2. Liquidity

6 Months Ended

Jun. 30, 2020

Liquidity

Liquidity

The Company’s cash, cash equivalents and restricted cash balance on June 30, 2020 was $8.4 million of which $800 thousand was restricted. This compares to $1.4 million on December 31, 2019 of which $150 thousand was restricted. As of June 30, 2020, the Company had $0 outstanding on its $4.0 million bank credit line, $583.3 thousand on a note, working capital of $6.9 million, and a current ratio of 1.6.

The Company closed on a $3.4 million private placement and issued an aggregate of 2,237,103 shares on May 26, 2020 at a purchase price of $1.52 per share, and in connection with the closing of the offering two designees of an investor in the private placement joined Zoom’s Board of Directors.

The Company closed on a $5.0 million private placement and issued an aggregate of 4,545,455 shares on May 3, 2019 at a purchase price of $1.10 per share, and in connection with the closing of the offering two designees of an investor in the private placement joined Zoom’s Board of Directors.

The Company’s recent loss of $2.3 million for the six months ended June 30, 2020 has raised management concerns as to the Company’s ability to continue as going concern within one year from the date of filing these financial statements. 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 Rosenthal & Rosenthal, Inc. as described in Note 7. These financial statements do not include any adjustments to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

The addition of US tariffs and the Coronavirus (“COVID-19”) pandemic has created potential disruptions to the Company’s operations. The 25% US tariffs assessed on products imported from China had a significant impact on cash and net loss for 2019. In the second quarter of 2020, these tariffs were $1.04 million. These tariffs will continue to have an impact on the Company’s financial performance until the Company has fully transitioned all of its production supply out of China. In late 2019, the Company made the decision to move its outsourced manufacturing operations from China to Vietnam, primarily to end the exposure to the trade-war imposed tariffs with China. While the COVID-19 pandemic caused delays in the original transition plan, the Company has worked actively with its primary outsourced development partner to establish manufacturing operations in Haiphong, Vietnam. The transition to Vietnam was completed in June 2020. All manufacturing of existing models will take place in Vietnam. During the balance of the year, only the initial manufacturing runs of new models will take place in China. 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 $0.9 million in freight expense incurred during the second quarter. The tariffs and increased freight expense were the primary reason for the Company recording a net loss of $1.53 million for the quarter.

The Company implemented cost cutting measures to conserve cash during the six months ended June 30, 2020, delaying the planned start dates of all new hiring during 2020, and gave notice that it would not renew the same footprint of its headquarters office lease when it expired in June 2020. The Company has retained just one small office within the co-work space office suite on a short-term, month-to-month basis at a cost of $720 per month. Despite the COVID-19 pandemic, the Company’s work force continues to work remotely, and is continuing operations. We negotiated extended and improved payment terms through the end of June 2020 with our primary outsourced manufacturing partner.

Due to requirements of the United States Department of Homeland Security and resulting from the continued 25% tariff on imports from China, the Company was required to commit to three letters of credit totaling $800 thousand. These funds are reported as restricted cash on the accompanying condensed consolidated balance sheets:

Effective Date	Expiration Date	June 30, 2020		December 31, 2019
July 9, 2019	July 8, 2020	$	150,000	$	150,000
January 8, 2020	January 7, 2021		400,000		––
April 6, 2020	April 6, 2021		250,000		––
Total		$	800,000	$	150,000

The Company applied for and received approval for a Small Business Administration (“SBA”) Paycheck Protection Plan Loan with Primary Bank under the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”). The loan from the US government in the amount of $583.3 thousand was approved in mid-April and funded in late April 2020.

On April 13, 2020, the Company entered into a sixth amendment to the Financing Agreement with Rosenthal & Rosenthal, Inc. This amendment increased the size of the Company’s revolving credit line to $4.0 million effective on the date of this amendment. The Company’s credit line has a maturity date of November 2020, and automatically renews from year to year unless cancelled under the terms of Financing Agreement, as amended.

On March 26, 2020, 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 also continues to work with its distribution partners in North America to deliver inventory to its customers. The current environment is difficult, particularly due to the COVID-19 pandemic, and the outcome of these matters cannot be predicted with any certainty at this time and raises challenges to the Company’s ability to continue as a going concern. There can be no assurance that the Company’s ongoing efforts will continue to be successful.