| SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | The accompanying condensed
consolidated financial statements (“financial statements”) are unaudited. However, the presentation of the condensed
consolidated balance sheet as of December 31, 2015 was derived from audited financial statements. In the opinion of management,
the accompanying financial statements include all necessary adjustments to present fairly the consolidated financial position,
results of operations and cash flows of Zoom Telephonics, Inc. (the “Company” or “Zoom”). The adjustments
are of a normal, recurring nature. The results of operations
for the periods presented are not necessarily indicative of the results to be expected for the entire year. The Company has evaluated
subsequent events from September 30, 2016 through the date of this filing and other than the subscription agreements disclosed
in Note 7, has determined that there are no such events requiring recognition or disclosure in the financial statements. The financial statements
of the Company presented herein have been prepared pursuant to the rules of the Securities and Exchange Commission for quarterly
reports on Form 10-Q and do not include all of the information and disclosures required by accounting principles generally
accepted in the United States of America. These financial statements should be read in conjunction with the audited financial statements
and notes thereto for the year ended December 31, 2015 included in the Company's 2015 Annual Report on Form 10-K . Recently Issued Accounting
Pronouncements In August 2014, the Financial
Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-15, "Presentation
of Financial Statements — Going Concern." This standard requires management to evaluate for each annual and interim
reporting period whether it is probable that the reporting entity will not be able to meet its obligations as they become due within
one year after the date that the financial statements are issued. If the entity is in such a position, the standard provides for
certain disclosures depending on whether or not the entity will be able to successfully mitigate its going concern status. This
guidance is effective for annual periods ending after December 15, 2016 and interim periods within annual periods beginning after
December 15, 2016. Early application is permitted. The Company does not expect a material impact to the Company’s financial
condition, results from operations, or cash flows from the adoption of this guidance. In July
2015, the FASB issued ASU No. 2015-11, “Inventory (Topic 330): Simplifying the Measurement of Inventory.” Currently,
all inventory is measured at the lower of cost or market. ASU 2015-11 changes the measurement principle for inventory from the
lower of cost or market to the lower of cost or net realizable value. Net realizable value is the estimated selling price in the
ordinary course of business less reasonably predictable costs of completion, disposal and transportation. The standard is effective
for annual reporting periods beginning after December 15, 2015, which for the Company commenced with the year beginning January
1, 2016. Prospective application is required. The Company does not believe the implementation of this standard has a material impact
on the Company’s consolidated financial statements. In
August 2015, the issued “Revenue
from Contracts with Customers (Topic 606): Deferral of the Effective Date.” The amendments in this update defer the
effective date of ASU 2014-09 for all entities by one year. Public business entities, certain not-for-profit entities, and certain
employee benefit plans should apply the guidance in ASU 2014-09 to annual reporting periods beginning after December 15, 2017,
including interim reporting periods within that reporting period. Earlier application is permitted only as of annual reporting
periods beginning after December 15, 2016, including interim reporting periods within that reporting period. In March
2016, the FASB issued ASU 2016-02, “Leases (Topic 842).” ASU 2016-02 requires that a lessee recognize the assets and
liabilities that arise from operating leases. A lessee should recognize in its balance sheet, a liability to make lease payments
(the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term (the lease
asset). For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying
asset not to recognize lease assets and lease liabilities. In transition, lessees and lessors are required to recognize and measure
leases at the beginning of the earliest period presented using a modified retrospective approach. Public business entities should
apply the amendments in ASU 2016-02 for fiscal years beginning after December 15, 2018, including interim periods within those
fiscal years. Early application is permitted. The adoption of this standard is not expected to have a material impact on the Company’s
consolidated financial condition, results of operations and cash flows. In March 2016, the FASB
issued ASU No. 2016-09, “Compensation – Stock Compensation.” ASU 2016-09 simplifies several aspects of the accounting
for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities,
and classification on the statement of cash flows. Some of the simplified areas apply only to nonpublic entities. ASU 2016-09 is
effective for public business entities for annual periods beginning after December 15, 2016, and interim periods within those annual
periods. Early adoption is permitted in any interim or annual period. If an entity early adopts ASU 2016-09 in an interim period,
any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. Methods of adoption
vary according to each of the amendment provisions. The Company is currently evaluating the potential impact that the adoption
of ASU 2016-09 may have on its consolidated financial statements. In April 2016, the FASB
issued ASU No. 2016-10, "Revenue from Contracts with Customers — Identifying Performance Obligations and Licensing."
ASU 2016-10 does not change the core principle of the guidance, rather it clarifies the identification of performance obligations
and the licensing implementation guidance, while retaining the related principles for those areas. ASU 2016-10 clarifies the guidance
in ASU No. 2014-09, "Revenue from Contracts with Customers (Topic 606)," which is not yet effective. The effective date
and transition requirements for ASU 2016-10 are the same as for ASU 2014-09, which was deferred by one year by ASU No.2015-14,
"Revenue from Contracts with Customers — Deferral of the Effective Date." Public business entities should adopt
the new revenue recognition standard for annual reporting periods beginning after December 15, 2017, including interim periods
within that year. Early adoption is permitted only as of annual reporting periods beginning after December 15, 2016, including
interim periods within that year. The Company is currently evaluating the potential impact that the adoption of ASU 2016-10 may
have on its consolidated financial statements. In May 2016, the FASB issued
ASU No. 2016-12, "Revenue from Contracts with Customers — Narrow- Scope Improvements and Practical Expedients."
ASU 2016-12 does not change the core principle of the guidance, rather it affects only certain narrow aspects of Topic 606, including
assessing collectability, presentation of sales taxes, noncash consideration, and completed contracts and contract modifications
at transition. ASU 2016-12 affects the guidance in ASU No. 2014-09, "Revenue from Contracts with Customers (Topic 606),"
which is not yet effective. The effective date and transition requirements for ASU 2016-12 are the same as for ASU 2014-09, which
was deferred by one year by ASU No. 2015-14, "Revenue from Contracts with Customers —Deferral of the Effective Date."
Public business entities should adopt the new revenue recognition standard for annual reporting periods beginning after December
15, 2017, including interim periods within that year. Early adoption is permitted only as of annual reporting periods beginning
after December 15, 2016, including interim periods within that year. The Company is currently evaluating the potential impact that
the adoption of ASU 2016-12 may have on its consolidated financial statements. In June 2016, the FASB issued
ASU No. 2016-13, "Financial Instruments Credit Losses —Measurement of Credit Losses on Financial Instruments."
ASU 2016-13 requires a financial asset (or group of financial assets) measured at amortized cost basis to be presented at the net
amount expected to be collected. ASU 2016-13 is effective for public business entities that are SEC filers for fiscal years beginning
after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted in any interim or annual
period for fiscal years beginning after December 15, 2018. An entity should apply the amendments in ASU 2016-13 through a cumulative-effect
adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective (modified-retrospective
approach). The Company is currently evaluating the potential impact that the adoption of ASU 2016-13 may have on its consolidated
financial statements, however, it does not expect it to have a material effect. | (a) Basis of Presentation and Use
of Estimates The consolidated financial
statements are prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP). All
significant intercompany balances and transactions have been eliminated in the consolidation The preparation of consolidated
financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial
statements and the reported amounts of revenue and expense during the reporting period. Actual results may differ from those estimates.
Significant estimates made by the Company include: 1) allowance for doubtful accounts for accounts receivable (collectability and
sales returns) and asset valuation allowance for deferred income tax assets; 2) write-downs of inventory for slow-moving and obsolete
items, and market valuations; 3) stock based compensation; 4) management plan forecast; 5) and estimated life of certification
costs. (b) Cash and Cash Equivalents All highly liquid investments
with original maturities of less than 90 days from the date of purchase are classified as cash equivalents. Cash equivalents consist
exclusively of money market funds. The Company has deposits at a limited number of financial institutions with federally insured
limits. Balances of cash and cash equivalents at these institutions can be in excess of the insured limits. However, the Company
believes that the institutions are financially sound and there is only nominal risk of loss. (c) Inventories Inventories are stated at
the lower of cost, determined using the first-in, first-out method, or market. Consigned inventory is held at third-party locations.
The Company retains title to the inventory until purchased by the third-party. Consigned inventory, consisting of finished goods,
was approximately $119,000 and $86,000 at December 31, 2015 and 2014, respectively. (d) Equipment Equipment is stated at cost,
less accumulated depreciation. Depreciation of equipment is provided using the straight-line method over the estimated useful lives
of the assets. (e) Impairment
of Long-Lived Assets Long-lived assets are reviewed
for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Recoverability of assets
to be held and used is measured by a comparison of the carrying amount of an asset or asset group to undiscounted future net cash
flows expected to be generated by the asset or asset group. If such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of the assets exceeds their fair value. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less cost to sell. (f)
Income Taxes Deferred income taxes are
provided on the differences between the financial statement carrying amounts of existing assets and liabilities and their respective
tax bases and on net operating loss and tax credit carry forwards. Deferred income tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered
or settled. The effect on deferred income tax assets and liabilities of a change in tax rates is recognized in income in the period
that includes the enactment date. A valuation allowance is provided for that portion of deferred tax assets not expected to be
realized. (g) Earnings
(Loss) Per Common Share Basic earnings (loss) per
share is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Diluted
earnings (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares and dilutive
potential common shares outstanding during the period. Under the treasury stock method, the unexercised options are assumed to
be exercised at the beginning of the period or at issuance, if later. The assumed proceeds are then used to purchase common shares
at the average market price during the period. A summary of the denominators used to compute basic and diluted earnings (loss)
per share follow:
2015 2014
Weighted average shares outstanding used to compute basic earnings (loss) per share 9,470,848 7,982,704
Net effect of dilutive potential common shares outstanding, based on the treasury stock method
Weighted average shares outstanding used to compute diluted earnings (loss) per share 9,470,848 7,982,701 Potential common shares
for which inclusion would have the effect of increasing diluted earnings per share (i.e., anti-dilutive) are excluded from the
computation. Options to purchase 2,761,500 shares of common stock at December 31, 2015 and 1,855,500 shares of common stock as
of December 31, 2014 were outstanding, but not included in the computation of diluted earnings per share as their effect would
be anti-dilutive. (h) Revenue
Recognition The Company primarily sells
hardware products to its customers. The hardware products include dial-up modems, DSL modems, cable modems, embedded modems, ISDN
modems, telephone dialers, and wireless and wired networking equipment. The Company does not sell software. The Company derives its
net sales primarily from the sales of hardware products to computer peripherals retailers, computer product distributors, OEMs,
and direct to consumers and other channel partners via the Internet. The Company recognizes net
hardware sales at the point when the customers take legal ownership of the delivered products. Legal ownership passes to the customer
based on the contractual delivery terms specified in signed contracts and purchase orders, which are both used extensively. Many
customer contracts or purchase orders specify FOB destination, which means buyer takes delivery of goods once the goods arrive
at the buyers dock. When the Company consigns
inventory to a retailer, sales revenue for an item in that inventory is recognized when that item is sold by the retailer to a
customer. The item remains in the Companys inventory when it is consigned, and moves out of Company inventory when the item
is sold by the retailer. The Company's net
sales of hardware are reduced by certain events that are characteristic of the sales of hardware to retailers of computer peripherals.
These events are product returns, certain sales and marketing incentives, price protection refunds, and consumer and in-store mail-in
rebates. These are accounted for as a reduction of net sales based on management estimates, which are reconciled to actual customer
or end-consumer credits on a monthly or quarterly basis. The estimates for product
returns are based on recent historical trends plus estimates for returns prompted by announced stock rotations, announced customer
store closings, etc. Management analyzes historical returns, current economic trends, and changes in customer demand and acceptance
of the Company's products when evaluating the adequacy of sales return allowances. Product return reserves were approximately $322.0
thousand and $354.0 thousand at December 31, 2015 and 2014, respectively. The Company's estimates for price protection refunds
require a detailed understanding and tracking by customer, by sales program. Estimated price protection refunds are recorded in
the same period as the announcement of a pricing change. Information from customer inventory-on-hand reports or from direct communications
with the customers is used to estimate the refund, which is recorded as a reserve against accounts receivable and a reduction of
current period revenue. Price protection reserves were approximately $131.3 and $0 thousand at December 31, 2015 and 2014, respectively.
The increase in price protection reserve was driven by a decrease in price for certain products in response to a competitors
decrease in price for similar products. The Company's estimates for consumer mail-in rebates are comprised of actual rebate claims
processed by the rebate redemption centers plus an accrual for an estimated lag in processing. The Company's estimates for store
rebates are comprised of actual credit requests from the eligible customers. Rebate reserves were $0 at both December 31, 2015
and 2014. Additionally, sales and marketing incentive reserves were approximately $22.0 thousand and $15.2 thousand at December
31, 2015 and 2014, respectively. The Companys allowances for doubtful accounts were approximately $8.1 thousand and $12.0
thousand at December 31, 2015 and 2014, respectively. These allowances are included in allowances for accounts receivable
on the accompanying consolidated balance sheets. The Company accounts for
point-of-sale taxes on a net basis. (i) Fair Value of Financial
Instruments The fair value hierarchy
prioritizes the inputs to valuation techniques used to measure fair value into three broad levels:
Level 1
Level 2
Level 3 Financial instruments consist
of cash and cash equivalents, accounts receivable, bank debt, accounts payable, and accrued expenses. Due to the short-term nature
and payment terms associated with these instruments, their carrying amounts approximate fair value. (j)
Stock-Based Compensation Compensation cost for awards
is generally recognized over the required service period based on the estimated fair value of the awards on their grant date. Fair
value is determined using the Black-Scholes option-pricing model wherein the discount rate is based on published daily treasury
interest rates for zero-coupon bonds available from the US Treasury. When not available for expected option lives, the
Company has used implied zero-coupon yields available from sources such as Bloomberg. Volatility is based on the historical
volatility over a period that is commensurate with the expected life of the option granted. (k) Advertising
Costs Advertising costs are expensed
as incurred and reported in selling expense in the accompanying statements of operations and comprehensive income (loss), and include
costs of advertising, production, trade shows, and other activities designed to enhance demand for the Company's products. There
are no deferred advertising costs in the accompanying balance sheets. The Company reported advertising costs of approximately $459.5
thousand in 2015 and $255.0 thousand in 2014. (l) Foreign
Currencies The Company generates a
portion of its revenues in markets outside North America principally in transactions denominated in foreign currencies, which exposes
the Company to risks of foreign currency fluctuations. Foreign currency transaction gains and losses are reflected in operations
and were not material for any period presented. The Company does not use derivative financial instruments. (m) Warranty Costs The Company provides for
the estimated costs that may be incurred under its standard warranty obligations, based on actual historical repair costs. The
reserve for the provision for warranty costs was $21,475 and $25,069 at December 31, 2015 and 2014, respectively. (n) Shipping and
Freight Costs The Company records the
expense associated with customer-delivery shipping and freight costs in selling expense. The Company reported shipping and freight
costs of $247.1 thousand in 2015 and $232.1 thousand in 2014. (o) Recently Issued
Accounting Pronouncements In August 2014, the Financial
Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-15, "Presentation
of Financial Statements Going Concern." This standard requires management to evaluate for each annual and interim
reporting period whether it is probable that the reporting entity will not be able to meet its obligations as they become due within
one year after the date that the financial statements are issued. If the entity is in such a position, the standard provides for
certain disclosures depending on whether or not the entity will be able to successfully mitigate its going concern status. This
guidance is effective for annual periods ending after December 15, 2016 and interim periods within annual periods beginning after
December 15, 2016. Early application is permitted. The Company does not expect a material impact to the Companys financial
condition, results from operations, or cash flows from the adoption of this guidance. In July 2015, the FASB
issued ASU No. 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory. Currently, all
inventory is measured at the lower of cost or market. ASU 2015-11 changes the measurement principle for inventory from the lower
of cost or market to the lower of cost and net realizable value. Net realizable value is the estimated selling price in the ordinary
course of business less reasonably predictable costs of completion, disposal and transportation. The standard is effective for
annual reporting periods beginning after December 15, 2015, which for the Company will commence with the year beginning January
1, 2016. Prospective application is required. The Company does not believe the implementation of this standard will have a material
impact on the Companys consolidated financial statements. In August 2015, the FASB
issued ASU No. 2015-14 Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date. The
amendments in this Update defer the effective date of ASU 2014-09 for all entities by one year. Public business entities, certain
not-for-profit entities, and certain employee benefit plans should apply the guidance in ASC 2014-09 to annual reporting periods
beginning after December 15, 2017, including interim reporting periods within that reporting period. Earlier application is permitted
only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting
period. The Company is assessing the impact to the Company's financial condition, results of operations or cash flows
from the adoption of this guidance. In March 2016, the FASB
issued ASU 2016-02, Leases (Topic 842). ASU 2016-02 requires that a lessee recognize the assets and liabilities that
arise from operating leases. A lessee should recognize in the balance sheets, a liability to make lease payments (the lease liability)
and a right-of-use asset representing its right to use the underlying asset for the lease term (the lease asset). For leases with
a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize
lease assets and lease liabilities. In transition, lessees and lessors are required to recognize and measure leases at the beginning
of the earliest period presented using a modified retrospective approach. Public business entities should apply the amendments
in ASU 2016-02 for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application
is permitted. The adoption of this standard is not expected to have a material impact on the Companys consolidated financial
condition, results of operations and cash flows. (p) Other Assets Other assets are stated
at cost, less accumulated amortization. Certain certification costs incurred that are necessary to market and sell products are
capitalized and reported as other assets in the accompanying consolidated balance sheets when the costs are measurable,
significant, and whose related products are projected to generate revenue beyond twelve months. These costs are amortized over
an eighteen-month period, beginning when the related products are available to be sold. Total certification costs capitalized
through December 31, 2015 were $655,000, accumulated amortization was $81,951 at December 31, 2015, and amortization
expense was $81,951 in 2015. There were no certification costs capitalized through December 31, 2014 and therefore
no related accumulated amortization at December 31, 2014 and no amortization expense in 2014. Expected amortization expense is
$238,331 in 2016, $271,384 in 2017, and $63,334 in 2018. |
