"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.
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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 or
discussed in Item 1A of Part II of this Quarterly Report on Form 10-Q, in our
Annual Report on Form 10-K for the year ended
Overview
We derive our net sales primarily from sales of Internet access and other
communications-related products including cable modems and modem/routers,
Digital Subscriber Line ("DSL") modems and modem/routers, routers and other
local area network products, and dial-up modems through retailers, distributors,
and other customers. We sell our products through a direct sales force and
through independent sales agents. Most of our employees are located at our
headquarters in
The Company has been headquartered in
In
We also lease a test/warehouse/ship facility in
We continually seek to improve our product designs and manufacturing approach in order to improve product performance and reduce our costs. We pursue a strategy of outsourcing rather than internally developing our modem chipsets, which are application-specific integrated circuits that form the technology base for our modems. By outsourcing the chipset technology, we are able to concentrate our research and development resources on modem system design, leverage the extensive research and development capabilities of our chipset suppliers, and reduce our development time and associated costs and risks. As a result of this approach, we are able to quickly develop new products while maintaining a relatively low level of research and development expense as a percentage of net sales. We also outsource aspects of our manufacturing to contract manufacturers as a means of reducing our costs of production, and to provide us with greater flexibility in our production capacity.
Our gross margin for a given product generally depends on a number of factors including tariffs and the type of customer to whom we are selling. The gross margin for sales through retailers tends to be higher than for some of our other customers; the sales, support, returns, and overhead costs associated with retailers tend to be higher.
As of
16 Recent Developments
On
On
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.
Leases. We adopted ASU 2016-02, "Leases (Topic 842)", which requires lessees to
recognize most leases on their balance sheets as a right-of-use asset with a
corresponding lease liability. Lessor accounting under the standard is
substantially unchanged. Additional qualitative and quantitative disclosures are
also required. The Company adopted the standard effective
Revenue Recognition.Revenue recognition is evaluated through the following five steps: (i) identification of the contract, or contracts, with a customer; (ii) identification of the performance obligations in the contract; (iii) determination of the transaction price; (iv) allocation of the transaction price to the performance obligations in the contract; and (v) recognition of revenue when or as a performance obligation is satisfied.
? Identification of the contract, or contracts, with a customer - a contract with a customer exists when we enter into an enforceable contract with a customer, typically a purchase order initiated by the customer, that defines each party's rights regarding the goods to be transferred, identifies the payment terms related to these goods, and that the customer has both the ability and intent to pay.
? Identification of the performance obligations in the contract - performance obligations promised in a contract are identified based on the goods that will be transferred to the customer that are distinct, whereby the customer can benefit from the goods on their own or together with other resources that are readily available from third parties or from us.
? Determination of the transaction price - the transaction price is determined based on the consideration to which we will be entitled in exchange for transferring goods to the customer. This would be the agreed upon quantity and price per product type in accordance with the customer purchase order, which is aligned with our internally approved pricing guidelines.
? Allocation of the transaction price to the performance obligations in the contract- if the contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation. This applies to us as there is only one performance obligation, which is to provide the goods.
? Recognition of revenue when, or as, we satisfy a performance obligation - we satisfy performance obligations at a point in time when control of the goods transfers to the customer. Determining the point in time when control transfers requires judgment. Indicators considered in determining whether the customer has obtained control of a good include:
? We have a present right to payment ? The customer has legal title to the goods ? We have transferred physical possession of the goods ? The customer has the significant risks and rewards of ownership of the goods ? The customer has accepted the goods
We have concluded that transfer of control substantively transfers to the customer upon shipment or delivery, depending on the delivery terms of the purchase agreement.
We primarily sell hardware products to our customers. The hardware products include cable modems and gateways, local area networking equipment including routers and MoCA adapters, DSL gateways, and dial-up modems.
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We derive our net sales primarily from the sales of hardware products through four types of customers:
?
Internet and local area network product retailers;
?
Internet and local area network product distributors;
?
Internet service providers; and
?
Original equipment manufacturers
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 us to the customer based on the contractual Free on Board ("FOB") point specified in signed contracts and purchase orders, which are both used extensively. Many of our customer contracts or purchase orders specify FOB destination, which means that title and risk remain with the seller until it has delivered the goods to the location specified in the contract. We verify the delivery date on all significant FOB destination shipments made during the last 10 business days of each quarter.
Our net sales of hardware include reductions resulting from certain events which are characteristic of the sales of hardware to retailers of computer peripherals. These events are product returns, certain sales and marketing incentives, price protection refunds, and consumer mail-in and in-store rebates. Each of these is accounted for as a reduction of net sales based on detailed management estimates, which are reconciled to actual customer or end-consumer credits on a monthly or quarterly basis.
Product Returns. Products are returned by retail stores and distributors for inventory balancing, contractual stock rotation privileges, and warranty repair or replacements. We estimate the sales and cost value of expected future product returns of previously sold products. Our estimates for product returns are based on recent historical trends plus estimates for returns prompted by, among other things, announced stock rotations and announced customer store closings. Management reviews historical returns, current economic trends, and changes in customer demand and acceptance of our products when estimating sales return allowances. Product returns are variable and under Topic 606 are estimated and recognized as a reduction of revenue as performance obligations are satisfied (e.g., upon shipment of goods). The Company monitors pending authorized returns of goods and, if deemed appropriate, record the right of return asset accordingly.
Price Protection Refunds. We have a policy of offering price protection to certain of our retailer and distributor customers for some or all their inventory. Under the price protection policies, when we reduce our prices for a product, the customer receives a credit for the difference between the original purchase price and our reduced price for their unsold inventory of that product. Our estimates for price protection refunds are based on a detailed understanding and tracking by customer and by sales program. Information from customer inventory-on-hand reports or from direct communications with the customers is used to estimate the refund. Price protection refunds are variable and are estimated and recognized as a reduction of revenue as performance obligations are satisfied (e.g., upon shipment of goods). The estimates due to price protection are historically not material.
Sales and Marketing Incentives. Many of our retailer customers require sales and marketing support funding, which is an expense item in selling expense, unless the funding is a function of sales activity and therefore variable. Sales and marketing incentives are estimated and recognized as a reduction of revenue as performance obligations are satisfied (e.g., upon shipment of goods). The estimates due to sales and marketing incentives are historically not material.
Rebates and Promotions. Our rebates are based on a detailed understanding and tracking by customer and sales program. Rebates and promotions are variable and are estimated and recognized as a reduction of revenue as performance obligations are satisfied (e.g., upon shipment of goods). The estimates due to rebates and promotions are historically not material.
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 and are issued to the customer's accounts.
Inventory Valuation and Cost of Goods Sold. Inventory is valued at the lower of cost, determined by the first-in, first-out method, or its net realizable value. We review inventories for obsolete and slow-moving products each quarter and make provisions based on our estimate of the probability that the material will not be consumed or that it will be sold below cost. Additionally, material product certification costs on new products are capitalized and amortized over the expected period of value of the respective products.
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Taxes. As part of the process of preparing our financial statements we estimate our income tax expense and deferred income tax position. This process involves the estimation of our actual current tax exposure together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included in our balance sheet. We then assess the likelihood that our deferred tax assets will be recovered from future taxable income. To the extent we believe that recovery is not likely, we establish a valuation allowance. Changes in the valuation allowance are reflected in the statement of operations.
Significant management judgment is required in determining our provision for income taxes and any valuation allowances. We have recorded a 100% valuation allowance against our deferred income tax assets. It is management's estimate that, after considering all available objective evidence, historical and prospective, with greater weight given to historical evidence, it is more likely than not that these assets will not be realized. If we establish a record of continuing profitability, at some point we will be required to reduce the valuation allowance and recognize an equal income tax benefit which will increase net income in that period(s).
As of
Results of Operations
Comparison of the three months ended
Summary. Net sales were
The addition of US tariffs and the COVID-19 pandemic has created potential
disruptions to the Company's operations. The 25% US tariffs assessed on products
imported from
During this factory transition and while recovering from the COVID-19 related
supply chain shock, the Company temporarily shifted from the use of primarily
ocean freight during prior quarters to the use of primarily air freight during
Q2 2020 to keep up with demand and replenish supply. This resulted in an
additional
The Company implemented cost cutting measures to conserve cash during the six
months ended
Gross Profit. Gross profit was
Selling Expense. Selling expense was
19
General and Administrative Expense. General and administrative expense was
Research and Development Expense.Research and development expense was
Other Income (Expense), Net. Other expense was
Net Loss. Net loss was
Comparison of the six months ended
Summary. Net sales were
Gross Profit. Gross profit was
Selling Expense. Selling expense was
General and Administrative Expense. General and administrative expense was
Research and Development Expense.Research and development expense was
Other Income (Expense). Other expense for the six months ended
Net Loss. Net loss was
Liquidity and Capital Resources
The Company's cash, cash equivalents and restricted cash balance on
20
The Company closed on a
The Company closed on a
The Company's financial statements have been prepared assuming that the Company
will continue as a going concern and contemplates continuity of operations,
realization of assets and satisfaction of liabilities and commitments in the
normal course of business. The Company's ability to continue as a going concern
is contingent upon, among other factors, the Company's ability to generate
sufficient cash flow from operations, decrease operating costs, obtain
additional equity or debt financing and comply with the financial and other
covenants contained in the Company's Financing Agreement, as amended, with
The assessment of US tariffs and the COVID-19 pandemic have given rise to
potential disruptions to the Company's operations. The 25% US tariffs assessed
on products imported from
The Company implemented cost cutting measures to conserve cash during the six
months ended
Due to requirements of the
The Company applied for and received approval for an SBA Paycheck Protection
Plan Loan with
On
The Company entered into an extension of its networking product license agreement with Motorola through 2025 and also entered into a new license agreement with Motorola to sell consumer grade home security and monitoring products and to provide related services. The Company continues to develop new products and expects to introduce several new models to the market during the remainder of 2020 and 2021.
The Company's ability to maintain adequate levels of liquidity depends in part
on its ability to sell inventory on hand, to continue to manufacture and import
more inventory to meet existing demand, and to collect related receivables. The
Company has executed its plan to move the manufacture of its products to outside
of
21 Commitments
During the six months ended
Off-Balance Sheet Arrangements
We did not have any material off-balance sheet arrangements as of
ITEM 3.
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