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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________
 
FORM 10-Q
______________
 
(Mark One)
 
þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended June 30, 2014
 
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 0-53722
 
———————
 
ZOOM TELEPHONICS, INC.
(Exact Name of Registrant as Specified in its Charter)
 
———————

Delaware
 
04-2621506
(State or Other Jurisdiction of Incorporation or Organization)
 
(I.R.S. Employer Identification No.)
 
207 South Street, Boston, Massachusetts
 
02111
(Address of Principal Executive Offices)
 
(Zip Code)
 
Registrant’s Telephone Number, Including Area Code: (617) 423-1072
 
_________________________________________________________________________
(Former Name, Former Address, 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. YES þ 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).  YES þ NO ¨
 
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  ¨
 
Accelerated filer  ¨
Non-accelerated filer ¨
 
Smaller Reporting Company þ
(do not check if a smaller reporting company)
   
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ¨ NO þ
 
The number of shares outstanding of the registrant’s Common Stock, $.01 par value, as of June 30, 2014, was 7,982,704 shares.
 


 
 
 
 
 
ZOOM TELEPHONICS, INC.
INDEX
 
    Page
     
Part I. - Financial Information
   
     
Item 1.    Financial Statements
  3
       
  Condensed Balance Sheets as of June 30, 2014 and December 31, 2013 (Unaudited)   3
       
  Condensed Statements of Operations and Comprehensive Income (Loss) for the three months and six months ended June 30, 2014 and 2013 (Unaudited)   4
       
  Condensed Statements of Cash Flows for the six months ended June 30, 2014 and 2013 (Unaudited)   5
       
  Notes to Condensed Financial Statements   6
       
Item 2.    Management's Discussion and Analysis of Financial Condition and Results of Operations
  9
       
Item 3.    Quantitative And Qualitative Disclosures About Market Risk
  14
       
Item 4.    Controls and Procedures
  14
       
Part II. Other Information
   
       
Item 1A.  Risk Factors
  15
       
Item 6.    Exhibits
  15
       
Signatures   16
       
Exhibit Index   17
 
 
 
2

 
 
PART I - FINANCIAL INFORMATION
 
ITEM 1.
FINANCIAL STATEMENTS
 
ZOOM TELEPHONICS, INC.
Condensed Balance Sheets (Unaudited)
 
ASSETS
 
June 30,
2014
   
December 31,
2013
 
Current assets
           
Cash and cash equivalents
 
$
53,684
   
$
55,393
 
Accounts receivable, net of allowances of $484,767 at June 30, 2014 and $640,456 at December 31, 2013
   
1,527,516
     
1,674,812
 
Inventories
   
2,447,065
     
1,714,081
 
Prepaid expenses and other current assets
   
256,597
     
225,152
 
Total current assets
   
4,284,862
     
3,669,438
 
                 
Equipment, net
   
47,549
     
51,025
 
Total assets
 
$
4,332,411
   
$
3,720,463
 
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
               
Current liabilities
               
Bank debt
 
$
960,273
   
$
318,318
 
Accounts payable
   
866,239
     
693,546
 
Accrued expenses
   
251,959
     
322,410
 
Total current liabilities
   
2,078,471
     
1,334,274
 
                 
Total liabilities
   
2,078,471
     
1,334,274
 
                 
Stockholders' equity
               
Common stock, $0.01 par value:
               
Authorized - 25,000,000 shares; issued and outstanding – 7,982,704 shares at June 30, 2014 and December 31, 2013, respectively
   
79,827
     
79,827
 
Additional paid-in capital
   
34,187,162
     
34,177,779
 
Accumulated deficit
   
(32,379,509
)
   
(32,235,772
)
Accumulated other comprehensive income ( loss)
   
366,460
     
364,355
 
Total stockholders' equity
   
2,253,940
     
2,386,189
 
Total liabilities and stockholders' equity
 
$
4,332,411
   
$
3,720,463
 
 
See accompanying notes.
 
 
3

 
 
ZOOM TELEPHONICS, INC.
Condensed Statements of Operations and
Comprehensive Income (Loss)
 
(Unaudited)
 
   
Three Months Ended June 30,
   
Six Months Ended June 30,
 
   
2014
   
2013
   
2014
   
2013
 
                         
Net sales
 
$
2,640,702
   
$
2,999,019
   
$
5,787,047
   
$
5,816,618
 
Cost of goods sold
   
1,841,012
     
1,964,785
     
4,054,890
     
4,078,416
 
Gross profit
   
799,690
     
1,034,234
     
1,732,157
     
1,738,202
 
                                 
Operating expenses:
                               
Selling
   
355,055
     
400,094
     
707,834
     
822,759
 
General and administrative
   
238,109
     
354,346
     
530,662
     
693,880
 
Research and development
   
290,213
     
213,606
     
598,879
     
472,118
 
     
883,377
     
968,046
     
1,837,375
     
1,988,757
 
                                 
Operating profit (loss)
   
(83,687
)
   
66,188
     
(105,218
)
   
(250,555
)
                                 
Other:
                               
Interest income
   
9
     
17
     
16
     
26
 
Other, net
   
(20,293
)
   
(15,797
)
   
(34,494
)
   
(32,126
)
Total other income (expense), net
   
(20,284
)
   
(15,780
)
   
(34,478
)
   
(32,100
)
                                 
Income (loss) before income taxes
   
(103,971
)
   
50,408
     
(139,696
)
   
(282,655
)
                                 
Income taxes (benefit)
   
2,711
     
1,016
     
4,041
     
1,527
 
                                 
Net income (loss)
 
$
(106,682
)
 
$
49,392
   
$
(143,737
)
 
$
(284,182
)
                                 
Other comprehensive income (loss):
                               
Foreign currency translation adjustments
   
1,743
     
1,896
     
2,105
     
(8,059
)
Unrealized gain (loss) for the period
   
––
     
(24,000
)
   
––
     
(11,200
)
                                 
Net comprehensive income (loss)
 
$
(104,939
)
 
$
27,288
   
$
(141,632
)
 
$
(303,441
)
                                 
Basic and diluted net income (loss) per share
 
$
(0.01
)
 
$
0.01
   
$
(0.02
)
 
$
(0.04
)
                                 
Weighted average common and common equivalent shares:
                               
Basic and diluted
   
7,982,704
     
6,973,704
     
7,982,704
     
6,973,704
 

See accompanying notes.
 
 
4

 

ZOOM TELEPHONICS, INC.
Condensed Statements of Cash Flows
 
(Unaudited)
 
   
Six Months Ended
June 30,
 
 
 
2014
   
2013
 
Operating activities:
           
Net income (loss)
 
$
(143,737
)
 
$
(284,182
)
                 
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
               
Depreciation and amortization
   
4,556
     
5,230
 
Stock based compensation
   
9,383
     
20,918
 
Provision for accounts receivable allowances
   
(723
)
   
(4,683
Provision for inventory reserves
   
37,730
 
   
13,899
 
Changes in operating assets and liabilities:
               
Accounts receivable
   
148,523
     
70,042
 
Inventories
   
(770,714
)
   
466,418
 
Prepaid expenses and other assets
   
(31,257
)
   
13,539
 
Accounts payable and accrued expenses
   
102,395
     
(253,572
)
Net cash provided by (used in) operating activities
   
(643,844
)
   
47,609
 
                 
Investing activities:
               
Additions to property, plant and equipment
   
(1,080
)
   
(30,543
)
Net cash provided by (used in) investing activities
   
(1,080
)
   
(30,543
)
                 
Financing activities:
               
     Net funds received from (paid to) bank credit lines
   
641,955
     
(168,315
)
                   Net cash provided by (used in) financing activities
   
641,955
     
(168,315
)
                 
Effect of exchange rate changes on cash
   
1,260
     
28
 
                 
Net change in cash
   
(1,709
)
   
(151,221
)
                 
Cash and cash equivalents at beginning of period
   
55,393
     
195,704
 
                 
Cash and cash equivalents at end of period
 
$
53,684
   
$
44,483
 
                 
Supplemental disclosures of cash flow information:
               
                 
Cash paid during the period for:
               
Interest
 
$
34,279
   
$
35,403
 
Income taxes
 
$
4,041
   
$
1,527
 

See accompanying notes.
 
 
5

 
 
ZOOM TELEPHONICS, INC.
Notes to Condensed Financial Statements
 
(Unaudited)
 
(1) Summary of Significant Accounting Policies
 
The accompanying financial statements are unaudited. However, the condensed balance sheet as of December 31, 2013 was derived from audited financial statements. In the opinion of management, the accompanying financial statements include all adjustments to present fairly the financial position, results of operations and cash flows of the Company.  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 June 30, 2014 through the date of this filing and determined that there are no such events requiring recognition or disclosure in the financial statements.

The condensed 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, 2013 included in the Company's 2013 Annual Report on Form 10-K.

(a)  Reclassifications
 
Certain reclassifications have been made to the prior year’s financial statements to conform to the 2014 presentation. The reclassifications relate to the presentation of changes in accounts receivable and inventory on the statements of cash flows. The reclassifications do not change the balance sheet or statement of operations.

 (2) Liquidity
 
Zoom’s cash balance on June 30, 2014 was $54 thousand, down slightly from $55 thousand on December 31, 2013.  Zoom’s maximum available line of credit was $1.25 million on June 30, 2014, and bank debt outstanding under this line of credit was $960 thousand.  Zoom’s net inventory increased $0.7 million to $2.4 million from December 31, 2013 to June 30, 2014 due to reduced retailer promotions, thus reducing sales of one of Zoom’s top products, and also due to an intentional increase in cable modem inventory to safeguard against a threatened dock strike.  This increase in inventory and the $144 thousand loss for the first half of 2014 were the primary reasons for a $0.6 million increase in bank debt from December 31, 2013 to $960 thousand at June 30, 2014.
 
On June 30, 2014 the Company had working capital of $2.2 million including $54 thousand in cash and cash equivalents.  On December 31, 2013 we had working capital of $2.3 million including $55 thousand in cash and cash equivalents. Our current ratio at June 30, 2014 was 2.1 compared to 2.8 at December 31, 2013.
 
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 continues until November 30, 2014 and from year to year thereafter, unless sooner terminated by either party as specified in the Financing Agreement. 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.
 
 
6

 
 
The Company is continuing to develop new products and to take other measures to increase sales.  Increasing sales typically results in increased inventory and higher accounts receivable, both of which reduce cash. Zoom believes that its financial resources and line of credit are sufficient to fund operations for the foreseeable future if Zoom management's sales and operating profit expectations are met.
 
 (3) Inventories
 
Inventories consist of :
 
June 30,
2014
   
December 31,
2013
 
Materials
 
$
300,025
   
$
440,723
 
Work in process
   
87,300
     
––
 
Finished goods (including $78,500 and $304,500 held by customers at June 30, 2014 and December 31, 2013, respectively)
   
2,059,740
     
1,273,358
 
Total
 
$
2,447,065
   
$
1,714,081
 
 
(4) 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. The Company's management believes that the ultimate resolution of such matters will not materially and adversely affect the Company's business, financial position, results of operations or cash flows.
 
On October 15, 2012, Telecomm Innovations LLC filed a complaint against Zoom Telephonics and at least 23 other companies including Dell Inc., various dial-up modem producers, and many fax machine producers.  The complaint was related to dial-up modems and alleged that Zoom infringed upon Telecomm Innovation patents.  Zoom believed that it was licensed for these patents already through its modem chipset suppliers.  On January 22, 2014, a Stipulation of Dismissal was filed for the case and the case has been closed pursuant to a resolution of the dispute between Zoom and Telecomm Innovations.  The closing of the case did not materially affect the Company’s business, financial position, results of operations or cash flows.
 
                On November 6, 2013, Innovative Wireless Solutions, LLC (“IWS”) filed a complaint against Zoom Telephonics alleging infringement of U.S. Patents Nos. 5,912,895,  6,327,264, and 6,587,473 all entitled “Information Network Access Apparatus and Methods of Communicating Information packets via Telephone Links.”  The Complaint asserts that Zoom sells products with “wireless access points and/or routers capable of connecting to an Ethernet network and an IEEE 802.11 wireless network to provide wireless Internet access.”  The case is in its early stages and a Scheduling Order was recently issued in the case.  Management is unable to reasonably estimate any potential outcome at this time.
 
(5) Segment and Geographic Information
 
The Company’s operations are classified as one reportable segment. The Company’s net sales by geographic region follow:
 
   
Three Months
         
Three Months
         
Six Months
         
Six Months
       
   
Ended
         
Ended
         
Ended
         
Ended
       
   
June 30,
2014
   
% of
Total
   
June 30,
2013
   
% of
Total
   
June 30,
2014
   
% of
Total
   
June 30,
2013
   
% of
Total
 
North America
  $ 2,521,144       95 %   $ 2,762,556       92 %   $ 5,596,925       97 %   $ 5,335,229       92 %
UK
    53,399       2 %     78,584       3 %     88,810       1 %     222,804       4 %
All Other
    66,159       3 %     157,879       5 %     101,312       2 %     258,585       4 %
Total
  $ 2,640,702       100 %   $ 2,999,019       100 %   $ 5,787,047       100 %   $ 5,816,618       100 %
 
 
7

 
 
(6) Customer Concentrations
 
The Company sells its products primarily through high-volume retailers and distributors, Internet service providers, value-added resellers, PC system integrators, and original equipment manufacturers ("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 have accounted for a substantial portion of the Company’s revenues.  In the second quarter of 2014, three customers accounted for 78% of our total net sales with our largest customer accounting for 56% of our net sales. In the first six months of 2014, three customers accounted for 74% of the Company’s total net sales with our largest customer accounting for 56% of our net sales. At June 30, 2014, three customers accounted for 86% of our gross accounts receivable, with our largest customer representing 63% of our gross accounts receivable. In the second quarter of 2013, three customers accounted for 73% of our net sales with our largest customer accounting for 54% of our net sales. In the first six months of 2013, three customers accounted for 66% of our total net sales with our largest customer accounting for 49% of our net sales. At December 31, 2013, three customers accounted for 84% of our gross accounts receivable, with our largest customer representing 71% of our gross accounts receivable.
 
The Company’s customers generally do not enter into long-term agreements obligating them to purchase products. The Company may not continue to receive significant revenues from any of these or from other large customers. A reduction or delay in orders from any of the Company’s significant customers, or a delay or default in payment by any significant customer, could materially harm the Company’s business and prospects. Because of the Company’s significant customer concentration, its net sales and operating income (loss) could fluctuate significantly due to changes in political or economic conditions, or the loss, reduction of business, or less favorable terms for any of the Company's significant customers.

(7) Valuation of Marketable Securities
 
In October 2010 Zoom Telephonics, Inc. entered into an agreement with Zoom Technologies, Inc. (Nasdaq: ZOOM) in which Zoom Telephonics transferred its rights to the zoom.com domain name and certain trademark rights in exchange for 80,000 shares of Zoom Technologies common stock.  These shares had trading restrictions that ended January 18, 2012.  The Company valued the marketable securities at market value in the financial statements. In the fourth quarter of 2013, Zoom Technologies, Inc. announced a reverse merger resulting in a 10:1 split so that the 80,000 shares became 8,000 shares.  In December 2013 the Company sold all 8,000 shares of Zoom Technologies, Inc. stock. The Company received proceeds of $40 thousand and reported a realized loss of $273 thousand in 2013.

(8)  Bank Credit Lines

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 continues until November 30, 2014 and from year to year thereafter, unless sooner terminated by either party as specified in the Financing Agreement. 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 June 30, 2014 Zoom was in compliance with the covenants of the Financing Agreement with Rosenthal & Rosenthal, Inc.
 
 
8

 

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 the safe harbor statement and the risk factors contained in Item IA of Part II of this Quarterly Report on Form 10-Q, in our Annual Report on Form 10-K for the year ended December 31, 2013, filed with the SEC on March 31, 2014 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.
 
Overview 
 
We derive our net sales primarily from sales of Internet-related communication products, principally broadband and dial-up modems and other communication products, to retailers, distributors, Internet Service Providers and Original Equipment Manufacturers. We sell our products through a direct sales force and through independent sales agents. All but two 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 Company’s products in accordance with our specifications is typically done at the product’s manufacturing facility in China.
 
Since 1983 our headquarters has been near South Station in downtown Boston at 201 and 207 South Street. In December 2006, the Company sold its owned headquarters buildings in Boston, Massachusetts and leased back 25,200 square feet for two years expiring December 2008. In November 2008 the Company signed a lease amendment for its headquarters’ offices in Boston in the existing building to approximately 14,400 square feet for three years with a six month termination option starting July 1, 2010. In May 2010 we signed a second lease amendment extending the term of the lease to April 30, 2016 with a six month termination option starting December 1, 2011. In December 2011 we signed a third lease amendment reducing our leased space to 10,600 square feet effective June 1, 2012, with a corresponding decrease in lease expense.

For many years we performed most of the final assembly, test, packaging, warehousing and distribution at a production and warehouse facility on Summer Street in Boston, Massachusetts, which had also engaged in firmware programming for some products. We moved most of our Summer Street operations to a dedicated 35,575 square foot facility in Tijuana, Mexico in October 2006.  We moved these operations to a 10,800 square foot facility in Tijuana, Mexico in March 2009.
 
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.
 
Generally our gross margin for a given product 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; but the sales, support, returns, and overhead costs associated with retailers also tend to be higher. Zoom’s sales to certain countries are currently handled by a single master distributor for that 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.
 
In most but not all years our sales have declined. In response, we have cut costs by reducing staffing and some overhead costs. Our total headcount was reduced from 28 on June 30, 2013 to 27 on June 30, 2014. As of July 30, 2014, Zoom had 26 employees and one temporary employee. Of the 27 included in our headcount on July 30, 2014, 9 were engaged in research and development and quality control, 5 were involved in manufacturing oversight, purchasing, assembly, packaging and shipping, 8 were engaged in sales, marketing, technical support, and the remaining 5 performed accounting, administrative and executive functions. Zoom has implemented cost cutting measures including reducing our headcount and reducing the number of days that certain employees work. As a result, Zoom currently has 16 full-time employees and 11 employees working less than 5 days per week, typically 4 days per week. Our dedicated manufacturing personnel in Mexico are employees of our Mexican manufacturing service provider and not included in our headcount.  On June 30, 2014, Zoom had one consultant in sales and one consultant in information systems that was not included in our headcount.
 
 
9

 
 
Zoom’s cash balance on June 30, 2014 was $54 thousand, down slightly from $55 thousand on December 31, 2013.  Zoom’s maximum available line of credit was $1.25 million on June 30, 2014, and bank debt outstanding under this line of credit was $960 thousand.  Zoom’s net inventory increased $0.7 million to $2.4 million from December 31, 2013 to June 30, 2014 due to reduced retailer promotions, thus reducing sales of one of Zoom’s top products, and also due to an intentional increase in cable modem inventory to safeguard against a threatened dock strike.  This increase in inventory and the $144 thousand loss for the first half of 2014 were the primary reasons for a $0.6 million increase in bank debt from December 31, 2013 to $960 thousand at June 30, 2014.
 
On June 30, 2014 the Company had working capital of $2.2 million including $54 thousand in cash and cash equivalents.  On December 31, 2013 we had working capital of $2.3 million including $55 thousand in cash and cash equivalents. Our current ratio at June 30, 2014 was 2.1 compared to 2.8 at December 31, 2013.
 
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 continues until November 30, 2014 and from year to year thereafter, unless sooner terminated by either party as specified in the Financing Agreement. Borrowings are secured by all of the Company assets including intellectual property. 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 such that we are required to maintain tangible net worth of not less than $2.0 million and working capital of not less than $1.75 million.
 
On June 30, 2014 Zoom was in compliance with the covenants of the Financing Agreement with Rosenthal & Rosenthal, Inc.
 
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 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 (Net Sales) Recognition. We primarily sell hardware products to our customers. The hardware products include dial-up modems, DSL modems, cable modems, voice over IP products, and wireless and wired networking equipment. We earn a small amount of royalty revenue that is included in our net sales, primarily from internet service providers. We generally do not sell software. We began selling services in 2004. We introduced our Global Village VoIP service in late 2004, but sales of those services to date have not been material.
 
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
 
 
original equipment manufacturers (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 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. We verify the delivery date on all significant FOB destination shipments made during the last 10 business days of each quarter.
 
 
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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.
 
When Zoom 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 Zoom inventory when it is consigned, and moves out of Zoom inventory when the item is sold by the retailer.

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. Product returns as a percentage of total shipments were 12.7% and 13.0% for the second quarter of 2014 and 2013, respectively.
 
Price Protection Refunds. We have a policy of offering price protection to certain of our retailer and distributor customers. 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. Reductions in our net sales due to price protection were negligible in both the second quarter of 2014 and the second quarter of 2013.
 
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 and were $20 thousand in the second quarter of 2014 and $40 thousand in the second quarter of 2013.
 
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. Reductions in our net sales due to the consumer rebates were $57 thousand in the second quarter of 2014 and $28 thousand in the second quarter of 2013.
 
To ensure that the sales, discounts, and marketing incentives are recorded in the proper period, we perform extensive tracking and documenting by customer, by period, and by type of marketing event. This tracking includes reconciliation to the accounts receivable records for deductions taken by our customers for these discounts and incentives.
 
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. Our bad-debt write-offs were negligible in both the second quarter of 2014 and the second quarter of 2013.
 
Inventory Valuation and Cost of Goods Sold. Inventory is valued at the lower of cost, determined by the first-in, first-out method, or market. 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. Additional charges to inventory reserves related to obsolete and slow-moving products were $26 thousand in the second quarter of 2014 and negligible in the second quarter of 2013.
 
 
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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 of the 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.
 
As of December 31, 2013 the Company had federal net operating loss carry forwards of approximately $49,363,000 which are available to offset future taxable income. They are due to expire in varying amounts from 2018 to 2033. As of December 31, 2013, the Company had Massachusetts state net operating loss carry forwards of approximately $8,069,000 which are available to offset future taxable income. They are due to expire in varying amounts from 2014 through 2018.

Valuation of Investments In October 2010 Zoom Telephonics, Inc. entered into an agreement with Zoom Technologies, Inc. (Nasdaq: ZOOM) in which Zoom Telephonics transferred its rights to the zoom.com domain name and certain trademark rights in exchange for 80,000 shares of Zoom Technologies common stock.  These shares had trading restrictions that ended January 18, 2012.  The Company valued the marketable securities at market value in the financial statements.  In the fourth quarter of 2013, Zoom Technologies, Inc. announced a reverse merger resulting in a 10:1 split so that the 80,000 shares became 8,000 shares.  In December 2013 the Company sold all 8,000 shares of Zoom Technologies, Inc. stock. The Company received proceeds of $40 thousand and reported a realized loss of $273 thousand in 2013.
 
Results of Operations
 
Summary. Net sales were $2.6 million for the second quarter ended June 30, 2014 (“Q2 2014”), down 11.9% from $3.0 million for the second quarter of 2013 (“Q2 2013”). Zoom reported a net loss of $107 thousand or $0.01 per share for Q2 2014 compared to net income of $49 thousand or $0.01 per share for Q2 2013. Net sales were $5.79 million for the six months ended June 30, 2014, down slightly from $5.82 million for the six months ended June 30, 2013. We had a net loss of $144 thousand for the six months ended June 30, 2014 compared to a net loss of $284 thousand for the six months ended June 30, 2013.  Loss per diluted share was $0.02 in the six months ended June 30, 2014 compared to $0.04 for the six months ended June 30, 2013.
 
Net Sales. Our total net sales for the second quarter of 2014 decreased $358 thousand or 11.9% from the second quarter of 2013, primarily due to lower sales for our dial-up, cable, and mobile broadband product categories.
 
Our total net sales for the first half of 2014 decreased $30 thousand or 0.5% from the first half of 2013, primarily due to lower sales for our dial-up and mobile broadband product categories, offset by increase in sales of our cable modem products.
 
Geographically, our North American sales continued their dominant share of our overall sales, going from 92% of our net sales in Q2 2013 to 95% in Q2 2014.  Our second largest market, the UK, continued to decline from 3% of our net sales in Q2 2013 to 2% in Q2 2014.  International sales outside the UK also declined from 5% of our net sales in Q2 2013 to 3% of our net sales in Q2 2014.
 
In the second quarter of 2014, three customers accounted for 78% of our total net sales with our largest customer accounting for 56% of our net sales. In the first six months of 2014, three customers accounted for 74% of the Company’s total net sales with our largest customer accounting for 56% of our net sales. Our net sales and operating income have fluctuated; and they could in the future 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.
 
 
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Gross Profit. Gross profit was $0.80 million or 30.3% of net sales in Q2 2014, down from $1.03 million or 34.5% of net sales in Q2 2013.  In Q2 2013 favorable resolution of a supplier pricing dispute added approximately 6.5% to Zoom’s gross margin; and Q2 2013 margins also benefitted from higher revenues than Q2 2014.
 
Gross profit was $1.73 million for the first 6 months of 2014, down slightly from gross profit of $1.74 million for the first 6 months of 2013. Our gross margin for the first 6 months of 2014 was 29.9%, unchanged from our gross margin for the first 6 months of 2013.
 
Selling Expense. Selling expense was $355 thousand or 13.4% of net sales in the second quarter of 2014, down from $400 thousand or 13.3% of net sales in the second quarter of 2013. The decrease of $45 thousand was primarily due to lower promotional expenses and salaries, offset by increase in freight expenses.  Selling expense was $708 thousand or 12.2% of net sales in the first half of 2014, down 14.0% from $823 thousand or 14.1% of net sales in the first half of 2013. The decrease of $115 thousand was primarily due to lower salaries and promotional expenses, offset by increase in freight expenses.
 
General and Administrative Expense. General and administrative expense was $238 thousand or 9.0% of net sales in the second quarter of 2014, down from $354 thousand or 11.8% of net sales in the second quarter of 2013. The decrease of $116 thousand was primarily due to decreases in salaries, legal fees, and outside services. General and administrative expense was $531 thousand or 9.2% for the first half of 2014, down from $694 thousand or 11.9 % for the first half of 2013.  The decrease of $163 thousand was primarily due to decreases in salaries, outside services, and legal costs.

Research and Development Expense. Research and development expense was $290 thousand or 11.0% of net sales in the second quarter of 2014 and $214 thousand or 7.1% of net sales in the second quarter of 2013.  The increase of $77 thousand was due primarily to increased product certification costs and salary cost for new R&D employees. Research and development expense was $599 thousand or 10.3% of net sales in the first half of 2014, up 26.8% from $472 thousand or 8.1% of net sales in the first half of 2013.  The increase of $127 thousand was due primarily to increased product certification costs and salary cost for new R&D employees, offset by decreases in consulting and outside service cost.
 
Other Income (Expense). Other expense was $20 thousand in the second quarter of 2014 and was $16 thousand in the second quarter of 2013, primarily due to interest expense related to our bank credit line. Other expense for the first half of 2014 was $34 thousand and was $32 thousand in the first half of 2013, again the expense in both periods primarily due to interest expense.
 
Net Income (Loss). The net loss was $107 thousand for the second quarter of 2014, compared to net income of $49 thousand for the second quarter of 2013.  Zoom’s decrease in sales and gross profit was partially offset by a decrease in overall expenses.  The net loss was $144 thousand for the first half of 2014, compared to a net loss of $284 thousand for the first half of 2013. The reduction in loss is attributable to reduction in operating expenses year over year.
 
Liquidity and Capital Resources
 
Zoom’s cash balance on June 30, 2014 was $54 thousand, down slightly from $55 thousand on December 31, 2013.  Zoom’s maximum available line of credit was $1.25 million on June 30, 2014, and bank debt outstanding under this line of credit was $960 thousand.  Zoom’s net inventory rose $0.7 million to $2.4 million from December 31, 2013 to June 30, 2014 due to reduced retailer promotions, thus reducing sales of one of Zoom’s top products, and also due to an intentional increase in cable modem inventory to safeguard against a threatened dock strike.  This increase in inventory and the $144 thousand loss for the first half of 2014 were the primary reasons for a $0.6 million increase in bank debt from December 31, 2013 to $960 thousand at June 30, 2014.
 
On June 30, 2014 the Company had working capital of $2.2 million including $54 thousand in cash and cash equivalents.  On December 31, 2013 we had working capital of $2.3 million including $55 thousand in cash and cash equivalents. Our current ratio at June 30, 2014 was 2.1 compared to 2.8 at December 31, 2013.
 
To conserve cash and manage our liquidity, we have implemented cost-cutting initiatives including the reduction of employee headcount and overhead costs. On June 30, 2014 we had a headcount of 27 compared to 28 as of June 30, 2013. Two contractors, one in sales and one in information systems were not included in our headcount.  We plan to continue to assess our cost structure as it relates to our revenues and cash position, and we may make further reductions if the actions are deemed necessary.
 
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 continues until November 30, 2014 and from year to year thereafter, unless sooner terminated by either party as specified in the Financing Agreement. Borrowings are secured by all of the Company assets including intellectual property. 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 such that we are required to maintain tangible net worth of not less than $2.0 million and working capital of not less than $1.75 million.
 
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On June 30, 2013 Zoom was in compliance with the covenants of the Financing Agreement with Rosenthal & Rosenthal, Inc.

The Company is continuing to develop new products and to take other measures to increase sales.  Increasing sales typically results in increased inventory and higher accounts receivable, both of which reduce cash. Zoom believes that its financial resources and line of credit are sufficient to fund operations for the foreseeable future if Zoom management's sales and operating profit expectations are met.
 
Commitments
 
During the six months ended June 30, 2014, 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, 2013.
 
"Safe Harbor" Statement under the Private Securities Litigation Reform Act of 1995.
 
Some of the statements contained in this report are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements involve known and unknown risks, uncertainties and other factors which may cause our or our industry's actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Forward-looking statements include, but are not limited to statements regarding: Zoom's plans, expectations and intentions, including statements relating to Zoom's prospects and plans relating to sales of and markets for its products and Zoom's financial condition or results of operations.
 
In some cases, you can identify forward-looking statements by terms such as "may," "will, " "should," "could," "would," "expects," "plans," "anticipates," "believes," "estimates," "projects," "predicts," "potential" and similar expressions intended to identify forward-looking statements. These statements are only predictions and involve known and unknown risks, uncertainties, and other factors that may cause our actual results, levels of activity, performance, or achievements to be materially different from any future results, levels of activity, performance, or achievements expressed or implied by such forward-looking statements. Given these uncertainties you should not place undue reliance on these forward-looking statements. Also, these forward-looking statements represent our estimates and assumptions only as of the date of this report. We expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statement contained in this report to reflect any change in our expectations or any change in events, conditions or circumstances on which any of our forward-looking statements are based. Factors that could cause or contribute to differences in our future financial results include those discussed in the risk factors set forth in Item 1A of Part II below as well as those discussed elsewhere in this report, in our Annual Report on Form 10-K for the year ended December 31, 2013, filed with the SEC on March 31, 2014 and in our other filings with the SEC.
 
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
Not Required.
 
ITEM 4.
CONTROLS AND PROCEDURES
 
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Securities Exchange Act of 1934 reports is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer who is also our Acting Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, as ours are designed to do, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
 
            As of June 30, 2014 we carried out an evaluation, under the supervision and with the participation of our management including our Chief Executive Officer and Acting Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934. Based upon that evaluation, our Chief Executive Officer and Acting Chief Financial Officer concluded that our disclosure controls and procedures are effective in enabling us to record, process, summarize and report information required to be included in our periodic SEC filings within the required time period.
 
There have been no changes in our internal control over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 
 
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PART II OTHER INFORMATION
 
ITEM 1A.
RISK FACTORS
 
This report contains forward-looking statements that involve risks and uncertainties, such as statements of our objectives, expectations and intentions. The cautionary statements made in this report are applicable to all forward-looking statements wherever they appear in this report. Our actual results could differ materially from those discussed herein. Factors that could cause or contribute to such differences include the risk factors contained in our Annual Report on Form 10-K for the year ended December 31, 2013, filed with the SEC on March 31, 2014, as well as those discussed in this report and in our other filings with the SEC.
 
Other than as set forth below, there have not been any material changes from the risk factors previously disclosed under Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2013.
 
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. We currently have a line of credit of up to $1.25 million from which we can borrow, and this line is subject to covenants that must be met.  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 November 6, 2013, Innovative Wireless Solutions, LLC (“IWS”) filed a complaint against Zoom Telephonics alleging infringement of U.S. Patents Nos. 5,912,895,  6,327,264, and 6,587,473 all entitled “Information Network Access Apparatus and Methods of Communicating Information packets via Telephone Links.”  The Complaint asserts that Zoom sells products with “wireless access points and/or routers capable of connecting to an Ethernet network and an IEEE 802.11 wireless network to provide wireless Internet access.”  The case is in its early stages and a Scheduling Order was recently issued in the case.  Management is unable to reasonably estimate any potential outcome at this time.  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.

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 second quarter of 2014, three customers accounted for 78% of our total net sales with our largest customer accounting for 56% of our net sales. In the first six months of 2014, three customers accounted for 74% of the Company’s total net sales with our largest customer accounting for 56% of our net sales. At June 30, 2014, three customers accounted for 86% of our gross accounts receivable, with our largest customer representing 63% of our gross accounts receivable. In the second quarter of 2013, three customers accounted for 73% of our net sales with our largest customer accounting for 54% of our net sales. In the first six months of 2013, three customers accounted for 66% of our total net sales with our largest customer accounting for 49% of our net sales. At December 31, 2013, three customers accounted for 84% of our gross accounts receivable, with our largest customer representing 71% of our gross accounts receivable. Our customers generally do not enter into long-term agreements obligating them to purchase our products. We may not continue to receive significant revenues from any of these or from other large customers. 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.

ITEM 6.
EXHIBITS
 
 Exhibit No.
 
Exhibit Description
     
 
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
 
Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
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ZOOM TELEPHONICS, INC.
 
SIGNATURES
 
Pursuant to the requirements of the Securities and Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
ZOOM TELEPHONICS, INC.
(Registrant)
     
     
Date: August 14, 2014
By:
/s/ Frank B. Manning
   
Frank B. Manning, President, Chief Executive Officer and Acting Chief Financial Officer
(Principal Executive Officer and Principal Financial Officer)
     
 


 
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EXHIBIT INDEX
 
Exhibit No.
 
Exhibit Description
     
 
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
 
Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 
 
 
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