1. Summary of Significant Accounting Policies

9 Months Ended

Sep. 30, 2019

Accounting Policies [Abstract]

Summary of Significant Accounting Policies

Basis of Presentation

The accompanying condensed consolidated financial statements (“financial statements”) are unaudited. However, the condensed consolidated balance sheet as of December 31, 2018 was derived from audited financial statements. In the opinion of management, the accompanying financial statements include all necessary adjustments to present fairly the condensed 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 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, 2018 included in the Company's 2018 Annual Report on Form 10-K for the year ended December 31, 2018.

Subsequent Events

The Company has evaluated subsequent events from September 30, 2019 through the date of this filing and has determined that there are no such events requiring recognition or disclosure in the financial statements.

Sales Tax

The Company has a state sales tax liability stemming from the Company’s ‘Fulfilled By Amazon’ sales agreement which allows Amazon to warehouse the Company’s inventory, and this inventory is warehoused in a number of states. During 2018 the Company put policies and procedures in place to collect and remit sales tax for Amazon sales in states where the Company believes it has nexus and is required to charge sales tax. Sales tax is now collected by the Company in states where the Company is required to collect and the Company has registered with the state. Sales and Use Tax filings are completed and filed and tax remitted back to the states consistent with the individual state filing requirements. Changes to state sales tax regulations are monitored to stay current with the law. Many states have adopted regulations which require marketplace facilitators, such as Amazon, to collect and remit sales and use tax. This has eased the burden on the Company of filing and remitting sales tax returns for those states that have enacted such laws. As of September 30, 2019, approximately $51 thousand of the original state sales tax liability remains open. An additional liability of approximately $138 thousand relates to sales tax that has been collected and not yet remitted to the respective states, and is included in Accrued other expenses on the accompanying condensed consolidated balance sheets as of September 30, 2019.

Revenue Recognition

The Company adopted Accounting Standards Codification (“ASC”) Topic 606 using the modified retrospective method provision of this standard effective January 1, 2018, which required the Company to apply the new revenue standard to (i) all new revenue contracts entered into after January 1, 2018 and (ii) all existing revenue contracts as of January 1, 2018 through a cumulative adjustment to retained earnings. In accordance with this approach, there was no material impact which required a cumulative effect adjustment.

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 the Company enters 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 the Company 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 the Company’s 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 the Company as there is only one performance obligation, which is to provide the goods.

● Recognition of revenue when, or as, the Company satisfies a performance obligation — the Company satisfies 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:

● The Company has a present right to payment

● The customer has legal title to the goods

● The Company has 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

The Company has concluded that transfer of control substantively transfers to the customer upon shipment or delivery, depending on the delivery terms of the purchase agreement.

Other considerations of Topic 606 include the following:

● Warranties - the Company does not offer customers the option to purchase a warranty separately. Therefore, there is not a separate performance obligation. The Company does account for 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. Warranties 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 estimates due to warranties are historically not material.

● Returned Goods - analyses of actual returned product are compared to that of the product return estimates and historically have resulted in no material difference between the two. The Company has concluded that the current process of estimating the return reserve represents a fair measure with which to adjust revenue. Returned goods 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). Under implementation of Topic 606, the Company monitors pending authorized returns of goods and, if deemed appropriate, records the right of return asset accordingly.

● Price protection - price protection provides that if the Company reduces the price on any products sold to the customer for eventual resale to an end-user, 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 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.

● Volume Rebates and Promotion Programs - volume rebates are variable dependent upon the volume of goods sold-through the Company’s customers to end-users 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 estimates due to rebates and promotions are historically not material.

Accounts receivable, net:

	September 30, 2019			December 31, 2018
Gross accounts receivable	$	4,770,069		$	2,774,619
Allowance for doubtful accounts		(22,562	)		(14,013	)
Total accounts receivable, net	$	4,747,507		$	2,760,606

Accrued other expenses:

	September 30, 2019		December 31, 2018
Audit, legal, payroll	$	179,762	$	234,119
Royalty costs		1,125,000		875,000
Sales and use tax		188,630		219,286
Sales allowances *		969,961		611,719
Other		243,182		289,437
Total accrued other expenses	$	2,706,534	$	2,229,561

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* Upon adoption of ASC 606 on January 1, 2018, certain sales allowances (warranties, returned goods, price protection, volume rebates, and promotion programs) were reclassified as accrued other expenses. Furthermore, a related inventory contract asset stemming from the sales return reserve of $439 thousand and $318 thousand is included within Inventories on the accompanying condensed consolidated balance sheets as of September 30, 2019 and December 31, 2018, respectively

Company revenues are primarily from the selling of products that are shipped and billed. Consistent with the revenue recognition accounting standard, revenues are recognized when control is transferred to customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods and services. Sales are earned at a point in time through ship-and-bill performance obligations.

Regarding disaggregated revenue disclosures, as previously noted, the Company’s business is controlled as a single operating segment that consists of the manufacture and sale of Internet access and other communications-related products. Most of the Company’s transactions are very similar in nature, contract, terms, timing, and transfer of control of goods.

Disaggregated revenue by distribution channel:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
Retailers	$	10,479,310	$	7,998,492	$	25,140,598	$	22,745,719
Distributors		122,111		552,346		1,095,335		1,255,259
Other		272,728		449,222		807,028		858,195
Total	$	10,874,149	$	9,000,060	$	27,042,961	$	24,859,173

Disaggregated revenue by product:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
Cable Modems & gateways	$	10,004,676	$	8,162,319	$	24,291,501	$	22,782,715
Other		869,473		837,741		2,751,460		2,076,458
Total	$	10,874,149	$	9,000,060	$	27,042,961	$	24,859,173

Revenue is recognized when obligations under the terms of a contract with customers are satisfied. Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring the products. Based on the nature of the Company’s products and customer contracts, the Company has not recorded any deferred revenue. Any agreements with customers that could impact revenue such as rebates or promotions are recognized in the period of agreement.

Amended and Restated Certificate of Incorporation

On July 25, 2019, the Company filed a Certificate of Amendment to the Amended and Restated Certificate of Incorporation of the Company which increased the number of authorized common shares from 25,000,000 to 40,000,000.

Recently Adopted Accounting Standards

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting standards Update (“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 January 1, 2019 using the alternative transition approach, which required the Company to apply the new lease standard to (i) all new lease contracts entered into after January 1, 2019 and (ii) all existing lease contracts as of January 1, 2018 through a cumulative adjustment to retained earnings.

Adoption of this standard resulted in the recognition of operating lease right-of-use assets and corresponding lease liabilities of $396 thousand and $421 thousand, respectively, on the consolidated balance sheet as of January 1, 2019. The standard did not materially impact operating results or liquidity. Disclosures related to the amount, timing and uncertainty of cash flows arising from leases are included in Note 5, Leases.

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. 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.