Attached files
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
FORM 10-Q
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OMB APPROVAL OMB Number: 3235-0070 Expires: January 31, 2013 Estimated average burden hours per response . . ..... .187.2 |
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2012
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 0-27210
Zunicom, Inc.
(Exact name of registrant as specified in its charter)
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Texas (State or other jurisdiction of incorporation or organization) |
75-2408297 (I.R.S. Employer Identification No.) |
4315 West Lovers Lane, Dallas, Texas
(Address of principal executive offices)
(214) 352-8674
(Registrant’s telephone number, including area code)
None
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
[ X ] Yes [ ] No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
[ X ] Yes [ ] No
1
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.
| Large accelerated filer o | Accelerated filer o |
| Non-accelerated filer o | Smaller reporting company þ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
[ ] Yes [ X ] No
As of October 10, 2012, 9,904,257 shares of Common Stock were outstanding.
2
Zunicom, Inc.
INDEX
| PART I - Financial Information | Page |
| Item 1. Financial Statements | |
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Consolidated Balance Sheet at September 30, 2012 (unaudited) and Consolidated Balance Sheet at December 31, 2011 |
4 |
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Unaudited Consolidated Statements of Operations for the three and nine months ended September 30, 2012 and 2011 |
5 |
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Unaudited Consolidated Statements of Cash Flows for the nine months ended September 30, 2012 and 2011 |
7 |
| Notes to Unaudited Consolidated Financial Statements | 9 |
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations |
13 |
| Item 3. Quantitative and Qualitative Disclosures About Market Risk | 16 |
| Item 4. Controls and Procedures | 16 |
| PART II - Other Information | |
| Item 1. Legal Proceedings | 17 |
| Item 6. Exhibits | 17 |
| Signature | 18 |
| Certifications | |
3
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
ZUNICOM, INC.
CONSOLIDATED BALANCE SHEETS
| ASSETS | ||||||
| September 30, 2012 | December 31, 2011 | |||||
| (unaudited) | ||||||
| CURRENT ASSETS | ||||||
| Cash and cash equivalents | $ | 3,217,083 | $ | 3,793,507 | ||
| Accounts receivable - trade, net of allowance | 18,578 | 44,283 | ||||
| for doubtful accounts of $12,000 for each | ||||||
| period respectively | ||||||
| Inventory | 34,200 | 28,621 | ||||
| Deferred costs | 77,810 | 67,780 | ||||
| Prepaid expenses and other current assets | 53,329 | 29,494 | ||||
| Total current assets | 3,401,000 | 3,963,685 | ||||
| PROPERTY AND EQUIPMENT | ||||||
| Computer equipment | 3,147 | 3,147 | ||||
| Furniture and fixtures | 10,000 | 10,000 | ||||
| Total Property and Equipment | 13,147 | 13,147 | ||||
| Less accumulated depreciation | (5,620) | (3,648) | ||||
| Net property and equipment | 7,527 | 9,499 | ||||
| INTANGIBLE ASSETS - NET OF ACCUMULATED AMORTIZATION | 202,250 | 290,000 | ||||
| INVESTMENT IN UNCONSOLIDATED INVESTEE | 4,673,503 | 4,575,977 | ||||
| TOTAL ASSETS | $ | 8,284,280 | $ | 8,839,161 | ||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||
| Current liabilities | ||||||
| Accounts payable | $ | 352,690 | $ | 404,750 | ||
| Accrued expenses | 23,189 | 55,402 | ||||
| Deferred revenue | 47,547 | 13,463 | ||||
| Customer deposits | 69,624 | 51,121 | ||||
| Total current liabilities | 493,050 | 524,736 | ||||
| DEFERRED TAX LIABILITY | 2,088,846 | 2,213,406 | ||||
| TOTAL LIABILITIES | 2,581,896 | 2,738,142 | ||||
| STOCKHOLDERS' EQUITY | ||||||
Preferred stock - $1.00 par value, 1,000,000 shares authorized; 58,708 and 60,208 Class A Shares issued and outstanding; liquidation preference of $308,217 and $316,092 as of September 30, 2012 and December 31, 2011 |
58,708 | 60,208 | ||||
Common stock - $0.01 par value; 50,000,000 Shares authorized; 9,904,257 and 9,901,257 shares issued and outstanding, respectively |
99,043 | 99,013 | ||||
| Additional paid-in capital | 9,208,663 | 9,194,684 | ||||
| Accumulated deficit | (3,664,030) | (3,252,886) | ||||
| Total stockholders' equity | 5,702,384 | 6,101,019 | ||||
| TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ | 8,284,280 | $ | 8,839,161 | ||
| The accompanying footnotes are an integral part of these unaudited | ||||||
| consolidated financial statements | ||||||
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ZUNICOM, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three and Nine Months Ended September 30, 2012 and 2011
| For the three months ended | For the nine months ended | |||||||||||
| September 30, | September 30, | |||||||||||
| 2012 | 2011 | 2012 | 2011 | |||||||||
| REVENUE | ||||||||||||
| Sales | $ | 179,202 | $ | 309,730 | $ | 562,857 | $ | 914,140 | ||||
| Service | 114,423 | 87,589 | 300,999 | 226,817 | ||||||||
| Total revenue | 293,625 | 397,319 | 863,856 | 1,140,957 | ||||||||
| COST OF REVENUE | ||||||||||||
| Cost of goods sold | 67,975 | 153,325 | 269,281 | 415,089 | ||||||||
| Direct servicing costs | 54,185 | 62,159 | 157,250 | 168,006 | ||||||||
| Total cost of revenue | 122,160 | 215,484 | 426,531 | 583,095 | ||||||||
| GROSS PROFIT | 171,465 | 181,835 | 437,325 | 557,862 | ||||||||
| OPERATING EXPENSES | ||||||||||||
| Selling, general and administrative | 347,291 | 377,646 | 964,299 | 956,837 | ||||||||
| Depreciation and amortization | 29,907 | 29,907 | 89,722 | 89,407 | ||||||||
| Total operating expenses | 377,198 | 407,553 | 1,054,021 | 1,046,244 | ||||||||
| LOSS FROM OPERATIONS | (205,733) | (225,718) | (616,696) | (488,382) | ||||||||
| OTHER INCOME (EXPENSE) | ||||||||||||
| Interest income | 1,146 | 2,449 | 4,914 | 9,008 | ||||||||
| Equity in earnings of unconsolidated investee | 15,939 | 73,348 | 92,518 | 279,542 | ||||||||
| Total other income | 17,085 | 75,797 | 97,432 | 288,550 | ||||||||
| INCOME BEFORE PROVISION FOR INCOME TAXES | (188,648) | (149,921) | (519,264) | (199,832) | ||||||||
| INCOME TAXES BENEFIT (EXPENSE) | 22,626 | 28,360 | 124,560 | (20,193) | ||||||||
The accompanying footnotes are an integral part of these unaudited consolidated financial statements.
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ZUNICOM, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three and Nine Months Ended September 30, 2012 and 2011
| For the three months ended | For the nine months ended | |||||||||||
| September 30, | September 30, | |||||||||||
| 2012 | 2011 | 2012 | 2011 | |||||||||
| NET LOSS | $ | (166,022) | $ | (121,561) | $ | (394,704) | $ | (220,025) | ||||
| Preferred stock dividend | (5,284) | (5,419) | (16,438) | (16,708) | ||||||||
| Net loss attributable to | ||||||||||||
| common stockholders | $ | (171,306) | $ | (126,980) | $ | (411,142) | $ | (236,733) | ||||
| Basic and diluted net loss per share | ||||||||||||
| attributable to common stockholders: | ||||||||||||
| Net Loss | $ | (0.02) | $ | (0.01) | $ | (0.04) | $ | (0.02) | ||||
| Number of weighted average shares of common stock | ||||||||||||
| outstanding | ||||||||||||
| Basic and diluted | 9,904,257 | 9,901,257 | 9,903,731 | 9,793,738 | ||||||||
The accompanying footnotes are an integral part of these unaudited consolidated financial statements.
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ZUNICOM, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
For The Nine Months Ended September 30, 2012 and 2011
| 2012 | 2011 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net loss | $ | (394,704) | $ | (220,025) | ||||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation and amortization | 89,722 | 89,407 | ||||||
| Provision for bad debts | - | 12,330 | ||||||
| Equity in earnings of investee | (92,518) | (279,542) | ||||||
| Stock-based compensation | 7,501 | 27,475 | ||||||
| Deferred income taxes | (124,560) | 20,193 | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable - trade | 25,704 | (62,753) | ||||||
| Inventories | (5,579) | (19,510) | ||||||
| Deferred costs | (10,030) | 62,219 | ||||||
| Prepaid expenses and other current assets | (23,833) | (21,303) | ||||||
| Accounts payable | (52,061) | 540 | ||||||
| Accrued expenses | (32,215) | (23,650) | ||||||
| Deferred revenue | 34,084 | 4,691 | ||||||
| Customer deposits | 18,503 | (21,999) | ||||||
| Net cash used in operating activities | (559,986) | (431,927) | ||||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Purchase of property and equipment | - | (3,147) | ||||||
| Net cash used in investing activities | - | (3,147) | ||||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Dividends paid on preferred stock | (16,438) | (16,708) | ||||||
| Net cash used in financing activities | (16,438) | (16,708) | ||||||
The accompanying footnotes are an integral part of these unaudited consolidated financial statements.
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ZUNICOM, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
For The Nine Months Ended September 30, 2012 and 2011
| 2012 | 2011 | ||||||
| NET DECREASE IN CASH AND CASH EQUIVALENTS | (576,424) | (451,783) | |||||
| Cash and cash equivalents at beginning of period | 3,793,507 | 4,427,227 | |||||
| Cash and cash equivalents at end of period | $ | 3,217,083 | $ | 3,975,444 | |||
| SUPPLEMENTAL DISCLOSURE OF NON-CASH FLOW FINANCING ACTIVITIES | |||||||
| Conversion of preferred stock to common stock | $ | (1,500) | $ | - | |||
| Income taxes paid | $ | 720 | $ | - | |||
| Restricted stock issued | $ | - | $ | 64,309 | |||
The accompanying footnotes are an integral part of these unaudited consolidated financial statements.
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ZUNICOM, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - ORGANIZATION
Zunicom, Inc., ("Zunicom" or the "Company") was formed on January 10, 1992 as a Texas corporation. Zunicom's consolidated wholly-owned subsidiary, AlphaNet Hospitality Systems Inc. ("AlphaNet"), has been a provider of guest communication services to the hospitality market. AlphaNet discontinued this business as of August 31, 2010. In April of 2010, AlphaNet purchased the assets and business of Action Computer Systems and is now a reseller of point-of-sale software and hardware to restaurants in southern Connecticut, Westchester County, New York, and New York City (Note I). Zunicom also holds a 40.8 percent ownership interest in Universal Power Group, Inc. (UPG), a distributor and supplier to a diverse and growing range of industries of portable power and related synergistic products, provider of third-party logistics services and a custom battery pack assembler.
NOTE B - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by United States generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments considered necessary for a fair presentation have been included for the three and nine month periods ended September 30, 2012. The results for the three and nine month periods ended September 30, 2012 are not necessarily indicative of the results that may be expected for the year ended December 31, 2012. The unaudited consolidated financial statements included in this filing should be read in conjunction with the Company's audited consolidated financial statements and notes thereto included in the Company's annual report on form 10-K for the year ended December 31, 2011.
NOTE C - STOCK-BASED COMPENSATION
Stock-based compensation expense recognized in the statements of operations for the three and nine months ended September 30, 2012 and 2011, of $2,519, $2,519, $7,501, and $27,475 respectively, represents the amortization of the restricted stock grant to the Company's chairman.
As of June 30, 2011, the 2007 grant of restricted stock to the Company's chairman has been fully expensed.
Amortization of the restricted stock granted to UPG employees for the three and nine months ended September 30, 2012 and 2011 of $1,682, $1,682, $5,008, and $12,063 respectively, represents the amortization of the restricted stock grant to UPG employees in 2007 and 2011. The grant of the new restricted shares to UPG officers and employees is accounted for as a contribution of capital. The Company will amortize 59% of that capital contribution as additional equity in earnings (loss) of the investee over the vesting period.
Restricted Stock
On June 25, 2007, the Board of Directors approved a grant of 996,940 restricted shares of the Company’s common stock to our chairman and certain officers and employees of UPG. Several of the officers and employees of UPG had been officers and employees of the Company prior to the deconsolidation of UPG in December 2006. The Company attributed a value of $205,801 to the restricted stock granted to our chairman and $377,392 to the restricted stock granted to the officers and employees of UPG. The grant was made in recognition of past and future performance, especially with regard to the initial public offering of UPG's common stock in which Zunicom was able to sell 1,000,000 shares of UPG common stock resulting in an $0.80 dividend to shareholders paid in the first quarter of 2007. The restricted stock vested in full on June 25, 2011, but was extended for three years pursuant to a new agreement as described below. Accordingly, the deferred stock compensation to the Company’s chairman has been fully amortized and the unrecognized compensation cost to certain UPG employees has been fully realized as of September 30, 2012.
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NOTE C - STOCK-BASED COMPENSATION (CONTINUED)
On January 21, 2009, the chief executive officer of UPG resigned and according to the terms of the restricted stock agreement, forfeited his restricted stock grant. Accordingly, his shares were returned to the Company and the investment in UPG was reduced by $132,925. During 2011, two UPG employees resigned and according to the terms of the restricted stock agreement, forfeited their restricted stock grant. Accordingly, their shares have been returned to the Company and the investment in UPG has been reduced by $4,624.
On June 24, 2011, the Company offered an additional grant of restricted shares to the grantees on condition that the grantees would agree that the original grant remain in escrow and subject to the original restrictions until June 30, 2014. The new grant will also be subject to the same restrictions and remain in escrow for the same period. All remaining grantees accepted the Company’s offer.
Accordingly, on June 24, 2011, the Company issued a grant of 87,952 restricted shares of common stock to the Company’s chairman and a grant of 99,536 restricted shares of common stock to certain employees of UPG. These additional shares will vest on June 30, 2014 and will be held in escrow for the benefit of the grantee subject to the same restrictions and risk of forfeiture as the original shares until the vesting date.
As of September 30, 2012, $12,702 of the restricted stock grant to the Company’s chairman has been amortized and $17,465 remains unamortized and $8,481 of the restricted stock grant to UPG employees has been amortized and $11,662 remains unamortized.
The Company accounted for the grant of the new restricted shares to our chairman as stock based compensation. We accounted for the grant of the new restricted shares to UPG officers and employees as a contribution of capital. The Company will amortize 59% of that capital contribution as additional equity in earnings (loss) of the investee over the vesting period.
Valuation Assumptions
The fair values of option awards are estimated at the grant date using a Black-Scholes option pricing model. There were no options granted in the nine months ended September 30, 2012 or 2011.
Activity and Summary
Stock option activity under the 1999 and 2000 stock option plans was as follows:
| Weighted Average | ||||
| Number of Shares | Exercise Price | |||
| Options outstanding at December 31, 2011 | 125,000 | $ | 0.71 | |
| Granted | -- | $ | -- | |
| Exercised | -- | $ | -- | |
| Canceled, lapsed or forfeited | (25,000 | ) | $ | 1.75 |
| Options outstanding at September 30, 2012 | 100,000 | 0.45 | ||
The following table summarizes stock options outstanding under the 1999 and 2000
stock option plans at September 30, 2012:
| Options Outstanding | Options Exercisable | |||||||||
| Weighted | ||||||||||
| Average | ||||||||||
| Remaining | Weighted | Weighted | ||||||||
| Number of | Contractual | Average | Number of | Average | ||||||
| Range of | Options | Life | Exercise | Options | Exercise | |||||
| Exercise Prices | Outstanding | (in years) | Price | Exercisable | Price | |||||
| $ 0.45 | 100,000 | 0.50 | $ | 0.45 | 100,000 | $ | 0.45 | |||
At September 30, 2012, the aggregate intrinsic value of options outstanding and exercisable was $0. The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying awards and the quoted price of the Company's common stock for those awards that have an exercise price currently below the quoted price. At September 30, 2012, all outstanding options were fully vested.
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NOTE D - NET LOSS PER SHARE
Basic net loss per share is computed by dividing net loss increased by the preferred stock dividends of $5,284 and $5,419, $16,438, and $16,708 for the three and nine months ended September 30, 2012 and 2011, respectively, by the weighted average number of common shares outstanding for the period.
Diluted net loss per share is computed by dividing net income decreased by the preferred stock dividends by the weighted average number of common shares and common stock equivalents outstanding for the period. The Company's common stock equivalents include all common stock issuable upon conversion of preferred stock and the exercise of outstanding stock options.
The dilutive effect of 100,000 options and the dilutive effect of the conversion of 58,708 shares of preferred stock into 117,416 shares of common stock have not been included in the computation of dilutive net income per share for the three and nine month periods ended September 30, 2012, as the effect would be anti-dilutive.
The dilutive effect of 100,000 in-the-money options and the dilutive effect of the conversion of 60,208 shares of preferred stock into 120,416 shares of common stock have not been included in the computation of dilutive net income per share for the three and nine month periods ended September 30, 2011, as the effect would be anti-dilutive.
NOTE E - UNCONSOLIDATED INVESTEE
The Company's investment in UPG is accounted for under the equity method of accounting for the three and nine month periods ended September 30, 2012 and 2011. Following is a summary of financial information of UPG for the three and nine month periods ended September 30, 2012 and 2011:
Three and Nine Months Ended September 30,
($ in thousands)
(Unaudited)
| 2012 | 2011 | 2012 | 2011 | ||||||||
| Net revenues | $ | 22,114 | $ | 24,676 | $ | 72,035 | $ | 67,785 | |||
| Cost of revenues | 18,539 | 19,920 | 59,617 | 54,349 | |||||||
| Gross profit | 3,575 | 4,756 | 12,418 | 13,436 | |||||||
| Operating expenses | 3,312 | 4,241 | 10,883 | 11,524 | |||||||
| Income from operations | 263 | 515 | 1,535 | 1,912 | |||||||
| Interest expense | (145) | (161) | (441) | (452) | |||||||
| Other, net | 3 | -- | 129 | -- | |||||||
| Income from continuing operations | |||||||||||
| before income tax provision | 121 | 354 | 1,223 | 1,460 | |||||||
| Income tax provision | (78) | (197) | (439) | (623) | |||||||
| Income from continuing operations | 43 | 157 | 784 | 837 | |||||||
| Income (loss) from discontinued operations | |||||||||||
| before income tax provision | -- | 40 | (707) | (187) | |||||||
| Income tax provision | -- | (14) | 161 | 61 | |||||||
| Gain (loss) from discontinued operations | -- | 26 | (546) | (126) | |||||||
| Net income | $ | 43 | $ | 183 | $ | 238 | $ | 711 | |||
Following is a summary of the balance sheets for UPG as of
September 30, 2012 and December 31, 2011.
| ($ in thousands) | ||
| September 30, | December 31, | |
| 2012 | 2011 | |
| Current assets | 48,767 | 40,990 |
| Noncurrent assets | 2,752 | 3,085 |
| Current liabilities | 28,309 | 21,086 |
| Noncurrent liabilities | 156 | 229 |
| Shareholders' equity | 23,054 | 22,760 |
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NOTE F - SHAREHOLDERS' EQUITY
During the three and nine month periods ended September 30, 2012 and 2011, the Company paid a cash dividend of $5,284, $5,419, $16,438, and $16,708 respectively, to the holders of its class A Preferred Stock.
NOTE G - LEGAL PROCEEDINGS
The Company is subject to legal proceedings and claims that arise in the ordinary course of business. As of September 30, 2012, the Company is not subject to any ongoing legal proceedings.
NOTE H – DISCONTINUED OPERATIONS
In August 2010, the Company discontinued its guest communications services business. The Company chose to abandon the assets associated with this business and accordingly has written these assets off in the consolidated statements of operations for the year ended December 31, 2010.
The liability related to discontinued operations as of September 30, 2012 and December 31, 2011 is accounts payable of $252,725 and $289,102 respectively.
NOTE I - ECONOMIC DEPENDENCE
With the purchase of the business of Action Computer Systems in April 2010, the Company is now a reseller for Action Systems Inc. (ASI) in Silver Spring, Maryland, the developer of Restaurant Manager, a point-of-sale computer software system designed for restaurants. Should ASI fail to develop and issue improvements for the Restaurant Manager software to keep pace with technological developments and the operational needs of restaurants, Restaurant Manager's competitive position could be diminished and the Company's business would be harmed.
Should ASI cease operation of its business, the Company would be forced to identify other point-of-sale software that it could offer to the restaurant industry. The Company has an effective sales and marketing, and service and support infrastructure in place and an installed system base in excess of 500 customers which could make it an attractive reseller for one of the many point-of-sale software systems offered to restaurants. However, there is no guarantee that the Company would be able to identify such a replacement system or, if identified, complete an arrangement satisfactory to the Company or to the system developer.
NOTE J – REVERSE/FORWARD STOCK SPLIT
The Company's Board of Directors approved a 1-for-12 reverse stock split of our Common Stock followed by a 12-for-1 forward stock split of our Common Stock (the" Reverse/Forward Stock Split"). In January 2012, shareholders owing in excess of 50% of the voting power of the Company approved the Reverse/Forward Stock Split. On February 10, 2012, the Company filed Schedules 14C and a 13E-3 Transaction Statement with the Securities and Exchange Commission (SEC) in connection with the Reverse/Forward Stock Split. The Reverse/Forward Stock Split became effective as of the opening of business on October 11, 2012. The Reverse/Forward Stock Split provides that all shareholders owning less than 12 shares of our Common Stock will receive a payment of $.65 for each share and will thereafter no longer be shareholders of the Company. The shareholdings of all other shareholders will remain unchanged. The Reverse/Forward Stock Split is part of the Company's plan to terminate the registration of the Common Stock under section 12(g) of the Exchange Act and suspend its reporting requirements under the Exchange Act ("Deregistration"). Following the effective date of the Reverse/Forward Stock Split, the Company has fewer than 300 Shareholders of record and is eligible for Deregistration under the Exchange Act. Therefore, the Reverse/Forward Stock Split is considered a "going private" transaction as defined in Rule 13e-3 promulgated under the Exchange Act. On October 11, 2012, the Company filed Form 15 with the SEC terminating its registration under section 12(g) and its duty to file reports under sections 13 and 15(d) of the Exchange Act . The financial statements have not been retroactively stated to reflect the effect of the reverse split as the number of shareholders holding eleven or fewer shares is not available at this time due to the damage inflicted by hurricane Sandy. However, the retroactive adjustment is not expected to be material to the financial statements.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with Zunicom's Unaudited Consolidated Interim Financial Statements and notes thereto included elsewhere in this Form 10-Q. Except for the historical information contained herein, the discussion in this Form 10-Q contains certain forward looking statements that involve risks and uncertainties, such as statements of Zunicom's plans, objectives, expectations and intentions. The cautionary statements made in this Form 10-Q should be read as being applicable to all related forward-looking statements wherever they appear in this Form 10-Q. These statements include, without limitation, statements concerning the potential operations and results of the Company described below. Zunicom's actual results could differ materially from those discussed here. Factors that could cause or contribute to such differences include, without limitation, those factors discussed herein and in Zunicom's Annual Report on Form 10-K for the year ended December 31, 2011.
RESULTS OF OPERATIONS
Currently, the operations of Zunicom are conducted through its wholly-owned subsidiary, AlphaNet. AlphaNet had been a provider of guest communication services to the hospitality market. AlphaNet exited this business as of August 31, 2010. In April 2010, AlphaNet purchased the assets and business of Action Computer Systems and is now a reseller of point-of-sale software and hardware to restaurants in southern Connecticut, Westchester County, New York, and New York City.
Three months ended September 30, 2012
REVENUES
For the three month period ended September 30, 2012, Zunicom, through its wholly owned subsidiary Alphanet, had consolidated revenues of $293,625 compared to $397,319 for the same period in 2011, a decrease of $103,694 or 26.1%. The decrease is due primarily to a decrease in the sales of new systems offset by increases in service and commission revenue. We are encountering increased competition from lower end point-of-sale systems reducing the number of systems sold and decreasing prices and margins on those systems sold. In July 2012, we became a reseller for a lower-end, cloud-based restaurant point-of-sale system and added a salesman.
COST OF REVENUES
For the three month period ended September 30, 2012, cost of revenue was $122,160 compared to $215,484 for the same period in 2011, an decrease of $93,324 or 43.3%. The decrease reflects the decrease in the sales of new systems.
GROSS PROFIT
For the three month period ended September 30, 2012, gross profit was $171,465 compared to $181,835 for the same period in 2011, a decrease of $10,370 or 5.7%. Gross profit as a percent of total revenue was 58.4% for the three month period ended September 30, 2012 compared to 45.8% for the same period in 2011. The decrease in gross profit dollars reflects the increasing pricing pressure in the market for point-of-sale systems while the increase in gross profit percent reflects the increase in service revenue and software upgrades which carry a higher gross profit percent.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
OPERATING EXPENSES
For the three month period ended September 30, 2012, Zunicom's consolidated operating expenses, consisting of selling, general and administrative expenses decreased to $347,291 compared to $377,646 for the same period in 2011, a decrease of $30,355 or 8.0%. The decrease is primarily due to a decrease in Zunicom’s legal fees related to the 14C and 13E-3 filings with the Securities and Exchange Commission (see Note J in the financial statements). Operating expenses at Action Computer Systems are essentially flat between the two periods.
For the three month period ended September 30, 2012, the Company recorded $29,907 in depreciation and amortization expense compared to $29,907 in 2011.
OTHER INCOME / EXPENSE
Zunicom's consolidated interest income for the three month period ended September 30, 2012 was $1,146 compared to interest income of $2,449 for the same period in 2011, a decrease of $1,303, or 61.5%. The decrease is due to a declining cash balance.
Equity in earnings of investee of $15,939 represents Zunicom's share of UPG's net loss for the three month period ended September 30, 2012 recorded in accordance with the equity method of accounting for an unconsolidated investee.
Nine months ended September 30, 2012
REVENUES
For the nine month period ended September 30, 2012, Zunicom, through its wholly owned subsidiary Alphanet, had consolidated revenues of $863,856 compared to $1,140,957 for the same period in 2011, a decrease of $277,101 or 24.3%. The decrease is due primarily to a decrease in the sales of new systems offset by increases in service and commission revenue. We are encountering increased competition from lower end point-of-sale systems reducing the number of systems sold and decreasing prices and margins on those systems sold. In July 2012, we became a reseller for a lower-end, cloud-based restaurant point-of-sale system and added a salesman.
COST OF REVENUES
For the nine month period ended September 30, 2012, cost of revenue was $426,531 compared to $583,095 for the same period in 2011, a decrease of $156,564 or 26.9%. The decrease reflects the decrease in the sales of new systems.
GROSS PROFIT
For the nine month period ended September 30, 2012, gross profit was $437,325 compared to $557,862 for the same period in 2011, a decrease of $120,537 or 21.6%. Gross profit as a percent of total revenue was 50.6% for the nine month period ended September 30, 2012 compared to 48.9% for the same period in 2011. The decrease in gross profit dollars reflects the increasing pricing pressure in the market for point-of-sale systems while the increase in gross profit percent reflects the increase in service revenue and software upgrades which carry a higher gross profit percent.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
OPERATING EXPENSES
For the nine month period ended September 30, 2012, Zunicom's consolidated operating expenses, consisting of selling, general and administrative expenses were $964,299 compared to $956,837 for the same period in 2011, an increase of $7,462 or 0.8%. The increase is due to an increase in Zunicom’s legal fees related to the 14C and 13E-3 filings with the Securities and Exchange Commission (see Note J in the financial statements) offset by a decrease in stock compensation expense. Operating expenses increased at Action Computer Systems due primarily to an increase in compensation costs reflecting the addition of one marketing and administrative support position, an increase in marketing expenses reflecting efforts to increase the number of customers on service and support contracts, and an increase in health insurance costs, offset by a decrease in sales commissions reflecting the lower volume of new systems sales.
For the nine month period ended September 30, 2012, the Company recorded $89,722 in depreciation and amortization expense compared to $89,407 in 2011.
OTHER INCOME / EXPENSE
Zunicom's consolidated interest income for the nine month period ended September 30, 2012 was $4,914 compared to interest income of $9,008 for the same period in 2011, a decrease of $4,094, or 45.4%. The decrease is due to a declining cash balance.
Equity in earnings of investee of $92,518 represents Zunicom's share of UPG's net income for the nine month period ended September 30, 2012 recorded in accordance with the equity method of accounting for an unconsolidated investee.
LIQUIDITY
Zunicom, on a consolidated basis, had cash and cash equivalents of $3,217,083 at September 30, 2012.
Net cash used in operating activities was $559,986 for the nine month period ended September 30, 2012 as compared to $431,927 for the same period in 2011. The cash used in operating activities is primarily attributable to the net loss of $394,704, equity in earnings of investee of $92,518, deferred income taxes of $124,560, offset by depreciation of $89,722, non-cash stock based compensation of $7,501, and changes in operating assets and liabilities of negative $45,427.
Net cash used in financing activities for the nine month period ended September 30, 2012 was $16,438 representing payment of a cash dividend on the Company's preferred stock.
Zunicom management believes that cash on hand will be sufficient to meet its operational needs over the next year.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rates
We currently have no direct borrowings and therefore are not exposed to market rate risk for changes in interest rates.
ITEM 4. CONTROLS AND PROCEDURES
The Company's management, including the Company's principal executive officer and principal financial officer, has evaluated the effectiveness of the Company's disclosure controls and procedures (as defined in Rules 13(a) - 15(e) and 15(d) - 15(e) under the Securities Exchange Act of 1934) as of the nine months ended September 30, 2012. Based upon that evaluation, the Company's principal executive officer and principal financial officer have concluded that the disclosure controls and procedures were effective as of September 30, 2012 to insure that the information required to be disclosed by us in the reports filed or submitted by us under the Securities Exchange Act of 1934, as amended, was recorded, processed, summarized or reported within the time periods specified in the rules and regulations of the SEC, and included controls and procedures designed to ensure that information required to be disclosed by us in such reports was accumulated and communicated to management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosures.
There were no changes in the Company's internal control over financial reporting that occurred during the Company's last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings. None
Item 6. Exhibits.
| a. | The following exhibits are filed as part of this report or incorporated herein as indicated. |
| 3.1 | Articles of Incorporation, as amended (incorporated by reference to the Company's Registration Statement on Form SB-2, Commission File No. 33-98662, filed on October 30, 1995 and amended on January 5,1996 and January 23, 1996). |
| 3.2 | Certificate of Designation (incorporated by reference to the Company's Registration Statement on Form SB-2, Commission File No. 33-98662, filed on October 30, 1995 and amended on January 5, 1996 and January 23, 1996). |
| 3.2A | Amended Certificate of Designation (incorporated by reference to the Company's Registration Statement on Form SB-2, Commission File No.33-98662, filed on October 30, 1995 and amended on January 5, 1996 and January 23, 1996). |
| 3.3 | Bylaws (incorporated by reference to the Company's Registration Statement on Form SB-2, Commission File No. 33-98662, filed on October 30, 1995 and amended on January 5, 1996 and January 23, 1996). |
| 10.1 | Second Amended and Restated Creditors Subordination Agreement (incorporated by reference to the Company's Quarterly Report on Form 10-Q for the Quarter ended June 30, 2008, Commission File No. 0-27210, filed August 14, 2008) |
| 10.2 |
Purchase and Sale agreement between AlphaNet Hospitality Systems, Inc. Advanced Computer Software, Inc. dated March 30, 2010 (incorporated by reference to the Company's Annual Report on Form 10-K for the Fiscal year ended December 31, 2009, Commission File No. 000-27210, filed April 7, 2010)
|
|
14.2
|
Code of Ethics and Business Conduct as adopted March 30, 2004 (incorporated by reference to the Company's Annual Report on Form 10-K for the Fiscal Year ended December 31, 2003, Commission File No. 0-27210, filed March 31, 2004) |
| 31.1 |
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
|
| 31.2 | Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002* |
| 32.1 | Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002* |
| 32.2 | Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002* |
____________
* Filed herewith.
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Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| Zunicom, Inc. | |
| (Registrant) | |
| Date: November 14, 2012 | /s/ John C. Rudy |
|
John C. Rudy Chief Financial Officer (principal financial officer) |
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