Notes to Condensed Consolidated
Financial Statements
(Unaudited)
(1)
Summary of Significant Accounting Policies
The
accompanying condensed consolidated financial statements
(“financial statements”) are unaudited. However, the
presentation of the condensed consolidated balance sheet as of
December 31, 2015 was derived from audited financial
statements. In the opinion of management, the accompanying
financial statements include all necessary adjustments to present
fairly the consolidated financial position, results of operations
and cash flows of Zoom Telephonics, Inc. (the “Company”
or “Zoom”). The adjustments are of a normal, recurring
nature.
The
results of operations for the periods presented are not necessarily
indicative of the results to be expected for the entire year. The
Company has evaluated subsequent events from September 30, 2016
through the date of this filing and other than the subscription
agreements disclosed in Note 7, has determined that there are no
such events requiring recognition or disclosure in the financial
statements.
The
financial statements of the Company presented herein have been
prepared pursuant to the rules of the Securities and Exchange
Commission for quarterly reports on Form 10-Q and do not
include all of the information and disclosures required by
accounting principles generally accepted in the United States of
America. These financial statements should be read in conjunction
with the audited financial statements and notes thereto for the
year ended December 31, 2015 included in the Company's 2015
Annual Report on Form 10-K .
Recently Issued Accounting Pronouncements
In
August 2014, the Financial Accounting Standards Board ("FASB")
issued Accounting Standards Update ("ASU") No. 2014-15,
"Presentation of Financial Statements — Going Concern." This
standard requires management to evaluate for each annual and
interim reporting period whether it is probable that the reporting
entity will not be able to meet its obligations as they become due
within one year after the date that the financial statements are
issued. If the entity is in such a position, the standard provides
for certain disclosures depending on whether or not the entity will
be able to successfully mitigate its going concern status. This
guidance is effective for annual periods ending after December 15,
2016 and interim periods within annual periods beginning after
December 15, 2016. Early application is permitted. The Company does
not expect a material impact to the Company’s financial
condition, results from operations, or cash flows from the adoption
of this guidance.
In
July 2015, the FASB issued ASU No. 2015-11, “Inventory (Topic
330): Simplifying the Measurement of Inventory.” Currently,
all inventory is measured at the lower of cost or market. ASU
2015-11 changes the measurement principle for inventory from the
lower of cost or market to the lower of cost or net realizable
value. Net realizable value is the estimated selling price in the
ordinary course of business less reasonably predictable costs of
completion, disposal and transportation. The standard is effective
for annual reporting periods beginning after December 15, 2015,
which for the Company commenced with the year beginning January 1,
2016. Prospective application is required. The Company does not
believe the implementation of this standard has a material impact
on the Company’s consolidated financial
statements.
In August 2015, the
FASB
issued
ASU No.
2015-14
“Revenue from
Contracts with Customers (Topic 606): Deferral of the
Effective Date.” The amendments in this update defer the
effective date of ASU 2014-09 for all entities by one year. Public
business entities, certain not-for-profit entities, and certain
employee benefit plans should apply the guidance in ASU 2014-09 to
annual reporting periods beginning after December 15, 2017,
including interim reporting periods within that reporting period.
Earlier application is permitted only as of annual reporting
periods beginning after December 15, 2016, including interim
reporting periods within that reporting period.
The Company is assessing the impact to the
Company's financial condition, results of operations or cash flows
from the adoption of this guidance.
In
March 2016, the FASB issued ASU 2016-02, “Leases (Topic
842).” ASU 2016-02 requires that a lessee recognize the
assets and liabilities that arise from operating leases. A lessee
should recognize in its balance sheet, a liability to make lease
payments (the lease liability) and a right-of-use asset
representing its right to use the underlying asset for the lease
term (the lease asset). For leases with a term of 12 months or
less, a lessee is permitted to make an accounting policy election
by class of underlying asset not to recognize lease assets and
lease liabilities. In transition, lessees and lessors are required
to recognize and measure leases at the beginning of the earliest
period presented using a modified retrospective approach. Public
business entities should apply the amendments in ASU 2016-02 for
fiscal years beginning after December 15, 2018, including interim
periods within those fiscal years. Early application is permitted.
The adoption of this standard is not expected to have a material
impact on the Company’s consolidated financial condition,
results of operations and cash flows.
In
March 2016, the FASB issued ASU No. 2016-09, “Compensation
– Stock Compensation.” ASU 2016-09 simplifies several
aspects of the accounting for share-based payment transactions,
including the income tax consequences, classification of awards as
either equity or liabilities, and classification on the statement
of cash flows. Some of the simplified areas apply only to nonpublic
entities. ASU 2016-09 is effective for public business entities for
annual periods beginning after December 15, 2016, and interim
periods within those annual periods. Early adoption is permitted in
any interim or annual period. If an entity early adopts ASU 2016-09
in an interim period, any adjustments should be reflected as of the
beginning of the fiscal year that includes that interim period.
Methods of adoption vary according to each of the amendment
provisions. The Company is currently evaluating the potential
impact that the adoption of ASU 2016-09 may have on its
consolidated financial statements.
In
April 2016, the FASB issued ASU No. 2016-10, "Revenue from
Contracts with Customers — Identifying Performance
Obligations and Licensing." ASU 2016-10 does not change the core
principle of the guidance, rather it clarifies the identification
of performance obligations and the licensing implementation
guidance, while retaining the related principles for those areas.
ASU 2016-10 clarifies the guidance in ASU No. 2014-09, "Revenue
from Contracts with Customers (Topic 606)," which is not yet
effective. The effective date and transition requirements for ASU
2016-10 are the same as for ASU 2014-09, which was deferred by one
year by ASU No.2015-14, "Revenue from Contracts with Customers
— Deferral of the Effective Date." Public business entities
should adopt the new revenue recognition standard for annual
reporting periods beginning after December 15, 2017, including
interim periods within that year. Early adoption is permitted only
as of annual reporting periods beginning after December 15, 2016,
including interim periods within that year. The Company is
currently evaluating the potential impact that the adoption of ASU
2016-10 may have on its consolidated financial
statements.
In
May 2016, the FASB issued ASU No. 2016-12, "Revenue from Contracts
with Customers — Narrow- Scope Improvements and Practical
Expedients." ASU 2016-12 does not change the core principle of the
guidance, rather it affects only certain narrow aspects of Topic
606, including assessing collectability, presentation of sales
taxes, noncash consideration, and completed contracts and contract
modifications at transition. ASU 2016-12 affects the guidance in
ASU No. 2014-09, "Revenue from Contracts with Customers (Topic
606)," which is not yet effective. The effective date and
transition requirements for ASU 2016-12 are the same as for ASU
2014-09, which was deferred by one year by ASU No. 2015-14,
"Revenue from Contracts with Customers —Deferral of the
Effective Date." Public business entities should adopt the new
revenue recognition standard for annual reporting periods beginning
after December 15, 2017, including interim periods within that
year. Early adoption is permitted only as of annual reporting
periods beginning after December 15, 2016, including interim
periods within that year. The Company is currently evaluating the
potential impact that the adoption of ASU 2016-12 may have on its
consolidated financial statements.
In
June 2016, the FASB issued ASU No. 2016-13, "Financial Instruments
Credit Losses —Measurement of Credit Losses on Financial
Instruments." ASU 2016-13 requires a financial asset (or group of
financial assets) measured at amortized cost basis to be presented
at the net amount expected to be collected. ASU 2016-13 is
effective for public business entities that are SEC filers for
fiscal years beginning after December 15, 2019, including interim
periods within those fiscal years. Early adoption is permitted in
any interim or annual period for fiscal years beginning after
December 15, 2018. An entity should apply the amendments in ASU
2016-13 through a cumulative-effect adjustment to retained earnings
as of the beginning of the first reporting period in which the
guidance is effective (modified-retrospective approach). The
Company is currently evaluating the potential impact that the
adoption of ASU 2016-13 may have on its consolidated financial
statements, however, it does not expect it to have a material
effect.
(2) Liquidity
The
Company’s cash and cash equivalents balance at September 30,
2016 was approximately $175 thousand, a decrease of $1.7 million
from December 31, 2015. Major uses of cash were attributed to a
$1.9 million loss for the nine months ended September 30, 2016, an
increase of approximately $1.8 million in accounts receivable, an
increase of approximately $1.4 million in inventory, and an
increase of approximately $0.2 million in prepaid expense. These
were partially offset by increases of approximately $2.1 million in
bank debt, approximately $0.7 million in accrued expenses, and
approximately $0.4 million in accounts payable.
On
September 30, 2016 the Company had approximately $2.1 million in
bank debt of a $3.0 million credit line, working capital of
approximately $2.9 million including approximately $175 thousand in
cash and cash equivalents. The Company raised $3.65 million from a
$3.42 million private placement in September 2015 and a $229
thousand rights offering in July 2015. On December 31, 2015 the
Company had working capital of approximately $4.4 million including
approximately $1.8 million in cash and cash equivalents. The
Company’s current ratio at September 30, 2016 was 1.6
compared to 3.6 at December 31, 2015.
On May 18, 2015, the Company announced
licensing of the Motorola trademark for cable modems and gateways
for the U.S. and Canada for five years starting January 2016
In order to support anticipated sales growth, the Company raised
approximately $3.65 million as described above. The Company
believes that its existing financial resources, supplemented by net
proceeds of approximately $1.5 million from the private placement
offering that occurred subsequent to September 30, 2016, along with
its existing line of credit and recent increase to the credit
limit, will be sufficient to fund operations for at least the next
twelve months.
(3)
Inventories
Inventories
consist of :
|
|
|
Materials
|
$
1,166,501
|
$
477,929
|
Work
in process
|
162,539
|
––
|
Finished
goods
|
2,900,030
|
2,306,681
|
Total
|
$
4,229,070
|
$
2,784,610
|
Finished
goods includes consigned inventory held by our customers of
$402,963 at September 30, 2016 and $119,100 at December 31, 2015.
The Company reviews inventory for obsolete and slow moving products
each quarter and makes provisions based on its estimate of the
probability that the material will not be consumed or that it will
be sold below cost. The provision for inventory reserves was
negligible in both the first nine months of 2016 and
2015.
(4)
Commitments and Contingencies
From
time to time, the Company is party to various lawsuits and
administrative proceedings arising in the ordinary course of
business. The Company evaluates such lawsuits and proceedings on a
case-by-case basis, and its policy is to vigorously contest any
such claims, that it believes are without merit. The Company's
management believes that the ultimate resolution of such matters
will not materially and adversely affect the Company's business,
financial position, or results of operations.
On
January 30, 2015, Wetro LAN LLC ("Wetro LAN") filed a complaint in
the U.S. District Court for the Eastern District of Texas
(U.S.D.C., E.D.Tex.) against the Company alleging infringement of
U.S. Patent No. 6,795,918 (“the ’918 patent”)
entitled “Service Level Computer Security.” Wetro LAN
alleged that the Company’s wireless routers, including its
Model 4501 Wireless-N Router, infringe the '918 patent. “In
its complaint, Wetro LAN sought unspecified compensatory
damages.” The case was resolved on May 18, 2016 with the
entry by the Judge of an Order of Dismissal with
Prejudice.
On
May 17, 2016, Magnacross LLC ("Magnacross") filed a complaint in
the U.S. District Court for the Eastern District of Texas
(U.S.D.C., E.D.Tex.) against the Company alleging infringement of
U.S. Patent No. 6,917,304 (“the ’304 patent”)
entitled “Wireless Multiplex Data Transmission System.”
Magnacross alleged that the Company’s wireless routers,
including its Model 5363, 5360 5354 (N300, N600, AC1900) Routers,
infringe the '304 patent. In its complaint, Magnacross sought
injunctive relief and unspecified compensatory damages. The case is
in its early stages and the Court entered an Amended Docket Control
Order on October 12, 2016. If the case is not otherwise
resolved, trial is scheduled to commence on November 6,
2017.
On
May 14, 2015, Zoom entered into a License Agreement with Motorola
Mobility LLC (the “License Agreement”). The
License Agreement provides Zoom with an exclusive license to use
certain trademarks owned by Motorola Trademark Holdings, LLC. for
the manufacture, sale and marketing of consumer cable modem
products in the United States and Canada through certain authorized
sales channels.
On
August 8, 2016, Zoom entered into an amendment to the License
Agreement with Motorola Mobility LLC (the
“Amendment”). The Amendment expands
Zoom’s exclusive license to use the Motorola trademark to a
wide range of authorized channels worldwide, and expands the
license from cable modems and gateways to also include consumer
routers, WiFi range extenders, home powerline network adapters, and
access points. The License Agreement, as amended, has a five-year
term beginning January 1, 2016 through December 31,
2020.
In
connection with the amended License Agreement, the Company has
committed to spend a certain percentage of its Motorola revenues
for use in advertising, merchandising and promotion of the related
products. Additionally, the Company is required to make quarterly
royalty payments equal to a certain percentage of the preceding
quarter’s net sales with minimum annual royalty payments as
follows:
Year ending December 31,
2016:
$2,000,000
2017:
$3,000,000
2018:
$3,500,000
2019:
$4,000,000
2020:
$4,500,000
Royalty
expense under the License Agreement amounted to $583,333 for the
third quarter of 2016 and $1,416,666 for the first nine months of
2016, and is included in selling expense on the accompanying
condensed consolidated statements of operations. The balance of the
committed royalty expense for 2016 amounts to $583,334 for the
remaining quarter of 2016.
In
order to facilitate the Company’s current and planned
increase in production demand, driven in part by the launch of
Motorola branded products, the Company has committed with North
American Production Sharing, Inc. (“NAPS”) to extend
its existing lease used in connection with the Production Sharing
Agreement (“PSA”) entered into between the Company and
NAPS. The extension term is December 1, 2015 through November 30,
2018 and allows the Company to contract additional Mexican
personnel to work in the Tijuana facility.
The
Company moved its headquarters on June 29, 2016 from its long time
location at 207 South Street, Boston, MA. to a nearby location at
99 High Street, Boston, MA. The Company signed a lease for 11,480
square feet that terminates on June 29, 2019. Payments under the
lease are zero for the first 2 months, an aggregate of $413,280 for
the next 12 months, an aggregate of $424,760 for the next 12
months, and an aggregate of $363,533 for the remaining term of the
lease ending June 29, 2019. Rent expense amounted to $99,876 for
the third quarter of 2016 and $302,935 for the first nine months of
2016.
(5)
Customer Concentrations
The
Company sells its products primarily through high-volume retailers
and distributors, Internet service providers, value-added
resellers, personal computer system integrators, and original
equipment manufacturers ("OEMs"). The Company supports its major
accounts in their efforts to offer a well-chosen selection of
attractive products and to maintain appropriate inventory
levels.
Relatively
few customers have accounted for a substantial portion of the
Company’s revenues. In the third quarter of 2016, three
customers accounted for 86% of the Company’s net sales with
the Company’s largest customer accounting for 32% of its net
sales. In the first nine months of 2016, three customers accounted
for 81% of the Company’s total net sales with the
Company’s largest customer accounting for 30% of its net
sales. At September 30, 2016 three customers accounted for 88% of
the Company’s accounts receivable, with the Company’s
largest customer representing 48% of its accounts receivable. In
the third quarter of 2015, three customers accounted for 79% of the
Company’s total net sales with the Company’s largest
customer accounting for 48% of its net sales. In the first nine
months of 2015, three customers accounted for 77% of the
Company’s total net sales with the Company’s largest
customer accounting for 46% of its net sales. At September 30,
2015, three customers accounted for 90% of the Company’s
accounts receivable, with the Company’s largest customer
representing 61% of its accounts receivable.
The
Company’s customers generally do not enter into long-term
agreements obligating them to purchase products. The Company may
not continue to receive significant revenues from any of these or
from other large customers. A reduction or delay in orders from any
of the Company’s significant customers, or a delay or default
in payment by any significant customer, could materially harm the
Company’s business and prospects. Because of the
Company’s significant customer concentration, its net sales
and operating income (loss) could fluctuate significantly due to
changes in political or economic conditions, or the loss, reduction
of business, or less favorable terms for any of the Company's
significant customers.
(6) Bank Credit
Lines
On December 18, 2012, the Company entered into a
Financing Agreement with Rosenthal & Rosenthal, Inc. (the
“Financing Agreement”). The Financing Agreement
originally provided for up to $1.75 million of revolving credit,
subject to a borrowing base formula and other terms and conditions.
The Financing Agreement continued until November 30, 2014 with
automatic renewals from year to year thereafter, unless sooner
terminated by either party. The lender has the right to terminate
the Financing Agreement at any time on 60 days’ prior written
notice.
Borrowings
are secured by all of the Company assets including intellectual
property. The Financing Agreement contains several covenants,
including a requirement that the Company maintain tangible net
worth of not less than $2.5 million and working capital of not less
than $2.5 million.
On
March 25, 2014, the Company entered into an amendment to the
Financing Agreement (the “Amendment”) with an effective
date of January 1, 2013. The Amendment clarified the definition of
current assets in the Financing Agreement, reduced the size of the
revolving credit line to $1.25 million, and revised the financial
covenants so that Zoom is required to maintain tangible net worth
of not less than $2.0 million and working capital of not less than
$1.75 million.
On
October 29, 2015, the Company entered into a second amendment to
the Financing Agreement (the “Second Amendment”).
Retroactive to October 1, 2015, the Second Amendment eliminated
$2,500 in monthly charges for the Financing Agreement. Effective
December 1, 2015, the Second Amendment reduces the effective rate
of interest to 2.25% plus an amount equal to the higher of prime
rate or 3.25%.
On
July 19, 2016, the Company entered into a third amendment to the
Financing Agreement. The Amendment increased the size of the
revolving credit line to $2.5 million effective as of date of the
amendment.
On
September 1, 2016, the Company entered into a fourth amendment to
the Financing Agreement. The Amendment increased the size of the
revolving credit line to $3.0 million effective with the date of
this amendment.
The
Company is required to calculate its covenant compliance on a
quarterly basis. As of September 30, 2016, the Company was in
compliance with both its working capital and tangible net worth
covenants. At September 30, 2016, the Company’s tangible net
worth was approximately $3.1 million, while the Company’s
working capital was approximately $2.9 million.
(7) Subsequent Events
On
October 24, 2016, Zoom entered into stock subscription agreements
with investors in connection with a non-brokered private placement
of 619,231 unregistered shares of the Company’s common stock,
which raised approximately $1.5 million net proceeds.
Management
of the Company has reviewed subsequent events from September 30,
2016 through the date of filing and has concluded that, except as
noted above, there were no subsequent events requiring adjustment
to or disclosure in these consolidated financial
statements.