PPP loan.