2. Liquidity

9 Months Ended

Sep. 30, 2020

Liquidity

Liquidity

The Company’s cash, cash equivalents and restricted cash balance on September 30, 2020 was $4.8 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 September 30, 2020, the Company had no debt outstanding on its $4.0 million credit line, $583.3 thousand on a note, working capital of $6.3 million, and a current ratio of 1.4.

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 net loss of $2.6 million for the nine months ended September 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 condensed consolidated 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, maintain or decrease operating expense ratios, obtain additional equity or debt financing and comply with the financial and other covenants contained in the Company’s Financing Agreement, as amended, 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 and the first two quarters of 2020. In the first quarter of 2020, tariffs were $1.5 million. In the second quarter of 2020, tariffs were $1.0 million. In the third quarter of 2020, tariffs were $115.5 thousand. These tariffs had an unfavorable impact on our financial performance until July 2020, the first full month after which the Company fully transitioned all of its core 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 worked actively with its primary outsourced development partner to establish manufacturing operations in Haiphong, Vietnam. As noted above, the transition to Vietnam was completed in June 2020. All manufacturing of existing models now takes place in Vietnam. For the balance of the year, only the initial manufacturing runs of new models will take place in China.

The Company implemented cost cutting measures to conserve cash during the nine months ended September 30, 2020, including delaying the planned start dates of all new hiring during 2020, and not renewing the same footprint of its headquarters office lease when it expired in June 2020. The Company downsized its executive offices by retaining a small office within the City of Boston on a short-term, month-to-month basis at a cost of $682 per month starting November 1, 2020. The Company negotiated extended and improved payment terms through the end of June 2020 with its primary outsourced manufacturing partner and as of September 30, 2020 the Company has fully paid all invoices with these extended payment terms.

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	September 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 5, 2021		250,000		––
Total		$	800,000	$	150,000

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* Although the letter of credit dated July 9, 2019 expired on July 8, 2020, the restricted cash committed under this letter of credit remains in effect until the Company finalizes an administrative application requesting the release of the cash.

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 and funded in April 2020. The Company submitted an application for forgiveness of this loan in October 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.