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EX-23.1 - CONSENTS OF EXPERTS AND COUNSEL - MINIM, INC. | zmtp_ex231.htm |
As filed with the Securities and Exchange Commission on January 4,
2017
Registration No. 333-214980
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Amendment No. 1 to
FORM S-1
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
Zoom Telephonics, Inc.
(Exact
Name of Registrant as Specified in Its Charter)
Delaware
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3661
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04-2621506
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(State
or other jurisdiction of
incorporation
or organization)
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(Primary
Standard Industrial
Classification
Code Number)
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(I.R.S.
Employer
Identification
Number)
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99 High Street
Boston, MA 02110
(617) 423-1072
(Address,
Including Zip Code, and Telephone Number, Including Area Code, of
Registrant’s Principal Executive Offices)
Frank Manning
President, Chief Executive Officer and
Chairman of the Board
99 High Street
Boston, MA 02110
(617) 423-1072
(Address,
Including Zip Code, and Telephone Number, Including Area Code, of
Agent for Service)
Copies to:
Stephen D. Brook, Esq.
Robert A. Petitt, Esq.
Burns & Levinson LLP
125 Summer Street
Boston, MA 02110
(617) 345-3361
Approximate date of commencement of proposed sale to the
public: As soon as practicable after this registration
statement becomes effective.
If any
of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, check the following
box: ☑
If this
Form is filed to register additional shares for an offering
pursuant to Rule 462(b) under the Securities Act, please check the
following box and list the Securities Act registration statement
number of the earlier effective registration statement for the same
offering: ☐
If this
Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier
effective registration statement for the same
offering: ☐
If this
Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier
effective registration statement for the same
offering: ☐
Indicate
by check mark whether the registrant is a large accelerated filer,
an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See the definitions of “large accelerated
filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer
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☐
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Accelerated filer
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☐
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Non-accelerated
filer
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☐
(Do not check if a smaller reporting
company)
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Smaller reporting company
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☑
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CALCULATION OF REGISTRATION FEE
Title of each
class of securities to be registered
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Amount
to
be
registered (1)
(2)
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Proposed
maximum
offering
price
per share
(3)
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Proposed
maximum
aggregate
offering price
(4)
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Amount of
registration fee
(6)
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Common Stock, $.01
par value per share (5)
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619,231
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$2.50
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$1,548,078
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$180
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(1)
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This
Registration Statement covers the resale by our selling
shareholders of 619,231 shares of Common Stock that were issued in
the private placement transaction in October, 2016.
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(2)
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Also
includes an indeterminate number of shares which may be issued with
respect to such shares of Common Stock by way of a stock dividend,
stock split or in connection with a stock combination,
recapitalization, merger, consolidation, or otherwise.
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(3)
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Calculated
pursuant to Rule 457(c), the fee calculation is based on the
average of the high and low sales prices of our Common Stock on the
OTCQB on December 5, 2016, which was $2.50.
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(4)
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Estimated
solely for the purpose of determining the registration fee in
accordance with Rule 457(a) of the Securities Act of 1933, as
amended.
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(5)
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This
Registration Statement also includes the preferred stock purchase
rights issued pursuant to the Section 382 Rights Agreement, dated
November 18, 2015, between the registrant and Computershare Trust
Company, N.A., which are presently attached to, and trade with, the
registrant’s Common Stock.
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(6)
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Previously
Paid.
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The registrant hereby amends this Registration Statement on such
date or dates as may be necessary to delay its effective date until
the registrant shall file a further amendment which specifically
states that this Registration Statement shall thereafter become
effective in accordance with Section 8(a) of the Securities
Act of 1933 or until this Registration Statement shall become
effective on such date as the Commission, acting pursuant to
Section 8(a), may determine.
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE
CHANGED. THESE SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION
STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS
EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES
AND IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE
WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED JANUARY 4, 2017
Prospectus
ZOOM TELEPHONICS, INC.
619,231 SHARES OF COMMON STOCK
This
prospectus relates to the possible resale, from time to time, by
the holders of 619,231 shares of Common Stock that were issued in a
private placement transaction completed in October, 2016.
These holders are named in this prospectus and are referred to
herein as the “selling security holders”.
We are
not selling any shares of our Common Stock in this offering and, as
a result, we will not receive any proceeds from the sale of the
Common Stock covered by this prospectus. All of the net proceeds
from the sale of our Common Stock will go to the selling security
holders.
The
selling security holders may sell Common Stock from time to time at
prices established on the OTC Markets Group’s OTCQB, or as
negotiated in private transactions, or as otherwise described under
the heading “Plan of Distribution.” The Common Stock
may be sold directly or through agents or broker-dealers acting as
agents on behalf of the selling security holders. The selling
security holders may engage brokers, dealers or agents who may
receive commissions or discounts from the selling security holders.
We will pay all the expenses incident to the registration of the
shares; however, we will not pay for sales commissions or other
expenses applicable to the sale of our Common Stock registered
hereunder.
Our
Common Stock is quoted on the OTC Markets Group, OTCQB under the
symbol “ZMTP.” The last reported sales price of our
shares of Common Stock on January 3, 2017 was $2.15 per
share.
Our
principal executive office is located at 99 High Street, Boston, MA
02110. Our telephone number at that address is (617) 423-1072.
Our website is located at http://www.zoomtel.com.
INVESTING IN OUR COMMON STOCK INVOLVES SIGNIFICANT RISKS. YOU
SHOULD CAREFULLY CONSIDER THE RISK FACTORS BEGINNING ON PAGE 4 OF
THIS PROSPECTUS BEFORE EXERCISING YOUR RIGHTS.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE
SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE
SECURITIES OR PASSED UPON THE ADEQUACY OR ACCURACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
OUR SECURITIES ARE NOT BEING OFFERED IN ANY JURISDICTION WHERE THE
OFFER IS NOT PERMITTED UNDER APPLICABLE LOCAL LAWS.
The date of this prospectus
is
, 2017.
Table of Contents
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Page |
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ABOUT
THIS PROSPECTUS
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1
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CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS
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1
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PROSPECTUS
SUMMARY
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2
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RISK
FACTORS
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4
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USE OF
PROCEEDS
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11
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DETERMINATION
OF OFFERING PRICE
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11
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DILUTION
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11
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SELLING
SECURITY HOLDERS
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11
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PLAN OF
DISTRIBUTION
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12
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MARKET
PRICE OF AND DIVIDENDS ON OUR COMMON STOCK
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14
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MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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16
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BUSINESS
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25
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PROPERTIES
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33
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LEGAL
PROCEEDINGS
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34
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BOARD
OF DIRECTORS AND MANAGEMENT
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35
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EXECUTIVE
COMPENSATION
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37
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CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
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40
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DIRECTOR
INDEPENDENCE
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40
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SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
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41
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DESCRIPTION
OF CAPITAL STOCK
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42
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LEGAL
MATTERS
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43
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EXPERTS
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43
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WHERE
YOU CAN FIND MORE INFORMATION
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43
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DISCLOSURE
OF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT
LIABILITIES
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43
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INCORPORATION
OF CERTAIN DOCUMENTS BY REFERENCE
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44
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INDEX
TO FINANCIAL STATEMENTS AND SCHEDULES
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F-1
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ZOOM TELEPHONICS, INC.
619,231 SHARES OF COMMON STOCK
ABOUT THIS PROSPECTUS
You should rely only on the information contained in this
prospectus. We have not provided, and we have not authorized anyone
else to provide you with, different or additional information. You
should not assume that the information contained in this prospectus
is accurate as of any date other than the date on the front of this
prospectus regardless of its time of delivery, and you should not
consider any information in this prospectus or in the documents
incorporated by reference herein to be investment, legal or tax
advice. We encourage you to consult your own counsel, accountant
and other advisors for legal, tax, business, financial and related
advice regarding an investment in our securities.
This
prospectus does not constitute an offer to sell or the solicitation
of an offer to buy any of our securities other than the securities
covered hereby, nor does this prospectus constitute an offer to
sell or the solicitation of an offer to buy any securities in any
jurisdiction to any person to whom it is unlawful to make such
offer or solicitation in such jurisdiction. Persons who come into
possession of this prospectus in jurisdictions outside the United
States are required to inform themselves about, and to observe, any
restrictions as to the offering and the distribution of this
prospectus applicable to those jurisdictions.
We
further note that the representations, warranties and covenants
made by us in any agreement that is filed as an exhibit to any
document that is incorporated by reference in the accompanying
prospectus were made solely for the benefit of the parties to such
agreement, including, in some cases, for the purpose of allocating
risk among the parties to such agreements, and should not be deemed
to be a representation, warranty or covenant to you. Moreover, such
representations, warranties or covenants were accurate only as of
the date when made. Accordingly, such representations, warranties
and covenants should not be relied on as accurately representing
the current state of our affairs.
As used
in this prospectus, “Zoom Telephonics,”
“Zoom,” “Company,” “we,”
“our” and “us” refer to Zoom Telephonics,
Inc. unless stated otherwise or the context requires
otherwise.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Throughout
this prospectus we make “forward-looking statements,”
as that term is defined in Section 27A of the Securities Act
of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended (the “Exchange Act”).
Forward-looking statements include the words “may,”
“would,” “could,” “likely,”
“estimate,” “intend,” “plan,”
“continue,” “believe,” “expect”
or “anticipate” and similar words as well as our
acquisition, development and expansion plans, objectives or
expectations and our liquidity projections. These forward-looking
statements generally relate to our plans, objectives, prospects and
expectations for future operations and results and are based upon
what we consider to be reasonable future estimates. Although we
believe that our plans, objectives, prospects and expectations
reflected in, or suggested by, such forward-looking statements are
reasonable at the present time, we may not achieve or we may modify
them from time to time. Furthermore, there is no assurance that any
positive trends suggested or referred to in such statements will
continue. Any forward-looking statements made in this prospectus
are made as of the date of this prospectus and we assume no
obligation to update the forward-looking statements. You should
read this prospectus thoroughly, including the factors described in
the “Risk Factors” section of this prospectus for
information regarding risk factors that could affect our results
with the understanding that actual future results may be materially
different from what we expect. You should understand that it is not
possible to predict or identify all such risks and uncertainties.
Consequently, you should not consider these risks and uncertainties
to be a complete discussion of all potential risks and
uncertainties associated with an investment in us or our
securities. We will not update forward-looking statements even
though our situation or plans may change in the future, unless
applicable law requires us to do so.
1
PROSPECTUS SUMMARY
The following summary provides an overview of certain information
about Zoom and this offering and may not contain all the
information that is important to you. This summary is qualified in
its entirety by, and should be read together with, the information
contained in other parts of this prospectus and the documents we
incorporate by reference. You should carefully review this entire
prospectus, including the matters discussed in “Risk
Factors” beginning on page 4, and our most recent Annual
Report on Form 10-K before making a decision about whether to
invest in our securities.
Our Company
Zoom Telephonics designs, produces, markets, sells, and supports
Internet access and other communications-related products including
cable modems, cable modem / routers, mobile broadband modems,
Asymmetrical Digital Subscriber Line (“ADSL” or
commonly “DSL”) modems, and dial-up modems. Our primary
objective is to build upon our position as a leading producer of
Internet access devices sold through sales channels that include
many of the largest United States (“USA” or
“US”) high-volume electronics retailers, and to take
advantage of a number of trends in communications including higher
data rates, increasing use of wireless technology for transmission
of data, and increasing use of smartphones, tablets, and streaming
media.
Broadband modems, especially cable modems, were Zoom’s
highest revenue product category in both 2015 and 2014. In
response to demand for faster connection speeds and increased modem
functionality, we have invested and continue to invest resources to
advance our broadband modem product line.
Cable modems provide a high-bandwidth connection to the Internet
through a cable that connects to the cable service provider’s
managed broadband network. We began shipping cable modems in 2000.
Our primary means of distribution to end-users in the US, our
primary market, is through national retailers and distributors. We
have been selling cable modem products under the Zoom brand, and
beginning in 2016 we have started offering cable modem products
under the Motorola brand in the US and Canada.
Our mobile broadband products provide a high-bandwidth connection
to the Internet through access to a mobile service provider’s
mobile broadband network. Zoom’s product line includes mobile
broadband modems, mobile broadband routers, and mobile broadband
modem/router combinations.
Our DSL modems provide a high-bandwidth connection to the Internet
through a telephone line that typically connects to compatible DSL
equipment that is typically managed by the DSL service provider. In
past years Zoom has shipped a broad line of DSL modems.
Zoom’s primary DSL product today includes a DSL modem and a
802.11n (“wireless-N”) router.
Our dial-up modems connect personal computers and other devices to
the local telephone line for transmission of data, fax, voice, and
other information. Our dial-up modems enable personal computers and
other devices to connect to other computers and networks, including
the Internet, at top data speeds up to 56,000 bits per second.
Zoom’s sales of dial-up modems, our largest source of
revenues from the mid-eighties through 2010, are expected to
continue their decline due to the ongoing adoption of broadband
access.
Zoom’s product line also includes wireless products,
including WiFi®-compatible
wireless-N broadband gateways. These products typically
provide wireless communication between devices that are within a
quarter mile or less of each other, depending on the specific
product.
Corporate Information
We are incorporated in Delaware under the name Zoom Telephonics,
Inc. Zoom Telephonics, Inc. was originally incorporated
in New York in 1977 and changed its state of incorporation to
Delaware in 1993. MTRLC LLC, a wholly owned subsidiary of Zoom
Telephonics, Inc., is a limited liability company organized in
Delaware that focuses on the sale of our Motorola brand products.
Our principal executive offices are located at 99 High Street,
Boston, MA 02110, and our telephone number is (617) 423-1072. Our
Web site is at www.zoomtel.com.
Information contained on our web site does not constitute part of
this prospectus.
Our common stock is traded on the Over-The-Counter market
(“OTCQB”) under the symbol ZMTP.
2
Recent Developments
On
October 24, 2016, we entered into Subscription Agreements (the
“Subscription Agreements”) with accredited investors
pursuant to which we sold an aggregate of 619,231 shares of Common
Stock at a purchase price of $2.60 per share. The gross
proceeds to us at the closing of this private placement were
approximately $1.6 million. Pursuant to the terms of the
Subscription Agreements, the Company is required to file a
registration statement with the Securities and Exchange Commission
to register for resale the shares of Common Stock sold in the
offering. This prospectus relates to the resale of 619,231 shares
of Common Stock issued pursuant to the Subscription
Agreements.
SUMMARY OF THE OFFERING
Common
Stock offered by selling security holders
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619,231
shares
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Terms
of the Offering
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The
selling security holders will determine when and how they will sell
the Common Stock offered in this prospectus.
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Common
Stock outstanding*
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14,602,790
shares
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Use of
proceeds
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We are
not selling any shares of Common Stock covered by this prospectus,
and as a result will not receive any proceeds from this
offering.
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OTCQB
Symbol
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ZMTP
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Risk
Factors
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See
“Risk Factors” beginning on page 4 and the other
information in this, together with the information contained under
the heading “Risk Factors” in our Annual Report on Form
10-K for our fiscal year ended December 31, 2015, filed with the
SEC and any updates of those Risk Factors contained in our
Quarterly Reports on Form 10-Q.
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* Does
not include shares of Common Stock reserved for issuance pursuant
to the Company’s equity incentive plans.
3
RISK FACTORS
An investment in our common stock involves a high degree of risk.
Prospective investors should carefully consider the following risk
factors, together with the other information contained in this
Prospectus, including our financial statements and the notes
thereto, in evaluating the Company and its business before
purchasing our securities. In particular, prospective investors
should note that this prospectus contains forward-looking
statements within the meaning of Section 27A of the Securities
Act of 1933, as amended and Section 21E of the Securities
Exchange Act of 1934 (the “Exchange Act”) and that
actual results could differ materially from those contemplated by
such statements. The factors listed below represent certain
important factors which we believe could cause such results to
differ. These factors are not intended to represent a complete list
of the general or specific risks that may affect us. Other risks
may be significant, presently or in the future, and the risks set
forth below may affect us to a greater extent than indicated. Many
factors, including those described below, could cause actual
results to differ materially from those discussed in
forward-looking statements.
Risks Related to Our Business
Our recent license agreement with Motorola has risks, including
risks associated with our ability to successfully generate Motorola
sales that are large enough to make our Motorola business
profitable after we pay the minimum annual royalty payments
required by the license agreement. Our failure to successfully
increase Motorola sales would have an adverse effect on our
liquidity and financial results.
In May
2015 Zoom entered into an agreement to license the Motorola brand
trademark for use with cable modem products in North America for
five years starting with shipments January 2016. In August 2016
that agreement was amended to include WiFi routers, range
extenders, and other products worldwide, and to increase the
minimum royalty payments. In connection with this opportunity, Zoom
has an aggressive plan to continue to introduce new Motorola brand
products. Our product development plan has and will continue to
increase our costs and may result in cost overruns and delays. If
our sales of Motorola brand products do not meet our forecasts,
this may result in excess inventory and a shortage of cash. In
addition, the license agreement includes significant minimum
quarterly royalty payments due by Zoom. If we are unable to sell a
sufficient number of Motorola brand products to offset these
minimum royalty payments, our net income and cash position will be
reduced and we may experience losses.
We may require additional funding, which may be difficult to obtain
on favorable terms, if at all.
Over
the next twelve months we may require additional funding if, for
instance, we buy inventory and develop products in anticipation of
significant Motorola sales, if our sales are lower than forecast,
or if we experience losses. On September 1, 2016, we signed an
amendment to our financing agreement to increase our line of credit
to $3.0 million assuming our receivables support this amount; and
this line is subject to covenants that must be met and may be
terminated by the lender at any time upon sixty days prior notice.
It is not certain whether all or part of this line of credit will
be available to us in the future; and other sources of financing
may not be available to us on a timely basis if at all, or on terms
acceptable to us. If we fail to obtain acceptable additional
financing when needed, we may not have sufficient resources to fund
our normal operations; and this would have a material adverse
effect on our business.
We may experience costs and senior management distractions due to
patent-related matters.
Many of
our products incorporate patented technology. We attempt to license
appropriate patents either directly or through our integrated
circuit suppliers. However, we are subject to costs and senior
management distractions due to patent-related
litigation.
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.
Patent
litigation matters are complex and time consuming and expose Zoom
to potentially material obligations. It is impossible to assess the
potential cost and senior management distraction associated with
patent litigation matters that are currently outstanding or may
occur in the future.
4
Our reliance on a small number of customers for a large portion of
our revenues could materially harm our business and
prospects.
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. In 2015 three
customers accounted for 77% of the Company’s total net sales
with our largest customer accounting for 46% of our net sales. At
December 31, 2015, three customers accounted for 93% of our gross
accounts receivable, with our largest customer representing 67% of
our gross accounts receivable. In 2014 three customers accounted
for 74% of the Company’s total net sales, with our largest
customer accounting for 53% of our net sales. At December 31, 2014,
three customers accounted for 92% of our gross accounts receivable,
with our largest customer representing 64% of our gross accounts
receivable.
Our
customers generally do not enter into long-term agreements
obligating them to purchase our products. Because of our
significant customer concentration, our net sales and operating
income could fluctuate significantly due to changes in political or
economic conditions or the loss of, reduction of business with, or
less favorable terms for any of our significant customers. A
reduction or delay in orders from any of our significant customers,
or a delay or default in payment by any significant customer could
materially harm our business, results of operation and
liquidity.
Our business may be harmed due to Charter Communications
Inc.’s (“Charter”) having acquired Time Warner
Cable and Bright House Networks, to the extent that Charter extends
its policy of not offering customers a savings when customers
supply their own cable modem.
In
applying for FCC approval of its proposed acquisition of Time
Warner Cable and Bright House Networks, Charter stated that it
would extend its practice of charging a single price for cable
modem leasing and Internet service to some customers in the
newly-acquired cable systems. Zoom’s position has been and
remains that they should separately state a non-subsidized price
for the cable modem, offering customers a saving if they use their
own modem instead. In its public filings, Charter stated that it
had about 4.8 million residential customers. Charter has also
stated that if the proposed transactions were consummated, Charter
would acquire about 10.8 million residential customers from Time
Warner Cable and about 2.5 million residential and business
customers from Bright House Networks. Zoom filed an action at the
FCC which asked that the FCC deny Charter’s application for
the proposed acquisitions or, if the acquisitions were approved,
that they be conditioned on a requirement that Charter separately
state the price of the Charter-supplied cable modem, and that price
not be subsidized. Charter did successfully acquire Time Warner
Cable and Bright House, and there was no associated FCC requirement
that Charter separately state the price of the Charter-supplied
cable modem, and that price not be subsidized. We believe that
Charter has extended its bundled, subsidized approach to some but
not all Time Warner Cable and Bright House customers, but that
policy could change. Zoom is continuing its efforts to obtain
relief from the FCC, but these efforts may not be successful.
Charter’s policy eliminates one of the major incentives for
purchasing a cable modem, and thereby threatens cable modem sales
by retailers and threatens Zoom as a supplier to these retailers.
We believe our sales of cable modems will be reduced in markets
where Charter extends its policy of bundling its offering of a
subsidized cable modem with its Internet service.
Product liability claims related to future Connected Home products
could harm our competitive position, results of operations and
financial condition.
We plan to introduce products that may be used to monitor for
threats such as fire, flooding, break-ins, medical emergencies, and
other threats; to allow remote control of our Connected Home
products and attached electrical devices; and to cause actions
including alerts and sirens in certain situations. If our
products fail to provide accurate and timely information or to
operate as designed, our customers could assert claims against us
for product liability. Litigation with respect to product
liability claims, regardless of any outcome, could result in
substantial cost to us, divert management’s attention from
operations and decrease market acceptance of our products. While we
intend to carry product liability insurance, we cannot give
any assurance that our current or future insurance coverage will be
sufficient to cover all possible liabilities. Further, we can give
no assurance that adequate insurance will be available to us or
that such insurance may be maintained at a reasonable cost to us.
A successful claim
brought against us, or any claim or product recall that results in
negative publicity about us, could harm our competitive position,
results of operations and financial condition.
5
The market for Internet access products and services has many
competing technologies, and the demand for certain of our products
and services is declining.
If we are unable to grow demand for our broadband and dial-up
modems or other products, we may be unable to sustain or grow our
business. The market for high-speed communications products and
services has a number of competing technologies. For instance,
Internet access can be achieved by using a standard telephone line
with an appropriate modem and dial-up or DSL service; using a cable
TV line with a cable modem and cable modem service; or using a
mobile broadband modem and mobile broadband service. We
currently sell products that include all these technologies. The
introduction of new products by competitors, market acceptance of
competing products based on new or alternative technologies, or the
emergence of new industry standards have in the past rendered and
could continue to render our products less competitive or even
obsolete.
Our reliance on sole suppliers or limited sources of supply could
materially harm our business.
We obtain certain key parts, components, and equipment from
sole or limited sources of supply. In the first nine months of
2016, our business relied on a single primary cable modem supplier.
As of September 30, 2016, this supplier provided 89% of our
purchased inventory. In 2015, we had two suppliers that provided
85% of our purchased inventory. Also, as examples, the vast
majority of our broadband modems use Broadcom chipsets and the vast
majority of our dial-up modems use Conexant chipsets. The
loss of the services of any of our significant suppliers or a
material change in their business or their relationship with us
could harm our business and operating results. In the past we have
experienced long lead-times and significant delays in receiving
shipments of modem chipsets from our sole source suppliers. We may
experience similar delays in the future. In addition, some products
may have other components that are available from only one source.
If we are unable to obtain a sufficient supply of components from
our current sources, we would experience difficulties in obtaining
alternative sources or in altering product designs to use
alternative components. Resulting delays or reductions in product
shipments could damage relationships with our customers, and our
customers could decide to purchase products from our competitors.
Inability to meet our customers’ demand or a decision by one
or more of our customers to purchase products from our competitors
could harm our operating results.
Fluctuations in the foreign currency exchange rates in relation to
the US dollar could have a material adverse effect on our operating
results.
Changes in currency exchange rates that increase the relative value
of the US dollar may make it more difficult for us to compete with
foreign manufacturers on price, may reduce our foreign currency
denominated sales when expressed in dollars, or may otherwise have
a material adverse effect on our sales and operating results. A
significant increase in our foreign currency denominated sales
would increase our risk associated with foreign currency
fluctuations. A weakness in the US dollar relative to the Mexican
peso and various Asian currencies, especially the Chinese renminbi
(“RMB”), could increase our product costs. Fluctuations
in the currency exchange rates have, and may continue to, adversely
affect our operating results.
The current uncertainty in global economic conditions could
negatively affect our business, results of operations, and
financial condition.
The current uncertainty in global economic conditions has resulted
in a tightening in the credit markets, a low level of liquidity in
many financial markets, and extreme volatility in credit, equity
and fixed income markets. There could be a number of follow-on
effects from these economic developments on our business, including
unavailability of credit, insolvency of key suppliers resulting in
product delays; customer insolvencies; rapid changes to the foreign
currency exchange rates; decreased customer confidence; and
decreased customer demand. Any of these events, or any
other events caused by the recent financial crisis, may have a
material adverse effect on our business, operating results, and
financial condition.
Capacity constraints in our Mexican operations could reduce our
sales and revenues and hurt customer relationships.
We rely on our Mexican operations to finish and ship most of the
products we sell. Since moving our operations to our Mexican
facility we have experienced and may continue to experience
constraints on our capacity as we address challenges related to
operating our new facility, such as hiring and training workers,
creating the facility’s infrastructure, developing new
supplier relationships, complying with customs and border
regulations, and resolving shipping and logistical issues. Our
sales and revenues may be reduced and our customer relationships
may be impaired if we continue to experience constraints on our
capacity. We are working to minimize capacity constraints in a
cost-effective manner, but there can be no assurance that we will
be able to adequately minimize capacity constraints.
Our reliance on a business processing outsourcing partner to
conduct our operations in Mexico could materially harm our business
and prospects.
6
In connection with our North American manufacturing operations in
Mexico, we rely on a business processing outsourcing partner to
hire, subject to our oversight, the team for our Mexican
operations, provide the selected facility described above, and
coordinate many of the ongoing logistics relating to our operations
in Mexico. Our outsourcing partner’s related functions
include acquiring the necessary Mexican permits, providing the
appropriate Mexican operating entity, assisting in customs
clearances, and providing other general assistance and
administrative services in connection with the ongoing operation of
the Mexican facility. Our outsourcing partner’s performance
of these obligations efficiently and effectively is critical to the
success of our operations in Mexico. Failure of our outsourcing
partner to perform its obligations efficiently and effectively
could result in delays, unanticipated costs or interruptions in
production, delays in deliveries to our customers or other harm to
our business, results of operation, and liquidity. Moreover, if our
outsourcing arrangement is not successful, we cannot assure our
ability to find an alternative production facility or outsourcing
partner to assist in our operations in Mexico or our ability to
operate successfully in Mexico without outsourcing or similar
assistance.
We believe that our future success will depend in large part on our
ability to more successfully penetrate the broadband modem markets,
which have been challenging markets, with significant barriers to
entry.
We believe that our future success depends in large part on our
ability to penetrate the broadband modem markets including cable
and mobile broadband. These markets have significant barriers to
entry. Although some cable, and mobile broadband modems are sold at
retail, the high volume purchasers of these modems are concentrated
in a relatively few large cable, telephone, and mobile broadband
service providers which offer broadband modem services to their
customers. These customers, particularly cable and mobile broadband
services providers, also have extensive and varied certification
processes for modems to be approved for use on their network. These
certifications are expensive and time consuming, and they continue
to evolve. Successfully penetrating the broadband modem market
therefore presents a number of challenges including: the current
limited retail market for broadband modems; the relatively small
number of cable, telecommunications and Internet service provider
customers that make up the bulk of the market for broadband modems
in certain countries, including the US; the significant bargaining
power of these large volume purchasers; the time consuming,
expensive, uncertain and varied certification process of the
various cable service providers; the savings if any offered to
customers who use their own modem instead of one supplied by the
service provider; and the strong relationships with cable service
providers enjoyed by incumbent cable equipment providers like
ARRIS.
If we fail to meet changing customer requirements and emerging
industry standards, there would be an adverse impact on our ability
to sell our products and services.
The market for Internet access products and services is
characterized by aggressive pricing practices, continually changing
customer demand patterns, rapid technological advances, emerging
industry standards and short product life cycles. Some of our
product and service developments and enhancements have taken longer
than planned and have delayed the availability of our products and
services, which adversely affected our sales and profitability in
the past. Any significant delays in the future may adversely impact
our ability to sell our products and services, and our results of
operations and financial condition may be adversely affected. Our
future success will depend in large part upon our ability
to: identify and respond to emerging technological trends and
industry standards in the market; develop and maintain competitive
products that meet changing customer demands; enhance our products
by adding innovative features that differentiate our products from
those of our competitors; bring products to market on a timely
basis; introduce products that have competitive prices; manage our
product transitions, inventory levels and manufacturing processes
efficiently; respond effectively to new technological changes or
new product announcements by others; meet changing industry
standards; distribute our products quickly in response to customer
demand; and compete successfully in the markets for our new
products. These factors could also have an adverse effective
on our operating results.
Our product cycles tend to be short and we may incur significant
non-recoverable expenses or devote significant resources to sales
that do not occur when anticipated. Therefore, the resources we
devote to product development, sales and marketing may not generate
material net sales for us. In addition, short product cycles have
resulted in and may in the future result in excess and obsolete
inventory, which has had and may in the future have an adverse
effect on our results of operations. In an effort to develop
innovative products and technology, we have incurred and may in the
future incur substantial development, sales, marketing, and
inventory costs. If we are unable to recover these costs, our
financial condition and operating results could be adversely
affected. In addition, if we sell our products at reduced prices in
anticipation of cost reductions and we still have higher cost
products in inventory, our business would be harmed and our results
of operations and financial condition would be adversely
affected.
Our international operations are subject to a number of risks that
could harm our business.
7
Currently
our business is significantly dependent on our operations outside
the US, particularly the production of substantially all of our
products. Through nine months ending September 30, 2016 sales
outside North America were only 1.4% of our net sales. However, almost all of our manufacturing
operations are now located outside of the US. The
inherent risks of international operations could harm our business,
results of operation, and liquidity. For instance, our operations
in Mexico are subject to the challenges and risks associated with
international operations, including those related to integration of
operations across different cultures and languages, and economic,
legal, political and regulatory risks. In addition, fluctuations in
the currency exchange rates have had, and may continue to have, an
adverse effect on our operating results. The types of risks faced
in connection with international operations include, among others:
regulatory and communications requirements and policy changes;
currency exchange rate fluctuations, including changes in value of
the Mexican peso relative to the US dollar; cultural differences;
reduced control over staff and other difficulties in staffing and
managing foreign operations; reduced protection for intellectual
property rights in some countries; political and economic changes
and disruptions; governmental currency controls; shipping costs;
strikes and work slowdowns at ports or other locations in the
supply path; and import, export, and tariff regulations. Almost all
of our products are built in mainland China or Taiwan, so these
products are subject to numerous risks including currency risk and
economic, legal, political and regulatory
risks.
We may be subject to product returns resulting from defects or from
overstocking of our products. Product returns could
result in the failure to attain market acceptance of our products,
which would harm our business.
If our products contain undetected defects, errors, or failures, we
could face delays in the development of our products, numerous
product returns, and other losses to us or to our customers or end
users. Any of these occurrences could also result in the loss of or
delay in market acceptance of our products, either of which would
reduce our sales and harm our business. We are also exposed to the
risk of product returns from our customers as a result of
contractual stock rotation privileges and our practice of assisting
some of our customers in balancing their inventories. Overstocking
has in the past led and may in the future lead to higher than
normal returns.
If we fail to effectively manage our inventory levels, there could
be a material and adverse effect on our liquidity and our
business.
Due to rapid technological change and changing markets we are
required to manage our inventory levels carefully to both meet
customer expectations regarding delivery times and to limit our
excess inventory exposure. In the event we fail to effectively
manage our inventory our liquidity may be adversely affected and we
may face increased risk of inventory obsolescence, a decline in
market value of the inventory, or losses from theft, fire, or other
casualty.
We may be unable to produce sufficient quantities of our products
because we depend on third party manufacturers. If these third
party manufacturers fail to produce quality products in a timely
manner, our ability to fulfill our customer orders would be
adversely impacted.
We use contract manufacturers and original design manufacturers for
electronics manufacturing of most of our products. We use these
third party manufacturers to help ensure low costs, rapid market
entry, and reliability. Any manufacturing disruption could impair
our ability to fulfill orders, and failure to fulfill orders would
adversely affect our sales. Although we currently use four
electronics manufacturers for the bulk of our purchases, in some
cases a given product is only provided by one of these companies.
The loss of the services of any of our significant third party
manufacturers or a material adverse change in the business of or
our relationships with any of these manufacturers could harm our
business. Since third parties manufacture our products and we
expect this to continue in the future, our success will depend, in
part, on the ability of third parties to manufacture our products
cost effectively and in sufficient quantities to meet our customer
demand.
We are subject to the following risks because of our reliance on
third party manufacturers: reduced management and control of
component purchases; reduced control over delivery schedules,
quality assurance, manufacturing yields, and labor practices; lack
of adequate capacity during periods of excess demand; limited
warranties on products supplied to us; potential increases in
prices; interruption of supplies from assemblers as a result of a
fire, natural calamity, strike or other significant event; and
misappropriation of our intellectual property.
Our cable modem sales may be significantly reduced due to long
lead-times.
Cable modems and other broadband modems represented 89% of
Zoom’s net sales during 2015, and 96% of Zoom’s net
sales for the nine months ending September 30, 2016. These products
have experienced long lead-times due to certain component
production lead-times of up to 20 weeks and due to
manufacturer-related delays, and these long lead times may
significantly reduce our potential sales.
We face significant competition, which could result in decreased
demand for our products or services.
8
We may be unable to compete successfully. A number of companies
have developed, or are expected to develop, products that compete
or will compete with our products. Furthermore, many of our current
and potential competitors have significantly greater resources than
we do. Intense competition, rapid technological change and evolving
industry standards could result in less favorable selling terms to
our customers, decrease demand for our products or make our
products obsolete. Our operating results and our ability
to compete could be adversely affected if we are unable to:
successfully and accurately anticipate customer demand; manage our
product transitions, inventory levels, and manufacturing processes
efficiently; distribute or introduce our products quickly in
response to customer demand and technological advances;
differentiate our products from those of our competitors; or
otherwise compete successfully in the markets for our
products.
Environmental regulations may increase our manufacturing costs and
harm our business.
In the past, environmental regulations have increased our
manufacturing costs and caused us to modify products. New state,
US, or other regulations may in the future impact our product costs
or restrict our ability to ship certain products into certain
regions.
Changes in current or future laws or governmental regulations and
industry standards that negatively impact our products, services
and technologies could harm our business.
The jurisdiction of the FCC, extends to the entire US
communications industry including our customers and their products
and services that incorporate our products. Our products are also
required to meet the regulatory requirements of other countries
throughout the world where our products and services are sold.
Obtaining government certifications is time-consuming and costly.
In the past, we have encountered delays in the introduction of our
products, such as our cable modems, as a result of government
certifications. We may face further delays if we are unable to
comply with governmental regulations. Delays caused by the time it
takes to comply with regulatory requirements may result in
cancellations or postponements of product orders or purchases by
our customers, which would harm our business.
In addition to reliability and quality standards, the market
acceptance of certain products and services is dependent upon the
adoption of industry standards so that products from multiple
manufacturers are able to communicate with each other. Standards
are continuously being modified and replaced. As standards evolve,
we may be required to modify our existing products or develop and
support new versions of our products. The failure of our products
to comply, or delays in compliance, with various existing and
evolving industry standards could delay or interrupt volume
production of our products, which could harm our
business.
Our future success will depend on the continued services of our
executive officers and key product development
personnel.
The loss of any of our executive officers or key product
development personnel, the inability to attract or retain qualified
personnel in the future, or delays in hiring skilled personnel
could harm our business. Competition for skilled personnel is
significant. We may be unable to attract and retain all the
personnel necessary for the development of our business. In
addition, the loss of Frank B. Manning, our president and chief
executive officer, or some other member of the senior management
team, a key engineer or salesperson, or other key contributors,
could harm our relations with our customers, our ability to respond
to technological change, and our business.
We may have difficulty protecting our intellectual
property.
Our ability to compete is heavily affected by our ability to
protect our intellectual property. We rely primarily on trade
secret laws, confidentiality procedures, patents, copyrights,
trademarks, and licensing arrangements to protect our intellectual
property. The steps we take to protect our technology may be
inadequate. Existing trade secret, trademark and copyright laws
offer only limited protection. Our patents could be invalidated or
circumvented. We have more intellectual property assets in some
countries than we do in others. In addition, the laws of some
foreign countries in which our products are or may be developed,
manufactured or sold may not protect our products or intellectual
property rights to the same extent as do the laws of the US. This
may make the possibility of piracy of our technology and products
more likely. We cannot ensure that the steps that we have taken to
protect our intellectual property will be adequate to prevent
misappropriation of our technology.
We could infringe the intellectual property rights of
others.
Particular aspects of our technology could be found to infringe on
the intellectual property rights or patents of others. Other
companies may hold or obtain patents on inventions or may otherwise
claim proprietary rights to technology necessary to our business.
We cannot predict the extent to which we may be required to seek
licenses. We cannot assure that the terms of any licenses we may be
required to seek will be reasonable. We are often indemnified by
our suppliers relative to certain intellectual property rights; but
these indemnifications do not cover all possible suits, and there
is no guarantee that a relevant indemnification will be honored by
the indemnifying party.
9
Risks Related to the Securities Market and Our Common
Stock
The
market price of our common stock may be volatile and trading volume
may be low.
The
market price of our common stock could fluctuate significantly for
many reasons, including, without limitation: as a result of the
risk factors listed herein; actual or anticipated fluctuations in
our operating results; regulatory changes that could impact our
business; and general economic and industry conditions. Shares of
our common stock are quoted on the OTCQB. The lack of an active
market may impair the ability of holders of our common stock to
sell their shares of common stock at the time they wish to sell
them or at a price that they consider reasonable. The lack of an
active market may also reduce the fair market value of the shares
of our common stock.
We
do not expect to pay any dividends in the foreseeable
future.
We do
not expect to declare dividends in the foreseeable future. We
currently intend to retain cash to support our operations and to
finance the growth and development of our business. There can be no
assurance that we will have, at any time, sufficient surplus under
Delaware law to be able to pay any dividends. If we do not pay
dividends, the price of our common stock that you receive in the
distribution must appreciate for you to receive a gain on your
investment in Zoom Telephonics.
Our directors, executive officers and principal stockholders own a
significant percentage of our shares, which will limit your ability
to influence corporate matters.
Our
directors, executive officers and certain other principal
stockholders owned approximately 42% percent of our outstanding
Common Stock as of December 6, 2016. Accordingly, these
stockholders could have a significant influence over the outcome of
any corporate transaction or other matter submitted to our
stockholders for approval, including mergers, consolidations and
the sale of all or substantially all of our assets and also could
prevent or cause a change in control. The interests of these
stockholders may differ from the interests of our other
stockholders. Third parties may be discouraged from making a tender
offer or bid to acquire us because of this concentration of
ownership.
In 2015 we adopted an Internal Revenue Code Section 382 stockholder
rights plan which could discourage potential acquisition proposals
and could prevent, deter or delay a change in control of our
company.
In
November 2015 we adopted an Internal Revenue Code Section 382
stockholder rights plan (the “Rights Plan”) with the
purpose of reducing the likelihood of an unintended
“ownership change” and thus assisting in preserving the
value of the tax benefits associated with our accumulated net
operating losses. The Rights Plan could have the effect,
either alone or in combination provisions of our certificate of
incorporation or Delaware law, of preventing, deterring or delaying
a change in control of our company, even if a change in control
would be beneficial to our stockholders.
Our ability to use our net operating losses (“NOLs”)
may be negatively affected if there is an “ownership
change” as defined under Section 382 of the Internal Revenue
Code.
At
December 31, 2015 we had approximately $50.7 million in federal
NOLs. These deferred tax assets are currently fully
reserved. Under Internal Revenue Code Section 382 rules,
if a change of ownership is triggered, our ability to use our NOLs
can be negatively affected if there is an “ownership
change” as defined under Internal Revenue Code Section 382.
In general, an ownership change occurs whenever there is a shift in
ownership by more than 50 percentage points by one or more 5%
stockholders over a specified time period (generally three years).
Given Internal Revenue Code Section 382’s broad definition,
an ownership change could be the unintended consequence of
otherwise normal market trading in the Company’s stock that
is outside of the Company’s control. Similar plans have been
adopted by a number of companies holding similar significant tax
assets over the past several years.
10
USE OF PROCEEDS
We will
not receive any proceeds from the sale of Common Stock by the
selling security holders. All of the net proceeds from the resale
of our Common Stock will go to the selling security holders as
described below in the sections entitled “Selling Security
Holders” and “Plan of Distribution.” We have
agreed to bear the expenses relating to the registration of the
Common Stock for the selling security holders.
DETERMINATION OF OFFERING PRICE
The
prices at which the shares of Common Stock covered by this
prospectus may actually be sold will be determined by the
prevailing public market price for shares of Common Stock, by
negotiations between the selling security holders and buyers of our
Common Stock in private transactions or as otherwise described in
“Plan of Distribution.”
DILUTION
The
resale of the shares of the Common Stock under this prospectus will
not dilute the ownership interests of existing
stockholders.
SELLING SECURITY HOLDERS
The
Common Stock being offered for resale by the selling security
holders consists of 619,231 shares that were acquired by the
selling security holders in a private placement in October, 2016.
The following table sets forth the name of each selling security
holder, the number of shares of Common Stock beneficially owned by
each of the selling security holders as of December 1, 2016 and the
number of shares of Common Stock being offered by the selling
security holders. The selling security holders may offer all or
part of the shares for resale from time to time. However, the
selling security holders are under no obligation to sell all or any
portion of such shares nor are the selling security holders
obligated to sell any shares immediately upon effectiveness of this
prospectus. All information with respect to share ownership has
been furnished by the selling security holders.
Name of Selling
Security Holder (1)
|
Total Shares
Beneficially Owned Before Offering
|
Maximum Number
of Shares
Being
Offered
|
Total Shares
Beneficially Owned After Offering (2)
|
Percent of Total
Shares Outstanding After Offering (2)
|
Christopher
Davis
|
65,000
|
40,000
|
25,000
|
*
|
Clive
Anthony Caunter
|
38,461
|
38,461
|
0
|
*
|
Tariq Masood
|
130,000
|
130,000
|
0
|
*
|
Serge Kremer
|
115,385
|
115,385
|
0
|
*
|
Patricia Cunningham
|
40,000
|
40,000
|
0
|
*
|
Peter Sykes (3)
|
77,350
|
40,000
|
37,350
|
*
|
Ulster Overseas Limited (4)
|
80,000
|
80,000
|
0
|
*
|
Calypso No. 2 Limited (5)
|
40,000
|
40,000
|
0
|
*
|
Calypso No. 3 Limited (5)
|
40,000
|
40,000
|
0
|
*
|
Calypso No. 4 Limited (5)
|
40,000
|
40,000
|
0
|
*
|
Manfredo Radicati
|
15,385
|
15,385
|
0
|
*
|
(1)
In accordance with
Rule 13d-3 under the Exchange Act, a person is deemed to be the
beneficial owner, for purposes of this table, of any shares of
Common Stock over which such person has voting or investment power
and of which such person has the right to acquire beneficial
ownership within 60 days of the date hereof. The table includes
shares owned by spouses, other immediate family members, in trust,
shares held in retirement accounts or funds for the benefit of the
named individuals, shares held as restricted stock and other forms
of ownership, over which shares the persons named in the table may
possess voting and/or investment power. The address of each selling
security holder is c/o Zoom Telephonics, Inc., 99 High Street,
Boston, MA 02110.
(2)
Assumes that all
shares of Common Stock registered for resale by this prospectus
have been sold.
(3)
Mr. Sykes was
appointed to the Company’s Board of Directors on October 24,
2016.
(4)
Marco Jäger,
Britta Pfister, Chris Schallenberger, Karen Anne Marshall and
Claire Cooke possess voting power and
investment power over all securities included in this table which
are held Ulster Overseas Limited.
(5)
Ethan Chue, Britta
Pfister, Anita Raaflaub and Patricia Tan possess voting power and investment power over all
securities included in this table which are held Calypso No. 2
Limited, Calypso No. 3 Limited and Calypso No. 4
Limited.
*Less
than one percent of shares outstanding.
11
PLAN OF DISTRIBUTION
Each
selling security holder and any of their pledgees, assignees and
successors-in-interest may, from time to time, sell any or all of
their securities covered hereby on the OTC Markets Group’s
OTCQB or any other stock exchange, market or trading facility on
which the securities are traded or in private transactions. These
sales may be at fixed or negotiated prices. A selling security
holder may use any one or more of the following methods when
selling securities:
●
ordinary brokerage
transactions and transactions in which the broker-dealer solicits
purchasers;
●
block trades in
which the broker dealer will attempt to sell the securities as
agent but may position and resell a portion of the block as
principal to facilitate the transaction;
●
purchases by a
broker dealer as principal and resale by the broker-dealer for its
account;
●
an exchange
distribution in accordance with the rules of the applicable
exchange;
●
privately
negotiated transactions;
●
settlement of short
sales entered into after the effective date of the registration
statement of which this prospectus is a part;
●
in transactions
through broker dealers that agree with the selling security holders
to sell a specified number of such securities at a stipulated price
per security;
●
through the writing
or settlement of options or other hedging transactions, whether
through an options exchange or otherwise;
●
a combination of
any such methods of sale; or
●
any other method
permitted pursuant to applicable law.
The
selling security holders may also sell securities under Rule 144
under the Securities Act of 1933, as amended (the “Securities
Act”), if available, rather than under this
prospectus.
Broker
dealers engaged by the selling security holders may arrange for
other brokers dealers to participate in sales. Broker dealers may
receive commissions or discounts from the selling security holders
(or, if any broker dealer acts as agent for the purchaser of
securities, from the purchaser) in amounts to be negotiated, but,
except as set forth in a supplement to this Prospectus, in the case
of an agency transaction not in excess of a customary brokerage
commission in compliance with FINRA Rule 2440; and in the case of a
principal transaction a markup or markdown in compliance with FINRA
IM-2440.
In
connection with the sale of the securities or interests therein,
the selling security holders may enter into hedging transactions
with broker-dealers or other financial institutions, which may in
turn engage in short sales of the securities in the course of
hedging the positions they assume. The selling security holders may
also sell securities short and deliver these securities to close
out their short positions, or loan or pledge the securities to
broker-dealers that in turn may sell these securities. The selling
security holders may also enter into option or other transactions
with broker-dealers or other financial institutions or create one
or more derivative securities which require the delivery to such
broker-dealer or other financial institution of securities offered
by this prospectus, which securities such broker-dealer or other
financial institution may resell pursuant to this prospectus (as
supplemented or amended to reflect such transaction).
The
selling security holders and any broker-dealers or agents that are
involved in selling the securities may be deemed to be
“underwriters” within the meaning of the Securities Act
in connection with such sales. In such event, any commissions
received by such broker-dealers or agents and any profit on the
resale of the securities purchased by them may be deemed to be
underwriting commissions or discounts under the Securities Act.
Each selling security holder has informed the Company that it does
not have any written or oral agreement or understanding, directly
or indirectly, with any person to distribute the securities. In no
event shall any broker-dealer receive fees, commissions and markups
which, in the aggregate, would exceed eight percent
(8%).
The
Company is required to pay certain fees and expenses incurred by
the Company incident to the registration of the securities. The
Company has agreed to indemnify the selling security holders
against certain losses, claims, damages and liabilities, including
liabilities under the Securities Act.
Because
selling security holders may be deemed to be
“underwriters” within the meaning of the Securities
Act, they will be subject to the prospectus delivery requirements
of the Securities Act including Rule 172 thereunder. In addition,
any securities covered by this prospectus which qualify for sale
pursuant to Rule 144 under the Securities Act may be sold under
Rule 144 rather than under this prospectus. The selling security
holders have advised us that there is no underwriter or
coordinating broker acting in connection with the proposed sale of
the resale securities by the selling security holders.
12
We
agreed to use our commercially reasonable efforts to keep this
registration effective until the earliest of (i) the date on which
the securities have been sold pursuant to this prospectus or
pursuant to Rule 144 under the Securities Act or any other rule of
similar effect, (ii) the date on which the securities (other than
securities held by persons who are affiliates of the Company) may
be resold by the selling security holders without volume or
manner-of-sale restrictions pursuant to Rule 144 and without the
requirement for the Company to be in compliance with the current
public information requirement under Rule 144; or (iii) October 24,
2017. The resale securities will be sold only through registered or
licensed brokers or dealers if required under applicable state
securities laws. In addition, in certain states, the resale
securities covered hereby may not be sold unless they have been
registered or qualified for sale in the applicable state or an
exemption from the registration or qualification requirement is
available and is complied with.
Under
applicable rules and regulations under the Exchange Act, any person
engaged in the distribution of the resale securities may not
simultaneously engage in market making activities with respect to
the Common Stock for the applicable restricted period, as defined
in Regulation M, prior to the commencement of the distribution. In
addition, the selling security holders will be subject to
applicable provisions of the Exchange Act and the rules and
regulations thereunder, including Regulation M, which may limit the
timing of purchases and sales of the Common Stock by the selling
security holders or any other person. We will make copies of this
prospectus available to the selling security holders and have
informed them of the need to deliver a copy of this prospectus to
each purchaser at or prior to the time of the sale (including by
compliance with Rule 172 under the Securities Act).
13
MARKET PRICE OF AND DIVIDENDS ON OUR COMMON STOCK
Market Information
Our
common stock trades on the OTCQB under the symbol
“ZMTP”.
As of
December 5, 2016, there were 145 holders of record of our common
stock. On December 5, 2016, the closing price of our common stock
as reported by the OTCQB was $2.50. The following table sets forth,
for the periods indicated, the high and low sale prices per share
of common stock, as reported by the OTCQB.
FISCAL
PERIOD
|
HIGH
|
LOW
|
Fiscal Year ending
December 31, 2016
|
|
|
Fourth Quarter
through December 5, 2016
|
$3.15
|
$2.36
|
Third
Quarter
|
$3.20
|
$1.84
|
Second
Quarter
|
$2.93
|
$1.53
|
First
Quarter
|
$2.30
|
$1.22
|
|
|
|
Fiscal Year ending
December 31, 2015
|
|
|
Fourth
Quarter
|
$2.14
|
$1.32
|
Third
Quarter
|
$1.54
|
$0.70
|
Second
Quarter
|
$1.07
|
$0.16
|
First
Quarter
|
$0.25
|
$0.16
|
|
|
|
Fiscal Year ending
December 31, 2014
|
|
|
Fourth
Quarter
|
$0.25
|
$0.14
|
Third
Quarter
|
$0.28
|
$0.14
|
Second
Quarter
|
$0.20
|
$0.13
|
First
Quarter
|
$0.14
|
$0.11
|
Dividends
We have
never declared or paid cash dividends on our capital stock and do
not plan to pay any cash dividends in the foreseeable future. Our
current policy is to retain all of our earnings to finance future
growth.
14
Equity Compensation Plan Information
We
maintain a number of equity compensation plans for employees,
officers, directors and others whose efforts contribute to our
success. The table below sets forth certain information as of our
fiscal year ended December 31, 2015 regarding the shares of our
common stock available for grant or granted under stock option
plans that (i) were approved by our stockholders, and (ii) were not
approved by our stockholders.
Plan Category
|
Number Of
Securities
To Be
Issued
Upon Exercise Of
Outstanding
Options
|
Weighted-Average
Exercise Price Of Outstanding Options
|
Number Of
Securities
Remaining Available For
Future
Issuance
Under
Equity
Compensation
Plans (excluding securities
reflected in column (a))
|
|
(a)
|
(b)
|
(c)
|
Equity compensation
plans approved by security holders(1)
|
2,761,500
|
$0.39
|
3,438,500
|
|
|
|
|
Equity compensation
plans not approved by security holders
|
---
|
---
|
---
|
Total:
|
2,761,500
|
$0.39
|
3,438,500
|
(1)
|
Includes
the 2009 Stock Option Plan and the 2009 Directors Stock Option
Plan. These plans were approved by the shareholders at the 2010
annual meeting. At the 2013 annual meeting, shareholders approved
an increase to the total number of shares available for issuance
for the 2009 Stock Option Plan. The new number of shares is
5,500,000. At the 2013 annual meeting, shareholders approved an
increase to the total number of shares available for issuance for
the 2009 Directors Stock Option Plan. The new number of shares is
700,000. The purposes of the 2009 Stock Option Plan are to attract
and retain employees and provide an incentive for them to assist us
in achieving our long-range performance goals, and to enable such
employees to participate in our long-term growth. The purposes of
the 2009 Directors Stock Option Plan is to attract and retain
non-employee directors and to enable such directors to participate
in our long-term growth. The 2009 Stock Option Plan and the 2009
Directors Stock Option Plan are administered by the Compensation
Committee of the Board of Directors. All stock options granted
under the 2009 Stock Option Plan and the 2009 Directors Stock
Option Plan have been granted with an exercise price equal to at
least the fair market value of the common stock on the date of
grant.
|
15
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FORWARD LOOKING STATEMENTS
In addition to other information in this Registration Statement,
this Management’s Discussion and Analysis of Financial
Condition and Results of Operations contain forward-looking
statements within the meaning of the Private Securities Litigation
Reform Act of 1995. These statements are based on current
expectations and the current economic environment. We caution that
these statements are not guarantees of future performance. They
involve a number of risks and uncertainties that are difficult to
predict including, but not limited to, the risks and uncertainties
set forth in the section entitled “Risk
Factors.”
The
following discussion and analysis should be read in conjunction
with the safe harbor statement and the risk factors contained in
Item IA of Part II of our Quarterly Report on Form 10-Q for
quarter ended September 30, 2016, filed with the SEC on November
11, 2016, in our Annual Report on Form 10-K for year ended
December 31, 2015, filed with the SEC on March 15, 2016, and in our
other filings with the SEC. Readers should also be cautioned that
results of any reported period are often not indicative of results
for any future period. Actual results could differ materially from
those expressed or implied in the forward-looking
statements.
OVERVIEW
We
derive our net sales primarily from sales of Internet access and
other communications-related products, including cable modems,
cable modem / routers, Digital Subscriber Line (“DSL”)
modems and dial-up modems to retailers, distributors, Internet
Service Providers and original equipment manufacturers
(“OEMs”). We sell our products through a direct sales
force and through independent sales agents. All but one of our
employees are located at our headquarters in Boston,
Massachusetts. We are experienced in electronics
hardware, firmware, and software design and test, regulatory
certifications, product documentation, and packaging; and we use
that experience in developing each product in-house or in
partnership with suppliers who are typically based in Asia.
Electronic assembly and testing of the our products in accordance
with our specifications is typically done in Asia.
Since
1983 our headquarters have been near South Station in downtown
Boston. We recently moved from our long time location at 207 South
Street to 99 High Street in Boston. The lease for this new location
terminates June 29, 2019. We also lease a test/warehouse/ship
facility in Tijuana, Mexico. In November 2014 we signed a one-year
lease with five one-year renewal options thereafter for an 11,390
square foot facility in Tijuana Mexico. In September 2015, Zoom
extended the term of the lease from December 1, 2015 through
November 30, 2018. In September 2015, Zoom also signed a new lease
for additional space in the adjacent building, which doubled the
existing capacity. The term of the lease is from March 1, 2016
through November 30, 2018 with early access granted as of December
1, 2015.
We
continually seek to improve our product designs and manufacturing
approach in order to improve product performance and reduce our
costs. We pursue a strategy of outsourcing rather than internally
developing our modem chipsets, which are application-specific
integrated circuits that form the technology base for our modems.
By outsourcing the chipset technology, we are able to concentrate
our research and development resources on modem system design,
leverage the extensive research and development capabilities of our
chipset suppliers, and reduce our development time and associated
costs and risks. As a result of this approach, we are able to
quickly develop new products while maintaining a relatively low
level of research and development expense as a percentage of
net sales. We also outsource aspects of our manufacturing to
contract manufacturers as a means of reducing our costs of
production, and to provide us with greater flexibility in our
production capacity.
Our
gross margin for a given product generally depends on a number of
factors including the type of customer to whom we are selling. The
gross margin for retailers tends to be higher than for some of our
other customers; conversely, the sales, support, returns, and
overhead costs associated with retailers tend to be higher. Our
sales to certain countries are currently handled by a single master
distributor for each country, who handles the support and marketing
costs within the country. Gross margin for sales to these master
distributors tends to be low, since lower pricing to these
distributors helps them to cover the support and marketing costs
for their country.
As if
September 30, 2016 we had 30 employees, 25 working full-time and 5
working less than five days per week. Ten employees were engaged in
research and developement and quality control. Five employees were
involved in operations, which manages production, inventory,
purchasing, warehousing, freight, invoicing, shipping, collections,
and returns. Nine employees were engaged in sales, marketing, and
customer support. The remaining six employees performed executive,
accounting, administrative, and management information systems
functions. Our dedicated personnel in Tijuana, Mexico are employees
of our Mexican service provider and not included in our headcount.
As of September 30, 2016, we had one consultant in sales and one
consultant in information systems, neither whom is included in our
headcount.
16
Critical
Accounting Policies and Estimates
Following is a
discussion of what we view as our more significant accounting
policies and estimates. As described below, management judgments
and estimates must be made and used in connection with the
preparation of our consolidated financial statements. We have
identified areas where material differences could result in the
amount and timing of our net sales, costs, and expenses for any
period if we had made different judgments or used different
estimates.
Revenue Recognition. We primarily sell
hardware products to our customers. The hardware products include
dial-up modems, DSL modems, cable modems, and local area networking
equipment.
We
derive our net sales primarily from the sales of hardware products
to four types of customers:
●
Computer
peripherals retailers,
●
Computer product
distributors,
●
Internet service
providers, and
●
OEMs.
We
recognize hardware net sales for our customers at the point when
the customers take legal ownership of the delivered products. Legal
ownership passes from Zoom to the customer based on the contractual
Free on Board (“FOB”) point specified in signed
contracts and purchase orders, which are both used extensively.
Many of our customer contracts or purchase orders specify FOB
destination, which means that title and risk remain with the seller
until it has delivered the goods to the location specified in the
contract. We verify the delivery date on all significant FOB
destination shipments made during the last 10 business days of each
quarter.
Our net
sales of hardware include reductions resulting from certain events
which are characteristic of the sales of hardware to retailers of
computer peripherals. These events are product returns, certain
sales and marketing incentives, price protection refunds, and
consumer mail-in and in-store rebates. Each of these is accounted
for as a reduction of net sales based on detailed management
estimates, which are reconciled to actual customer or end-consumer
credits on a monthly or quarterly basis.
Product Returns. Products are returned
by retail stores and distributors for inventory balancing,
contractual stock rotation privileges, and warranty repair or
replacements. We estimate the sales and cost value of expected
future product returns of previously sold products. Our estimates
for product returns are based on recent historical trends plus
estimates for returns prompted by, among other things, announced
stock rotations and announced customer store closings. Management
reviews historical returns, current economic trends, and changes in
customer demand and acceptance of our products when estimating
sales return allowances. The estimate for future returns is
recorded as a reserve against accounts receivable, a reduction in
our net sales, and the corresponding change to inventory reserves
and cost of sales.
Price Protection Refunds. We have a
policy of offering price protection to certain of our retailer and
distributor customers for some or all their inventory. Under the
price protection policies, when we reduce our prices for a product,
the customer receives a credit for the difference between the
original purchase price and our reduced price for their unsold
inventory of that product. Our estimates for price protection
refunds are based on a detailed understanding and tracking by
customer and by sales program. Estimated price protection refunds
are recorded in the same period as the announcement of a pricing
change. Information from customer inventory-on-hand reports or from
direct communications with the customers is used to estimate the
refund, which is recorded as a reduction of net sales and a reserve
against accounts receivable.
Sales and Marketing Incentives. Many of
our retailer customers require sales and marketing support funding,
usually set as a percentage of our sales in their stores. The
incentives were reported as reductions in our net
sales.
Consumer Mail-In and In-Store Rebates.
Our estimates for consumer mail-in and in-store rebates are based
on a detailed understanding and tracking by customer and sales
program, supported by actual rebate claims processed by the rebate
redemption centers plus an accrual for an estimated lag in
processing at the redemption centers. The estimate for mail-in and
in-store rebates is recorded as a reserve against accounts
receivable and a reduction of net sales in the same period that the
rebate obligation was triggered.
Accounts Receivable Valuation. We
establish accounts receivable valuation allowances equal to the
above-discussed net sales adjustments for estimates of product
returns, price protection refunds, consumer rebates, and general
bad debt reserves. These allowances are reduced as actual credits
are issued to the customer's accounts.
17
Inventory Valuation and Cost of Goods
Sold. Inventory is valued at the lower of cost, determined
by the first-in, first-out method, or its net realizable value. We
review inventories for obsolete slow moving products each quarter
and make provisions based on our estimate of the probability that
the material will not be consumed or that it will be sold below
cost. Additionally, material product certification costs on new
products are capitalized and amortized over the expected period of
value of the respective products.
Valuation and Impairment of Deferred Tax Assets. As part of
the process of preparing our financial statements we estimate our
income tax expense and deferred income tax position. This process
involves the estimation of our actual current tax exposure together
with assessing temporary differences resulting from differing
treatment of items for tax and accounting purposes. These
differences result in deferred tax assets and liabilities, which
are included in our balance sheet. We then assess the likelihood
that our deferred tax assets will be recovered from future taxable
income. To the extent we believe that recovery is not likely, we
establish a valuation allowance. Changes in the valuation allowance
are reflected in the statement of operations.
Significant
management judgment is required in determining our provision for
income taxes and any valuation allowances. We have recorded a 100%
valuation allowance against our deferred income tax assets. It is
management's estimate that, after considering all available
objective evidence, historical and prospective, with greater weight
given to historical evidence, it is more likely than not that these
assets will not be realized. If we establish a record of continuing
profitability, at some point we will be required to reduce the
valuation allowance and recognize an equal income tax benefit which
will increase net income in that period(s).
As of
December 31, 2015 the Company had federal net operating loss carry
forwards of approximately $50.7 million that is available to offset
future taxable income. They are due to expire in varying
amounts from 2018 to 2035. As of December 31, 2015, the
Company had Massachusetts state net operating loss carry forwards
of approximately $5.1 million that is available to offset future
taxable income. They are due to expire in varying amounts from 2031
through 2035.
RESULTS OF OPERATIONS
THREE
MONTHS ENDED SEPTEMBER 30, 2016 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 2015
Summary. Net sales were $5.99 million for the third quarter
ended September 30, 2016 (“Q3 2016”), up 77.9% from
$3.37 million for Q3 2015. Zoom reported a net loss of $244
thousand for Q3 2016 compared to a net loss of $8 thousand for Q3
2015.
The
following table sets forth certain financial data as a percentage
of net sales for the periods indicated.
|
Three Months Ended September 30,
|
|
|
2015
|
2016
|
Net
sales
|
100.0%
|
100.0%
|
Cost
of goods sold
|
67.3
|
67.9
|
Gross
profit
|
32.7
|
32.1
|
Operating
expense:
|
|
|
Selling
|
12.4
|
24.6
|
General
and administration
|
9.1
|
5.9
|
Research
and development
|
10.5
|
5.9
|
Total
operating expenses
|
32.0
|
36.4
|
Operating
profit (loss)
|
0.6
|
(4.3)
|
Other
income (expense):
|
|
|
Other,
net
|
(0.8)
|
0.2
|
Total
other income (expense)
|
(0.8)
|
0.2
|
Income
(loss) before income taxes
|
(0.2)
|
(4.0)
|
Income
taxes (benefit)
|
0.1
|
0.0
|
|
|
|
Net
income (loss)
|
(0.2)%
|
(4.1)%
|
Net Sales. Our total net sales for the
third quarter of 2016 increased $2.62 million or 77.9% from the
third quarter of 2015, primarily due to continued expansion of
Motorola branded products.
18
Concentration. 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 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.
Gross Profit. Gross profit was $1.93
million or 32.1% of net sales in Q3 2016, up from $1.10 million or
32.7% of net sales in Q3 2015. Improvement in gross profit was
primarily due to increased sales.
Selling Expense. Selling expense was $1.47 million or 24.6%
of net sales in the third quarter of 2016, up from $0.42 million or
12.4% of net sales in the third quarter of 2015. The increase of
$1.06 million was primarily due to Motorola brand royalty payments,
and increased marketing and advertising costs.
General and Administrative Expense. General and
administrative expense was $354 thousand or 5.9% of net sales in
the third quarter of 2016, up 15.5% from $307 thousand or 9.1% of
net sales in the third quarter of 2015. The increase of $47
thousand was primarily due to increased personnel and related
costs, and increased legal expenses.
Research and Development Expense.
Research and development expense was $353 thousand or 5.9% of net
sales in the third quarter of 2016, down slightly from $354
thousand or 10.5% of net sales in the third quarter of 2015.
Increased engineering personnel costs
were offset by decreases in outside engineering
expenses.
Other Income (Expense). Other income was
$14 thousand in the third quarter of 2016, driven by a one-time
favorable settlement on a class action lawsuit for approximately
$41 thousand, reduced by loan interest costs of approximately $27
thousand. Other expense was $27 thousand in the third quarter of
2015 due to interest expense related to our bank credit
line.
Net Income (Loss). The net loss was $244 thousand for the
third quarter of 2016, compared to a net loss of $8 thousand for
the third quarter of 2015.
NINE
MONTHS ENDED SEPTEMBER 30, 2016 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 2015
Summary. Net sales of $12.69 million for the first nine
months of 2016 were up 40.7% from net sales of $9.02 million for
the first nine months of 2015. Zoom’s net loss was $1.94
million for the first nine months of 2016, up from a net loss of
$109 thousand for the first nine months of 2015. Loss per diluted
share was $0.14 in the nine months ended September 30, 2016
compared to $0.01 for the nine months ended September 30,
2015.
The
following table sets forth certain financial data as a percentage
of net sales for the periods indicated.
|
Nine Months Ended September 30,
|
|
|
2015
|
2016
|
Net
sales
|
100.0%
|
100.0%
|
Cost
of goods sold
|
67.7
|
68.8
|
Gross
profit
|
32.3
|
31.2
|
Operating
expense:
|
|
|
Selling
|
13.4
|
27.7
|
General
and administration
|
9.0
|
9.7
|
Research
and development
|
10.2
|
9.1
|
Total
operating expenses
|
32.6
|
46.6
|
Operating
profit (loss)
|
(0.3)
|
(15.4)
|
Other
income (expense):
|
|
|
Other,
net
|
(0.8)
|
0.1
|
Total
other income (expense)
|
(0.8)
|
0.1
|
Income
(loss) before income taxes
|
(1.1)
|
(15.3)
|
Income
taxes (benefit)
|
0.1
|
0.0
|
|
|
|
Net
income (loss)
|
(1.2)%
|
(15.3)%
|
Net Sales. Our total net sales for the
first nine months of 2016 increased $3.67 million or 40.7% from the
first nine months of 2015 primarily due to continued expansion of
Motorola branded products.
19
Concentration. 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. 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.
Gross Profit. Gross profit was $3.96 million for the first
nine months of 2016, up $1.05 million or 36.1% from gross profit of
$2.91 million for the first nine months of 2015.
Selling Expense. Selling expense was $3.52 million or 27.7%
of net sales in the first nine months of 2016, up from $1.21
million or 13.4% of net sales in the first nine months of 2015. The
increase of $2.31 million was again primarily due to Motorola brand
royalty payments, and increased marketing and advertising
costs.
General and Administrative Expense. General and
administrative expense was $1.24 million or 9.7% of net sales for
the first nine months of 2016, up 52.5% from $0.81 million or 9.0%
of net sales for the first nine months of 2015. The increase of
$426 thousand was primarily due to increased personnel costs, stock
option expenses, audit and legal costs, and increased investor
relations services.
Research and Development Expense.
Research and development expense was $1.15 million or 9.1% of net
sales in the first nine months of 2016, up 25.8% from $0.92 million
or 10.2% of net sales in the first nine months of 2015. The
increase of $237 thousand was due primarily to increased personnel
and related costs, and increased product certification and testing
expenses.
Other Income (Expense). Other income was
$10 thousand in the first nine months of 2016, driven by a one-time
favorable settlement on a class action lawsuit for approximately
$41 thousand, reduced by loan interest costs of approximately $32
thousand. Other expense was $73 thousand in the first nine months
quarter of 2015 due to interest expense on our bank credit
line.
Net Income (Loss). The net loss was
$1.94 million for the first nine months of 2016, compared to the
net loss of $109 thousand for the first nine months of
2015.
YEAR ENDED DECEMBER 31, 2015 COMPARED TO YEAR ENDED DECEMBER 31,
2014
Summary. Net sales
of $10.8 million for the fiscal year ended December 31, 2015
(“FY 2015”) were down 9.3% from net sales of $11.9
million for the fiscal year ended December 31, 2014 (“FY
2014”). Zoom reported a net loss of $833 thousand for FY 2015
compared to a net profit of $122 thousand for FY 2014. Gross margin was $3.4 million for FY
2015, down $89 thousand from $3.5 million for FY 2014. Gross margin
improved to 31.5% in FY 2015 from 29.3% in FY 2014 as a result of
supplier optimization resulting in reduced product costs for our
core cable modem products. These improved product costs helped
offset the effect of sales declines on overall gross margin in FY
2015 when compared to FY 2014.
The
following table sets forth certain financial data as a percentage
of net sales for the periods indicated.
|
Years Ended December 31,
|
|
|
2014
|
2015
|
Net
sales
|
100.0%
|
100.0%
|
Cost
of goods sold
|
70.7
|
68.5
|
Gross
profit
|
29.3
|
31.5
|
Operating
expense:
|
|
|
Selling
|
12.2
|
14.6
|
General
and administration
|
8.8
|
11.4
|
Research
and development
|
9.5
|
12.4
|
Total
operating expenses
|
30.5
|
38.4
|
Operating
profit (loss)
|
(1.2)
|
(6.9)
|
Other
income (expense):
|
|
|
Other,
net
|
2.3
|
(0.8)
|
Total
other income (expense)
|
2.3
|
(0.8)
|
Income
(loss) before income taxes
|
1.1
|
(7.7)
|
Income
taxes (benefit)
|
0.1
|
0.1
|
|
|
|
Net
income (loss)
|
1.0%
|
(7.7)%
|
20
Net Sales. Our total net sales
decreased year-over-year by $1.1 million or 9.3%. In both 2015 and
2014 we primarily generated our sales by selling broadband and
dial-up modems via retailers, distributors, and Internet Service
Providers. Zoom sales of Dial-up modems decreased $380 thousand or
24.8%. Our Broadband modems, Wireless and Other Products sales
decreased year-over-year by $731 thousand or 7.1%. Decreases in
sales were driven by continued shift in sales of older dial-up
modems to cable modems and other broadband technologies as well as
ongoing competition in the broadband
categories.
|
Year 2014
Sales $000
|
Year 2015
Sales $000
|
Change
$000
|
Change
%
|
Dial-up
|
$1,537
|
$1,157
|
$(380)
|
(24.8)%
|
Broadband,
Wireless and Other Products
|
10,364
|
9,633
|
(731)
|
(7.1)%
|
Total
Net Sales
|
$11,901
|
$10,790
|
$(1,111)
|
(9.3)%
|
Geographically,
our net sales in North America decreased $1.0 million to $10.6
million in 2015 from $11.6 million in 2014. The sales in North
America continue to reflect a shift in sales from dial-up modems to
cable modems and other broadband products. Our net sales outside of
North America were $0.2 million in 2015 compared to $0.3 million in
2014, a 40.1% decrease. Generally Zoom’s lower
sales outside North America reflect the fact that cable modems are
sold successfully through retailers in the US but not in most
countries outside the US, due primarily to variations in government
regulations.
|
Year 2014
Sales $000
|
Year 2015
Sales $000
|
Change
$000
|
Change
%
|
North
America
|
$11,564
|
$10,588
|
$(976)
|
(8.4)%
|
Outside
North America
|
337
|
202
|
(135)
|
(40.1)%
|
Total
Net Sales
|
$11,901
|
$10,790
|
$(1,111)
|
(9.3)%
|
Relatively few customers have accounted for a substantial portion
of the Company’s revenues. In 2015 three customers
accounted for 77% of the Company’s total net sales with our
largest customer accounting for 46% of our net sales. At December
31, 2015, three customers accounted for 93% of our gross accounts
receivable, with our largest customer representing 67% of our gross
accounts receivable. In 2014 three customers accounted for 74% of
our total net sales, with our largest customer accounting for 53%
of our net sales. At December 31, 2014, three customers accounted
for 92% of our gross accounts receivable, with our largest customer
representing 64% of our gross accounts receivable.
Because of our customer concentration, our net sales and operating
income could fluctuate significantly due to changes in political or
economic conditions or the loss, reduction of business, or less
favorable terms for any of our significant customers.
Gross Profit. Gross
profit was $3.4 million for FY 2015, down $89 thousand from $3.5
million for FY 2014. Gross margin improved to 31.5% in FY 2015 from
29.3% in FY 2014 as a result of reduced product costs for our core
cable modem products.
Operating Expense. Total
operating expense increased by $511 thousand from $3.6 million in
2014 to $4.1 million in 2015. Total operating expense as a
percentage of net sales increased from 30.5% in 2014 to 38.4% in
2015. The table below illustrates the change in
operating expense.
Operating Expense
|
Year 2014
Sales $000
|
% Net
Sales
|
Year 2015
Sales $000
|
% Net
Sales
|
Change
$000
|
%
Change
|
Selling
expense
|
$1,446
|
12.2%
|
$1,571
|
14.6%
|
$125
|
8.7%
|
General
and administrative expense
|
1,052
|
8.8%
|
1,229
|
11.4%
|
177
|
16.8%
|
Research
and development expense
|
1,133
|
9.5%
|
1,342
|
12.4%
|
209
|
18.5%
|
Total
operating expense
|
$3,631
|
30.5%
|
$4,142
|
38.4%
|
$511
|
14.1%
|
Selling Expense. Selling
expense increased to $1.6 million in 2015 from $1.4 million in
2014. Selling expense as a percentage of net sales was 14.6% in
2015 and 12.2% in 2014. The $125 thousand increase in selling
expense was due primarily to increased advertising
expenses.
General and Administrative Expense. General and administrative expense increased to
$1.2 million in 2015 from $1.1 million in 2014. General and
administrative expense as a percentage of net sales was 11.4% in
2015 and 8.8% in 2014. The $177 thousand increase in general and
administration expense was primarily due to increased
expenses for personnel and for professional fees related to
actively working with the Federal Communications Commission
(“FCC”) to insure consumer friendly and transparent
pricing for cable modems with cable TV operators.
21
Research and Development Expense. Research and development expense
increased to $1.3 million in 2015 from $1.1 million in
2014. Research and development expense as a percentage
of net sales increased to 12.4% in 2015 from 9.5% in 2014. The $209
thousand increase in research and development expense was
primarily due to increased product development and personnel
expenses.
Other Income (Expense). Other income (expense), net was $(86)
thousand in 2015, primarily due to loan related interest expense.
Other income (expense), net was $269 thousand in 2014, primarily
due to recognition of foreign currency translation gains of $361
thousand previously reported as accumulated other comprehensive
income in Stockholders Equity section of Balance Sheet, $(77)
thousand in interest expense, and $(15) thousand in miscellaneous
expense.
Income Tax Expense (Benefit). We recorded income tax from our operations in
Mexico, which was negligible in both 2015 and
2014.
LIQUIDITY AND CAPITAL RESOURCES
NINE
MONTHS ENDED SEPTEMBER 30, 2016 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 2015
The
Company’s cash and cash equivalents balance on 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 the recent $1.6 million funds
raised in a private placement offering, 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.
YEAR ENDED DECEMBER 31, 2015 COMPARED TO YEAR ENDED DECEMBER 31,
2014
On December 31, 2015 we had working capital of $4.4 million
including $1.8 million in cash and cash equivalents. On December
31, 2014 we had working capital of $2.1 million including $138
thousand in cash and cash equivalents. Our current ratio at
December 31, 2015 was 3.6 compared to 2.1 at December 31,
2014.
The
Company raised $3.65 million net in 2015 from a $3.42 million
private placement in September and a $229 thousand rights offering
in July. Zoom’s cash balance was also augmented by a $697
thousand increase in accounts payable, and a $732 thousand decrease
in net accounts receivable. These increases were offset by a
pay-down in the outstanding bank debt of $841 thousand, a $1.1
million increase in net inventory and a 12-month loss of $833
thousand. As of December 31, 2015 Zoom had no bank debt, a maximum
available line of credit of $1.25 million, working capital of $4.4
million, and a current ratio of 3.6. In 2014, the Company’s operating activities
used $411 thousand in cash, primarily due to $361 thousand
recognized foreign currency gains previously reported in
Accumulated Other Comprehensive Income on the Consolidated Balance
Sheets, and $137 thousand increase in accounts
receivable.
On May
18, 2015, the Company announced licensing of the Motorola trademark
for cable modems and gateways for the US and Canada for 5 years
starting January 1, 2016. In order to support anticipated sales
growth, the Company raised approximately $3.65 million net in Q3
2015. The Company believes that its existing financial resources
along with its existing line of credit, with the potential to
increase the maximum credit limit, will be sufficient to fund
operations for the foreseeable future if the Company management's
sales and operating profit expectations are met.
22
On
December 18, 2012, the Company entered into a Financing Agreement
with Rosenthal & Rosenthal, Inc. (the “Financing
Agreement”). The Financing Agreement provided for up to $1.75
million of revolving credit, subject to a borrowing base formula
and other terms and conditions as specified in the Financing
Agreement. The Financing Agreement continued until November 30,
2014 and automatically renews from year to year thereafter, unless
sooner terminated by either party as specified in the Financing
Agreement. The Lender shall have the right to terminate the
Financing Agreement at any time by giving the Company sixty
days’ prior written notice. Borrowings are secured by all of the
Company assets including intellectual property. The Loan Agreement
contained 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%.
The
Company is required to calculate its covenant compliance on a
quarterly basis. As of December 31, 2015, the Company was in
compliance with both its working capital and tangible net worth
covenants. At December 31, 2015, the Company’s tangible net
worth was approximately $4.6 million, while the Company’s
working capital was approximately $4.4 million.
There
were no material changes to our capital commitments and contractual
obligations from those disclosed in our Form 10-K for the year
ended December 31, 2015 through the date of this
filing.
Off-Balance Sheet Arrangements
We had
no off-balance sheet arrangements as of September 30,
2016.
EFFECTS OF NEW 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.
23
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 accumulative-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.
24
BUSINESS
Overview
Zoom Telephonics designs, produces, markets, sells, and supports
Internet access and other communications-related products including
cable modems, cable modem / routers, mobile broadband modems, ADSL
modems, and dial-up modems. Our primary objective is to build upon
our position as a leading producer of Internet access devices sold
through sales channels that include many of the largest US
high-volume electronics retailers, and to take advantage of a
number of trends in communications including higher data rates,
increasing use of wireless technology for transmission of data, and
increasing use of smartphones, tablets, and streaming
media.
Broadband modems, especially cable modems, were Zoom’s
highest revenue product category in both 2015 and 2014. In
response to demand for faster connection speeds and increased modem
functionality, we have invested and continue to invest resources to
advance our broadband modem product line.
Cable modems provide a high-bandwidth connection to the Internet
through a cable-TV cable that connects to compatible equipment that
is typically managed by the cable service provider. We began
shipping cable modems during the year 2000. Our primary means of
distribution to end-users in the US, our primary market, is through
national retailers and distributors. We have been selling cable
modem products under the Zoom brand, and beginning in 2016 we have
started offering cable modem products under the Motorola brand in
the US and Canada.
Our mobile broadband products provide or distribute a high-speed
connection to the Internet that uses a cellular phone service
provider’s network. Zoom’s product line includes mobile
broadband modems, mobile broadband routers, and mobile broadband
modem/router combinations.
Our DSL modems, provide a high-bandwidth connection to the Internet
through a telephone line that typically connects to compatible DSL
equipment that is typically managed by the DSL service provider. In
past years Zoom has shipped a broad line of DSL modems.
Zoom’s primary DSL product today includes a DSL modem and a
802.11n (“wireless-N”) router.
Our dial-up modems connect personal computers and other devices to
the local telephone line for transmission of data, fax, voice, and
other information. Our dial-up modems enable personal computers and
other devices to connect to other computers and networks, including
the Internet, at top data speeds up to 56,000 bits per second.
Zoom’s sales of dial-up modems, our largest source of
revenues from the mid-eighties through 2010, are expected to
continue their decline due to the ongoing adoption of broadband
access.
Zoom’s product line also includes wireless products,
including WiFi®-compatible
wireless-N broadband gateways. These products typically
provide communication between devices that are within a quarter
mile or less of each other, depending on the specific
product.
We are incorporated in Delaware under the name Zoom Telephonics,
Inc. Zoom Telephonics, Inc. was originally incorporated
in New York in 1977 and changed its state of incorporation to
Delaware in 1993. MTRLC LLC, a wholly owned subsidiary of Zoom
Telephonics, Inc., is a limited liability company organized in
Delaware that focuses on the sale of our Motorola brand products.
Our principal executive offices are located at 99 High Street,
Boston, MA 02111, and our telephone number is (617) 423-1072. Our
Web site is at www.zoomtel.com.
Our common stock is traded on the Over-The-Counter market
(“OTCQB”) under the symbol ZMTP.
Available Information
Our
Internet website address is www.zoomtel.com. Through our website we
make available, free of charge, our annual report on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K, and
any amendments to those reports, as soon as reasonably practicable
after we electronically file such material with, or furnish it to,
the SEC. These SEC reports can be accessed through the investor
relations section of our website.
EMPLOYEES
As of
September 30, 2016 we had 30 employees, 25 working full-time and 5
working less than five days per week. Our dedicated personnel in
Tijuana, Mexico are employees of our Mexican service provider and
are not included in our headcount. As of September 30, 2016, we had
one consultant in sales and one consultant in information systems,
neither of whom is included in our headcount.
Employment
by functional area as of September 30, 2016, is as
follows:
25
Executive,
Administration and Finance
|
6
|
Manufacturing
Oversight, Purchasing, Assembly, Packaging and
Shipping
|
5
|
Research,
Development and Quality Control
|
10
|
Sales, Marketing
and Technical Support
|
9
|
|
|
Total
|
30
|
PRODUCTS
General
The vast majority of our products facilitate communication of data
through the Internet. Our cable modems connect to the cable-TV
cable and our DSL modems connect to the local telephone line to
provide a high-speed link to the Internet. Our mobile broadband
modems and our coming mobile broadband routers and sensors connect
to the Internet through a mobile service provider’s mobile
broadband network. Our dial-up modems link computers,
point-of-purchase terminals, or other devices to each other or the
Internet through the traditional telephone network. Our router
products may communicate with a broadband modem for access to the
Internet, and they may also be used for local area network
communications. Our planned Connected Home products will
connect wireless sensors and controls to users through the
Internet.
Cable Modems
We have obtained CableLabs® certification for our currently
marketed cable modems, and these cable modems have also received a
number of cable service provider certifications. The lengthy, expensive, and technically
challenging certification process has been and continues to be a
significant barrier to entry.
Zoom sells cable modems to end-users through retailers and cable
service providers. While sales through the retail channel have been
significant, they have been handicapped by the fact that all cable
service providers offer cable modems directly with their service.
Our view is that cable service providers are required to separately
state the non-subsidized rental fees of carrier-provided modems and
to eliminate this fee if the consumer chooses to provide the modem,
but that view has been challenged by Charter. Charter has not
complied with these requirements, thereby hindering consumer choice
and the retail modem market. Nevertheless, Zoom has
significant cable modem sales through retailers, often to end-users
who want to eliminate a monthly cable modem rental charge from
their cable service provider.
During 2015 Zoom’s cable modem revenues were primarily from
four types of cable modems, all supporting Data Over Cable Service
Interface Specification (“DOCSIS”) 3.0 with either 16
or 8 downstream channels and 4 upstream channels
(“16x4” or “8x4”). One product was an 8x4
cable modem bridge, one was a 16x4 cable modem bridge, one was an
8x4 cable modem gateway that included an N300 wireless-N router,
and one was n 8x4 cable modem gateway that included an 802.11ac
(“wireless-AC”) AC1900 router. Zoom continues to
develop cable modem products as technology within the cable service
provider becomes updated for new generations of advanced
products.
In May 2015 Zoom entered into an agreement to license certain
Motorola trademarks from Motorola Trademark Holdings, LLC
(“Motorola”) for cable modem products. From January 1,
2016 through December 31, 2020 we are authorized to manufacture,
sell and market consumer cable modem products through certain
authorized sales channels using the Motorola trademarks. The
agreement includes numerous requirements intended to assure the
quality and reputation of Motorola brand products. In January 2016
Zoom, through its MTRLC LLC subsidiary which was formed on October
6, 2015, began shipping cable modems under the Motorola brand. Zoom
will also continue to ship Zoom brand cable modems, but these will
be distinctly different from our Motorola brand cable modem
products. On August 8, 2016, Zoom entered into an amendment to the
license agreement with Motorola. 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
ports.
Zoom’s division MTRLC LLC currently ships five Motorola brand
cable modem brands, and a sixth is expected to ship by the end of
2016. The least expensive product in this line is an 8x4 Docsis 3.0
cable modem, and the most expensive is a cable gateway (modem plus
router) that includes a 16x4 Docsis 3.0 cable modem and an AC1900
WiFi router with Power Boost. Zoom is continuing to develop new
cable modems, including a Docsis 3.1 cable modem.
26
DSL Modems
Our DSL modems incorporate the ADSL standards that are currently
most popular worldwide, including ADSL2/2+, G.dmt, G.Lite, and ANSI
T1.413 issue 2. Zoom currently sells one type of ADSL modem, which
has an integrated wireless-N 4-port router using Broadcom
Integrated Circuit (“IC”) technology.
Mobile Broadband Modems and Routers
During the second half of 2009 Zoom began shipping its first mobile
broadband or “cellular” products, mobile broadband
modems and wireless-N routers. Zoom’s mobile
broadband modems currently support AT&T, T-Mobile, and the
majority of cellular service providers worldwide who use the Global
System for Mobile Communications (“GSM”) standard for
voice and data. Zoom’s mobile broadband
wireless-N desk and travel routers allow someone to plug in a
mobile broadband GSM phone for Internet access, and to share that
Internet access with computers, phones, and other devices with
wireless-G or wireless-N capability. In late 2010 Zoom
expanded its mobile broadband line to include a modem with a top
download speed of 14.4 Mbps, and to include the We3G portable
modem/router. In 2012 Zoom began shipping a mobile broadband
modem/router that includes a voice port into which someone can plug
a telephone to make and receive voice calls. Zoom’s sales of
mobile broadband modems and routers are currently small, but Zoom
plans to ship new mobile broadband modems, routers, and
multi-sensor products that could significantly increase
Zoom’s mobile broadband product sales. Zoom has received
AT&T certification for four cellular modems, and Zoom plans to
focus on mobile broadband products that will typically be certified
by AT&T, Verizon and other cellular service
providers.
Dial-Up Modems
We have a broad line of dial-up modems with top data speeds up to
56,000 bps, available in external and internal models. Many of our
external modems are designed to work with almost any terminal or
computer, or operating system including Windows, Apple, Linux, and
others. Personal Computer (“PC”) oriented internal
modems are designed primarily for installation in the Peripheral
Component Interconnect (“PCI”) slot, PCI-E slot, or PC
card slot of IBM PC-compatibles. Embedded internal modems are
designed to be embedded in PCs dedicated for a specific
application, such as point-of-purchase terminals, kiosks, and
set-top boxes. We sell and market dial-up modems under the
Zoom® and Hayes® brands, as well as selling unbranded or
private labeled modems for some specific high-volume
accounts.
Wireless Local Area Networking
In 2005 Zoom began shipping DSL modems with the 802.11g
(“wireless-G”) standard. In 2009 Zoom began shipping
products that incorporate the extended range and higher data rate
associated with the wireless-N and then later with the wireless-AC
standards. Those products currently include wireless
adapters and routers, as well as wireless routers integrated with a
cable modems or DSL modems as discussed above. Two of the
wireless-N routers work with certain mobile broadband Universal
Serial Bus (“USB”) modems and smartphones, and a third
wireless-N router includes a mobile broadband modem. Our line also
includes a mobile broadband modem/router combination with a voice
port.
Wireless Connected Home Products
“Connected Home” products typically allow monitoring
and/or control of sensors and actuators in the home through a
smartphone or some other Internet-connected device. Zoom has
developed significant technology in this area, but Zoom still does
not ship this type of product in volume. Zoom continues to work on
a multi-sensor product that communicates to the Internet through a
built-in cellular modem, and which allows access to sensor data
through a smartphone or other Internet-connected device. Zoom
believes that there is significant potential for this type of
product, but that there are significant risks including risk
relating to delays in finishing this product and risks from
competitors.
Products
for Markets outside North America
Products for countries outside the US often differ from a similar
product for the US due to different regulatory and certification
requirements, country-specific phone jacks and AC power adapters,
and language-related specifics. As a result, the introduction of
new products into markets outside North America can be costly and
time-consuming. In 1993 we introduced our first dial-up modem
approved for selected Western European countries. Since then we
have continued to expand our product offerings into markets outside
North America. We have received regulatory certifications for, and
are currently selling our products in a number of countries,
including the US, the United Kingdom (“UK”), Spain,
Canada, Vietnam, and some Latin American countries. We intend to
continue to expand and enhance our product line for our existing
markets and to seek certifications for the sale of new products
outside the US. Most importantly, we hope to sell Motorola brand
WiFi products in China, Latin America, Europe, and other regions
outside the USA. However, the vast majority of our sales were in
North America in 2015 and in the first nine months of 2016, and we
expect that trend to continue in the near term.
27
SALES CHANNELS
General
We sell our products primarily through high-volume retailers and
distributors, Internet service providers, telephone service
providers, value-added resellers, PC system integrators, and
Original Equipment Manufacturers ("OEMs"). We support our major
accounts in their efforts to discern strategic directions in the
market, to maintain appropriate inventory levels, and to offer a
balanced selection of attractive products.
Relatively few customers have accounted for a substantial portion
of our revenues. In the first nine months of 2016, three
customers accounted for 81% of our total net sales with our largest
customer accounting for 30% of our net sales. At September 30, 2016
three customers accounted for 88% of our accounts receivable, with
our largest customer representing 48% of our accounts receivable.
In 2015 three customers accounted for 77% of our total net sales
with our largest customer accounting for 46% of our net sales. At
December 31, 2015, three customers accounted for 93% of our gross
accounts receivable, with our largest customer representing 67% of
our gross accounts receivable. In 2014 three customers
accounted for 74% of our total net sales, with our largest customer
accounting for 53% of our net sales. At December 31, 2014, three
customers accounted for 92% of our gross accounts receivable, with
our largest customer representing 64% of our gross accounts
receivable.
Distributors and Retailers outside North America
In markets outside North America we sell and ship our products
primarily to distributors. We believe that sales growth outside
North America will continue to require substantial additional
investments of resources for product design and testing, regulatory
certifications, native-language instruction manuals and software,
packaging, sales support, and technical support. We have made this
investment in the past for many countries, and we expect to make
this investment for some countries and products in the
future. However, we anticipate that the vast majority
of our future sales will come from the US, largely because the US
has an unusually robust retail cable modem market.
We have announced a master distributor agreement with T&W, a
Chinese manufacturer and our primary supplier, whereby T&W will
be the master distributor for some of our Motorola brand product
categories in China. We hope to have similar agreements for some
other countries, but there is no guarantee that we will have such
agreements. We have a distributor for Latin America, and we hope
that distributor will sell some of our Motorola brand WiFi
products. We hope to add other distributors for some countries
outside the USA. We also expect to sell some Motorola brand WiFi
products through Amazon UK and other Amazon sites in
Europe.
North American High-volume Retailers and Distributors
In North America we reach the retail market primarily through
high-volume retailers. Our North American retailers include Best
Buy, Micro Center, Target, Wal-Mart, and others including Amazon
and other Web-focused retailers.
We sell significant quantities of our products through
distributors, who often sell to corporate accounts, retailers,
service providers, value-added resellers, equipment manufacturers,
and other customers. Our North American distributors include
customers D&H Distributing, Ingram Micro, and Tech
Data.
Internet and Telephone Service Providers
In past years our sales have included DSL modems sold to DSL
service providers in the US and in some other countries. We plan to
continue selling and supporting these customers. In addition, we
will continue to offer some of our cable modem and mobile broadband
products to service providers.
System Integrators and Original Equipment
Manufacturers
Our system integrator and OEM customers sell our products under
their own name or incorporate our products as a component of their
systems. We seek to be responsive to the needs of these customers
by providing on-time delivery of high-quality, reliable,
cost-effective products with strong engineering and sales support.
We believe that some of these customers also appreciate the
improvement in their products' image due to use of a Zoom or Hayes
brand modem.
28
Sales, Marketing and Support
Our sales, marketing, and support are primarily managed from our
headquarters in Boston, Massachusetts. In North America we sell our
Zoom, Motorola, Hayes, and private-label dial-up modem products
through Zoom's sales force and through commissioned independent
sales representatives managed and supported by our own staff. Most
service providers are serviced by Zoom's sales force. Worldwide
technical support is primarily handled from our Boston
headquarters.
We believe that Zoom, Motorola, Hayes, and Global Village are
widely recognized brand names. We build upon our brand equity in a
variety of ways, including cooperative advertising, product
packaging, web advertising, trade shows, and public
relations.
We attempt to develop quality products that are user-friendly and
require minimal support. We typically support our claims of quality
with product warranties of one to two years, depending upon the
product. To address the needs of end-users and resellers who
require assistance, we have our own staff of technical support
specialists. They currently provide telephone support
five days per week in English and, at some times, Spanish. Our
technical support specialists also maintain a significant Internet
support facility that includes email, firmware and software
downloads, and the SmartFacts™ Q&A search
engine.
Research and Development
Our research and development efforts are focused on developing new
products, enhancing the capabilities of existing products, and
reducing production costs. We have developed close collaborative
relationships with certain of our Original Design Manufacturer
(“ODM”) suppliers and component suppliers. We work with
these partners and other sources to identify and respond to
emerging technologies and market trends by developing products that
address these trends. In addition, we purchase modems and other
chipsets that incorporate sophisticated technology from third
parties, thereby eliminating the need for us to develop this
technology in-house. We do however develop some products in-house,
including some modems and our Connected Home product
line.
The Company’s costs on research and development were $1.15
million for the first nine months of 2016, $1.3 million for 2015
and $1.1 million for 2014. As of September 30, 2016 we had 10
employees engaged primarily in research and development. Our
research and development team performs electronics hardware design
and layout, mechanical design, prototype construction and testing,
component specification, firmware and software development, product
testing, foreign and domestic regulatory certification efforts,
end-user and internal documentation, and third-party software
selection and testing.
Manufacturing and Suppliers
Our products are currently designed for high-volume automated
assembly to help assure reduced costs, rapid market entry, short
lead times, and reliability. High-volume assembly typically occurs
in China or Taiwan. Our contract manufacturers and original design
manufacturers typically obtain some or all of the material required
to assemble the products based upon a Zoom Telephonics Approved
Vendor List and Parts List. Our manufacturers typically insert
parts onto the printed circuit board, with most parts automatically
inserted by machine, solder the circuit board, and test the
completed assemblies. The contract manufacturer sometimes performs
final packaging. For the US and many other markets, packaging is
often performed at our facilities in North America, allowing us to
tailor the packaging and its contents for our customers immediately
before shipping. This facility also performs warehousing, shipping,
quality control, finishing and some software updates from time to
time. We also perform circuit design, circuit board layout, and
strategic component sourcing at our Boston headquarters facility.
Wherever the product is built, our quality systems are used to help
assure that the product meets our specifications.
Our North American facility is currently located in Tijuana,
Mexico. From time to time we experience certain challenges
associated with the Tijuana facility, specifically relating to
bringing products across the border between the US and
Mexico. We believe that this facility assists us
in cost-effectively providing rapid response to the needs of our US
customers.
Historically we have used one primary manufacturer for a given
design. We sometimes maintain back-up production tooling at a
second manufacturer for our highest-volume products. Our
manufacturers are normally adequate to meet reasonable and properly
planned production needs; but a fire, natural calamity, strike,
financial problem, or other significant event at an assembler's
facility could adversely affect our shipments and revenues. In the
first nine months of 2016, our business relied on a single primary
cable modem supplier. As of September 30, 2016, this supplier
provided 89% of our purchased inventory. The loss of a key
supplier, or a material adverse change in a key supplier’s
business or in our relationship with a key supplier, could
materially and adversely harm our business.
Our products include a large number of parts, most of which are
available from multiple sources with varying lead times. However,
most of our products include a sole-sourced chipset as the most
critical component of the product. The vast majority of our cable
and DSL modem chipsets come exclusively from Broadcom. Our dial-up
modem chipsets come exclusively from Conexant. Serious problems at
Broadcom or Conexant, including long chipset lead-times, would
significantly reduce Zoom’s shipments.
29
We have experienced delays in receiving shipments of modem chipsets
in the past, and we may experience such delays in the future.
Moreover, we cannot assure that a chipset supplier will, in the
future, sell chipsets to us in quantities sufficient to meet our
needs or that we will purchase the specified dollar amount of
products necessary to receive concessions and incentives from a
chipset supplier. An interruption in a chipset supplier's ability
to deliver chipsets, a failure of our suppliers to produce chipset
enhancements or new chipsets on a timely basis and at competitive
prices, a material increase in the price of the chipsets, our
failure to purchase a specified dollar amount of products or any
other adverse change in our relationship with modem component
suppliers could have a material adverse effect on our results of
operations.
We are also subject to price fluctuations in our cost of goods. Our
costs may increase if component shortages develop, lead-times
stretch out, fuel costs rise, or significant delays develop due to
labor-related issues.
We are also subject to the Restriction of Hazardous Substances
Directive (“RoHS”) and Consumer Electronics Control
(“CEC”) rules discussed above, which affect component
sourcing, product manufacturing, sales, and marketing.
Competition
The Internet access and networking industries are intensely
competitive and characterized by aggressive pricing practices,
continually changing customer demand patterns, rapid technological
advances, and emerging industry standards. These characteristics
result in frequent introductions of new products with added
capabilities and features, and continuous improvements in the
relative functionality and price of modems and other communications
products. Our operating results and our ability to compete could be
adversely affected if we are unable to:
●
successfully
and accurately anticipate customer demand;
●
manage
our product transitions, inventory levels, and manufacturing
processes efficiently;
●
distribute
or introduce our products quickly in response to customer demand
and technological advances;
●
differentiate
our products from those of our competitors; or
●
otherwise
compete successfully in the markets for our products.
Some
of our primary competitors by product group include the
following:
●
Cable modem competitors:
ARRIS, Belkin / Linksys, D-Link, Hon
Hai Network Systems (formerly Ambit Microsystems), Netgear, SMC
Networks, Technicolor, TP-Link and Ubee
Interactive.
●
Dial-up modem
competitors: Best Data, Hiro,
Lite-On, Trendnet and US Robotics.
●
DSL modem competitors:
ARRIS, 3Com, Actiontec, Airties, Asus,
Aztech, Best Data, Belkin / Linksys, D-Link, Huawei, Netgear,
Sagemcom (formerly Sagem), Siemens (formerly Efficient Networks),
Techicolor, TP-Link, Westell, Xavi, and ZyXEL
Communications.
●
Mobile broadband
competitors: Cradlepoint,
D-Link, Huawei, Netgear, Novatel Wireless, Sierra Wireless, and
ZTE.
●
Networking competitors:
Belkin / Linksys, Buffalo, D-Link,
Netgear, TP-Link and Trendnet.
Many of our competitors and potential competitors have more
extensive financial, engineering, product development,
manufacturing, and marketing resources than we do.
The
principal competitive factors in our industry include the
following:
30
●
product
performance, features, reliability and quality of
service;
●
price;
●
brand
image;
●
product
availability and lead times;
●
size
and stability of operations;
●
breadth
of product line and shelf space;
●
sales
and distribution capability;
●
technical
support and service;
●
product
documentation and product warranties;
●
relationships
with providers of broadband access services; and
●
certifications
evidencing compliance with various requirements.
We believe we are able to provide a competitive mix of the above
factors for our products, particularly when they are sold through
retailers, computer product distributors, small to medium sized
Internet service providers, and system integrators. We are less
successful in selling directly to large telephone companies and
other large providers of broadband access services.
Cable, DSL, and mobile broadband modems transmit data at
significantly faster speeds than dial-up modems. DSL and cable,
however, typically require a more expensive Internet access
service. In addition, the use of DSL and cable modems is currently
impeded by a number of technical and infrastructure limitations. We
have had some success in selling to smaller phone companies and to
Internet service providers, but we have not sold significant
quantities to large phone companies or to large cable service
providers.
Successfully
penetrating the broadband modem market presents a number of
challenges, including:
●
the current limited retail market for broadband
modems;
●
the relatively small number of cable, telecommunications and
Internet service providers that make up the majority of the market
for broadband modems in the USA, our largest market;
●
the significant bargaining power and market dominance of these
large volume purchasers;
●
the time-consuming, expensive and uncertain certification processes
of the various cable and DSL service providers; and
●
the strong relationships with service providers enjoyed by some
incumbent equipment providers, including ARRIS for cable modems and
Huawei for DSL and mobile broadband modems.
Intellectual Property Rights
We rely
primarily on a combination of copyrights, trademarks, trade secrets
and patents to protect our proprietary rights. We have trademarks
and copyrights for our firmware (software on a chip), printed
circuit board artwork, instructions, packaging, and literature. We
also have five active patents that expire between years 2020 and
2031. We cannot assure that any patent application will be granted
or that any patent obtained will provide protection or be of
commercial benefit to us, or that the validity of a patent will not
be challenged. Moreover, we cannot assure that our means of
protecting our proprietary rights will be adequate or that our
competitors will not independently develop comparable or superior
technologies.
We
license certain trademarks and certain technologies used in our
products, typically rights to bundled software, on a non-exclusive
basis. In addition we purchase chipsets that incorporate
sophisticated technology. We have received, and may receive in the
future, infringement claims from third parties relating to our
products and technologies. We investigate the validity of these
claims and, if we believe the claims have merit, we respond through
licensing or other appropriate actions. Certain of these past
claims have related to technology included in modem chipsets. We
forwarded these claims to the appropriate vendor. If we or our
component manufacturers were unable to license necessary technology
on a cost-effective basis, we could be prohibited from marketing
products containing that technology, incur substantial costs in
redesigning products incorporating that technology, or incur
substantial costs defending any legal action taken against it.
Where possible we attempt to receive patent indemnification from
chipset suppliers and other appropriate suppliers, but the extent
of this coverage varies and enforcement of this indemnification may
be difficult and costly.
31
In May 2015 we entered into an agreement to license certain
Motorola®
brand trademarks for consumer cable
modem products in the US and Canada through certain authorized
sales channels using such trademarks beginning January 1, 2016
through December 31, 2020. On August 8, 2016, we entered into an
amendment to the license agreement with Motorola. The amendment
expands our 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 ports.
Government Regulation
Regulatory Approvals, Certifications and Other Industry
Standards
Our
modems and related products sold in the U.S are required to meet
United States government regulations, including regulations of the
United States Federal Communications Commission, known as the FCC,
which regulates equipment, such as modems, that connects to the
public telephone network. The FCC also regulates the
electromagnetic radiation and susceptibility of communications
equipment. In addition, in order for our broadband products to be
qualified for use with a particular broadband Internet service, we
are often required to obtain approvals and certifications from the
actual cable, telephone or Internet service provider and from
CableLabs® for cable modems. In addition to U.S. regulations,
many of our products sold abroad require us to obtain specific
regulatory approvals from foreign regulatory agencies for matters
such as electrical safety, country-specific telecommunications
equipment requirements, and electromagnetic radiation and
susceptibility requirements. We submit products to accredited
testing laboratories and, when required, to specific foreign
regulatory agencies, to receive approvals for our products based on
the test standards appropriate to the target markets for a given
product. We expect to continue to seek and receive approvals for
new products to allow us to reach a large number of countries
throughout the world, including countries in the Americas, Europe,
Asia, and Africa. The regulatory process can be time-consuming and
can require the expenditure of substantial resources. We cannot
assure that the FCC or foreign regulatory agencies will grant the
requisite approvals for any of our products on a timely basis, if
at all.
United
States and foreign regulations regarding the manufacture and sale
of electronics devices are subject to change. On July 1, 2006
changes were implemented by the European Union to reduce the use of
hazardous materials, such as lead, in electronic equipment. As
discussed above, the implementation of these requirements caused
Zoom and other electronics companies to change or discontinue many
of its European products. As discussed above, the California Energy
Commission’s Appliance Efficiency Regulations will affect the
power cube supplied with some of Zoom’s US
products.
In
addition to reliability, quality and content standards, the market
acceptance of our products and services is dependent upon the
adoption of industry standards so that products from multiple
manufacturers are able to communicate with each other. Our products
and services, particularly our VoIP products and services, rely
heavily on a variety of communication, network and voice
compression standards to interoperate with other vendors'
equipment. There is currently a lack of agreement among industry
leaders about which standard should be used for a particular VoIP
application, and about the definition of the standards themselves.
There is significant and growing consensus to use SIP for VoIP
telephony, but there are important exceptions. One exception is
Skype, which uses a proprietary protocol. Another exception is
Packet Cable, which is popular with cable service providers.
Another complication is that some VoIP services continue to evolve.
The failure of our products and services to comply with various
existing and evolving standards could delay or interrupt volume
production of our VoIP telephony or other new products and
services, expose us to fines or other imposed penalties, or
adversely affect the perception and adoption rates of our products
and services, any of which could harm our business.
32
PROPERTIES
Since 1983 our headquarters has been near South Station in downtown
Boston. Our principal executive offices are still near South
Station, but our location changed in July 2016 to 99 High Street,
Boston, MA 02110, and our main telephone number continues to be
(617) 423-1072. Our current lease for this facility expires on June
30, 2019. We also lease a facility in Tijuana, Mexico. In
November 2014 we signed a one-year lease with five one-year renewal
options thereafter for an 11,390 square foot facility in Tijuana,
Mexico. In September 2015, Zoom extended the term of the lease from
December 1, 2015 through November 30, 2018. In September 2015, Zoom
also signed a new lease for additional space in the adjacent
building, which doubles our existing capacity. The term of the
lease is from March 1, 2016 through November 30, 2018.
33
LEGAL PROCEEDINGS
From
time to time, we are party to various lawsuits and administrative
proceedings arising in the ordinary course of business. We evaluate
such lawsuits and proceedings on a case-by-case basis, and our
policy is to vigorously contest any such claims, that we believe
are without merit. Our management believes that the ultimate
resolution of such matters will not materially and adversely affect
our 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.
34
BOARD OF DIRECTORS AND MANAGEMENT
Information Regarding the Board of Directors
The
Board of Directors currently consists of seven members. At each
meeting of stockholders, Directors are elected for a one-year term.
The following table and biographical descriptions set forth
information regarding the current members of the Board of
Directors.
Name
|
Age
|
Principal
Occupation
|
Director
Since
|
Frank B.
Manning
|
68
|
Chief Executive
Officer, President and Chairman of the Board of Zoom Telephonics,
Inc.
|
1977
|
Peter R.
Kramer(2),
(3)
|
65
|
Artist
|
1977
|
Robert
Crowley(1),(3)
|
77
|
Financial
Consultant
|
2014
|
Joseph J. Donovan(1), (2),
(3)
|
67
|
Adjunct Professor
at Suffolk University's Sawyer School of Management
|
2005
|
Philip
Frank
|
45
|
President and CEO
of AirSense Wireless
|
2015
|
George
Patterson(1),
(2)
|
41
|
Investment
Banker
|
2015
|
Peter
Sykes
|
71
|
Personal
Investor
|
2016
|
(1) Current members of the Audit Committee
effective November 2, 2015. Chair, Robert Crowley.
(2) Current members of the Compensation Committee effective
November 2, 2015. Chair, Peter Kramer.
(3) Current members of the Nominating Committee effective November
2, 2015. Chair, Joseph Donovan.
Frank B. Manning is a co-founder of our company.
Mr. Manning has been our President, Chief Executive Officer,
and a Director since May 1977. He has served as our chairman
of the board since 1986. He earned his BS, MS and PhD degrees in
Electrical Engineering from the Massachusetts Institute of
Technology, where he was a National Science Foundation Fellow. From
1998 through late 2006 Mr. Manning was also a director of the
Massachusetts Technology Development Corporation, a public purpose
venture capital firm that invests in seed and early-stage
technology companies in Massachusetts. Mr. Manning is the
brother of Terry Manning, our vice president of sales and
marketing. From 1999 to 2005 Mr. Manning was a Director of
Intermute, a company that Zoom co-founded and that was sold to
Trend Micro Inc., a subsidiary of Trend Micro Japan.
Mr. Manning was a Director of Unity Business Networks, a
hosted VoIP service provider, from Zoom's investment in
July 2007 until Unity’s acquisition in
October 2009. Mr. Manning was also a director of Zoom
Technologies, Inc. until November 2010. Mr. Manning’s
extensive experience as our Chief Executive Officer, as well as his
overall experience and professional skills in electronics and
business, enable him to capably serve as Chairman of Zoom’s
Board of Directors.
Peter R. Kramer is a co-founder of Zoom and has been a
Director of Zoom since May 1977. Mr. Kramer also served
as our Executive Vice President from May 1977 until
November 2009. Mr. Kramer retired from his position as our
Executive Vice President in November 1999 and is currently an
independent artist. He earned his B.A. degree in 1973 from SUNY
Stony Brook and his Master’s in Fine Art degree from C.W.
Post College in 1975. From 1999 to 2005 Mr. Kramer was a
Director of Intermute, a company that Zoom co-founded and that was
sold to Trend Micro Inc., a subsidiary of Trend Micro Japan.
Mr. Kramer was a member of the Board of Directors of Zoom
Technologies, Inc. from 1977 until September 2009.
Mr. Kramer’s experience as our co-founder and as
Executive Vice President with Zoom for over thirty years enables
him to bring a well informed perspective to our Board of
Directors.
Robert Crowley joined Zoom as a Director in January 2014. He
has been Principal at Crowley Capital Strategies since he founded
the company in 2011. Crowley Capital Strategies is a consulting
company that works with early stage companies, helping them to
develop their business models and financial strategies. Previously,
Mr. Crowley was President of Massachusetts Technology Development
Corporation. (MTDC). He had been associated with MTDC since its
inception in 1978, serving as Executive Vice President and Chief
Investment Officer until becoming President in 2002. Over the span
of Mr. Crowley’s time with MTDC, the firm invested $115
million in 126 companies including Zoom Telephonics. Mr. Crowley is
currently Chairman of the SBANE (Smaller Business Association of
New England) Educational Center. He is a former Chairman of the MIT
Enterprise Forum, and a former Chairman of SBANE. Mr. Crowley has
spent most of his career in finance, initially as a commercial
banker with The Shawmut Bank. He earned a BA from Fairfield
University and an MBA from Boston College. Mr. Crowley’s
extensive experience with business and finance, particularly for
smaller companies, enables him to capably serve on our board of
directors.
35
Joseph J. Donovan has been a Director of Zoom since 2005.
From March 2004 through September 2009 Mr. Donovan
served as the Director of Education Programs of Suffolk
University's Sawyer School of Management on the Dean College
campus, where he was responsible for the administration of
undergraduate and graduate course offerings at Dean College.
Mr. Donovan serves as an adjunct faculty member at Suffolk
University's Sawyer School of Management. He teaches Money and
Capital Markets, Managerial Economics, and Managerial Finance in
the Graduate School of Business Administration at Suffolk
University. Mr. Donovan served as the Director of Emerging
Technology Development for the Commonwealth of Massachusetts'
Office of Emerging Technology from January 1993 through
October 2004. Mr. Donovan also served as a Director of
the Massachusetts Technology Development Corporation, the
Massachusetts Emerging Technology Development Fund, and the
Massachusetts Community Development Corporation. He received a
Bachelor of Arts in Economics and History from St. Anselm College
in Manchester, N.H. and a Master's Degree in Economics and Business
from the University of Nebraska. Mr. Donovan was a member of
the Board of Directors of Zoom Technologies, Inc. from 2005 until
September 2009. Mr. Donovan adds a unique perspective to
our Board of Directors which he gained through his experience both
as an educator and a leader in the Massachusetts high technology
community.
Philip Frank is a technology
executive with over 20 years of experience. He has been a Director of Zoom since September 22,
2015. He has served as President and CEO of AirSense Wireless
since September 2016. Prior to that, he was Zoom's Chief
Financial Officer from September 2015 to July 2016. From
February 2005 to December 2014 he worked for the Nokia Corporation
including Nokia Siemens Networks, based in London, UK. At
Nokia, Mr. Frank was most recently the Global Head of Corporate
Development and M&A. Earlier in his career Mr. Frank was
an executive with AT&T Wireless as well as having worked with
global advisory firms DiamondCluster International and
Accenture. He received a Master’s in Business
Administration from the University of Michigan Ross School of Business. Mr. Frank’s
extensive experience as a senior financial and development
executive with the world’s largest telecommunications service
provider and with the world’s largest infrastructure vendor
provides Zoom with topical industry expertise and a valuable
perspective regarding financial management, strategy, development
and sales.
George Patterson has been a Director of Zoom since September
22, 2015. Mr. Patterson is currently an investment banker at
CODE Advisors, a technology and media focused boutique financial
services firm headquartered in San Francisco with offices in London
and New York. From July 2013 to July 2015, he served as the
Co-Head of Software, Systems and Solutions Investment Banking at
Barclays Investment Bank, based in New York. From January 2009 to
June 2013, Mr. Patterson was Head of Technology Investment Banking,
EMEA for Barclays, based in London. Prior to Barclays' acquisition
of Lehman Brothers’ North American operations in 2008, he
worked in the Technology investment banking group at Lehman
Brothers, which he joined in 2000. During his tenure as an
investment banker, Mr. Patterson has worked on a wide variety of
equity, fixed income and M&A transactions for many corporate
and institutional clients across the technology ecosystem in North
America, EMEA and the Asia Pacific. Mr. Patterson’s broad
background in technology finance enables him to capably serve on
our board of directors.
Peter Sykes has been a Director of Zoom since October 24,
2016. Mr. Sykes is a British entrepreneur and investor. Mr.
Sykes had a successful corporate career with Dell Inc., from 1992
to 2002 initially setting up the Dell subsidiaries in Switzerland
and Austria and later developing the Dell Global Enterprise Program
across Europe. Subsequently, Mr. Sykes spearheaded Dell's
development of Thailand, Korea and India. Since 2002 Mr.
Sykes has managed his personal investment portfolio. Mr. Sykes has
a wealth of experience developing electronics hardware sales
channels enabling him to capably serve on our board of directors.
Our Other Executive Officers
The
names and biographical information of our executive officers as of
December 31, 2015, who are not members of our Board of Directors,
are set forth below:
Name
|
|
Age
|
|
Position with
Zoom
|
|
|
|
|
|
Terry
J. Manning
|
|
65
|
|
Vice
President of Sales and Marketing
|
|
|
|
|
|
Deena
Randall
|
|
63
|
|
Vice
President of Operations
|
Terry J. Manning joined us in 1984 and served as corporate
communications director from 1984 until 1989, when he became the
director of sales and marketing. Terry Manning is Frank Manning's
brother. Terry Manning earned his BA degree from Washington
University in St. Louis in 1974 and his MPPA degree from the
University of Missouri at St. Louis in 1977.
36
Deena Randall joined us in 1977 as our first employee.
Ms. Randall has served in various senior positions within our
organization and has directed our operations since 1989.
Ms. Randall earned her BA degree from Eastern Nazarene College
in 1975.
EXECUTIVE COMPENSATION
Summary Compensation Table
The
following Summary Compensation Table sets forth the total
compensation paid or accrued for the fiscal years ended
December 31, 2014 and December 31, 2015 for our principal
executive officer and our other three most highly compensated
executive officers who were serving as executive officers on
December 31, 2015. We refer to these officers as our named
executive officers.
Name and
Principal Position
|
Year
|
Salary
|
Option
Awards
(1)
|
All Other
Compensation (3)
|
Total
|
Frank
B. Manning,
Chief
Executive Officer
|
2015
2014
|
$129,272
$129,272
|
$3,487
$0
|
$1,607
$1,607
|
$134,366
$130,879
|
Philip
Frank,
Former
Chief Financial Officer (4)
|
2015
|
$24,000
|
$93,570(2)
|
$31
|
$117,601
|
Deena
Randall
Vice
President of Operations
|
2015
2014
|
$128,366
$116,490
|
$3,255
$0
|
$536
$536
|
$132,157
$117,026
|
Terry
J. Manning
Vice
President of Sales and Marketing
|
2015
2014
|
$123,500
$123,500
|
$2,790
$0
|
$529
$529
|
$126,819
$124,029
|
(1)
The amounts
included in the “Option Awards” column reflect the
aggregate grant date fair value of option awards in accordance with
FASB ASC Topic 718, pursuant to the 2009 Stock Option Plan.
Assumptions used in the calculations of these amounts are included
in Note 7 to our Financial Statements included in our Annual Report
on Form 10-K for the year ended December 31, 2014. These
options are incentive stock options issued under the 2009 Stock
Option Plan and represent the right to purchase shares of Common
Stock at a fixed price per share (the grant date fair market value
of the shares of Common Stock underlying the options).
(2)
The amounts
included in the “Option Awards” column for Mr. Frank
reflect the aggregate grant date fair value of option awards of a
grant received as a director and that was issued under the 2009
Director Option Plan as well as a grant received as an employee
issued under the 2009 Stock Option Plan.
(3)
The amounts
included in the “All Other Compensation” column for
2015, consists of: (a) life insurance premiums paid by Zoom to the
named executive officer: Mr. Frank B. Manning $1,257, Mr. Phil
Frank $31, Mr. Terry Manning $179 and Ms. Randall $186;
(b) Zoom’s contribution to a 401(k) plan of $350 for each
named executive officer except Mr. Frank; and (c) a reduced salary
for Ms. Randall in 2015 due to her choice of reducing her time
worked at Zoom in 2015. For 2014, consists of: (a) life insurance
premiums paid by Zoom to the named executive officer:
Mr. Frank B. Manning $1,257, Mr. Terry Manning $179 and
Ms. Randall $186; (b) Zoom’s contribution to a 401(k)
plan of $350 for each named executive officer;and (c) a reduced
salary for Ms. Randall in 2014 due to her choice of reducing her
time worked at Zoom in 2014.
(4)
Mr. Frank was
appointed Chief Financial Officer on October 14, 2015 and resigned
effective as of July 29, 2016.
37
Outstanding Equity Interests
The
following table sets forth information concerning outstanding stock
options for each named executive officer as of December 31,
2015.
Outstanding
Equity Awards at Fiscal Year-End
Name
|
Grant Date
(1)
|
Number of
Securities
Underlying
Unexercised Options
|
Option
Exercise
Price
|
Option
Expiration Date
|
|
|
|
Exercisable
Options
|
Unexercisable
Options
|
|
|
Frank
B. Manning
|
03/02/2011
01/30/2013
04/30/2015
|
55,000
150,000
18,750
|
--
--
56,250
|
$0.48
$0.25
$0.25
|
03/02/2016
01/30/2018
04/30/2020
|
Philip
Frank(2)
|
09/23/2015
10/14/2015
|
30,000
|
--
150,000
|
$1.07
$1.85
|
09/23/2020
10/14/2020
|
Deena
Randall
|
03/02/2011
|
30,000
|
--
|
$0.48
|
03/02/2016
|
|
01/30/2013
04/30/2015
|
135,000
17,500
|
--
52,500
|
$0.25
$0.25
|
01/30/2018
04/30/2020
|
Terry
Manning
|
03/02/2011
|
45,000
|
--
|
$0.48
|
03/02/2016
|
|
01/30/2013
|
120,000
|
--
|
$0.25
|
01/30/2018
|
|
04/30/2015
|
15,000
|
45,000
|
$0.25
|
04/30/2020
|
(1)
The options granted
on March 2, 2011 and on January 30, 2013 are vested in full. The
options granted on 4/30/2015 vest in four equal installments every
6 months and become fully vested within two years from grant
date.
(2)
Mr. Frank joined
Zoom as a Director on September 22, 2015 and became Chief Financial
Officer on October 14, 2015. He received an option grant on
September 23, 2015 as a director from the 2009 Directors Option
plan. These options granted are vested in full. The options granted
on October 14, 2015 were granted as part of the 2009 Option Plan as
an employee. They vest in four equal installments every 6 months
and become fully vested within two years from grant date. Mr. Frank
resigned as Chief Financial Officer on July 29, 2016. The options
granted on October 14, 2015 were not fully vested and Mr. Frank
forfeited a total of 112,500 options.
Option
Exercises
None of
our named officers exercised stock options during the fiscal year
ended December 31, 2014. Peter Kramer, Joseph Donovan and Deena
Randall exercised options to purchase a total of 50,000 shares of
common stock during the fiscal year ended December 31,
2015.
Employment, Termination and Change of Control
Agreements
On
December 8, 2009 Zoom entered into severance and change of
control agreements with each of Frank Manning, Terry Manning, and
Deena Randall. The purpose of these arrangements is to encourage
the named executive officers to continue as employees and/or assist
in the event of a change-in-control of Zoom. Zoom has entered into
agreements with each of the executive officers formalizing the
compensation arrangement described below.
Under
the terms of each agreement, if such executive officer is
terminated by Zoom for any reason other than for cause, such
executive officer will receive severance pay in an amount equal to
the greater of three months’ base salary or a number of weeks
of base salary equal to the number of full years employed by Zoom
divided by two and all outstanding stock options issued on or after
September 22, 2009 held by the executive officer will become
immediately vested and will be exercisable for a period of up to 30
days after termination.
Under
the terms of each agreement, each executive officer will receive
severance pay equal to six months’ base salary if (i) the
executive officer’s employment is terminated without cause
within six months after a change-in-control, (ii) the executive
officer’s job responsibilities, reporting status or
compensation are materially diminished and the executive officer
leaves the employment of the acquiring company within six months
after the change-in-control, or (iii) Zoom is liquidated. In
addition, in the event of a change-in-control or liquidation of
Zoom, outstanding stock options granted to the executive officer on
or after September 22, 2009 will become immediately
vested.
38
Potential
Termination and Change-in Control Payments
As of
December 31, 2015 in the event certain named executive
officers are terminated by Zoom for any reason other than cause or
a change-in-control or liquidation of Zoom, the named executive
officer would receive the following cash payments: Mr. Frank
Manning $48,477; Ms. Randall $48,137 and Mr. Terry
Manning $38,000. These amounts represent the greater of three
months salary or the number of weeks of base salary equal to the
number of years employed by Zoom divided by two. In the event of
termination as a result of a change-in-control or liquidation, the
named executive officers would receive the following cash payments:
Mr. Frank Manning $64,636; Ms. Randall $64,183 and
Mr. Terry Manning $61,750. These amounts represent six
months’ base salary. In the event of either termination of
employment, all options held by any of the executive officers
listed above that were issued on or after September 22, 2009
would become immediately vested.
Director Compensation
The
following table sets forth information concerning the compensation
of our Directors who are not named executive officers for the
fiscal year ended December 31, 2015.
Name
|
Fees Earned or
Paid in Cash
|
Option Awards
(1)(2)(3)
|
All Other
Compensation
|
Total
|
Robert
Crowley
|
$2,000
|
$2,265
|
−
|
$4,265
|
Joseph
J. Donovan
|
$2,000
|
$2,265
|
−
|
$4,265
|
Peter
R. Kramer
|
$2,000
|
$2,265
|
−
|
$4,265
|
George
Patterson (4)
|
$500
|
$10,690
|
−
|
$11,190
|
(1)
The amounts
included in the “Option Awards” column reflect the
aggregate grant date fair value of option awards in accordance with
FASB ASC Topic 718, pursuant to the 2009 Directors Stock Option
Plan. Assumptions used in the calculations of these amounts are
included in Note 7 to our Financial Statements included in our
Annual Report on Form 10-K for the year ended
December 31, 2015. These options are non-qualified stock
options issued under the 2009 Directors Stock Option Plan and
represent the right to purchase shares of Common Stock at a fixed
price per share (the grant date fair market value of the shares of
Common Stock underlying the options).
(2)
As of
December 31, 2015, each non-employee Director holds the
following aggregate number of shares under outstanding stock
options:
Name
|
Number of Shares
Underlying Outstanding Stock Options
|
Robert
Crowley
|
30,000
|
Joseph
J. Donovan
|
67,500
|
Peter
R. Kramer
George
Patterson
|
67,500
30,000
|
(3)
The number of
shares underlying stock options granted to each non-employee
Director in 2015 and the grant date fair market value of such stock
options is:
Name
|
Grant
Date
|
Number of Shares
underlying Stock
Options Grants
in 2015
|
Grant Date Fair
Value of Stock
Option Grants in
2015
|
Robert
Crowley
|
01/12/15
07/10/15
|
7,500
7,500
|
$409
$1,856
|
Joseph
J. Donovan
|
01/12/15
07/10/15
|
7,500
7,500
|
$409
$1856
|
Peter
R. Kramer
|
01/12/15
07/10/15
|
7,500
7,500
|
$409
$1,856
|
George
Patterson
|
09/25/2015
|
30,000
|
$10,690
|
(4)
On September 22,
2015, Mr. George Patterson joined the Board of Directors of Zoom
Telephonics, Inc.
Each
non-employee Director of Zoom receives a fee of $500 per quarter
plus a fee of $500 for each meeting at which the Director is
personally present. Travel and lodging expenses are also
reimbursed.
Each
non-employee Director of Zoom may be granted stock options under
Zoom's 2009 Directors Stock Option Plan, as amended (the "Directors
Plan"). The Directors Plan provides in the aggregate that 700,000
shares of Common Stock (subject to adjustment for capital changes)
may be issued upon the exercise of options granted under the
Directors Plan. The exercise price for the options granted under
the Directors Plan is the fair market value of the Common Stock on
the date the option is granted. During 2015 Messrs. Crowley,
Donovan and Kramer each received options to purchase 15,000 shares
and Messr Patterson received options to purchase 30,000 shares of
Common Stock at a weighted average exercise price of $0.79 per
share.
39
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Item
404(d) of Regulation S-K requires us to disclose any
transaction in which the amount involved exceeds the lesser of (i)
$120,000, or (ii) one percent of the average of Zoom’s
total assets at year end for the last two completed fiscal years,
in which Zoom is a participant and in which any related person has
or will have a direct or indirect material interest. A related
person is any executive officer, Director, nominee for Director, or
holder of 5% or more of our common stock, or an immediate family
member of any of those persons.
Each of
Frank Manning, Zoom’s President, Chief Executive Officer and
Chairman of the Board, and Peter Kramer, a Director of Zoom,
participated in the private placement of Common Stock of Zoom which
was completed in September 2015.
Other
than the transactions included above, since January 1, 2013,
Zoom has not been a participant in any transaction that is
reportable under Item 404(d) of Regulation S-K.
Policies and Procedures Regarding Review, Approval or Ratification
of Related Person Transactions
In
accordance with our Audit Committee charter, our Audit Committee is
responsible for reviewing and approving the terms of any related
party transactions. Therefore, any material financial transaction
between Zoom and any related person would need to be approved by
our Audit Committee prior to us entering into such
transaction.
DIRECTOR INDEPENDENCE
The
Board of Directors has reviewed the qualifications of
Messrs. Donovan, Crowley and Patterson and has determined that
each individual is "independent" as such term is defined under the
current listing standards of the Nasdaq Stock Market. In addition,
each member of the Audit Committee is independent as required under
Section 10A(m)(3) of the Securities Exchange Act of 1934, as
amended.
40
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The
following table sets forth certain information regarding beneficial
ownership of Zoom's Common Stock as of December 6, 2016 by (i) each
person who is known by Zoom to own beneficially more than
five percent (5%) of Zoom's outstanding Common Stock, (ii)
each of Zoom's Directors and named executive officers, as listed
below in the Summary Compensation Table under the heading
"Executive Compensation", and (iii) all of Zoom's current Directors
and executive officers as a group.
On
December 6, 2016 there were 14,602,790 issued and outstanding
shares of Zoom's Common Stock. Unless otherwise noted, each person
identified below possesses sole voting and investment power with
respect to the shares listed. The information contained in this
table is based upon information received from or on behalf of the
named individuals or from publicly available information and
filings by or on behalf of those persons with the SEC.
Name
(1)
|
Number of Shares
Beneficially Owned
|
% of Common
Stock
|
Manchester
Management Company LLC(2)
3 West
Hill Place
Boston,
MA 02114
|
4,285,714
|
29.4%
|
T. Pat Manning(3)
6
Bellerive Country Club Grounds
Town
and Country, MO 63141
|
1,295,376
|
8.9%
|
SF Investors LP(4)
8 South
Acres Road
Plattsburgh,
NY 12901-3719
|
833,740
|
5.7%
|
Frank
B. Manning(5)
|
1,609,062
|
10.9%
|
Peter
R. Kramer(6)
|
352,429
|
2.4%
|
Robert
Crowley(7)
|
45,140
|
*
|
Joseph
J. Donovan(8)
|
98,500
|
*
|
Philip
Frank(9)
|
30,000
|
*
|
George
Patterson(10)
|
45,000
|
*
|
Peter
Sykes(11)
|
77,350
|
*
|
Terry
J. Manning(12)
|
228,842
|
1.6%
|
Deena
Randall(13)
|
149,500
|
1.0%
|
|
|
|
All
current directors and Executive
|
|
|
Officers
as a group (9 persons) (14)
|
2,635,823
|
17.2%
|
*Less
than one percent of shares outstanding.
(1)
Unless otherwise
noted: (i) each person identified possesses sole voting and
investment power over the shares listed; and (ii) the address of
each person identified is c/o Zoom Telephonics, Inc., 99 High
Street, Boston, MA 02110.
(2)
Information is
based on a Schedule 13D filed by Manchester Management Co LLC on
September 27, 2015. It includes the following stockholders
Manchester
Explorer, L.P. in the amount of 2,857,143 shares, JEB Partners,
L.P. in the amount of 1,142,857 shares, James E. Besser in the
amount of 142,857 shares and Morgan C. Frank in the amount of
142,857 shares totaling 1,295,376. In all cases the address listed
in the above table applies to all stockholders other than Morgan C.
Frank whose address is: 1398 Aerie Drive, Park City, UT
84060.
(3)
Information is
based on a Schedule 13G filed by T. Pat Manning on February 11,
2016.
(4)
Information is
based on a Schedule 13G filed by SF Investors LP on May 12,
2015.
(5)
Includes 206,250
shares that Mr. Frank B. Manning has the right to acquire upon
exercise of outstanding stock options exercisable within sixty (60)
days after December 6, 2016. Includes 120,673 shares held by
Mr. Frank B. Manning's daughter, as to which he disclaims
beneficial ownership.
(6)
Includes 75,000
shares that Mr. Kramer has the right to acquire upon exercise
of outstanding stock options exercisable within sixty (60) days
after December 6, 2016.
(7)
Includes 45,000
shares the Mr. Crowley has the right to acquire upon exercise
of outstanding stock options exercisable within sixty (60) days
after December 6, 2016.
(8)
Includes 75,000
shares the Mr. Donovan has the right to acquire upon exercise
of outstanding stock options exercisable within sixty (60) days
after December 6, 2016.
(9)
Includes 30,000
shares that Mr. Frank has the right to acquire upon exercise
of outstanding stock options exercisable within sixty (60) days
December 6, 2016.
(10)
Includes 45,000
shares that Mr. Patterson has the right to acquire upon
exercise of outstanding stock options exercisable within sixty (60)
days December 6, 2016.
(11)
Includes 165,000
shares that Mr. Manning has the right to acquire upon
exercise of outstanding stock options exercisable within sixty (60)
days after December 6, 2016.
(12)
Includes 30,000
shares that Mr. Sykes has acquired in the private placement
transaction on 10/24/2016.
(13)
Includes 127,500
shares that Ms. Randall has the right to acquire upon exercise
of outstanding stock options exercisable within sixty (60) days
after December 6, 2016.
(14)
Includes an
aggregate of 768,750 shares that the current directors and named
executive officers listed above have the right to acquire upon
exercise of outstanding stock options exercisable within sixty (60)
days after December 6, 2016.
41
DESCRIPTION OF CAPITAL STOCK
We are
authorized under Delaware law to issue up to 25,000,000 shares of
common stock, $.01 par value per share, and 2,000,000 shares of
preferred stock, $.001 par value per share. As of September 30,
2016, there were 14,595,290 shares of common stock issued and
outstanding and no shares of preferred stock issued and
outstanding.
Common Stock
Each
share of common stock has the same relative rights and is identical
in all respects with every other share of stock. Each holder of
common stock is entitled to one vote for each share held of record
on all matters submitted to a vote of holders of common stock and
is not permitted to cumulate votes in the election of our
directors. Holders of our common stock do not possess any dividend
or liquidation rights. Holders of our common stock have no
redemption, conversion or preemptive rights to purchase or
subscribe for our securities.
Shares
of our common stock are traded over-the-counter and sales are
reported on the OTCQB under the symbol
“ZMTP.”
Preferred Stock
Our Certificate of Incorporation authorizes the issuance of
2,000,000 shares of preferred stock, $.001 par value per share, of
which 1,000,000 shares have been designated Series A Junior
Participating Preferred Stock. No shares of preferred stock are
outstanding. The board of directors is empowered, without
stockholder approval, to designate and issue additional series of
preferred stock with dividend, liquidation, conversion, voting or
other rights, including the right to issue convertible securities
with no limitations on conversion, which could adversely affect the
voting power or other rights of the holders of our common stock,
substantially dilute a common stockholder’s interest and
depress the price of our common stock.
Shareholder Rights Plan
On November 18, 2015, we entered into a Section 382 Rights
Agreement with Computershare Trust Company, N.A., as rights agent,
and approved the declaration of a dividend distribution of one
preferred share purchase right on each outstanding share of our
common stock to shareholders of record as of the close of business
on November 27, 2015. Each right entitles the registered holder to
purchase from us one one-thousandths of a share of our Series A
Junior Participating Preferred Stock at a price of $20.00, subject
to adjustment.
Initially, the rights are not exercisable and are attached to and
trade with all shares of common stock outstanding as of, and issued
subsequent to November 27, 2015. The rights will separate from the
common stock and will become exercisable upon the earlier of (i)
the tenth calendar day after such date that the Company learns that
(a) a person or group beneficially owns (as defined in the Section
382 Rights Agreement) 4.90% or more of the outstanding Common Stock
or (b) a Grandfathered Person (as defined in the Section 382 Rights
Agreement) has exceeded its Grandfathered Percentage (as defined in
the Section 382 Rights Agreement) by 0.1% or more of the
outstanding shares of Common Stock (any person or group specified
in this bullet point, is referred to as an “Acquiring
Person”); and (ii) such date, if any, as may be designated by
the Board of Directors following the commencement of, or first
public disclosure of an intention to commence, a tender or exchange
offer for outstanding Common Stock which could result in a person
or group becoming an Acquiring Person.
The rights may be redeemed in whole, but not in part, at a price of
$0.001 per right by the Board of Directors only until the earlier
of (i) the time at which any person becomes an Acquiring Person or
(ii) the expiration date of the Section 382 Rights Agreement.
Immediately upon the action of the Board of Directors ordering
redemption of the rights, the rights will terminate and thereafter
the only right of the holders of rights will be to receive the
redemption price.
The rights will expire on the earlier of (a) November 15, 2018, or
(b) such earlier date as the Company’s net operating losses
have expired or been exhausted, unless earlier redeemed or
exchanged by the Company as provided below, as more fully set forth
in the Section 382 Rights Agreement.
42
LEGAL MATTERS
The
validity of the securities offered by this prospectus has been
passed upon for us by Burns & Levinson LLP.
EXPERTS
The
consolidated balance sheets as of December 31, 2015 and
December 31, 2014, and the related consolidated statements of
operations, and comprehensive income (loss), stockholders’
equity and cash flows for the years then ended included in this
registration statement, have been audited by Marcum LLP, an
Independent Registered Public Accounting Firm, as set forth in
their report thereon and included in this registration statement in
reliance upon such report given on the authority of such firm as
experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We file
reports, proxy statements and other information with the SEC.
Information filed with the SEC can be inspected and copied at the
public reference facilities maintained by the SEC at Headquarters
Office, 100 F Street, N.E., Room 1580, Washington, D.C. 20549. You
may also obtain copies of this information by mail from the Public
Reference Section of the SEC, Headquarters Office, 100 F Street,
N.E., Room 1580, Washington, D.C. 20549, at prescribed rates.
Further information on the operation of the SEC’s public
reference room in Washington, D.C. can be obtained by calling the
SEC at 1-800-SEC-0330. The SEC also maintains a website that
contains reports, proxy statements and other information about
issuers, such as us, who file electronically with the SEC. The
address of that website is http://www.sec.gov.
Our
common stock is traded in the over-the-counter market and is quoted
on the OTCQB under the symbol “ZMTP.” Our website is
located at http://www.zoomtel.com. The information on our website,
however, is not, and should not be deemed to be, a part of this
prospectus.
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES
ACT LIABILITIES
In so
far as indemnification for liabilities arising under the Securities
Act may be permitted to our directors and officers, we have been
advised that in the opinion of the SEC such indemnification is
against public policy as expressed in the Securities Act and is,
therefore, unenforceable. In addition, indemnification may be
limited by state securities laws.
43
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The SEC
allows us to incorporate by reference the information and reports
we file with them under File No. 001-37649, which means that we can
disclose important information to you by referring you to those
publicly available documents. The information incorporated by
reference is an important part of this prospectus, and information
that we file later with the SEC will automatically update and
supersede the information already incorporated by reference. We are
incorporating by reference the documents listed below, which we
have already filed with the SEC, and any future filings we make
with the SEC under Sections 13(a), 13(c), 14 or 15(d) of the
Exchange Act, except as to any portion of any future report or
document that is not deemed filed under such provisions, until we
sell all of the securities:
|
●
|
Our
Annual Report on Form 10-K for the year ended December 31,
2015 filed with the SEC on March 15, 2016;
|
|
|
|
|
●
|
Our
Quarterly Report on Form 10-Q for the quarter ended March 31,
2016 filed with the SEC on May 13, 2016;
|
|
|
|
|
●
|
Our
Quarterly Report on Form 10-Q for the quarter ended June 30, 2016
filed with the SEC on August 12, 2016;
|
|
|
|
|
●
|
Our
Quarterly Report on Form 10-Q for the quarter ended September 30,
2016 filed with the SEC on November 14, 2016, as amended by
Amendment No. 1 to our Quarterly Report on Form 10-Q for the
quarter ended September 30, 2016 filed with the SEC on December 6,
2016;
|
|
|
|
|
●
|
Our
Current Reports on Form 8-K filed with the SEC on June 27, 2016,
July 25, 2016, July 29, 2016, August 23, 2016, September 8, 2016
and October 26, 2016 (in each case, except for information
contained therein which is furnished rather than filed);
and
|
|
|
|
|
●
|
The
description of our Common Stock contained in our registration
statement on Form 10-12G filed with the SEC on July 10, 2009, as
amended on August 6, 2009 and September 4, 2009.
|
Any
statement contained in a document incorporated or deemed to be
incorporated by reference in this prospectus is modified or
superseded for purposes of the prospectus to the extent that a
statement contained in this prospectus or in any other subsequently
filed document that also is or is deemed to be incorporated by
reference herein modifies or supersedes such
statement.
Upon
request, we will provide, without charge, to each person, including
any beneficial owner, to whom a copy of this prospectus is
delivered a copy of the documents incorporated by reference into
this prospectus. You may request a copy of these filings, and any
exhibits we have specifically incorporated by reference as an
exhibit in this prospectus, at no cost by writing or telephoning us
at the following address:
Zoom
Telephonics, Inc.
99 High
Street
Boston,
MA 02110
Telephone:
(617) 423-1072.
This
prospectus is part of a registration statement we filed with the
SEC. We have incorporated exhibits into this registration
statement. You should read the exhibits carefully for provisions
that may be important to you.
You
should rely only on the information incorporated by reference or
provided in this prospectus or any prospectus supplement. We have
not authorized anyone to provide you with different information. We
are not making an offer of these securities in any state where the
offer is not permitted. You should not assume that the information
in this prospectus or in the documents incorporated by reference is
accurate as of any date other than the date on the front of this
prospectus or those documents.
44
ZOOM
TELEPHONICS, INC.
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
Interim
Unaudited Financial Statements of Zoom Telephonics,
Inc.:
Condensed
Consolidated Balance Sheets as of December 31, 2015 and September
30, 2016 (Unaudited)
|
F-2
|
Condensed
Consolidated Statements of Operations for the three and nine months
ended September 30, 2015 and 2016 (Unaudited)
|
F-3
|
Condensed
Consolidated Statements of Cash Flows for the nine months ended
September 30, 2015 and 2016 (Unaudited)
|
F-4
|
Notes to Condensed
Consolidated Financial Statements
|
F-5 –
F-9
|
Annual
Audited Financial Statements of Zoom Telephonics,
Inc.:
Report
of Independent Registered Public Accounting
Firm
|
F-10
|
Consolidated
Balance Sheets as of December 31, 2015 and December 31,
2014
|
F-11
|
Consolidated
Statements of Operations and Comprehensive Income (Loss) for the
years ended December 31, 2015 and 2014
|
F-12
|
Consolidated
Statements of Stockholders’ Equity for the years ended
December 31, 2015 and 2014
|
F-13
|
Consolidated
Statements of Cash Flows for the years ended December 31, 2015 and
2014
|
F-14
|
Notes
to Consolidated Financial Statements
|
F-15 - F-16
|
F-1
ZOOM
TELEPHONICS, INC.
Condensed
Consolidated Balance Sheets
(Unaudited)
ASSETS
|
September 30,
2016
(Unaudited)
|
December 31,
2015
|
Current assets
|
|
|
Cash
and cash equivalents
|
$175,308
|
$1,846,704
|
Accounts
receivable, net of allowances of $460,155 at September 30, 2016 and
$483,349 at December 31, 2015
|
2,871,603
|
1,079,145
|
Inventories
|
4,229,070
|
2,784,610
|
Prepaid
expenses and other current assets
|
574,450
|
381,205
|
Total current
assets
|
7,850,431
|
6,091,664
|
|
|
|
Other
assets
|
542,193
|
573,049
|
Equipment,
net
|
173,804
|
205,132
|
Total
assets
|
$8,566,428
|
$6,869,845
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
Current liabilities
|
|
|
Bank
debt
|
$2,141,799
|
$––
|
Accounts
payable
|
1,851,778
|
1,423,503
|
Accrued
expenses
|
948,709
|
292,756
|
Total
liabilities
|
4,942,286
|
1,716,259
|
|
|
|
Commitments and
contingencies (Note 4)
|
|
|
|
|
|
Stockholders' equity
|
|
|
Common stock:
Authorized: 25,000,000 shares at $0.01 par value
|
|
|
Issued and
outstanding: 13,976,059 shares at September 30, 2016 and 13,477,803
shares at December 31, 2015
|
139,761
|
134,778
|
Additional
paid-in capital
|
38,374,431
|
37,965,230
|
Accumulated
deficit
|
(34,890,050)
|
(32,946,422)
|
Total stockholders'
equity
|
3,624,142
|
5,153,586
|
Total liabilities
and stockholders' equity
|
$8,566,428
|
$6,869,845
|
See accompanying
notes to condensed consolidated financial statements
(unaudited).
F-2
ZOOM
TELEPHONICS, INC.
Condensed
Consolidated Statements of Operations
(Unaudited)
|
Three Months Ended
September 30,
|
Nine Months Ended
September 30,
|
||
|
2016
|
2015
|
2016
|
2015
|
|
|
|
|
|
Net
sales
|
$5,990,432
|
$3,367,838
|
$12,688,142
|
$9,019,582
|
Cost of goods
sold
|
4,064,834
|
2,267,235
|
8,727,755
|
6,110,159
|
Gross
profit
|
1,925,598
|
1,100,603
|
3,960,387
|
2,909,423
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
Selling
|
1,473,787
|
418,017
|
3,520,030
|
1,210,809
|
General and
administrative
|
354,237
|
306,827
|
1,236,239
|
810,556
|
Research and
development
|
352,849
|
354,252
|
1,154,789
|
918,014
|
|
2,180,873
|
1,079,096
|
5,911,058
|
2,939,379
|
|
|
|
|
|
Operating profit
(loss)
|
(255,275)
|
21,507
|
(1,950,671)
|
(29,956)
|
|
|
|
|
|
Other income
(expense):
|
|
|
|
|
Interest
income
|
21
|
16
|
238
|
31
|
Interest
expense
|
(27,778)
|
(27,347)
|
(32,115)
|
(72,360)
|
Other,
net
|
41,482
|
(63)
|
42,232
|
(929)
|
Total other income
(expense)
|
13,725
|
(27,394)
|
10,355
|
(73,258)
|
|
|
|
|
|
Income (loss)
before income taxes
|
(241,550)
|
(5,887)
|
(1,940,316)
|
(103,214)
|
|
|
|
|
|
Income
taxes
|
2,034
|
1,978
|
3,312
|
5,757
|
|
|
|
|
|
Net income
(loss)
|
$(243,584)
|
$(7,865)
|
$(1,943,628)
|
$(108,971)
|
|
|
|
|
|
Net income (loss)
per share:
|
|
|
|
|
Basic
and diluted
|
$(0.02)
|
$(0.00)
|
$(0.14)
|
$(0.01)
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
weighted average common and common equivalent shares
|
13,877,407
|
8,519,051
|
13,722,680
|
8,167,187
|
See accompanying
notes to condensed consolidated financial statements
(unaudited).
F-3
ZOOM
TELEPHONICS, INC.
Condensed
Consolidated Statements of Cash Flows
(Unaudited)
|
Nine Months
Ended
September 30,
|
|
|
2016
|
2015
|
Operating activities:
|
|
|
Net income
(loss)
|
$(1,943,628)
|
$(108,971)
|
|
|
|
Adjustments to
reconcile net income (loss) to net cash provided by (used in)
operating activities:
|
|
|
Depreciation and
amortization
|
389,487
|
58,724
|
Stock based
compensation
|
164,795
|
48,839
|
Provision for
accounts receivable allowances
|
8,988
|
34
|
Provision for
inventory reserves
|
10,450
|
22,913
|
Changes in
operating assets and liabilities:
|
|
|
Accounts
receivable
|
(1,801,446)
|
(149,635)
|
Inventories
|
(1,454,910)
|
313,785
|
Prepaid expenses
and other assets
|
(193,245)
|
(623,529)
|
Accounts payable
and accrued expenses
|
1,084,228
|
32,970
|
Net cash provided
by (used in) operating activities
|
(3,735,281)
|
(404,870)
|
|
|
|
Investing
activities:
|
|
|
|
|
|
Other
assets
|
(295,000)
|
––
|
Additions to
equipment
|
(32,303)
|
(45,314)
|
Net cash provided
by (used in) investing activities
|
(327,303)
|
(45,314)
|
|
|
|
Financing
activities:
|
|
|
Net
funds received from (to) bank credit lines
|
2,141,799
|
(840,585)
|
Proceeds
from stock option exercises
|
249,389
|
19,425
|
Proceeds
from private placement offering (net of issuance
costs)
|
––
|
3,421,001
|
Proceeds
from stock rights offering (net of issuance costs)
|
––
|
228,960
|
Net
cash provided by (used in) financing activities
|
2,391,188
|
2,828,801
|
|
|
|
Net change in
cash
|
(1,671,396)
|
2,378,617
|
|
|
|
Cash and cash
equivalents at beginning of period
|
1,846,704
|
137,637
|
|
|
|
Cash and cash
equivalents at end of period
|
$175,308
|
$2,516,254
|
|
|
|
Supplemental
disclosures of cash flow information:
|
|
|
|
|
|
Cash paid during
the period for:
|
|
|
Interest
|
$32,115
|
$72,360
|
Income
taxes
|
$3,312
|
$5,757
|
See accompanying
notes to condensed consolidated financial statements
(unaudited).
F-4
ZOOM
TELEPHONICS, INC.
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.
F-5
(1)
Summary of Significant Accounting Policies (continued)
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.
F-6
(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 :
|
September 30,
2016
|
December 31,
2015
|
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.
F-7
(4)
Commitments and Contingencies (continued)
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.
F-8
(5)
Customer Concentrations (continued)
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.
F-9
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
To the Audit
Committee of the
Board of Directors
and Stockholders
of Zoom
Telephonics, Inc.
We have audited the
accompanying consolidated balance sheets of Zoom Telephonics, Inc.
and its wholly owned subsidiary
(together the “Company”) as of December 31, 2015 and
2014, and the related consolidated statements of operations and
comprehensive income (loss), stockholders’ equity and cash
flows for the years then ended. These consolidated financial
statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our
audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are
free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audits included consideration
of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on
the effectiveness of the Company’s internal control over
financial reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence supporting
the amounts and disclosures in the consolidated financial
statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the
overall consolidated financial statement presentation. We
believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the
consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of
Zoom Telephonics, Inc. and its wholly owned subsidiary as of
December 31, 2015 and 2014, and the consolidated results of their
operations and their cash flows for the years then ended in
conformity with accounting principles generally accepted in the
United States of America.
/s/
Marcum LLP
MARCUM
LLP
Boston,
Massachusetts
March
15, 2016
F-10
ZOOM TELEPHONICS, INC.
CONSOLIDATED BALANCE SHEETS
As of December 31, 2015 and 2014
|
December
31,
|
|
|
2015
|
2014
|
ASSETS
|
|
|
Current assets
|
|
|
Cash
and cash equivalents
|
$1,846,704
|
$137,637
|
Accounts
receivable, net of allowances of $483,349 and $381,234 at December
31, 2015 and 2014, respectively
|
1,079,145
|
1,811,006
|
Inventories,
net
|
2,784,610
|
1,724,507
|
Prepaid
expenses and other current assets
|
381,205
|
270,263
|
Total
current assets
|
6,091,664
|
3,943,413
|
|
|
|
Equipment,
net
|
205,132
|
67,142
|
Other
assets
|
573,049
|
––
|
|
|
|
Total
assets
|
$6,869,845
|
$4,010,555
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
Current liabilities
|
|
|
Bank
credit line
|
$––
|
$840,585
|
Accounts
payable
|
1,423,503
|
726,627
|
Accrued
expenses
|
292,756
|
284,736
|
Total
current liabilities
|
1,716,259
|
1,851,948
|
|
|
|
Total
liabilities
|
1,716,259
|
1,851,948
|
|
|
|
Commitments
and contingencies (Note 6)
|
|
|
|
|
|
Stockholders' equity
Common
stock: Authorized: 25,000,000 shares at $0.01 par
value
|
|
|
Issued
and outstanding: 13,477,803 shares and 7,982,704 shares at December
31, 2015 and 2014, respectively
|
134,778
|
79,827
|
Additional
paid-in capital
|
37,965,230
|
34,192,066
|
Accumulated
deficit
|
(32,946,422)
|
(32,113,286)
|
Total
stockholders' equity
|
5,153,586
|
2,158,607
|
Total
liabilities and stockholders' equity
|
$6,869,845
|
$4,010,555
|
See
accompanying notes.
F-11
ZOOM TELEPHONICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(LOSS)
Years Ended December 31, 2015 and 2014
|
2015
|
2014
|
Net
sales
|
$10,790,342
|
$11,901,339
|
Cost
of goods sold
|
7,388,075
|
8,409,665
|
Gross
profit
|
3,402,267
|
3,491,674
|
|
|
|
Operating
expenses:
|
|
|
Selling
|
1,571,256
|
1,446,110
|
General
and administrative
|
1,229,198
|
1,052,326
|
Research
and development
|
1,342,081
|
1,132,791
|
|
4,142,535
|
3,631,227
|
Operating
profit (loss)
|
(740,268)
|
(139,553)
|
|
|
|
Other
:
|
|
|
Interest
income
|
444
|
33
|
Interest
expense
|
(72,360)
|
(77,225)
|
Other
income (expense), net
|
(13,589)
|
346,311
|
Total
other income (expense), net
|
(85,505)
|
269,119
|
|
|
|
Income
(loss) before income taxes
|
(825,773)
|
129,566
|
|
|
|
Income
taxes (benefit)
|
7,363
|
7,080
|
|
|
|
Net
income (loss)
|
$(833,136)
|
$122,486
|
|
|
|
Other comprehensive
income (loss):
|
|
|
Foreign currency translation
adjustments
|
––
|
(3,621)
|
Foreign currency
translation recognition upon reclassification from accumulated
other comprehensive income
|
––
|
(360,734)
|
|
|
|
Total
comprehensive income (loss)
|
$(833,136)
|
$(241,869)
|
|
|
|
Basic
and diluted net income (loss) per share
|
$(0.09)
|
$0.02
|
|
|
|
Weighted
average common and common equivalent shares:
|
|
|
Basic
and Diluted
|
9,470,848
|
7,982,704
|
See
accompanying notes.
F-12
ZOOM TELEPHONICS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 2015 and 2014
|
Common
Stock
|
|
|
|
|
|
|
Shares
|
Amount
|
Additional
Paid In
Capital
|
Accumulated
Deficit
|
Accumulated
Other Comprehensive Income
(Loss)
|
Total
|
|
|
|
|
|
|
|
Balance
at January 1, 2014
|
7,982,704
|
$79,827
|
$34,177,779
|
$(32,235,772)
|
$364,355
|
$2,386,189
|
|
|
|
|
|
|
|
Net
income (loss)
|
––
|
––
|
––
|
122,486
|
––
|
122,486
|
Total
other comprehensive income (loss)
|
––
|
––
|
––
|
––
|
(364,355)
|
(364,355)
|
Stock
based compensation
|
––
|
––
|
14,287
|
––
|
––
|
14,287
|
Balance
at December 31, 2014
|
7,982,704
|
$79,827
|
$34,192,066
|
$(32,113,286)
|
$––
|
$2,158,607
|
|
|
|
|
|
|
|
Net
income (loss)
|
––
|
––
|
––
|
(833,136)
|
––
|
(833,136)
|
Private
placement offering (net of issuance costs of $16,000)
|
4,909,999
|
49,100
|
3,371,901
|
––
|
––
|
3,421,001
|
Stock
rights offering (net of issuance costs of $39,780)
|
298,600
|
2,986
|
225,974
|
––
|
––
|
228,960
|
Stock
option exercise
|
286,500
|
2,865
|
99,755
|
|
|
102,620
|
Stock
based compensation
|
––
|
––
|
75,534
|
––
|
––
|
75,534
|
Balance
at December 31, 2015
|
13,477,803
|
$134,778
|
$37,965,230
|
$(32,946,422)
|
$––
|
$5,153,586
|
See
accompanying notes.
F-13
ZOOM TELEPHONICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2015 and 2014
|
2015
|
2014
|
Operating activities:
|
|
|
Net
income (loss)
|
$(833,136)
|
$122,486
|
|
|
|
Adjustments
to reconcile net income (loss) to net cash provided by (used in)
operating activities:
|
|
|
Stock
based compensation
|
75,534
|
14,287
|
Depreciation
and amortization
|
121,027
|
9,048
|
Provision
(recovery) for accounts receivable allowances
|
(3,915)
|
574
|
Provision
for inventory reserves
|
18,078
|
81,843
|
Reclassification
out of accumulated other comprehensive income (loss)
|
––
|
(360,734)
|
Changes
in operating assets and liabilities:
|
|
|
Accounts
receivable
|
735,776
|
(136,768)
|
Inventories
|
(1,078,181)
|
(92,269)
|
Prepaid
expense and other current assets
|
(110,942)
|
(45,111)
|
Accounts
payable and accrued expenses
|
704,896
|
(4,593)
|
Net
cash provided by (used in) operating activities
|
(370,863)
|
(411,237)
|
|
|
|
Investing activities:
|
|
|
Purchases
of plant and equipment
|
(177,066)
|
(25,165)
|
Other
assets
|
(655,000)
|
––
|
Net
cash provided by (used in) investing activities
|
(832,066)
|
(25,165)
|
|
|
|
Financing activities:
|
|
|
Proceeds
from stock option exercise
|
102,620
|
––
|
Proceeds
from private placement offering
|
3,437,001
|
––
|
Issuance
costs of private placement offering
|
(16,000)
|
––
|
Proceeds
from stock rights offering
|
268,740
|
––
|
Issuance
costs of stock rights offering
|
(39,780)
|
––
|
Net
funds (to) from bank credit lines
|
(840,585)
|
522,267
|
Net
cash provided by (used in) financing activities
|
2,911,996
|
522,267
|
|
|
|
Effect
of exchange rate changes on cash
|
––
|
(3,621)
|
|
|
|
Net
change in cash
|
1,709,067
|
82,244
|
|
|
|
Cash
and cash equivalents at beginning of year
|
137,637
|
55,393
|
|
|
|
Cash
and cash equivalents at end of year
|
$1,846,704
|
$137,637
|
|
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
Cash
paid during the period for:
|
|
|
Interest
|
$72,360
|
$77,225
|
Income
taxes
|
$7,363
|
$7,080
|
See
accompanying notes.
F-14
ZOOM TELEPHONICS,
INC.
Notes to Consolidated Financial Statements
Years Ended December 31, 2014 and 2015
(1) NATURE
OF OPERATIONS
Zoom
Telephonics, Inc. and its wholly owned subsidiary MTRLC LLC
(collectively the "Company"), designs, produces, markets and
supports cable modems and other communication
products.
(2) SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of Presentation and Use of
Estimates
The
consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States of
America (U.S. GAAP). All significant intercompany balances and
transactions have been eliminated in the consolidation
The
preparation of consolidated financial statements in conformity with
U.S. GAAP requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
consolidated financial statements and the reported amounts of
revenue and expense during the reporting period. Actual results may
differ from those estimates. Significant estimates made by the
Company include: 1) allowance for doubtful accounts for accounts
receivable (collectability and sales returns) and asset valuation
allowance for deferred income tax assets; 2) write-downs of
inventory for slow-moving and obsolete items, and market
valuations; 3) stock based compensation; 4) management plan
forecast; 5) and estimated life of certification
costs.
(b) Cash
and Cash Equivalents
All
highly liquid investments with original maturities of less than 90
days from the date of purchase are classified as cash equivalents.
Cash equivalents consist exclusively of money market funds. The
Company has deposits at a limited number of financial institutions
with federally insured limits. Balances of cash and cash
equivalents at these institutions can be in excess of the insured
limits. However, the Company believes that the institutions are
financially sound and there is only nominal risk of
loss.
(c) Inventories
Inventories
are stated at the lower of cost, determined using the first-in,
first-out method, or market. Consigned inventory is held at
third-party locations. The Company retains title to the inventory
until purchased by the third-party. Consigned inventory, consisting
of finished goods, was approximately $119,000 and $86,000 at
December 31, 2015 and 2014, respectively.
(d) Equipment
Equipment
is stated at cost, less accumulated depreciation. Depreciation of
equipment is provided using the straight-line method over the
estimated useful lives of the assets.
(e) Impairment of Long-Lived Assets
Long-lived
assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount may not be
recoverable.
Recoverability
of assets to be held and used is measured by a comparison of the
carrying amount of an asset or asset group to undiscounted future
net cash flows expected to be generated by the asset or asset
group. If such assets are considered to be impaired, the impairment
to be recognized is measured by the amount by which the carrying
amount of the assets exceeds their fair value. Assets to be
disposed of are reported at the lower of the carrying amount or
fair value less cost to sell.
F-15
(f) Income Taxes
Deferred
income taxes are provided on the differences between the financial
statement carrying amounts of existing assets and liabilities and
their respective tax bases and on net operating loss and tax credit
carry forwards. Deferred income tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred income
tax assets and liabilities of a change in tax rates is recognized
in income in the period that includes the enactment date. A
valuation allowance is provided for that portion of deferred tax
assets not expected to be realized.
(g) Earnings (Loss) Per Common Share
Basic
earnings (loss) per share is computed by dividing net income (loss)
by the weighted average number of common shares outstanding during
the period. Diluted earnings (loss) per share is
computed by dividing net income (loss) by the weighted average
number of common shares and dilutive potential common shares
outstanding during the period. Under the treasury stock method, the
unexercised options are assumed to be exercised at the beginning of
the period or at issuance, if later. The assumed proceeds are then
used to purchase common shares at the average market price during
the period. A summary of the denominators used to compute basic and
diluted earnings (loss) per share follow:
|
2015
|
2014
|
Weighted
average shares outstanding – used to compute basic earnings
(loss) per share
|
9,470,848
|
7,982,704
|
Net
effect of dilutive potential common shares outstanding, based on
the treasury stock method
|
––
|
––
|
Weighted
average shares outstanding – used to compute diluted earnings
(loss) per share
|
9,470,848
|
7,982,704
|
Potential
common shares for which inclusion would have the effect of
increasing diluted earnings per share (i.e., anti-dilutive) are
excluded from the computation. Options to purchase 2,761,500 shares
of common stock at December 31, 2015 and 1,855,500 shares of common
stock as of December 31, 2014 were outstanding, but not included in
the computation of diluted earnings per share as their effect would
be anti-dilutive.
(h) Revenue Recognition
The
Company primarily sells hardware products to its customers. The
hardware products include dial-up modems, DSL modems, cable modems,
embedded modems, ISDN modems, telephone dialers, and wireless and
wired networking equipment. The Company does not sell
software.
The
Company derives its net sales primarily from the sales of hardware
products to computer peripherals retailers, computer product
distributors, OEMs, and direct to consumers and other channel
partners via the Internet.
The
Company recognizes net hardware sales at the point when the
customers take legal ownership of the delivered products. Legal
ownership passes to the customer based on the contractual delivery
terms specified in signed contracts and purchase orders, which are
both used extensively. Many customer contracts or purchase orders
specify FOB destination, which means buyer takes delivery of goods
once the goods arrive at the buyers dock.
When the Company
consigns inventory to a retailer, sales revenue for an item in that
inventory is recognized when that item is sold by the retailer to a
customer. The item remains in the Company’s inventory when it
is consigned, and moves out of Company inventory when the item is
sold by the retailer.
The
Company's net sales of hardware are reduced by certain events that
are characteristic of the sales of hardware to retailers of
computer peripherals. These events are product returns, certain
sales and marketing incentives, price protection refunds, and
consumer and in-store mail-in rebates. These are accounted for as a
reduction of net sales based on management estimates, which are
reconciled to actual customer or end-consumer credits on a monthly
or quarterly basis.
F-16
The
estimates for product returns are based on recent historical trends
plus estimates for returns prompted by announced stock rotations,
announced customer store closings, etc. Management analyzes
historical returns, current economic trends, and changes in
customer demand and acceptance of the Company's products when
evaluating the adequacy of sales return allowances. Product return
reserves were approximately $322.0 thousand and $354.0 thousand at
December 31, 2015 and 2014, respectively. The Company's estimates
for price protection refunds require a detailed understanding and
tracking by customer, by sales program. Estimated price protection
refunds are recorded in the same period as the announcement of a
pricing change. Information from customer inventory-on-hand reports
or from direct communications with the customers is used to
estimate the refund, which is recorded as a reserve against
accounts receivable and a reduction of current period revenue.
Price protection reserves were approximately $131.3 and $0 thousand
at December 31, 2015 and 2014, respectively. The increase in price
protection reserve was driven by a decrease in price for certain
products in response to a competitor’s decrease in price for
similar products. The Company's estimates for consumer mail-in
rebates are comprised of actual rebate claims processed by the
rebate redemption centers plus an accrual for an estimated lag in
processing. The Company's estimates for store rebates are comprised
of actual credit requests from the eligible customers. Rebate
reserves were $0 at both December 31, 2015 and 2014. Additionally,
sales and marketing incentive reserves were approximately $22.0
thousand and $15.2 thousand at December 31, 2015 and 2014,
respectively. The Company’s allowances for doubtful accounts
were approximately $8.1 thousand and $12.0 thousand at December 31,
2015 and 2014, respectively. These allowances are included in
allowances for accounts receivable on the accompanying consolidated
balance sheets.
The
Company accounts for point-of-sale taxes on a net
basis.
(i) Fair Value of Financial
Instruments
The
fair value hierarchy prioritizes the inputs to valuation techniques
used to measure fair value into three broad levels:
●
Level 1 - Inputs are unadjusted quoted
prices in active markets for identical assets or liabilities that
the Company has the ability to access.
●
Level 2 - Inputs are
inputs (other than quoted prices included within Level 1) that are
observable for the asset or liability, either directly or
indirectly.
●
Level 3 - Inputs
include unobservable inputs for the asset or liability and rely on
management's own assumptions about the assumptions that market
participants would use in pricing the asset or liability. (The
unobservable inputs should be developed based on the best
information available in the circumstances and may include the
Company’s own data.)
Financial
instruments consist of cash and cash equivalents, accounts
receivable, bank debt, accounts payable, and accrued expenses. Due
to the short-term nature and payment terms associated with these
instruments, their carrying amounts approximate fair
value.
(j) Stock-Based Compensation
Compensation
cost for awards is generally recognized over the required service
period based on the estimated fair value of the awards on their
grant date. Fair value is determined using the Black-Scholes
option-pricing model wherein the discount rate is based on
published daily treasury interest rates for zero-coupon bonds
available from the US Treasury. When not available for expected
option lives, the Company has used implied zero-coupon yields
available from sources such as Bloomberg. Volatility is based on
the historical volatility over a period that is commensurate with
the expected life of the option granted.
(k) Advertising Costs
Advertising
costs are expensed as incurred and reported in selling expense in
the accompanying statements of operations and comprehensive income
(loss), and include costs of advertising, production, trade shows,
and other activities designed to enhance demand for the Company's
products. There are no deferred advertising costs in the
accompanying balance sheets. The Company reported advertising costs
of approximately $459.5 thousand in 2015 and $255.0 thousand in
2014.
(l) Foreign Currencies
The
Company generates a portion of its revenues in markets outside
North America principally in transactions denominated in foreign
currencies, which exposes the Company to risks of foreign currency
fluctuations. Foreign currency transaction gains and losses are
reflected in operations and were not material for any period
presented. The Company does not use derivative financial
instruments.
F-17
(m) Warranty Costs
The
Company provides for the estimated costs that may be incurred under
its standard warranty obligations, based on actual historical
repair costs. The reserve for the provision for warranty costs was
$21,475 and $25,069 at December 31, 2015 and 2014,
respectively.
(n) Shipping and Freight Costs
The
Company records the expense associated with customer-delivery
shipping and freight costs in selling expense. The Company reported
shipping and freight costs of $247.1 thousand in 2015 and $232.1
thousand in 2014.
(o) 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 and 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 will commence with the year beginning January
1, 2016. Prospective application is required. The Company does not
believe the implementation of this standard will have 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 ASC 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 the balance sheets, 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.
F-18
(p) Other Assets
Other assets are
stated at cost, less accumulated amortization. Certain
certification costs incurred that are necessary to market and sell
products are capitalized and reported as “other assets”
in the accompanying consolidated balance sheets when the costs are
measurable, significant, and whose related products are projected
to generate revenue beyond twelve months. These costs are amortized
over an eighteen-month period, beginning when the related products
are available to be sold. Total certification costs capitalized
through December 31, 2015 were $655,000, accumulated amortization
was $81,951 at December 31, 2015, and amortization expense was
$81,951 in 2015. There were no certification costs capitalized
through December 31, 2014 and therefore no related accumulated
amortization at December 31, 2014 and no amortization expense in
2014. Expected amortization expense is $238,331 in 2016, $271,384
in 2017, and $63,334 in 2018.
(3) LIQUIDITY
On
December 31, 2015 the Company had working capital of $4.4 million
including $1.8 million in cash and cash equivalents. On December
31, 2014 the Company had working capital of $2.1 million including
$138 thousand in cash and cash equivalents. The
Company’s current ratio at December 31, 2015 was 3.6 compared
to 2.1 at December 31, 2014.
The Company raised
$3.65 million in 2015 from a $3.42 million private placement in
September and a $229 thousand rights offering in July. The
Company’s cash balance was also augmented by a $697 thousand
increase in accounts payable, a $732 thousand decrease in net
accounts receivable. These increases were offset by a pay-down in
the outstanding bank debt of $840 thousand, a $1.1 million increase
in net inventory and a 12-month loss of $833 thousand. As of
December 31, 2015 the Company had no bank debt, a maximum available
line of credit of $1.25 million, working capital of $4.4 million,
and a current ratio of 3.6. In 2014,
the Company’s operating activities used $411 thousand in
cash, primarily due to $361 thousand recognized foreign currency
gains previously reported in Accumulated Other Comprehensive Income
on the Consolidated Balance Sheets, and $137 thousand increase in
accounts receivable.
On May 18, 2015, the Company announced
licensing of the Motorola trademark for cable modems and gateways
for the US and Canada for 5 years starting January 2016. In
order to support anticipated sales growth, the Company raised
approximately $3.65 million net, as described above. The Company
believes that its existing financial resources along with its
existing line of credit, with the potential to increase the maximum
credit limit, will be sufficient to fund operations for the
foreseeable future if the Company management's sales and operating
profit expectations are met.
(4) INVENTORIES
Inventories,
net of reserves, consist of the following at December
31:
|
2015
|
2014
|
Materials
|
$477,929
|
$300,739
|
Finished
goods
|
2,306,681
|
1,423,768
|
Total
|
$2,784,610
|
$1,724,507
|
Finished
goods includes consigned inventory held by our customers of
$119,100 and $85,600 at December 31, 2015 and 2014, respectively.
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
$18,078 and $81,843 for the years ending December 31, 2015 and
2014, respectively.
F-19
(5) EQUIPMENT
Equipment
consists of the following at December 31:
|
2015
|
2014
|
Estimated
Useful lives
in years
|
Computer
hardware and software
|
$209,517
|
$196,070
|
3
|
Machinery
and equipment
|
265,446
|
258,446
|
5
|
Molds,
tools and dies
|
244,192
|
96,557
|
5
|
Office
furniture and fixtures
|
39,451
|
38,938
|
5
|
|
758,606
|
590,011
|
|
Accumulated
depreciation
|
(553,474)
|
(522,869)
|
|
Equipment,
net
|
$205,132
|
$67,142
|
|
|
|
|
|
Depreciation
expense for year ended
|
$39,076
|
$9,048
|
|
(6) COMMITMENTS
AND CONTINGENCIES
(a) Lease Obligations
In
December 2011 the Company signed a lease amendment for 10,600
square feet effective June 1, 2012 at the Company’s
headquarters in Boston, Massachusetts. This lease expires on April
30, 2016.
The Company
performs most of the final assembly, test, packaging, warehousing
and distribution at a production and warehouse facility in Tijuana,
Mexico. In November 2014 the Company signed a one-year lease with
five one-year renewal options thereafter for an 11,390 square foot
facility. In September 2015, the Company extended the term of the
lease from December 1, 2015 through November 30, 2018. In September
2015, the Company also signed a new lease for additional space in
the adjacent building, which doubles our existing capacity. The
term of the lease is from March 1, 2016 through November 30, 2018
with early access granted as of December 1, 2015.
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 Mexico personnel to work
in the Tijuana facility.
The
Company closed the UK sales office in October 2014 and now has an
independent sales representative for the U.K. and
Ireland.
Rent
expense for all of the Company's leases was $363.8 thousand in 2015
and $313.4 thousand in 2014.
As
of December 31, 2014, the Company's estimated future minimum
committed rental payments, excluding executory costs, under the
operating leases described above to their expiration or the
earliest possible termination date, whichever is sooner, are $177.1
thousand for 2016, $104.6 thousand for 2017, and $95.8 thousand for
2018. There are no future minimum committed rental payments that
extend beyond 2018.
(b) Contingencies
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 which it believes
are without merit.
F-20
The Company reviews
the status of its legal proceedings and records a provision for a
liability when it is considered probable that both a liability has
been incurred and the amount of the loss can be reasonably
estimated. This review is updated periodically as additional
information becomes available. If either or both of the criteria
are not met, the Company reassesses whether there is at least a
reasonable possibility that a loss, or additional losses, may be
incurred. If there is a reasonable possibility that a loss may be
incurred, the Company discloses the estimate of the amount of the
loss or range of losses, that the amount is not material, or that
an estimate of the loss cannot be made. The Company expenses its
legal fees as incurred.
On January 30,
2015, Wetro LAN LLC ("Wetro LAN") filed a complaint against the
Company alleging infringement of U.S. Patent No. 6,795,918
(“the ’918 patent”). The ’918 patent is
titled “Service Level Computer Security.” Wetro LAN
alleges that the Company’s wireless routers, including its
Model 4501 Wireless-N Router, infringe the '918 patent. The case is
in its early stages and on March 15th, 2016 the trial
date was set by the judge for April 17th, 2017.
On November 14,
2014, Concinnitas, LLC and Mr. George W. Hindman (collectively
"Concinnitas") filed a complaint against the Company alleging
infringement of U.S. Patent No. 7,805,542 (“the ’542
patent”) titled "“Mobile United Attached in a Mobile
Environment that Fully Restricts Access to Data Received via
Wireless Signal to a Separate Computer in the Mobile
Environment.” The Complaint asserts that the Company sells
"products and/or systems (including at least the wireless router
model no. 4530)" that infringe the '542 patent. Concinnitas and the
Company have executed a settlement agreement. On August 13, 2015,
this case was closed following an order of dismissal with prejudice
pursuant to a resolution of the dispute between Zoom and
Concinnitas, LLC.
(c) Commitments
On
May 13, 2015 the Company entered into a non-cancellable licensing
agreement (“the Agreement”) to use certain trademarks
in connection with the manufacture, sale, marketing, and
distribution of cable modem equipment. The Agreement commences on
January 1, 2016 and terminates on December 31, 2020. Additionally,
the Company has committed to reserving a certain percentage of
wholesale prices for use in advertising, merchandising and
promotion of the related products. In conjunction with the
Agreement, 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:
$2,400,000
2018:
$2,600,000
2019:
$2,600,000
2020:
$2,600,000
(7) STOCK
OPTION PLANS
2009 Stock Option Plan
On December 10, 2009, the Company established
the 2009
Stock Option Plan (the
“Option Plan”) for officers and certain full-time and
part-time employees of the Company. Non-employee directors of the
Company are not entitled to participate under this plan. The Option
Plan provides for 5,500,000 shares of common stock for issuance
upon the exercise of stock options granted under the plan. Under
this plan, stock options are granted at the discretion of the
Compensation Committee of the Board of Directors at an option price
not less than the fair market value of the stock on the date of
grant. The options are exercisable in accordance with terms
specified by the Compensation Committee not to exceed ten years
from the date of grant. Option activity under this plan
follows.
F-21
|
Number
of shares
|
Weighted
average
exercise
price
|
Balance
as of January 1, 2014
|
2,315,000
|
$0.35
|
Granted
|
50,000
|
0.12
|
Exercised
|
––
|
––
|
Expired
|
(674,500)
|
0.49
|
Balance
as of December 31, 2014
|
1,690,500
|
$0.29
|
Granted
|
1,155,000
|
0.49
|
Exercised
|
(256,500)
|
0.36
|
Expired
|
(52,500)
|
0.16
|
Balance
as of December 31, 2015
|
2,536,500
|
$0.38
|
The
weighted average grant date fair value of options granted was $0.04
in 2014. The weighted average grant date fair value of options
granted was $0.13 in 2015. The aggregate intrinsic value of options
outstanding was approximately $4.9 million at December 31, 2015 and
$0 at December 31, 2014. The aggregate intrinsic value of
exercisable options was approximately $3.4 million at December 31,
2015 and $0 at December 31, 2014. As of December 31, 2015 there
remained 5,243,500 shares available to be issued under the Option
Plan.
The following table summarizes information about
fixed stock options under the 2009 Stock Option Plan
outstanding on December 31,
2015.
|
Options
Outstanding
|
Options
Exercisable
|
|||
Exercise
Prices
|
Number
Outstanding
|
Weighted
Average Remaining Contractual Life
|
Weighted
Average Exercise Price
|
Number
Exercisable
|
Weighted
Average Exercise Price
|
$0.18 to 0.25
|
2,115,000
|
2.55
|
$0.25
|
1,421,250
|
$0.22
|
$0.48 to 1.85
|
421,500
|
0.41
|
$1.03
|
226,500
|
$0.07
|
$0.18 to 1.85
|
2,536,500
|
2.96
|
$0.38
|
1,647,750
|
$0.29
|
2009 Director Stock Option Plan
On December 10, 2009 the Company established
the 2009
Director Stock Option Plan (the
"Directors Plan"). The Directors Plan was established for all
Directors of the Company except for any Director who is a full-time
employee or full-time officer of the Company. The option price is
the fair market value of the common stock on the date the option is
granted. There are 700,000 shares authorized for issuance under the
Directors Plan. Each option expires five years from the grant date.
Option activity under this plan follows.
|
Number
of
shares
|
Weighted
average
exercise
price
|
Balance
as of January 1, 2014
|
270,000
|
0.31
|
Granted
|
60,000
|
0.13
|
Exercised
|
––
|
––
|
Expired
|
(165,000)
|
––
|
Balance
as of December 31, 2014
|
165,000
|
0.24
|
Granted
|
105,000
|
0.87
|
Exercised
|
(30,000)
|
0.31
|
Expired
|
(15,000)
|
0.41
|
Balance
as of December 31, 2015
|
225,000
|
$0.51
|
The
weighted average grant date fair value of options granted was $0.04
in 2014 and $0.26 in 2015. The aggregate intrinsic value of options
outstanding was approximately $0.4 million at December 31, 2015 and
$0 at December 31, 2014. The aggregate intrinsic value of
exercisable options was approximately $0.4 million at December 31,
2015 and $0 at December 31, 2014. As of December 31, 2015 there
remained 670,000 shares available to be issued under the Directors
Plan.
F-22
The
following table summarizes information about fixed stock options
under the Directors Plan on December 31, 2015.
|
Options
Outstanding
|
Options
Exercisable
|
|||
Exercise Prices
|
Number
Outstanding
|
Weighted
Average
Remaining
Contractual Life
|
Weighted
Average
Exercise
Price
|
Number
Exercisable
|
Weighted
Average
Exercise
Price
|
$0.12-0.14
|
45,000
|
3.3
|
$0.13
|
45,000
|
$0.13
|
|
|
|
|
|
|
$0.16-0.20
|
30,000
|
2.0
|
$0.18
|
30,000
|
$0.18
|
|
|
|
|
|
|
$0.25-0.26
|
30,000
|
1.3
|
$0.26
|
30,000
|
$0.26
|
|
|
|
|
|
|
$0.35-0.36
|
15,000
|
.6
|
$0.36
|
15,000
|
$0.36
|
|
|
|
|
|
|
$0.18-1.20
|
105,000
|
4.6
|
$0.87
|
105,000
|
$0.87
|
$0.12-1.20
|
225,000
|
3.30
|
$0.51
|
225,000
|
$0.51
|
The
Black-Scholes range of assumptions for the Option Plan and the
Directors Plan are shown below:
|
|
2015
|
|
2014
|
Assumptions
|
|
|
|
|
|
|
|
|
|
Expected
life
|
|
2.75
(yrs) - 3.5 (yrs)
|
|
2.75
(yrs) - 3.5 (yrs)
|
|
|
|
|
|
Expected
volatility
|
|
41.69%
- 45.52%
|
|
46.40%
- 48.71%
|
|
|
|
|
|
Risk-free
interest rate
|
|
0.67%
- 1.57%
|
|
0.57%
- 1.32%
|
|
|
|
|
|
Expected
dividend yield
|
|
0.00%
|
|
0.00%
|
The
unrecognized stock based compensation expense related to non-vested
stock awards was approximately $79 thousand as of December 31,
2015. This amount will be recognized through the fourth
quarter of 2017.
F-23
(8) INCOME
TAXES
Income
tax expense (benefit) consists of:
|
Current
|
Deferred
|
Total
|
Year
Ended December 31, 2014:
|
|
|
|
U.S.
federal
|
$––
|
$––
|
$––
|
State
and local
|
––
|
––
|
––
|
Foreign
|
7,080
|
––
|
7,080
|
|
$7,080
|
$––
|
$7,080
|
Year
Ended December 31, 2015:
|
|
|
|
U.S.
federal
|
$––
|
$––
|
$––
|
State
and local
|
––
|
––
|
––
|
Foreign
|
7,363
|
––
|
7,363
|
|
$7,363
|
$––
|
$7,363
|
A
reconciliation of the expected income tax expense or benefit to
actual follows:
|
2015
|
2014
|
Computed
"expected" US tax (benefit) at Federal statutory rate
|
$(283,266)
|
$41,645
|
Change
resulting from:
|
|
|
State
and local income taxes, net of federal income tax
benefit
|
(55,828)
|
––
|
Valuation
allowance
|
414,612
|
(281,039)
|
Non––deductible
items
|
(68,155)
|
12,063
|
Expired
State Net Operating Losses
|
––
|
234,411
|
Income
tax expense (benefit)
|
$7,363
|
$7,080
|
Temporary
differences at December 31 follow:
|
2015
|
2014
|
Deferred
income tax assets:
|
|
|
Inventories
|
$90,879
|
$132,511
|
Accounts
receivable
|
181,223
|
143,780
|
Accrued
expenses
|
43,668
|
36,621
|
Net
operating loss and tax credit carry forwards
|
18,272,306
|
17,863,473
|
Plant
and equipment
|
590
|
4,629
|
Stock
compensation
|
97,464
|
90,504
|
Other
– investment impairments
|
127,855
|
127,855
|
Total
deferred income tax assets
|
18,813,985
|
18,399,373
|
Valuation
allowance
|
(18,813,985)
|
(18,399,373)
|
Net
deferred tax assets
|
$––
|
$––
|
As
of December 31, 2015 the Company had federal net operating loss
carry forwards of approximately $50,691,000 which are available to
offset future taxable income. They are due to expire in
varying amounts from 2018 to 2035. As of December 31, 2015,
the Company had Massachusetts state net operating loss carry
forwards of approximately $5,097,000 which are available to offset
future taxable income. They are due to expire in varying amounts
from 2031 through 2035. A valuation allowance has been established
for the full amount of deferred income tax assets as management has
concluded that it is more-likely than-not that the benefits from
such assets will not be realized
The Company reviews
annually the guidance for the financial statement recognition,
measurement and disclosure of uncertain tax positions recognized in
the financial statements. Tax positions must meet a
"more-likely-than-not" recognition threshold. At December 31, 2015
and 2014, the Company did not have any uncertain tax positions. No
interest and penalties related to uncertain tax positions were
accrued at December 31, 2015 and 2014.
F-24
The
Company files income tax returns in the US and also filed returns
in the UK through 2014. The Company no longer files returns in the
UK. For returns filed in the US for all years prior to 2011 to the
extent the net operating losses were generated, if and when the net
operating losses are used, the Internal Revenue Service has the
opportunity to then review the underlying returns which created the
net operating loss.
(9) SIGNIFICANT
CUSTOMERS
The
Company sells its products primarily through high-volume
distributors and retailers, internet service providers, telephone
service providers, value-added resellers, PC system integrators,
and OEMs. The Company supports its major accounts in their efforts
to discern strategic directions in the market, to maintain
appropriate inventory levels, and to offer a balanced selection of
attractive products.
Relatively
few customers account for a substantial portion of the
Company’s revenues. In 2015 three customers accounted
for 77% of the Company’s total net sales with our largest
customer accounting for 46% of our net sales. At December 31, 2015,
three customers accounted for 93% of our gross accounts receivable,
with our largest customer representing 67% of our gross accounts
receivable. In 2014 three customers accounted for 74% of our total
net sales, with our largest customer accounting for 53% of our net
sales. At December 31, 2014, three customers accounted for 92% of
our gross accounts receivable, with our largest customer
representing 64% of our gross accounts receivable.
(10) SEGMENT AND
GEOGRAPHIC INFORMATION
The
Company's operations are classified as one reportable segment.
Substantially all of the Company's operations and long-lived assets
reside primarily in the North America. Net sales information
follows:
|
2014
|
Percent
|
2015
|
Percent
|
North
America
|
$11,563,956
|
97%
|
$10,558,167
|
98%
|
Outside
North America
|
337,383
|
3%
|
202,175
|
2%
|
Total
|
$11,901,339
|
100%
|
$10,790,342
|
100%
|
(11) DEPENDENCE ON
KEY SUPPLIERS
The
Company participates in the PC peripherals industry, which is
characterized by aggressive pricing practices, continually changing
customer demand patterns and rapid technological developments. The
Company's operating results could be adversely affected should the
Company be unable to successfully anticipate customer demand
accurately; manage its product transitions, inventory levels and
manufacturing process efficiently; distribute its products quickly
in response to customer demand; differentiate its products from
those of its competitors or compete successfully in the markets for
its new products.
The Company depends
on many third-party suppliers for key components contained in its
product offerings. For some of these components, the Company may
only use a single source supplier, in part due to the lack of
alternative sources of supply. However, in 2015, the Company had two suppliers that
provided 85% of the Company's purchased inventory. In 2014 the
Company had one supplier that provided 86% of the Company's
purchased inventory.
(12)
RETIREMENT
PLAN
The
Company has a 401(k) retirement savings plan for employees. Under
the plan, the Company matches 25% of an employee's contribution, up
to a maximum of $350 per employee per year. Company matching
contributions charged to expense in 2014 and 2015 were $4,682 and
$4,523, respectively.
F-25
(13) BANK CREDIT
LINE
On December 18,
2012, the Company entered into a Financing Agreement with Rosenthal
& Rosenthal, Inc. (the “Financing Agreement”). The
Financing Agreement provided for up to $1.75 million of revolving
credit, subject to a borrowing base formula and other terms and
conditions as specified in the Financing Agreement. The Financing
Agreement continued until November 30, 2014 and automatically
renews from year to year thereafter, unless sooner terminated by
either party as specified in the Financing Agreement. The Lender
shall have the right to terminate the Financing Agreement at any
time by giving the Company sixty days’ prior written
notice. Borrowings are
secured by all of the Company assets including intellectual
property. The Loan Agreement contained 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%.
The Company is
required to calculate its covenant compliance on a quarterly basis.
As of December 31, 2015, the Company was in compliance with both
its working capital and tangible net worth covenants. At December
31, 2015, the Company’s tangible net worth was approximately
$4.6 million, while the Company’s working capital was
approximately $4.4 million.
(14) STOCKHOLDERS
EQUITY
The Company raised
approximately $3.4 million from a private placement in September,
2015 and incurred issuance costs of approximately $16 thousand
resulting in net proceeds of approximately $3.4 million. The
Company also raised approximately $269 thousand from a stock rights
offering in July, 2015 and incurred issuance costs of approximately
$40 thousand resulting in net proceeds of approximately $229
thousand.
(15) RECLASSIFICATIONS OUT OF
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
|
2015
|
2014
|
Accumulated
Other Comprehensive Income (Loss) Components:
|
|
|
|
|
|
Foreign
currency translations:
|
|
|
Balance
at beginning of period
|
$––
|
$364,355
|
Current
period currency translation adjustments
|
––
|
(3,621)
|
Amounts
reclassified on closing of U.K. branch in 2014
|
––
|
(360,734)
|
Balance
at end of period
|
$––
|
$––
|
|
|
|
Accumulated
Other Comprehensive Income (Loss) end of period
|
$––
|
$––
|
(16) SUBSEQUENT
EVENTS
Management
of the Company has reviewed subsequent events from December 31,
2015 through the date of filing and has concluded that, except as
noted below, there were no subsequent events requiring adjustment
to or disclosure in these consolidated financial statements. The
Company was required to pay a one-time setup fee of $100,000, which
was paid on January 4, 2016 under a licensing
agreement.
F-26
You
should rely only on the information contained in this prospectus.
We have not, and have not authorized anyone else, to provide you
with different or additional information. We are not making an
offer of securities in any state or other jurisdiction where the
offer is not permitted. You should not assume that the information
contained in this prospectus is accurate as of any date other than
the date on the front of this prospectus regardless of its time of
delivery, and you should not consider any information in this
prospectus to be investment, legal or tax advice. We encourage you
to consult your own counsel, accountant and other advisors for
legal, tax, business, financial and related advice regarding an
investment in our securities.
ZOOM
TELEPHONICS, INC.
619,231
SHARES OF COMMON STOCK
Prospectus
___________,
2017
PART
II
INFORMATION
NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND
DISTRIBUTION
SEC Registration
Fee
|
$180
|
Legal Fees and
Expenses
|
$15,000
|
Accounting Fees and
Expenses
|
$6,000
|
Miscellaneous
Costs
|
$600
|
|
|
Total
|
$21,780
|
*Other than the
Securities and Exchange Commission registration fee, all of the
amounts shown are estimates.
ITEM
14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Zoom's Certificate
of Incorporation and Bylaws authorize it to indemnify directors,
officers, employees and agents of Zoom against expenses (including
attorneys' fees), liabilities and other matters incurred in
connection with any action, suit or proceeding, to the fullest
extent permitted by Section 145 of Delaware General Corporation
Law. In addition, Zoom's Certificate of Incorporation provides that
its directors shall not be personally liable to Zoom or its
stockholders for monetary damages for any breach of fiduciary duty
by such director as a director. Notwithstanding the foregoing, a
director shall be liable to the extent provided by applicable law
(i) for breach of the director's duty of loyalty to Zoom or its
stockholders, (ii) for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law, (iii)
pursuant to Section 174 of the Delaware General Corporation Law or
(iv) for any transaction from which the director derived an
improper personal benefit.
Zoom may also
advance all reasonable expenses which were incurred by or on behalf
of a present director or officer in connection with any proceeding
to the fullest extent permitted by applicable law.
The Bylaws also
permit Zoom to enter into indemnity agreements with individual
directors, officers, employees, and other agents. Any such
agreements, together with the Bylaws and Certificate of
Incorporation, may require Zoom, among other things, to indemnify
directors or officers against certain liabilities that may arise by
reason of their status or service as directors (other than
liabilities resulting from willful misconduct of a culpable
nature), to advance expenses to them as they are incurred, and to
obtain and maintain directors' and officers' insurance if available
on reasonable terms.
The Company
maintains director and officer liability insurance policies
providing for the insurance on behalf of any person who is or was a
director or officer of the company or a subsidiary for any claim
made during the policy period against the person in any such
capacity or arising out of the person’s status as such. The
insurers’ limit of liability under the policies is $2.5
million in the aggregate for all insured losses for the policy
period, which is October 22, 2016 through October 22,
2017.
Insofar as
indemnification for liabilities arising under the Securities Act
may be permitted to directors and officers and controlling persons
of the registrant pursuant to the foregoing provisions, or
otherwise, the registrant has been advised that in the opinion of
the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is,
therefore, unenforceable.
ITEM
15. RECENT SALES OF UNREGISTERED SECURITIES.
On October 24,
2016, Zoom issued 619,231 shares of common stock to several
accredited investors for gross proceeds of $1,610,000. This
transaction was exempt from registration pursuant to Section 4(2)
of the Securities Act, as a transaction not involving a public
offering.
II-1
ITEM
16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a)
Exhibits:
A list of exhibits
filed with this registration statement on Form S-1is set forth on
the Exhibit Index and is incorporated herein by
reference.
ITEM 17. UNDERTAKINGS
The undersigned
registrant hereby undertakes:
(1)
To
file, during any period in which offers or sales are being made, a
post-effective amendment to this registration
statement:
(i)
To
include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii)
To
reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set
forth in the registration statement. Notwithstanding the foregoing,
any increase or any decrease in volume of securities offered (if
the total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low end or high
end of the estimated maximum offering range may be reflected in the
form of prospectus filed with the Commission pursuant to Rule
424(b) if, in the aggregate, the changes in volume and price
represent no more than 20% change in the maximum aggregate offering
price set forth in the “Calculation of Registration
Fee” table in the effective registration
statement;
(iii)
To
include any material information with respect to the plan of
distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement.
(2)
That,
for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to
be a new registration statement relating to the securities to be
offered therein, and the offering of such securities at that time
shall be deemed to be an initial bona fide offering
thereof.
(3)
To
remove from registration by means of a post-effective amendment any
of the securities being registered which shall remain unsold at the
termination of the offering.
(4)
That,
for the purpose of determining liability under the Securities Act
to any purchaser:
(i)
Each
prospectus filed by the registrant pursuant to Rule 424(b)(3) shall
be deemed to be part of the registration statement as of the date
the filed prospectus was deemed part of and included in the
registration statement; and
(ii)
Each
prospectus required to be filed pursuant to Rule 424(b)(2), (b)(5)
or (b)(7) as part of a registration statement in reliance on Rule
430B relating to an offering made pursuant to Rule 415(a)(1)(i),
(vii) or (x) for the purpose of providing information required by
Section 10(a) of the Securities Act shall be deemed to be part of
and included in the registration statement as of the earlier of the
date such form of prospectus is first used after effectiveness or
the date of the first contract of sale of securities in the
offering described in the prospectus. As provided in Rule 430B, for
liability purposes of the issuer and any person that is at that
date an underwriter, such date shall be deemed to be a new
effective date of the registration statement relating to the
securities in the registration statement to which that prospectus
relates, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof. Provided,
however, that no statement made in a registration statement or
prospectus that is part of the registration statement or made in a
document incorporated or deemed incorporated by reference into the
registration statement or prospectus that is part of the
registration statement will, as to a purchaser with a time of
contract of sale prior to such effective date, supersede or modify
any statement that was made in the registration statement or
prospectus that was part of the registration statement or made in
any such document immediately prior to such effective
date.
II-2
Insofar as
indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or
otherwise, the registrant has been advised that in the opinion of
the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant
of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in
the Act and will be governed by the final adjudication of such
issue.
II-3
SIGNATURES
Pursuant to the
requirements of the Securities Act of 1933, the registrant has duly
caused this Amendment No. 1 to the registration statement to be
signed on its behalf by the undersigned, thereunto duly authorized,
in the City of Boston, Commonwealth of Massachusetts, on January 4,
2017.
|
ZOOM
TELEPHONICS, INC.
|
||
|
|
|
|
|
By:
|
/s/ Frank B.
Manning
|
|
|
|
Frank B.
Manning
|
|
|
|
President and Chief
Executive Officer
|
|
POWER
OF ATTORNEY
Pursuant to the
requirements of the Securities Act of 1933, as amended, this
Amendment No. 1 to the registration statement has been signed by
the following persons in the capacities and on the date
indicated.
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
/s/ Frank B.
Manning
|
|
President, Chief
Executive Officer, Chairman of the Board and acting Chief Financial
Officer
|
|
January 4, 2017
|
Frank B.
Manning
|
|
(Principal
Executive Officer and Principal Financial and Accounting
Officer)
|
|
|
|
|
|
|
|
*
|
|
Director
|
|
January 4, 2017
|
Robert Crowley
|
|
|
|
|
|
|
|
|
|
*
|
|
Director
|
|
January 4, 2017
|
Joseph Donovan
|
|
|
|
|
|
|
|
|
|
*
|
|
Director
|
|
January 4, 2017
|
Philip Frank
|
|
|
|
|
|
|
|
|
|
*
|
|
Director
|
|
January 4, 2017
|
Peter
Kramer
|
|
|
|
|
|
|
|
|
|
*
|
|
Director
|
|
January 4, 2017
|
George
Patterson
|
|
|
|
|
|
|
|
|
|
*
|
|
Director
|
|
January 4, 2017
|
Peter
Sykes
|
|
|
|
|
By:
*/s/ Frank B. Manning
|
|
|
|
|
Frank
B. Manning
Attorney-in-Fact
|
|
|
|
|
Exhibit
Index
The following
exhibits are filed herewith or incorporated by reference as part of
this Registration Statement.
Exhibit
No.
|
|
Description
of Document
|
|
|
|
2.1
|
|
Separation and
Distribution Agreement by and between Zoom Technologies, Inc. and
Zoom Telephonics, Inc. (incorporated by reference to annex B of the
preliminary proxy statement filed by Zoom Technologies, Inc. May
13, 2009).
|
3.1
|
|
Amended and
Restated Certificate of Incorporation of Zoom Telephonics, Inc.
(incorporated by reference to Exhibit 3.1 to Zoom Telephonics, Inc.
Registration Statement on Form 10, filed with the Commission on
September 4, 2009).
|
3.2
|
|
Amendment to
Amended and Restated Certificate of Incorporation (incorporated by
reference to Exhibit 3.1 to the Form 8-K filed on November 18,
2015)
|
3.3
|
|
Certificate of
Designation of Series A Junior Participating Preferred Stock
(incorporated by reference to Exhibit 3.2 to the Form 8-K filed on
November 18, 2015)
|
3.4
|
|
By-Laws of Zoom
Telephonics, Inc. (incorporated by referenced to Exhibit 3.2 to
Zoom Telephonics, Inc. Registration Statement on Form 10 filed with
the Commission on September 4, 2009).
|
4.1
|
|
Section
382 Rights Agreement, dated as of November 18, 2015, between Zoom
Telephonics, Inc. and Computershare Trust Company, N.A., which
includes the Form of Certificate of Designation of Series A
Preferred Stock as Exhibit A, the Form of Right Certificate as
Exhibit B and the Summary of Rights to Purchase Preferred Stock as
Exhibit C (incorporated by reference to Exhibit 4.1 to the Form 8-K
filed by the Company on November 18, 2015)*
|
5.1**
|
|
Legal Opinion of
Burns & Levinson LLP
|
10.1
|
|
Zoom Telephonics,
Inc. 2009 Stock Option Plan (incorporated by reference to Exhibit
4.1 to the Form 8-K dated December 16, 2009 and incorporated by
reference herein).*
|
10.2
|
|
Zoom Telephonics,
Inc. 2009 Directors Stock Option Plan (incorporated by reference to
Exhibit 4.2 to the Form 8-K dated December 16, 2009 and
incorporated by reference herein).*
|
10.3
|
|
Form of director
option grant pursuant to Zoom Telephonics, Inc. 2009 Directors
Stock Option Plan (incorporated by reference to Exhibit 4.3 to the
Form 8-K dated December 16, 2009 and incorporated by reference
herein).*
|
10.4
|
|
Form of incentive
stock option grant pursuant to Zoom Telephonics, Inc. 2009 Stock
Option Plan (incorporated by reference to Exhibit 4.4 to the Form
8-K dated December 16, 2009 and incorporated by reference
herein).*
|
10.5
|
|
Form of
non-qualified stock option grant pursuant to Zoom Telephonics, Inc.
2009 Stock Option Plan (incorporated by reference to Exhibit 4.5 to
the Form 8-K dated December 16, 2009 and incorporated by reference
herein).*
|
10.6
|
|
Severance Agreement
between Zoom Telephonics, Inc. and Frank B. Manning (incorporated
by reference to Exhibit 10.1 to the 10-Q filed on May 14,
2010)
|
10.7
|
|
Severance Agreement
between Zoom Telephonics, Inc. and Deena Randall (incorporated by
reference to Exhibit 10.3 to the 10-Q filed on May 14,
2010)
|
10.8
|
|
Severance Agreement
between Zoom Telephonics, Inc. and Terry Manning (incorporated by
reference to Exhibit 10.4 to the 10-Q filed on May 14,
2010)
|
10.9
|
|
Financing
Agreement, dated December 18, 2012, between Zoom Telephonics, Inc.
and Rosenthal & Rosenthal, Inc. (incorporated by reference to
Exhibit 10.1 to the Form 8-K dated December 21, 2012)
|
10.10
|
|
Intellectual
Property Security Agreement, dated December 18, 2012, between Zoom
Telephonics, Inc. and Rosenthal & Rosenthal, Inc. (incorporated
by reference to Exhibit 10.2 to the Form 8-K dated December 21,
2012)
|
10.11
|
|
Amendment dated
March 25, 2014, effective January 1, 2013 to Financing Agreement,
dated December 18, 2012, between Zoom Telephonics, Inc. and
Rosehthal & Rosenthal, Inc. (incorporated by reference to
Exhibit 10.1 to the Form 8-K filed by the Company on November 3,
2015)
|
10.12
|
|
Amendment dated
October 29, 2015, effective January 1, 2013, to Financing
Agreement, dated December 18, 2012, between Zoom Telephonics, Inc.
and Rosenthal & Rosenthal, Inc. (incorporated by reference to
Exhibit 10.1 to the Form 8-K filed by the Company on November 3,
2015)
|
10.13
|
|
Amendment dated July 19, 2016 to Financing
Agreement, dated December 18, 2012, between Zoom Telephonics, Inc.
and Rosenthal & Rosenthal, Inc. (incorporated by reference to
Exhibit 10.1 to the Form 8-K filed by the Company on July 25,
2016).
|
10.14
|
|
Amendment dated September 1, 2016 to
Financing Agreement, dated December 18, 2012, between Zoom
Telephonics, Inc. and Rosenthal & Rosenthal, Inc. (incorporated
by reference to Exhibit 10.1 to the Form 8-K filed by the Company
on September 8, 2016).
|
10.15
|
|
Form
of Common Stock Subscription Agreement (incorporated by reference
to Exhibit 10.1 to the Form 8-K filed by the Company on September
26, 2016).
|
10.16†
|
|
License Agreement,
dated May 13, 2015, between Zoom Telephonics, Inc. and Motorola
Mobility LLC (incorporated by reference to Exhibit 10.3 to the Form
10-Q/A filed by the Company on December 6, 2016).
|
10.17†
|
|
Amendment to License Agreement, dated August 16,
2016, between Zoom Telephonics, Inc. and Motorola Mobility
LLC (incorporated by reference to Exhibit 10.4 to the Form
10-Q/A filed by the Company on December 6, 2016).
|
21.1
|
|
Subsidiaries
(incorporated by reference to Exhibit 21 to the Annual Report on
Form 10-K for the year ended December 31, 2015)
|
23.1
|
|
Consent of Marcum
LLP
|
23.2**
|
|
Consent of Burns
& Levinson LLP (included in Exhibit 5.1)
|
24.1**
|
|
Power of Attorney
(contained in the signature page of this registration
statement)
|
101.INS
|
|
XBRL Instance
Document
|
101.SCH
|
|
XBRL Taxonomy
Extension Schema Document
|
101.CAL
|
|
XBRL Taxonomy
Calculation Linkbase Document
|
101.LAB
|
|
XBRL Taxonomy Label
Linkbase Document
|
101.PRE
|
|
XBRL Taxonomy
Presentation Linkbase Document
|
101.DEF
|
|
XBRL Taxonomy
Extension Definition Linkbase Document
|
_________
* Management
contract or compensatory plan or arrangement
** Previously
filed
†
Confidential treatment requested as to portions of the exhibit.
Confidential materials omitted and filed separately with the
Securities and Exchange Commission.