Zoom Telephonics, Inc. — Form 10-Q for the quarter ended June 30, 2016
The supplied metadata names Fiee, Inc., but the filing identifies Zoom Telephonics, Inc. as the registrant. This summary covers the second quarter and six months ended June 30, 2016; financial statements are unaudited.
Business context and reporting period
Zoom sells communications hardware, including cable and DSL modems, primarily through retailers, distributors, internet service providers, and OEMs. Motorola-branded cable modem and gateway products launched under a five-year U.S. and Canada trademark license beginning January 2016. North America represented 98% of sales in both Q2 2016 and Q2 2015.
Financial results and liquidity
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Net sales | $3.98 million | $2.59 million | $6.70 million | $5.65 million |
| Gross profit | $1.20 million | $852 thousand | $2.03 million | $1.81 million |
| Gross margin | 30.2% | 32.9% | 30.4% | 32.0% |
| Operating loss | $967 thousand | $79 thousand | $1.70 million | $51 thousand |
| Net loss | $972 thousand | $106 thousand | $1.70 million | $101 thousand |
| Loss per share, basic and diluted | $0.07 | $0.01 | $0.12 | $0.01 |
For the six months, operating cash outflow was $2.27 million, investing cash outflow $222 thousand, and financing cash inflow $742 thousand. Cash fell by $1.75 million to $95.9 thousand. At June 30, current assets were $6.85 million and current liabilities $3.90 million; working capital was approximately $3.0 million and the current ratio 1.8, versus 4.4 million and 3.6 at year-end 2015. Bank debt was $606 thousand, compared with none at December 31, 2015. On July 19, after quarter-end, the revolving credit facility was increased to $2.5 million. The company reported compliance with its working-capital and tangible-net-worth covenants at June 30.
Total assets were $7.61 million and stockholders’ equity $3.71 million at June 30. No off-balance-sheet arrangements were reported.
Material changes and management commentary
- Q2 sales rose 53.4%; first-half sales rose 18.5%. Management attributed growth primarily to Motorola-branded sales, which were $2.8 million in Q2, offsetting a $1.3 million decline in legacy products.
- Gross profit increased, but gross margin declined, which management attributed to lower prices on certain cable modems and higher costs for Motorola-branded products.
- Selling expense increased substantially, primarily from Motorola royalties and higher marketing and advertising costs. Motorola royalty expense was $583 thousand in Q2 and $833 thousand for the first half; the minimum 2016 royalty was $2.0 million, with $583 thousand due in each remaining quarter.
- Management said existing resources and the credit line should fund operations for the foreseeable future if sales and operating-profit expectations are met. No specific sales or earnings guidance was provided.
Risks, contingencies, and unusual items
- Cash was low and fell sharply during the half, while inventory, receivables, and prepaid expenses increased. Management’s funding assessment is conditional on meeting sales and operating-profit expectations.
- Customer concentration is significant: three retailers accounted for 79% of Q2 sales and 86% of June 30 receivables; the largest accounted for 28% of Q2 sales and 43% of receivables. Customers generally have no long-term purchase commitments.
- The Motorola license includes minimum annual royalties through 2020 and advertising, merchandising, and promotion commitments.
- A patent case filed by Magnacross in May 2016 remained in its early stages; the plaintiff sought injunctive relief and unspecified damages. A separate Wetro LAN patent case was dismissed with prejudice in May 2016.
- The company entered a lease for new Boston headquarters space through June 29, 2019. It also extended and expanded its Tijuana facility arrangements to support production.
- Management reported effective disclosure controls as of June 30 and no material changes in internal control over financial reporting. No material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether Motorola product sales and margins can cover recurring royalties and other selling costs, and how legacy-product sales continue to trend.
- Cash burn, inventory and receivables conversion, available borrowing-base capacity, and continued covenant compliance.
- Exposure to major customers, including order variability and collection risk.
- Developments in the Magnacross litigation and the costs and obligations under the Motorola license and facility leases.