The accompanying notes are an
integral part of these unaudited consolidated financial statements.
Notes
to Consolidated Financial Statements
(Unaudited)
(1) NATURE OF OPERATIONS AND BASIS OF PRESENTATION
Minim,
Inc., formerly known as Zoom Telephonics, Inc., and its wholly owned subsidiaries, Zoom Connectivity, Inc., MTRLC LLC, and Minim Asia
Private Limited, are herein collectively referred to as the “Company”. We deliver intelligent networking products that reliably
and securely connect homes and offices around the world. We are the exclusive global license holder to the Motorola brand for home networking
hardware. The Company designs and manufactures products including cable modems, cable modem/routers, mobile broadband modems, wireless
routers, Multimedia over Coax (“MoCA”) adapters and mesh home networking devices. Our AI-driven cloud software platform and
applications make network management and security simple for home and business users, as well as the service providers that assist them—
leading to higher customer satisfaction and decreased support burden.
On
June 3, 2021, the Company changed its legal corporate name from “Zoom Telephonics, Inc.” to “Minim, Inc.”
On
July 7, 2021, the Company’s common stock, $0.01 par value per share (the “Common Stock”), ceased trading on the OTCQB
and commenced trading on The Nasdaq Capital Market under the ticker symbol “MINM.”
On
July 23, 2021, the Company filed with the Secretary of State of the State of Delaware a Certificate of Amendment to its Amended and Restated Certificate of Incorporation to increase
the number of authorized shares of capital stock to 62,000,000 shares, consisting of 60,000,000 shares of Common Stock and 2,000,000
shares of Preferred Stock.
Basis
of Presentation
The
accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with the requirements
of the U.S. Securities and Exchange Commission (“SEC”) for interim reporting. As permitted under those rules, certain footnotes
or other financial information that are normally required by U.S. generally accepted accounting principles (“GAAP”) can be
condensed or omitted. In the opinion of management, the financial statements include all normal and recurring adjustments that are considered
necessary for the fair presentation of the Company’s financial position and operating results. All intercompany balances and transactions
have been eliminated in consolidation. The information included in this Quarterly Report on Form 10-Q should be read in conjunction with
the audited financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.
The
results of the Company’s operations can vary during each quarter of the year. Therefore, the results and trends in these interim
financial statements may not be the same as those for the full year or any future periods.
Certain
prior year amounts have been reclassified to conform to the current year presentation. None of the reclassifications impacted the consolidated
statements of operations for the three- and nine-month period ended September 30, 2020.
Use
of Estimates
The
preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenue and expense during the reporting period. Actual results may differ from those
estimates. Significant estimates made by the Company include: 1) allowance for doubtful accounts for accounts receivable; 2) contract
liabilities (sales returns, and other variable considerations); 3) valuation allowance for deferred income tax assets; 4) write-downs
of inventory for slow-moving and obsolete items, and market valuations; and 5) stock-based compensation.
Zoom
Connectivity Merger
On
November 12, 2020, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Zoom Connectivity,
Inc., a Delaware corporation (“Zoom Connectivity”), that designs, develops, sells and supports an IoT security platform
that enables and secures a better connected home. Under the Merger Agreement, a wholly-owned subsidiary of
the Company, was merged with and into Zoom Connectivity in exchange for 10,784,534
shares of Common Stock of the Company. As a result
of the merger, effected December 4, 2020, Zoom Connectivity was the surviving entity and became a wholly-owned subsidiary of the Company.
Immediately
prior to closing of the Merger Agreement, the majority stockholder of the Company was also the majority stockholder of Zoom Connectivity.
As a result of the common ownership upon closing of the transaction, the merger was considered a common-control transaction and was outside
the scope of the business combination guidance in ASC 805-50. The entities are deemed to be under common control as of October 9, 2020,
which was the date that the majority stockholder acquired control of the Company and, therefore, held control over both companies. The
consolidated financial statements incorporate Zoom Connectivity’s financial results and financial information for the period beginning
October 9, 2020, and the comparative information of the prior period does not include the financial results of Zoom Connectivity prior
to October 9, 2020. The merger of the Company with Zoom Connectivity is referred to as the “Zoom Connectivity Merger” within
these Notes to the Consolidated Financial Statements (Unaudited).
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The
Company’s significant accounting policies are disclosed in its Annual Report on Form 10-K for the year ended December 31, 2020.
The Company’s significant accounting policies did not change during the three and nine months ended September 30, 2021.
Recently
Adopted Accounting Standards
In
December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) ASU
2019-12 “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes”, which is intended to improve consistent
application and simplify the accounting for income taxes. This ASU removes certain exceptions to the general principals in Topic 740
and clarifies and amends existing guidance. The Company adopted the new standard effective January 1, 2021. The adoption had no impact
on the Company’s financial condition, results of operations or cash flows.
Recently
Issued Accounting Standards
In
June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments Credit Losses —Measurement of Credit Losses on Financial
Instruments.” ASU 2016-13 requires a financial asset (or group of financial assets) measured at amortized cost basis to be
presented at the net amount expected to be collected, which includes the Company’s accounts receivable. This ASU is effective for
the Company for reporting periods beginning after December 15, 2022. The Company is currently assessing the potential impact that the
adoption of this ASU will have on its consolidated financial statements.
With
the exception of the new standards discussed above, there have been no other new accounting pronouncements that have significance, or
potential significance, to the Company’s financial condition, results of operations and cash flows.
(3) REVENUE RECOGNITION
The
Company primarily sells hardware products to its customers. The hardware products include cable modems and gateways, mobile broadband
modems, wireless routers, MoCA adapters and mesh home networking devices. The Company derives its net sales primarily from the sales
of hardware products to computer peripherals retailers, computer product distributors, OEMs, and direct to consumers and other channel
partners via the Internet. The Company accounts for point-of-sale taxes on a net basis.
The
Company also sells and earns revenues from Software as a Service (“SaaS”), including software service that enables and secures
a better-connected home with the AI-driven smart home WiFi management and security platform. Customers do not have the contractual right
or ability to take possession of the hosted software.
The
Company has concluded that transfer of control of its hardware products transfers to the customer upon shipment or delivery, depending
on the delivery terms of the purchase agreement. Revenues from sales of hardware products are recognized at a point in time upon transfer
of control.
The
SaaS agreements are offered over a defined contract period, generally one year, and are sold to Internet service providers, who then
promote the services to their subscribers. These services are available as an on-demand application over the defined term. The agreements
include service offerings, which deliver applications and technologies via cloud-based deployment models that the Company develops functionality
for, provides unspecified updates and enhancements for, and hosts, manages, provides upgrade and support for the customers’
access by entering into solution agreements for a stated period. The monthly fees charged to the customers are based on the number
of subscribers utilizing the services each month, and the revenue recognized generally corresponds to the monthly billing amounts as
the services are delivered.
Multiple
Performance Obligations
During
the nine months ended September 30, 2021, the Company introduced new hardware products that include SaaS services as a bundled product
to its customers. The Company accounts for these sales in accordance with the multiple performance obligation guidance of ASC Topic 606.
For multiple performance obligation contracts, the Company accounts for the promises separately as individual performance obligations
if they are distinct. Performance obligations are determined to be distinct if they are both capable of being distinct and distinct within
the context of the contract. In determining whether performance obligations meet the criteria of being distinct, the Company considers
a number of factors, such as degree of interrelation and interdependence between obligations, and whether or not the good or service
significantly modifies or transforms another good or service in the contract. SaaS included with certain hardware products is considered
distinct from the hardware, and therefore the hardware and SaaS offerings are treated as separate performance obligations.
After
identifying the separate performance obligations, the transaction price is allocated to the separate obligations on a relative standalone
selling price basis (“SSP”). SSP’s are generally determined based on the prices charged to customers when the performance
obligation is sold separately or using an adjusted market assessment. The estimated SSP of the hardware and SaaS offerings are directly
observable from the sales of those products and software based on a range of prices.
Revenue
is recognized for each distinct performance obligation as control is transferred to the customer. Revenue attributable to hardware products
bundled with SaaS offerings are recognized at the time control of the product transfers to the customer. The transaction price allocated
to the SaaS offering is recognized ratably beginning when the customer is expected to activate their account and over a three-year period
that the Company has estimated based on the expected replacement of the hardware.
The
following table includes estimated revenue expected to be recognized in the future related to the SaaS performance obligation that are
unsatisfied or (partially unsatisfied) as of September 30, 2021:
SCHEDULE
OF PERFORMANCE OBLIGATIONS
|
|
|
1 year
|
|
|
2 years
|
|
|
Greater than 2 years
|
|
|
Total
|
|
|
Performance obligations
|
|
$
|
429,157
|
|
|
$
|
420,653
|
|
|
$
|
326,718
|
|
|
$
|
1,176,528
|
|
Other
considerations of ASC 606 include the following:
●
Warranties - the Company does not provide separate warranty for purchase to customers. Therefore, there is not a separate performance
obligation. The Company does account for assurance-type warranties as a cost accrual and the warranties do not include any additional
distinct services other than the assurance that the goods comply with agreed-upon specifications. The warranty reserve was not material
at September 30, 2021 and December 31, 2020.
●
Returned Goods - analyses of actual returned products are compared to the product return estimates and historically have resulted
in immaterial differences. The Company has concluded that the current process of estimating the return reserve represents a fair measure
to adjust revenue. Returned goods are a form of variable consideration 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 sales returns accrual was $1.4 million and $775
thousand at September 30, 2021 and December 31, 2020, respectively.
●
Price protection - price protection provides that if the Company reduces the price on any products sold to the customer, the Company
will guarantee an account credit for the price difference for all quantities of that product that the customer still holds. Price protection
is variable and under Topic 606 is estimated and recognized as a reduction of revenue as performance obligations are satisfied (e.g.,
upon shipment of goods). The price protection accrual was not material at September 30, 2021 and December 31, 2020.
●
Volume Rebates and Promotion Programs - volume rebates are variable dependent upon the volume of goods sold-through the Company’s
customers to end-users 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 rebate and promotion accrual were $138 thousand and $384 thousand at September 30, 2021 and December
31, 2020, respectively.
Contract
Balances
The
Company records accounts receivable when it has an unconditional right to consideration. Contract liabilities are recorded when cash
payments are received or due in advance of performance. Contract liabilities consist of deferred revenue, where the Company has unsatisfied
performance obligations.
The
following table reflects the contract balances as of periods ended:
SCHEDULE
OF CONTRACT BALANCES
|
Balance
Sheet Location
|
|
September
30, 2021
|
|
|
December
31, 2020
|
|
|
Accounts
receivable, net
|
|
$
|
11,578,886
|
|
|
$
|
9,203,334
|
|
|
Deferred
revenue, current
|
|
$
|
429,157
|
|
|
$
|
—
|
|
|
Deferred
revenue, non-current
|
|
$
|
747,371
|
|
|
$
|
—
|
|
The
Company’s business is controlled as a single operating segment that consists of the manufacture and sale of cable modems and gateway,
and the majority of the Company’s customers are retailers and distributors.
Disaggregated
revenue by distribution channel for three and nine months ended September 30, 2021 and 2020:
SCHEDULE
OF DISAGGREGATION OF REVENUE BY DISTRIBUTION CHANNEL
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retailers
|
|
$
|
14,377,917
|
|
|
$
|
9,797,021
|
|
|
$
|
41,165,195
|
|
|
$
|
29,093,066
|
|
|
Distributors
|
|
|
645,568
|
|
|
|
1,628,387
|
|
|
|
3,431,652
|
|
|
|
3,813,533
|
|
|
Other
|
|
|
12,685
|
|
|
|
602,049
|
|
|
|
350,042
|
|
|
|
1,349,218
|
|
|
Total
|
|
$
|
15,036,170
|
|
|
$
|
12,027,457
|
|
|
$
|
44,946,889
|
|
|
$
|
34,255,817
|
|
Disaggregated
revenue by product for three and nine months ended September 30, 2021 and 2020:
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cable Modems & gateways
|
|
$
|
14,561,563
|
|
|
$
|
11,399,705
|
|
|
$
|
41,956,973
|
|
|
$
|
31,762,498
|
|
|
Software as a Service
|
|
|
206,283
|
|
|
|
—
|
|
|
|
483,659
|
|
|
|
—
|
|
|
Other
|
|
|
268,324
|
|
|
|
627,752
|
|
|
|
2,506,257
|
|
|
|
2,493,319
|
|
|
Total
|
|
$
|
15,036,170
|
|
|
$
|
12,027,457
|
|
|
$
|
44,946,889
|
|
|
$
|
34,255,817
|
|
|
Revenues
|
|
$
|
15,036,170
|
|
|
$
|
12,027,457
|
|
|
$
|
44,946,889
|
|
|
$
|
34,255,817
|
|
(4) INVENTORIES
SCHEDULE
OF INVENTORIES
|
Inventories consist of:
|
|
September 30,
2021
|
|
|
December 31,
2020
|
|
|
|
|
As of
|
|
|
Inventories consisted of:
|
|
September 30,
2021
|
|
|
December 31,
2020
|
|
|
Raw materials
|
|
$
|
946,261
|
|
|
$
|
1,238,332
|
|
|
Work in process
|
|
|
7,493
|
|
|
|
84,203
|
|
|
Finished goods
|
|
|
22,288,233
|
|
|
|
15,182,305
|
|
|
Total
|
|
$
|
23,241,987
|
|
|
$
|
16,504,840
|
|
Finished
goods include consigned inventory held by our customers of approximately $3.5 million at September 30, 2021 and approximately $2.3 million
at December 31, 2020 and in-transit inventory of $8.3 million and $6.2 million at September 30, 2021 and December 31, 2020, respectively.
The Company reviews inventory for obsolete and slow-moving products each quarter and makes provisions based on its estimate of the probability
that the material will not be consumed or that it will be sold below cost. Inventory reserves were $214 thousand and $139 thousand as
of September 30, 2021 and December 31, 2020, respectively.
(5) SALE OF TRADEMARK
One
August 12, 2021, the Company entered into an agreement with Zoom Video Communications, Inc. to sell, and sold,
all of the Company’s right, title and interest in the ZOOM® trademark for cash consideration in the amount of $4.0 million,
net of legal costs incurred of $44 thousand. The Company did not have a carrying basis in the trademark that was subject to the agreement
and recorded income of approximately $4.0 million, which is recorded in income from continuing operations pursuant to ASC 360-10, Impairment
or Disposal of Long-Lived Assets.
(6) ACCRUED EXPENSES
SCHEDULE
OF ACCRUED EXPENSES
|
|
|
September 30, 2021
|
|
|
December 31, 2020
|
|
|
|
|
As of
|
|
|
Accrued expenses consisted of the following:
|
|
September 30, 2021
|
|
|
December 31, 2020
|
|
|
Inventory
|
|
$
|
314,901
|
|
|
$
|
1,458,850
|
|
|
Payroll & related compensation
|
|
|
347,730
|
|
|
|
853,402
|
|
|
Professional fees
|
|
|
484,381
|
|
|
|
618,308
|
|
|
Royalty costs
|
|
|
1,586,571
|
|
|
|
1,906,439
|
|
|
Sales allowances
|
|
|
1,688,036
|
|
|
|
1,559,847
|
|
|
Sales and use tax
|
|
|
51,424
|
|
|
|
183,264
|
|
|
Other
|
|
|
637,670
|
|
|
|
884,953
|
|
|
Total accrued other expenses
|
|
$
|
5,110,713
|
|
|
$
|
7,465,063
|
|
(7) COMMITMENTS AND CONTINGENCIES
(a)
Lease Obligations
In
May 2020, the Company signed a two-year lease agreement for 3,218 square feet at 275 Turnpike Executive Park in Canton, MA. The agreement
includes a one-time option to cancel the second year of lease with three months’ advance notice. The location is currently being occupied
by the research and development group of the Company. Rent expense was $13 thousand and $13 thousand for the three months ended September
30, 2021, and 2020, respectively. Rent expense was $40 thousand and $17 thousand for the nine months ended September 30, 2021 and 2020,
respectively.
Upon
the completion of the Zoom Connectivity Merger, the Company assumed Zoom Connectivity’s office facility lease located at the 848
Elm Street in Manchester, NH. The original facility lease agreement was effective from August 1, 2019 to July 31, 2021 and was renewed
for a one year extension until July 31, 2022. The facility lease agreement provides for the lease of 2,656 square feet of office space.
Rent expense was $8 thousand and $23 thousand for the three and nine months ended September 30, 2021, respectively.
In
June 2019, the Company signed a twelve-month lease agreement for offices at 225 Franklin Street, Boston, MA. The lease for this office
expired on June 30, 2020. The Company has elected to apply the short-term lease exception under ASC 842, which does not require the recognition
of an operating lease liability or right-of-use asset on the consolidated balance sheet in relation to the lease at 225 Franklin Street.
Rent expense was $3 thousand and $264 thousand for the three and nine months ended September 30, 2020, respectively.
The
Company performs most of the final assembly, testing, packaging, warehousing and distribution at an approximately 24,000 square foot
production and warehouse facility in Tijuana, Mexico. On April 16, 2021, the Company signed a lease extension to November 30, 2021. Rent
expense was $26 thousand and $27 thousand for the three months ended September 30, 2021 and 2020, respectively. Rent expense was $75
thousand and $80 thousand for the nine months ended September 30, 2021 and 2020, respectively.
The
Company also had a lease for approximately 1,550 square feet in Boston, MA that expired on October 31, 2019 and was terminated effective
June 30, 2020. The Company had another lease for approximately 1,500 square feet in Boston that was terminated effective July 31, 2020.
The Company has elected to apply the short-term lease exception for both of these leases under ASC 842. Rent expense for these leases
was $6 thousand and $77 thousand for the three and nine months ended September 30, 2020, respectively.
At
inception of a lease the Company determines whether that lease meets the classification criteria of a finance or operating lease. Some
of the Company’s lease arrangements contain lease components (e.g., minimum rent payments) and non-lease components (e.g., maintenance,
labor charges, etc.). The Company generally accounts for each component separately based on the estimated standalone price of each component.
As
of September 30, 2021, the Company’s estimated future minimum committed rental payments, excluding executory costs, under the operating
leases described above to their expiration or the earliest possible termination date, whichever is sooner. There is no future minimum
committed rental payment that extend beyond 2022.
Operating
leases are included in operating lease right-of-use assets, operating lease liabilities, and long-term operating lease liabilities on
the consolidated balance sheet. These assets and liabilities are recognized at the commencement date based on the present value of remaining
lease payments over the lease term using the Company’s secured incremental borrowing rates or implicit rates, when readily determinable.
Short-term operating leases, which have an initial term of 12 months or less, are not recorded on the balance sheet.
Lease
expense for operating leases is recognized on a straight-line basis over the lease term. Lease expense is included in general and administrative
expenses on the consolidated statements of operations.
The
following table presents information about the amount and timing of the Company’s operating leases as of September 30, 2021.
SCHEDULE
OF OPERATING LEASE LIABILITIES MATURITY
|
|
|
September 30, 2021
|
|
|
Maturity of Lease Liabilities
|
|
|
Lease Payments
|
|
|
2021 (remaining)
|
|
$
|
38,332
|
|
|
2022
|
|
|
40,294
|
|
|
Less: Imputed interest
|
|
|
(1,901
|
)
|
|
Present value of operating lease liabilities
|
|
$
|
76,725
|
|
|
|
|
|
|
|
|
Balance Sheet Classification
|
|
|
|
|
|
Current maturities of operating lease liabilities
|
|
$
|
76,725
|
|
|
Operating lease liabilities, less current maturities
|
|
|
—
|
|
|
Total operating lease liabilities
|
|
$
|
76,725
|
|
|
|
|
|
|
|
|
Other Information
|
|
|
|
|
|
Weighted-average remaining lease term for operating leases
|
|
|
0.6
|
|
|
Weighted-average discount rate for operating leases
|
|
|
7.1
|
%
|
Cash
Flows
During
the three months ended September 30, 2021 and 2020, the Company recorded an additional lease liability and corresponding right-of-use
asset of $29 thousand and $0 thousand, respectively. During the nine months ended September 30, 2021 and 2020, the operating lease liability
was reduced by $100 thousand and $91 thousand, respectively, and amortization expense of the right-of-use assets was $100 thousand and
$92 thousand, respectively.
Supplemental
cash flow information and non-cash activity related to our operating leases are as follows:
SCHEDULE OF SUPPLEMENTAL CASH FLOW INFORMATION RELATED TO OPERATING LEASES
|
|
|
2021
|
|
|
2020
|
|
|
|
|
Nine Months Ended
September 30,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
Operating cash flow information:
|
|
|
|
|
|
|
|
|
|
Amounts included in measurement of lease liabilities
|
|
$
|
88,523
|
|
|
$
|
96,832
|
|
|
Non-cash activities:
|
|
|
|
|
|
|
|
|
|
Right-of-use assets obtained in exchange for lease obligations
|
|
$
|
88,523
|
|
|
$
|
96,199
|
|
(b)
Commitments
The
Company is party to a license agreement with Motorola Mobility LLC pursuant to which the Company has an exclusive license to use certain
trademarks owned by Motorola Trademark Holdings, LLC for the manufacture, sale and marketing of consumer cable modem products, consumer
routers, WiFi range extenders, MoCa adapters, cellular sensors, home powerline network adapters, and access points worldwide through
a wide range of authorized sales channels. The license agreement, has a term ending December 31, 2025.
In
connection with the License Agreement, the Company has committed to reserve a certain percentage of wholesale prices for use in advertising,
merchandising and promotion of the related products. Additionally, the Company is required to make quarterly royalty payments equal to
a certain percentage of the preceding quarter’s net sales with minimum annual royalty payments as follows:
SCHEDULE OF MINIMUM ANNUAL ROYALTY PAYMENTS
|
Years ending December 31,
|
|
Minimum
Royalty Payments
|
|
|
2021
(remaining)
|
|
$
|
1,587,500
|
|
|
2022
|
|
|
6,600,000
|
|
|
2023
|
|
|
6,850,000
|
|
|
2024
|
|
|
7,100,000
|
|
|
2025
|
|
|
7,100,000
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
29,237,500
|
|
|
Total minimum royalty payments
|
|
$
|
29,237,500
|
|
Royalty
expense under the license agreement was $1.6 million and $1.3 million for the three months ended September 30, 2021 and 2020, respectively,
and $4.8 million and $3.8 million for the nine months ended September 30, 2021 and 2020, respectively. The royalty expense is included
in selling and marketing expenses on the accompanying consolidated statements of operations.
(c)
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.
On
February 16, 2021, the Company received a letter from a law firm representing a stockholder of the Company requesting the opportunity
to review certain books and records of the Company to investigate the possibility of breaches of fiduciary duty by current and former
members of the Board of Directors and the Company’s controlling stockholder, Mr. Jeremy Hitchcock (the Company’s Chairman
of the Board of Directors who, together with his spouse Ms. Elizabeth Hitchcock, who also is a director of the Company, are
the Company’s largest stockholders), in connection with the Hitchcocks’ and their affiliates’ acquisition of majority
control of the Company without compensating the Company’s minority stockholders and the acquisition by merger of Zoom Connectivity
in which they held a substantial equity stake.
On
August 20, 2021, the Company, Mr. Hitchcock, and the stockholder entered into a Settlement Agreement pursuant to which the stockholder
released all claims relating to the subject matter of the demand, and the Company will pay $225
thousand for the legal expenses of the
stockholder. Pursuant to the terms of the Settlement Agreement, the Company and Mr. Hitchcock agreed to comply with certain corporate
governance requirements until the earlier of (i) the fourth anniversary of the Settlement Date or (ii) such time as Mr. Hitchcock,
Ms. Hitchcock and either of their controlled affiliates beneficially own less than 35.0%
of the outstanding Common Stock of the Company.
On
June 29, 2021, the Company received a letter from a law firm representing a stockholder of the Company making a litigation
demand on behalf of the Company and its stockholders to address certain alleged misconduct by the Company’s Board of Directors
in connection with the implementation of an amendment to the Company’s Amended and Restated Certificate of Incorporation without
having received proper stockholder approval thereof as required under Delaware corporation law. The Company took corrective action,
including obtaining stockholder approval of the amendment. On July 23, 2021, the Company filed with the Delaware Secretary of State
an amendment to the Company’s Amended and Restated Certificate of Incorporation to increase the number of authorized shares of
capital stock to 62,000,000 shares,
consisting of 60,000,000 shares
of Common Stock and 2,000,000 shares
of Preferred Stock. On September 30, 2021, the Company and
the stockholder settled the matter pursuant to which, among other things, the claimant acknowledged that the Company had taken
action sufficient to fairly and fully resolve the allegations of the demand.
The
Company reviews the status of its legal proceedings and records a provision for a liability when it is considered probable that both
a liability has been incurred and the amount of the loss can be reasonably estimated. This review is updated periodically as additional
information becomes available. If both of the criteria are not met, the Company reassesses whether there is at least a reasonable possibility
that a loss, or additional losses, may be incurred. If there is a reasonable possibility that a loss may be incurred, the Company discloses
the estimate of the amount of the loss or range of losses, that the amount is not material, or that an estimate of the loss cannot be
made. Except for the matter disclosed above, at September 30, 2021, the Company is not currently a party to any legal proceedings that,
if determined adversely to the Company, in management’s opinion, are currently expected to individually or in the aggregate have
a material adverse effect on the Company’s business, operating results or financial condition taken as a whole. The Company expenses
its legal fees as incurred.
In
the ordinary course of its business, in addition to the matters described above, the Company is subject to lawsuits, arbitrations, claims,
and other legal proceedings in connection with their business. Some of such additional proceedings include claims for substantial or
unspecified compensatory and/or punitive damages. A substantial adverse judgment or other unfavorable resolution of such matters could
have a material adverse effect on the Company’s financial condition, results of operations, and cash flows. Management believes
that the Company has adequate legal defenses with respect to such additional legal proceedings to which it is a defendant or respondent
and that the outcome of such proceedings is not likely to have a material adverse effect on the financial condition, results of operations,
or cash flows of the Company. However, the Company is unable to predict the outcome of these matters.
(8) BANK CREDIT LINES AND GOVERNMENT LOANS
Bank
Credit Line
On
December 18, 2012, the Company entered into a Financing Agreement with Rosenthal & Rosenthal, Inc. (the “Financing Agreement”).
The Financing Agreement, as amended, provided for up to $5.0
million of revolving credit, subject to a
borrowing base formula and other terms and conditions as specified therein.
On
March 12, 2021, the Company terminated its Financing Agreement with Rosenthal & Rosenthal, Inc. and entered into a loan and
security agreement with Silicon Valley Bank (the “SVB Loan Agreement”). On November 1, 2021, the Company entered
into the First Amendment to Loan and Security Agreement (See Note 14). The SVB Loan Agreement, as amended, provides for a revolving
facility up to a principal amount of $25.0 million.
The SVB Loan Agreement matures, and all outstanding amounts become due and payable on November 1, 2023. The SVB Loan
Agreement is secured by substantially all of the Company’s assets but excludes the Company’s intellectual property. Loans
under the credit facility bear interest at a rate per annum equal to (i) at all times when a streamline period is in effect, the
greater of (a) one-half of one percent (0.50%) above the Prime Rate or (b) three and three-quarters of one percent (3.75%) and (ii)
at all times when a streamline period is not effect, the greater of (a) one percent (1.0%) above the Prime Rate and (b) four and
one-quarter of one percent (4.25%). The SVB Loan Agreement includes a minimum interest rate per month of
$20 thousand
and requires a financial covenant of the Company to maintain certain levels of minimum adjusted EBITDA, which is tested on the last
day of each calendar quarter and measured for the trailing 3-month period ending on the last day of each quarter. The
availability of borrowings under the SVB Loan Agreement is subject to certain conditions and requirements, and the borrowing base
amount is up to (a) 85% of eligible accounts receivable balances plus (b) the least of (i) 60% of eligible inventory, (ii) 85% of
net orderly liquidation value, and (iii) $4.8 million. In conjunction with the SVB Loan Agreement, the Company secured a $1.0
million commercial credit card line.
The
Company incurred $93
thousand in origination costs in connection with
entering into the SVB Loan Agreement. These origination costs were recorded as a debt discount and are being expensed over the remaining
term of the facility. Interest expense was $70
thousand and $5
thousand for the three months ended September
30, 2021 and 2020, respectively, and $170
thousand and $14
thousand for the nine months ended September
30, 2021 and 2020, respectively.
As
of September 30, 2021, the Company had $7.0
million outstanding, net of origination costs
of $67
thousand, under the SVB Loan Agreement,
and this credit line had availability of $50
thousand. The interest rate was 3.75%
as of September 30, 2021.
Government
Loans
On
March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was enacted to provide financial
aid to family and businesses impacted by the COVID-19 pandemic. The Company participated in the CARES Act, and on April 15, 2020, the
Company received a $583
thousand 23-month
unsecured loan from Primary Bank, under the Small Business Administration
(“SBA”) Paycheck Protection Program (“PPP”), at a fixed rate of 1%
per annum with interest deferred for six months. Under the terms of
the PPP loan, the Company received forgiveness of $513
thousand principal amount of the PPP loan.
The Company used the proceeds from the PPP loan for qualifying expenses as defined under the PPP.
On
April 11, 2020, Zoom Connectivity received a $545
thousand 23-month
unsecured loan from Primary Bank under the PPP at a fixed interest
rate of 1%
per annum with interest deferred for six months. Under the terms of the PPP loan, the Company received forgiveness of $535
thousand principal amount of, and $3
thousand in accrued interest under, the PPP
loan. The Company used the proceeds from the PPP loan for qualifying expenses as defined under the PPP.
In
February 2021, the Company received additional forgiveness of $20
thousand related to the Economic Injury Disaster
Loan Advance received with the PPP loan.
For
the period ended September 30, 2021, the Company has recorded $61 thousand of the PPP loans in current maturities of long-term debt in
the balance sheet. For the fiscal year ended December 31, 2020, the Company had recorded $65 thousand of the PPP loans in current maturities
of long-term debt and $15 thousand in long-term debt in the consolidated balance sheet.
(9) EQUITY
On
July 28, 2021, the Company entered into an underwriting agreement with B. Riley Securities, Inc., as representative (the “Representative”)
of the several underwriters named therein (collectively, the “Underwriters”), pursuant to which the Company agreed to issue
and sell an aggregate of 10,000,000
shares of the Company’s Common Stock, to
the Underwriters (the “Public Offering”). The shares of Common Stock were sold to the public at an offering price of $2.50
per share and were purchased by the Underwriters
from the Company at a price of $2.32715
per share. On August 2, 2021, the Company received
$22.7
million in aggregate net proceeds after deducting
Underwriters’ discounts, commissions, and other offering expenses after issuing 10,000,000
shares of the Company’s Common Stock through
the Public Offering.
(10) SIGNIFICANT CUSTOMER AND DEPENDENCY ON KEY SUPPLIERS
Relatively
few companies account for a substantial portion of the Company’s revenues. In the three months ended September 30, 2021, two companies
accounted for 10% or greater individually and 85% in the aggregate of the Company’s total net sales. At September 30, 2021, three
companies with an accounts receivable balance of 10% or greater individually accounted for a combined 82% of the Company’s accounts
receivable. In the three months ended September 30, 2020, three companies accounted for 10% or greater individually and 85% in the aggregate
of the Company’s total net sales. At September 30, 2020, three companies with an accounts receivable balance of 10% or greater
individually accounted for a combined 91% of the Company’s accounts receivable. In the nine months ended September 30, 2021, three
companies accounted for 10% or greater individually and 86% in the aggregate of the Company’s total net sales. In the nine months
ended September 30, 2020, three companies accounted for 10% or greater individually and 88% in the aggregate of the Company’s total
net sales.
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 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.
The
Company participates in the PC peripherals industry, which is characterized by aggressive pricing practices, continually changing customer
demand patterns and rapid technological developments. The Company’s operating results could be adversely affected should the Company
be unable to successfully anticipate customer demand accurately; manage its product transitions, inventory levels and manufacturing process
efficiently; distribute its products quickly in response to customer demand; differentiate its products from those of its competitors
or compete successfully in the markets for its new products.
The
Company depends on many third-party suppliers for key components contained in its product offerings. For some of these components, the
Company may only use a single source supplier, in part due to the lack of alternative sources of supply. During the three months ended
September 30, 2021, the Company had one supplier that provided 97% of the Company’s purchased inventory. During the three months
ended September 30, 2020, the Company had one supplier that provided 94% of the Company’s purchased inventory.
(11) INCOME TAXES
During
the nine months ended September 30, 2021 and 2020, we recorded no income tax benefits for the net operating losses incurred or for the
research and development tax credits generated due to the uncertainty of realizing a benefit from those items.
We
have evaluated the positive and negative evidence bearing upon the Company’s ability to realize its deferred tax assets, which
primarily consist of net operating loss carryforwards and research and development tax credits. We considered the history of cumulative
net losses, estimated future taxable income and prudent and feasible tax planning strategies and we have concluded that it is more likely
than not that we will not realize the benefits of our deferred tax assets. As a result, as of September 30, 2021 and December 31, 2020,
we recorded a full valuation allowance against our net deferred tax assets.
As
of September 30, 2021 and December 31, 2020, the Company had federal net operating loss carry-forwards of approximately $62
million and $61.8
million, respectively, which are available to
offset future taxable income. They are due to expire in varying amounts starting in 2021.
Federal net operating losses occurring after December 31, 2017, of approximated $14
million may be carried forward indefinitely.
As of September 30, 2021 and December 31, 2020, the Company had state net operating loss carry-forwards of approximately $20
million and $19.2
million, respectively, which are available to
offset future taxable income. They
are due to expire in varying amounts from 2032 through 2040. A
valuation allowance has been established for the full amount of deferred income tax assets as management has concluded that it is more-likely
than-not that the benefits from such assets will not be realized. We recorded minimum state income taxes and tax related to our operations
in Mexico. For the three and nine months ended September 30, 2021, income tax expense was $8
thousand and $41
thousand, respectively, compared to prior year
periods of $3 thousand
and $16 thousand.
(12) EARNINGS (LOSS) PER SHARE
Basic
earnings (loss) per share is calculated by dividing net income (loss) attributable to common stockholders by the weighted-average number
of common shares. Diluted earnings (loss) per share reflects additional common shares that would have been outstanding if dilutive potential
shares of Common Stock had been issued. Potential shares of Common Stock that may be issued by the Company include shares of Common Stock
that may be issued upon exercise of outstanding stock options. Under the treasury stock method, the unexercised options are assumed to
be exercised at the beginning of the period or at issuance, if later. The assumed proceeds are then used to purchase shares of Common
Stock at the average market price during the period.
Net
income (loss) per share for the three and nine months ended September 30, 2021 and 2020, respectively, are as follows:
SCHEDULE
OF NET INCOME (LOSS) PER SHARE
|
|
|
September 30, 2021
|
|
|
September 30, 2020
|
|
|
September 30, 2021
|
|
|
September 30, 2020
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
|
September 30, 2021
|
|
|
September 30, 2020
|
|
|
September 30, 2021
|
|
|
September 30, 2020
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (loss)
|
|
$
|
1,699,896
|
|
|
$
|
(341,421
|
)
|
|
$
|
(399,535
|
)
|
|
$
|
(2,621,285
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares - basic
|
|
|
42,301,480
|
|
|
|
23,887,718
|
|
|
|
37,705,175
|
|
|
|
22,419,823
|
|
|
Effective of dilutive common share equivalent
|
|
|
1,135,996
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Weighted average common shares - dilutive
|
|
|
43,437,476
|
|
|
|
23,887,718
|
|
|
|
37,705,175
|
|
|
|
22,419,823
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per share
|
|
$
|
0.04
|
|
|
$
|
(0.01
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.12
|
)
|
|
Diluted net income (loss) per share
|
|
$
|
0.04
|
|
|
$
|
(0.01
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.12
|
)
|
Diluted
loss per common share excludes the effects of 306,532 common share equivalents for the three-month period ended September 30, 2020 since
such inclusion would be anti-dilutive. Diluted loss per common share excludes the effects of 1,135,996 and 306,532 common share equivalents
for the nine-month periods ended September 30, 2021 and 2020, respectively, since such inclusion would be anti-dilutive.
(13) RELATED PARTY TRANSACTIONS
Zoom
Connectivity
On
November 12, 2020, the Company entered into the Merger Agreement pursuant to which the Company and Zoom Connectivity merged and combined
their businesses. Zoom Connectivity offers a cloud WiFi management platform that enables and secures a better-connected home by providing
AI-driven WiFi management and IoT security platform for homes, SMBs, and broadband service providers. Mr. Jeremy Hitchcock was Chairman
and, together with his spouse Ms. Elizabeth Hitchcock, a controlling stockholder of Zoom Connectivity. Prior to the Zoom Connectivity
Merger, the Company had licensed Zoom Connectivity software products and, upon completion of the Zoom Connectivity Merger, the Company
integrated the Zoom Connectivity software with the Company’s hardware products and combined the Zoom Connectivity’s
business-to-business sales channels with the Company’s retail channels. Immediately prior to execution of the Merger Agreement,
Mr. Hitchcock, the Company’s Chairman of the Board of Directors, and Ms. Hitchcock, a director of the Company, were,
through investment vehicles jointly beneficially owned by them, the majority stockholders of both the Company and Zoom Connectivity.
Zoom
Connectivity Relationship
On
July 25, 2019, the Company entered into a Master Partnership Agreement with Zoom Connectivity together with a related Statement of Work,
License, Collaborative Agreement, Software/Service Availability Agreement and Software/Service Support Level Agreement (collectively,
the “Partnership Agreement”). Mr. Hitchcock was the Chairman of Zoom Connectivity. Under the Partnership Agreement, the Company
would integrate software and services into certain hardware products distributed by the Company, and Zoom Connectivity would be entitled
to certain fees and a portion of revenue received from the end users of such services and software. The Company and Zoom Connectivity
entered into an additional Statement of Work on December 31, 2019 providing for further integration of Zoom Connectivity services, with
a monthly minimum payment of $5 thousand payable by the Company to Zoom Connectivity starting in January 2020 for a period of 36 months
and a requirement for Zoom Connectivity to purchase at least $90 thousand of the Company’s hardware by December 2022. Minimum monthly
payments under this agreement increased to $15 thousand in July 2020. During the nine months ended September 30, 2020, $90 thousand of
payments were made by the Company to Zoom Connectivity under the Partnership Agreement. The Company recorded $90 thousand of expenses
for the nine months ended September 30, 2020. The Partnership Agreement terminated upon completion of the Zoom Connectivity Merger. During
the nine months ended September 30, 2020, $90 thousand of payments were made by the Company to Zoom Connectivity under the Partnership
Agreement. As of September 30, 2021, no amounts were due from or to the Company under the former Partnership Agreement.
Zoom
Connectivity leases office space located at the 848 Elm Street, Manchester, NH. The landlord is an affiliate entity owned by Mr. Hitchcock.
The
two-year facility lease agreement was effective from August 1, 2019, to July 31, 2021 and has been extended to July 31, 2022.
The facility lease agreement provides for 2,656
square feet at an aggregate annual rental price
of $30
thousand. For the three-month period and nine-month
period ended September 30, 2021, the rent expense was $8
thousand and $23
thousand, respectively.
(14) SUBSEQUENT EVENTS
On
November 1, 2021, the Company and Silicon Valley Bank amended the SVB Loan Agreement to increase the revolving facility from $12.0
million to $25.0
million and extends the maturity term from March 23, 2023 to November
1, 2023. The amendment also increased the minimum interest rate per month from $14,000 to $20,000 and includes a new
financial covenant of the Company to maintain certain levels of minimum adjusted EBITDA, which is tested on the last day of each
calendar quarter and measured for the trailing 3-month period ending on the last day of each quarter. All other substantial terms,
including the commercial credit card line of $1.0
million, of the SVB Loan Agreement remain unchanged.
The
Company has evaluated subsequent events from September 30, 2021 through the date of this filing and has determined that there are no
additional events requiring recognition or disclosure in the financial statements.
