10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

______________

FORM 10-Q

______________

(Mark One)

☑ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2017

or

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from________ to ________

Commission File Number 0-53722

———————

ZOOM TELEPHONICS, INC.

(Exact Name of Registrant as Specified in its Charter)

———————

Delaware	04-2621506
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)
99 High Street, Boston, Massachusetts	02110
(Address of Principal Executive Offices)	(Zip Code)

Registrant’s Telephone Number, Including Area Code: (617) 423-1072

_________________________________________________________________________

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES ☑ NO ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES ☑ NO ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☐	Accelerated filer  ☐
Non-accelerated filer ☐	Smaller Reporting Company ☑
(do not check if a smaller reporting company)	Emerging growth company  ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ☐ NO ☑

The number of shares outstanding of the registrant’s Common Stock, $.01 par value, as of November 6, 2017, was 15,067,790 shares.

ZOOM TELEPHONICS, INC.

INDEX

	Page
Part I. - Financial Information
Item 1.    Financial Statements	2
Condensed Consolidated Balance Sheets as of September 30, 2017 (Unaudited) and December 31, 2016	2
Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2017 and 2016 (Unaudited)	3
Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2017 and 2016 (Unaudited)	4
Notes to Condensed Consolidated Financial Statements (Unaudited)	5
Item 2.    Management's Discussion and Analysis of Financial Condition and Results of Operations	10
Item 3.    Quantitative And Qualitative Disclosures About Market Risk	15
Item 4.    Controls and Procedures	15
Part II. Other Information
Item 1.   Legal Proceedings	16
Item 1A.  Risk Factors	16
Item 6.    Exhibits	16
Signatures	17
Exhibit Index	18

1

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

ZOOM TELEPHONICS, INC.

Condensed Consolidated Balance Sheets

ASSETS	September 30, 2017 (Unaudited)	December 31, 2016
Current assets
Cash and cash equivalents	$90,853	$179,846
Accounts receivable, net of allowances of $661,892 at September 30, 2017 and $507,296 at December 31, 2016	2,104,555	2,498,259
Inventories, net	5,306,662	4,926,612
Prepaid expenses and other current assets	935,984	652,402
Total current assets	8,438,054	8,257,119
Other assets	398,824	588,907
Equipment, net	187,374	175,743
Total assets	$9,024,252	$9,021,769
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Bank debt	$594,778	$1,306,620
Accounts payable	3,761,662	2,502,323
Accrued expenses	1,214,240	1,051,616
Total liabilities	5,570,680	4,860,559
Commitments and contingencies (Note 4)
Stockholders' equity
Common stock: Authorized: 25,000,000 shares at $0.01 par value
Issued and outstanding: 15,037,790 shares at September 30, 2017 and 14,685,290 shares at December 31, 2016	150,378	146,853
Additional paid-in capital	40,163,143	39,893,919
Accumulated deficit	(36,859,949)	(35,879,562)
Total stockholders' equity	3,453,572	4,161,210
Total liabilities and stockholders' equity	$9,024,252	$9,021,769

 See accompanying notes to condensed consolidated financial statements.

2

ZOOM TELEPHONICS, INC.

Condensed Consolidated Statements of Operations

(Unaudited)

	Three Months Ended September 30,		Nine Months Ended September 30,
	2017	2016	2017	2016
Net sales	$8,582,076	$5,990,432	$20,556,157	$12,688,142
Cost of goods sold	5,515,753	4,064,834	13,561,520	8,727,755
Gross profit	3,066,323	1,925,598	6,994,637	3,960,387
Operating expenses:
Selling	1,812,921	1,473,787	5,341,239	3,520,030
General and administrative	383,475	354,237	1,153,753	1,236,239
Research and development	457,309	352,849	1,367,718	1,154,789
	2,653,705	2,180,873	7,862,710	5,911,058
Operating income (loss)	412,618	(255,275)	(868,073)	(1,950,671)
Other income (expense):
Interest income	22	21	59	238
Interest expense	(30,636)	(27,778)	(87,178)	(32,115)
Other, net	65	41,482	(11,072)	42,232
Total other income (expense)	(30,549)	13,725	(98,191)	10,355
Income (loss) before income taxes	382,069	(241,550)	(966,264)	(1,940,316)
Income taxes	4,984	2,034	14,123	3,312
Net income (loss)	$377,085	$(243,584)	$(980,387)	$(1,943,628)
Net income (loss) per share:
Basic	$0.03	$(0.02)	$(0.07)	$(0.14)
Diluted	$0.02	$(0.02)	$(0.07)	$(0.14)
Basic weighted average common and common equivalent shares	14,953,285	13,877,407	14,851,229	13,722,680
Diluted weighted average common and common equivalent shares	16,419,374	13,877,407	14,851,229	13,722,680

 See accompanying notes to condensed consolidated financial statements.

3

ZOOM TELEPHONICS, INC.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

	Nine Months Ended September 30,
	2017	2016
Cash flows from operating activities:
Net income (loss)	$(980,387)	$(1,943,628)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization	391,181	389,487
Stock based compensation	170,074	164,795
Provision for accounts receivable allowances	540	8,988
Provision for inventory reserves	186,440	10,450
Changes in operating assets and liabilities:
Accounts receivable	393,164	(1,801,446)
Inventories	(566,490)	(1,454,910)
Prepaid expenses and other assets	(327,462)	(193,245)
Accounts payable and accrued expenses	1,421,963	1,084,228
Net cash provided by (used in) operating activities	689,023	(3,735,281)
Cash flows from investing activities:
Cost of other assets	(75,000)	(295,000)
Additions to plant and equipment	(93,849)	(32,303)
Net cash provided by (used in) investing activities	(168,849)	(327,303)
Cash flows from financing activities:
Net funds received from (to) bank credit lines	(711,842)	2,141,799
Proceeds from stock option exercises	102,675	249,389
Net cash provided by (used in) financing activities	(609,167)	2,391,188
Net change in cash	(88,993)	(1,671,396)
Cash and cash equivalents at beginning of period	179,846	1,846,704
Cash and cash equivalents at end of period	$90,853	$175,308
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest	$87,178	$32,115
Income taxes	$14,123	$3,312

 See accompanying notes to condensed consolidated financial statements.

4

ZOOM TELEPHONICS, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(1) Summary of Significant Accounting Policies

The accompanying condensed consolidated financial statements (“financial statements”) are unaudited. However, the condensed consolidated balance sheet as of December 31, 2016 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 Company has evaluated subsequent events from September 30, 2017 through the date of this filing and 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, 2016 included in the Company's 2016 Annual Report on Form 10-K for the year ended December 31, 2016.

Recently Adopted Accounting Standards

In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-09, Improvements to Employee Share-Based Payment Accounting ("ASU 2016-09"). 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. The Company adopted ASU 2016-09 as of January 1, 2017 and elected an accounting policy to record forfeitures as they occur. The impact of this change in accounting policy had an insignificant effect on accumulated deficit as of January 1, 2017. ASU 2016-09 also provides that companies no longer record excess tax benefits or certain tax deficiencies in additional paid-in capital. Instead, all excess tax benefits and tax deficiencies are recorded as income tax expense or benefit in the statement of operations. There was no financial statement impact of adopting this provision of ASU 2016-09 as the Company is currently in a net operating loss position and the excess tax benefits that existed from options previously exercised had a full valuation allowance. The effects of adopting the remaining provisions in ASU 2016-09 affecting the classification of awards as either equity or liabilities when an entity partially settles the award in cash in excess of the employer’s minimum statutory withholding requirements and classification in the statement of cash flows did not have a significant impact on the Company’s financial position, results of operations or cash flows.

Recently Issued Accounting Standards

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”). ASU 2014-09 supersedes the revenue recognition requirements in ASC Topic 605, “Revenue Recognition” and some cost guidance included in ASC Subtopic 605-35, “Revenue Recognition - Construction-Type and Production-Type Contracts.” The core principle of ASU 2014-09 is that revenue is recognized when the transfer of goods or services to customers occurs in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services. ASU 2014-09 requires the disclosure of sufficient information to enable readers of the Company’s financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts. ASU 2014-09 also requires disclosure of information regarding significant judgments and changes in judgments, and assets recognized from costs incurred to obtain or fulfill a contract. ASU 2014-09 provides two methods of retrospective application. The first method would require the Company to apply ASU 2014-09 to each prior reporting period presented. The second method would require the Company to retrospectively apply ASU 2014-09 with the cumulative effect recognized at the date of initial application.

There have been four new ASUs issued amending certain aspects of ASU 2014-09, ASU 2016-08, "Principal versus Agent Considerations (Reporting Revenue Gross Versus Net)," was issued in March 2016 to clarify certain aspects of the principal versus agent guidance in ASU 2014-09. In addition, ASU 2016-10, "Identifying Performance Obligations and Licensing," issued in April 2016, amends other sections of ASU 2014-09 including clarifying guidance related to identifying performance obligations and licensing implementation. ASU 2016-12, "Revenue from Contracts with Customers - Narrow Scope Improvements and Practical Expedients" provides amendments and practical expedients to the guidance in ASU 2014-09 in the areas of assessing collectability, presentation of sales taxes received from customers, noncash consideration, contract modification and clarification of using the full retrospective approach to adopt ASU 2014-09. Finally, ASU 2016-20, "Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers," was issued in December 2016, and provides elections regarding the disclosures required for remaining performance obligations in certain cases and also makes other technical corrections and improvements to the standard. With its evaluation of the impact of ASU 2014-09, the Companu will also consider the impact on its financial statements related to the updated guidance provided by these four new ASUs. The Company will adopt the new guidance in fiscal 2018, and anticipates using the modified retrospective method. The Company is in the final process of evaluating the new standard against its existing accounting policies, including the timing of revenue recognition and its contracts with customers to determine the effect the guidance will have on its financial statements and what changes to systems and controls may be warranted.

5

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 Company is currently evaluating the potential impact that the adoption of ASU 2016-02 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.

In May 2017, the FASB issued ASU No. 2017-09, “Compensation-Stock Compensation (Topic 718), Scope of Modification Accounting.” ASU 2017-09 provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. An entity should account for the effects of a modification unless all of the following criteria are met: (1) The fair value of the modified award is the same as the fair value of the original award immediately before the original award is modified. If the modification does not affect any of the inputs to the valuation technique that the entity uses to value the award, the entity is not required to estimate the value immediately before and after the modification. (2) The vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified. (3) The classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the original award is modified. Disclosure requirements remain unchanged. ASU 2017-09 is effective for all entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted as described in ASU 2017-09. The Company is currently evaluating the potential impact that the adoption of ASU 2017-09 will have on its consolidated financial statements.

(2) Liquidity

The Company’s cash and cash equivalents balance on September 30, 2017 was approximately $91 thousand, down from $180 thousand on December 31, 2016. Major uses of cash were a $980 thousand loss for the nine months ended September 30, 2017, a decrease of approximately $712 thousand in bank debt, an increase of approximately $380 thousand in inventory, and an increase of approximately $284 thousand in prepaid expenses. These were offset by an increase of approximately $1.4 million in accounts payable and accrued expenses, a decrease of approximately $394 thousand in accounts receivable, and a decrease of approximately $190 thousand in other assets.

6

On September 30, 2017 the Company had approximately $595 thousand in bank debt for a $3.0 million asset-based credit line and had working capital of approximately $2.9 million, including approximately $91 thousand in cash and cash equivalents. On December 31, 2016 the Company had working capital of approximately $3.4 million including approximately $180 thousand in cash and cash equivalents. The Company’s current ratio at September 30, 2017 was 1.5 compared to 1.7 at December 31, 2016.

Although the Company has experienced losses in the past, the Company has experienced dramatic growth over the last year and one-half. Sales in 2016 were up 65% over sales in 2015 and sales in the first nine months of 2017 were up 62% over sales in the first nine months of 2016. The Company believes that year-over-year growth is likely to continue for the foreseeable future due to a number of factors including the strength of the Motorola brand, new product introductions, increased shelf space, growing online retailer sales, and international expansion. Because of projected sales increases, the associated improved net income, and its Financing Agreement (as defined below) with Rosenthal & Rosenthal, Inc., the Company expects to maintain acceptable levels of liquidity to meet its obligations as they become due for at least twelve months from the date of our quarterly filing of this Form 10-Q with the Securities Exchange Commission.

 (3) Inventories

Inventories consist of :	September 30, 2017	December 31, 2016
Materials	$1,287,621	$888,830
Work in process	209,694	27,708
Finished goods	3,809,347	4,010,074
Total	$5,306,662	$4,926,612

Finished goods includes consigned inventory held by our customers of $835,800 at September 30, 2017 and $442,300 at December 31, 2016. 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. The provision for inventory reserves was $60,096 for the three months ended September 30, 2017 and $7,838 for the three months ended September 30, 2016. The provision for inventory reserves was $186,440 for the nine months ended September 30, 2017 and $10,450 for the nine months ended September 30, 2016.

(4) Commitments and Contingencies

(a)  Contingencies

From time to time 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 that it believes are without merit. The Company's management believes that the ultimate resolution of such matters will not materially and adversely affect the Company's business, financial position, or results of operations.

On May 17, 2016, Magnacross LLC ("Magnacross") filed a complaint in the U.S. District Court for the Eastern District of Texas (U.S.D.C., E.D.Tex.) against the Company alleging infringement of U.S. Patent No. 6,917,304 (“the ’304 patent”) entitled “Wireless Multiplex Data Transmission System.” Magnacross alleged that the Company’s wireless routers, including its Model 5363, 5360, and 5354 (N300, N600, and AC1900) Routers, infringe the '304 patent. In its complaint, Magnacross sought injunctive relief and unspecified compensatory damages. The case was resolved on February 2, 2017 with the entry by the judge of an Order of Dismissal with Prejudice.

(b)  Commitments

In May 2015 Zoom entered into a License Agreement with Motorola Mobility LLC (the “License Agreement”).  The License Agreement provides Zoom with an exclusive license to use certain trademarks owned by Motorola Trademark Holdings, LLC. for the manufacture, sale and marketing of consumer cable modem products in the United States and Canada through certain authorized sales channels.

7

In August 2016 Zoom entered into an amendment to the License Agreement with Motorola Mobility LLC (the “2016 Amendment”).  The 2016 Amendment expands Zoom’s exclusive license to use the Motorola trademark to a wide range of authorized channels worldwide, and expands the license from cable modems and gateways to also include consumer routers, WiFi range extenders, home powerline network adapters, and access points.

In August 2017 Zoom entered into an amendment to the License Agreement with Motorola Mobility LLC (the “2017 Amendment”).  The 2017 Amendment expands Zoom’s exclusive license to use the Motorola trademark to a wide range of authorized channels worldwide, and expands the license from cable modems, gateways, consumer routers, WiFi range extenders, home powerline network adapters, and access points to also include MoCa adapters, and cellular sensors. The License Agreement, as amended, has a five-year term beginning January 1, 2016 through December 31, 2020 and increased the minimum royalty payments as outlined below.

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:

Year ending December 31,
2017	$3,000,000
2018	$3,500,000
2019	$4,500,000
2020	$5,100,000

Royalty expense under the License Agreement was $583,333 for the third quarter of 2016 and $750,000 for the third quarter of 2017, and royalty expense is included in selling expense on the accompanying condensed consolidated statements of operations. The balance of the committed royalty expense for 2017 amounts to $750,000 for the remaining quarter of 2017.

In order to facilitate the Company’s current and planned increase in production demand, driven in part by the launch of Motorola branded products, the Company has committed with North American Production Sharing, Inc. (“NAPS”) to extend its existing lease used in connection with the Production Sharing Agreement (“PSA”) entered into between the Company and NAPS. The extension term is December 1, 2015 through November 30, 2018 and allows the Company to contract additional Mexican personnel to work in the Tijuana facility.

The Company moved its headquarters on June 29, 2016 from its long time location at 207 South Street, Boston, MA. to a nearby location at 99 High Street, Boston, MA. The Company signed a lease for 11,480 square feet that terminates on June 29, 2019. Payments under the lease are zero for the first 2 months, an aggregate of $413,280 for the next 12 months, an aggregate of $424,760 for the next 12 months, and an aggregate of $363,533 for the remaining term of the lease ending June 29, 2019. Rent expense was $102,338 for the third quarter of 2017.

(5) Customer Concentrations

The Company sells its products primarily through high-volume retailers and distributors, Internet service providers, value-added resellers, Personal Computer (“PC”) system integrators, and original equipment manufacturers ("OEMs"). The Company supports its major accounts in their efforts to offer a well-chosen selection of attractive products and to maintain appropriate inventory levels.

Relatively few customers account for a substantial portion of the Company’s revenues.  In the third quarter of 2017, three customers accounted for 10% or greater separately and 92% combined of the Company’s total net sales. In the first nine months of 2017, three customers accounted for 10% or greater separately and 90% combined of the Company’s total net sales. At September 30, 2017, three customers with an accounts receivable balance of 10% or greater accounted for a combined 83% of the Company’s accounts receivable. In the third quarter of 2016, three customers accounted for 10% or greater separately and 86% combined of the Company’s total net sales. In the first nine months of 2016, three customers accounted for 10% or greater separately and 81% combined of the Company’s total net sales. At September 30, 2016 three customers with an accounts receivable balance of 10% or greater accounted for a combined 88% of the Company’s accounts receivable.

8

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.

(6) Bank Credit Lines

On December 18, 2012, the Company entered into a Financing Agreement with Rosenthal & Rosenthal, Inc. (the “Financing Agreement”). The Financing Agreement originally provided for up to $1.75 million of revolving credit, subject to a borrowing base formula and other terms and conditions. The Financing Agreement continued until November 30, 2014 with automatic renewals from year to year thereafter, unless sooner terminated by either party. The lender has the right to terminate the Financing Agreement at any time on 60 days’ prior written notice.Borrowings are secured by all of the Company assets including intellectual property. The Financing Agreement contains several covenants, including a requirement that the Company maintain tangible net worth of not less than $2.5 million and working capital of not less than $2.5 million.

On March 25, 2014, the Company entered into an amendment to the Financing Agreement (the “Amendment”) with an effective date of January 1, 2013. The Amendment clarified the definition of current assets in the Financing Agreement, reduced the size of the revolving credit line to $1.25 million, and revised the financial covenants so that Zoom is required to maintain tangible net worth of not less than $2.0 million and working capital of not less than $1.75 million.

On October 29, 2015, the Company entered into a second amendment to the Financing Agreement (the “Second Amendment”). Retroactive to October 1, 2015, the Second Amendment eliminated $2,500 in monthly charges for the Financing Agreement. Effective December 1, 2015, the Second Amendment reduces the effective rate of interest to 2.25% plus an amount equal to the higher of prime rate or 3.25%.

On July 19, 2016, the Company entered into a third amendment to the Financing Agreement. The Amendment increased the size of the revolving credit line to $2.5 million effective as of date of the amendment.

On September 1, 2016, the Company entered into a fourth amendment to the Financing Agreement. The Amendment increased the size of the revolving credit line to $3.0 million effective with the date of this amendment.

The Company is required to calculate its covenant compliance on a quarterly basis. As of September 30, 2017, the Company was in compliance with both its working capital and tangible net worth covenants. At September 30, 2017, the Company’s tangible net worth was approximately $3.1 million, while the Company’s working capital was approximately $2.9 million.

(7) 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, except for periods with a loss from operations.  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.

Diluted earnings (loss) per common share for the three-month period ended September 30, 2017 includes the effects of 1,466,089 common share equivalents. Diluted earnings (loss) per common share for the three-month period ended September 30, 2016 excludes the effects of 2,015,825 common share equivalents, since such inclusion would be anti-dilutive. Diluted earning (loss) per common share for the nine-month periods ended September 30, 2017 and 2016 excludes the effects of 1,466,089 and 2,015,825 common share equivalents, respectively, since such inclusion would be anti-dilutive. The common share equivalents consist of common shares issuable upon exercise of outstanding stock options.

9

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

"Safe Harbor" Statement under the Private Securities Litigation Reform Act of 1995.

Some of the statements contained in this report are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements involve known and unknown risks, uncertainties and other factors which may cause our or our industry's actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Forward-looking statements include, but are not limited to statements regarding: Zoom's plans, expectations and intentions, including statements relating to Zoom's prospects and plans relating to sales of and markets for its products; and Zoom's financial condition or results of operations.

In some cases, you can identify forward-looking statements by terms such as "may," "will, " "should," "could," "would," "expects," "plans," "anticipates," "believes," "estimates," "projects," "predicts," "potential" and similar expressions intended to identify forward-looking statements. These statements are only predictions and involve known and unknown risks, uncertainties, and other factors that may cause our actual results, levels of activity, performance, or achievements to be materially different from any future results, levels of activity, performance, or achievements expressed or implied by such forward-looking statements. Given these uncertainties you should not place undue reliance on these forward-looking statements. Also, these forward-looking statements represent our estimates and assumptions only as of the date of this report. We expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statement contained in this report to reflect any change in our expectations or any change in events, conditions or circumstances on which any of our forward-looking statements are based. Factors that could cause or contribute to differences in our future financial results include those discussed in the risk factors set forth in Item 1A of Part II of this Quarterly Report on Form 10-Q, in our Annual Report on Form 10-K for the year ended December 31, 2016, filed with the Securities and Exchange Commission on March 22, 2017 and in our other filings with the Securities and Exchange Commission. Readers should also be cautioned that results of any reported period are often not indicative of results for any future period.

Overview 

We derive our net sales primarily from sales of Internet access and other communications-related products, including cable modems, cable modem / routers, Digital Subscriber Line (“DSL”) modems and dial-up modems to retailers, distributors, Internet Service Providers and original equipment manufacturers (“OEMs”). We sell our products through a direct sales force and through independent sales agents. All of our employees are located at our headquarters in Boston, Massachusetts.  We are experienced in electronics hardware, firmware, and software design and test, regulatory certifications, product documentation, and packaging; and we use that experience in developing each product in-house or in partnership with suppliers who are typically based in Asia. Electronic assembly and testing of our products in accordance with our specifications is typically done in Asia.

Last year Zoom headquarters moved from our long time location at 207 South Street to 99 High Street in Boston. The lease for this new location terminates June 29, 2019. We also lease a test/warehouse/ship facility in Tijuana, Mexico. In November 2014 we signed a one-year lease with five one-year renewal options thereafter for an 11,390 square foot facility in Tijuana Mexico. In September 2015, Zoom extended the term of the lease from December 1, 2015 through November 30, 2018. In September 2015, Zoom also signed a new lease for additional space in the adjacent building, which doubled the existing capacity. The term of the lease is from March 1, 2016 through November 30, 2018.

We continually seek to improve our product designs and manufacturing approach in order to improve product performance and reduce our costs. We pursue a strategy of outsourcing rather than internally developing our modem chipsets, which are application-specific integrated circuits that form the technology base for our modems. By outsourcing the chipset technology, we are able to concentrate our research and development resources on modem system design, leverage the extensive research and development capabilities of our chipset suppliers, and reduce our development time and associated costs and risks. As a result of this approach, we are able to quickly develop new products while maintaining a relatively low level of research and development expense as a percentage of net sales. We also outsource aspects of our manufacturing to contract manufacturers as a means of reducing our costs of production, and to provide us with greater flexibility in our production capacity.

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Our gross margin for a given product generally depends on a number of factors including the type of customer to whom we are selling. The gross margin for retailers tends to be higher than for some of our other customers; but the sales, support, returns, and overhead costs associated with retailers tend to be higher. Our sales to certain countries are currently handled by a single master distributor for each country, who handles the support and marketing costs within the country. Gross margin for sales to these master distributors tends to be low, since lower pricing to these distributors helps them to cover the support and marketing costs for their country.

As of September 30, 2017 we had 32 employees, 27 working full-time and 5 working less than five days per week. Twelve employees were engaged in research and development and quality control. Five employees were involved in operations, which manages production, inventory, purchasing, warehousing, freight, invoicing, shipping, collections, and returns. Nine employees were engaged in sales, marketing, and customer support. The remaining six employees performed executive, accounting, administrative, and management information systems functions. Our dedicated personnel in Tijuana, Mexico are employees of our Mexican service provider and are not included in our headcount.

Critical Accounting Policies and Estimates

Following is a discussion of what we view as our more significant accounting policies and estimates. As described below, management judgments and estimates must be made and used in connection with the preparation of our financial statements. We have identified areas where material differences could result in the amount and timing of our net sales, costs, and expenses for any period if we had made different judgments or used different estimates.

Revenue Recognition. We primarily sell hardware products to our customers. The hardware products include dial-up modems, DSL modems, cable modems, and local area networking equipment.

We derive our net sales primarily from the sales of hardware products to four types of customers:

● Computer peripherals retailers;

● Computer product distributors;

● Internet service providers; and

● OEMs.

We recognize hardware net sales for our customers at the point when the customers take legal ownership of the delivered products. Legal ownership passes from Zoom to the customer based on the contractual Free on Board (“FOB”) point specified in signed contracts and purchase orders, which are both used extensively. Many of our customer contracts or purchase orders specify FOB destination, which means that title and risk remain with the seller until it has delivered the goods to the location specified in the contract. We verify the delivery date on all significant FOB destination shipments made during the last 10 business days of each quarter.

Our net sales of hardware include reductions resulting from certain events which 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 mail-in and in-store rebates. Each of these is accounted for as a reduction of net sales based on detailed management estimates, which are reconciled to actual customer or end-consumer credits on a monthly or quarterly basis.

Product Returns. Products are returned by retail stores and distributors for inventory balancing, contractual stock rotation privileges, and warranty repair or replacements. We estimate the sales and cost value of expected future product returns of previously sold products. Our estimates for product returns are based on recent historical trends plus estimates for returns prompted by, among other things, announced stock rotations and announced customer store closings. Management reviews historical returns, current economic trends, and changes in customer demand and acceptance of our products when estimating sales return allowances. The estimate for future returns is recorded as a reserve against accounts receivable, a reduction in our net sales, and the corresponding change to inventory reserves and cost of sales.

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Price Protection Refunds. We have a policy of offering price protection to certain of our retailer and distributor customers for some or all their inventory. Under the price protection policies, when we reduce our prices for a product, the customer receives a credit for the difference between the original purchase price and our reduced price for their unsold inventory of that product. Our estimates for price protection refunds are based on a detailed understanding and tracking by customer and 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 reduction of net sales and a reserve against accounts receivable.

Sales and Marketing Incentives. Many of our retailer customers require sales and marketing support funding, usually set as a percentage of our sales in their stores. The incentives are reported as reductions in our net sales.

Consumer Mail-In and In-Store Rebates. Our estimates for consumer mail-in and in-store rebates are based on a detailed understanding and tracking by customer and sales program, supported by actual rebate claims processed by the rebate redemption centers plus an accrual for an estimated lag in processing at the redemption centers. The estimate for mail-in and in-store rebates is recorded as a reserve against accounts receivable and a reduction of net sales in the same period that the rebate obligation was triggered.

Accounts Receivable Valuation. We establish accounts receivable valuation allowances equal to the above-discussed net sales adjustments for estimates of product returns, price protection refunds, consumer rebates, and general bad debt reserves. These allowances are reduced as actual credits are issued to the customer's accounts.

Inventory Valuation and Cost of Goods Sold. Inventory is valued at the lower of cost, determined by the first-in, first-out method, or its net realizable value. We review inventories for obsolete slow moving products each quarter and make provisions based on our estimate of the probability that the material will not be consumed or that it will be sold below cost. Additionally, material product certification costs on new products are capitalized and amortized over the expected period of value of the respective products.

Valuation and Impairment of Deferred Tax Assets. As part of the process of preparing our financial statements we estimate our income tax expense and deferred income tax position. This process involves the estimation of our actual current tax exposure together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included in our balance sheet. We then assess the likelihood that our deferred tax assets will be recovered from future taxable income. To the extent we believe that recovery is not likely, we establish a valuation allowance. Changes in the valuation allowance are reflected in the statement of operations.

Significant management judgment is required in determining our provision for income taxes and any valuation allowances. We have recorded a 100% valuation allowance against our deferred income tax assets. It is management's estimate that, after considering all available objective evidence, historical and prospective, with greater weight given to historical evidence, it is more likely than not that these assets will not be realized. If we establish a record of continuing profitability, at some point we will be required to reduce the valuation allowance and recognize an equal income tax benefit which will increase net income in that period(s).

As of December 31, 2016 we had federal net operating loss carry forwards of approximately $54.0 million which are available to offset future taxable income. They are due to expire in varying amounts from 2018 to 2036. As of December 31, 2016, we had Massachusetts state net operating loss carry forwards of approximately $7.3 million which are available to offset future taxable income. They are due to expire in varying amounts from 2031 through 2036. 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.

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Results of Operations

Comparison of the three months ended September 30, 2017 to the three months ended September 30, 2016

Summary. Net sales were $8.58 million for the third quarter ended September 30, 2017 (“Q3 2017”), up 43.3% from $5.99 million for the third quarter ended September 30, 2016 (“Q3 2016”). We reported net income of $377 thousand for Q3 2017, compared to a net loss of $244 thousand for Q3 2016.

Net Sales. Our total net sales for Q3 2017 increased $2.59 million or 43.3% from Q3 2016, primarily due to sales increases on Motorola branded cable modems and cable modem routers.

Concentration. In Q3 2017 three customers accounted for 10% or greater separately and 92% combined of the Company’s total net sales. At September 30, 2017 three customers with an accounts receivable balance of 10% or greater accounted for a combined 83% of the Company’s accounts receivable. In Q3 2016, three customers accounted for 10% or greater separately and 86% combined of the Company’s total net sales. At September 30, 2016 three customers with an accounts receivable balance of 10% or greater accounted for a combined 88% of the Company’s accounts receivable.

Gross Profit. Gross profit was $3.07 million or 35.7% of net sales in Q3 2017, up from $1.93 million or 32.1% of net sales in Q3 2016. Improvement in gross profit was primarily due to increased sales.

Selling Expense. Selling expense was $1.81 million or 21.1% of net sales in Q3 2017, up from $1.47 million or 24.6% of net sales in Q3 2016. The increase of $339 thousand was primarily due to Motorola brand royalty payments, and increased advertising costs and freight expenses.

General and Administrative Expense. General and administrative expense was $383 thousand or 4.5% of net sales in Q3 2017, up 8.3% from $354 thousand or 5.9% of net sales in Q3 2016. The increase of $29 thousand was primarily due to increases in stock option expenses, which were partially offset by reduced legal expenses.

Research and Development Expense. Research and development expense was $457 thousand or 5.3% of net sales in Q3 2017, up from $353 thousand or 5.9% of net sales in Q3 2016. The increase of $104 thousand was primarily due to higher product certification costs.

Other Income (Expense). Other expense was $31 thousand in Q3 2017 due to interest expense related to our bank credit line. Other income was $14 thousand in Q3 2016, driven by a one-time favorable settlement on a class action lawsuit for approximately $41 thousand, reduced by loan interest costs of approximately $27 thousand.

Net Income (Loss). Net income was $377 thousand for Q3 2017, compared to a net loss of $244 thousand for Q3 2016.

Comparison of the nine months ended September 30, 2017 to the nine months ended September 30, 2016

Summary. Net sales of $20.56 million for the first nine months of 2017 were up 62.0% from net sales of $12.69 million for the first nine months of 2016. Our net loss was $0.98 million for the first nine months of 2017, down from a net loss of $1.94 million for the first nine months of 2016. Loss per diluted share was $0.07 in the nine months ended September 30, 2017 compared to $0.14 for the nine months ended September 30, 2016.

Net Sales. Our total net sales for the first nine months of 2017 increased $7.87 million or 62.0% from the first nine months of 2016, primarily due to continued expansion of Motorola branded products and increased sales.

Concentration. In the first nine months of 2017, three customers accounted for 10% or greater separately and 90% combined of the Company’s total net sales. In the first nine months of 2016, three customers accounted for 10% or greater separately and 81% combined of the Company’s total net sales.

Gross Profit. Gross profit was $6.99 million for the first nine months of 2017, up $3.03 million or 76.6% from gross profit of $3.96 million for the first nine months of 2016.Improvement in gross profit was primarily due to increased sales. The improvement in gross margin was due to the increase in total sales, which reduced our fixed overhead as a percentage of sales.

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Selling Expense. Selling expense was $5.34 million or 26.0% of net sales in the first nine months of 2017, up from $3.52 million or 27.7% of net sales in the first nine months of 2016. The increase of $1.82 million was primarily due to increased advertising costs, Motorola royalty payments, and freight expenses.

General and Administrative Expense. General and administrative expense was $1.15 million or 5.6% of net sales for the first nine months of 2017, down 6.7% from $1.24 million or 9.7% of net sales for the first nine months of 2016. The decrease of $82 thousand was due primarily to lower personnel, legal, and audit costs, partially offset by increased consulting expenses.

Research and Development Expense. Research and development expense was $1.37 million or 6.7% of net sales in the first nine months of 2017, up 18.4% from $1.15 million or 9.1% of net sales in the first nine months of 2016. The increase of $213 thousand was due primarily to increased certification and outside consultant costs.

Other Income (Expense). Other expense was $98 thousand in the first nine months quarter of 2017, of which $87 thousand is interest expense on our bank credit line. Other income was $10 thousand in the first nine months of 2016, driven by a one-time favorable settlement on a class action lawsuit for approximately $41 thousand, reduced by loan interest costs of approximately $32 thousand.

Net Income (Loss). The net loss was $0.98 million for the first nine months of 2017, compared to the net loss of $1.94 million for the first nine months of 2016.

Liquidity and Capital Resources

Our cash and cash equivalents balance on September 30, 2017 was approximately $91 thousand, a decrease from a balance of $180 thousand on December 31, 2016. Major uses of cash were a $980 thousand loss for the nine months ended September 30, 2017, a decrease of approximately $712 thousand in bank debt, an increase of approximately $380 thousand in inventory, and an increase of approximately $284 thousand in prepaid expenses. These were offset by an increase of approximately $1.4 million in accounts payable and accrued expenses, a decrease of approximately $394 thousand in accounts receivable, and a decrease of approximately $190 thousand in other assets.

On September 30, 2017 we had approximately $595 thousand in bank debt for a $3.0 million asset-based credit line and had working capital of approximately $2.9 million, including approximately $91 thousand in cash and cash equivalents. On December 31, 2016 we had working capital of approximately $3.4 million, including approximately $180 thousand in cash and cash equivalents. Our current ratio at September 30, 2017 was 1.5 compared to 1.7 at December 31, 2016.

On May 18, 2015, we announced licensing of the Motorola trademark for cable modems and gateways for the U.S. and Canada for five years starting January 2016. In order to support anticipated sales growth, we raised approximately $1.5 million in net proceeds from the private placement offering of 619,231 unregistered shares of our common stock that closed on October 24, 2016.

Although the Company has experienced losses in the past, the Company has experienced dramatic growth over the last year and one-half. Sales in 2016 were up 65% over sales in 2015 and sales in the first nine months of 2017 were up 62% over sales in the first nine months of 2016. The Company believes that year-over-year growth is likely to continue for the foreseeable future due to a number of factors including the strength of the Motorola brand, new product introductions, increased shelf space, growing online retailer sales, and international expansion. Because of projected sales increases, the associated improved net income, and its Financing Agreement (as defined below) with Rosenthal & Rosenthal, Inc., the Company expects to maintain acceptable levels of liquidity to meet its obligations as they become due for at least twelve months from the date of our quarterly filing of this Form 10-Q with the Securities Exchange Commission.

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Commitments

During the nine months ended September 30, 2017, there were no material changes to our capital commitments and contractual obligations from those disclosed in our Form 10-K for the year ended December 31, 2016.

Off-Balance Sheet Arrangements

During the nine months ended September 30, 2017, there were no material changes to our off-balance sheet arrangements from those disclosed in our Form 10-K for the year ended December 31, 2016.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not Required.

ITEM 4. CONTROLS AND PROCEDURES

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports pursuant to the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission, and that such information is accumulated and communicated to our management, including our Chief Executive Officer who is also our Acting Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, as ours are designed to do, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

In connection with the preparation of this Quarterly Report on the Form 10-Q, we carried out an evaluation, under the supervision and with the participation of our management including our Chief Executive Officer and Acting Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act as of September 30, 2017. Based upon that evaluation, our Chief Executive Officer and Acting Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.

There have been no significant changes in our internal controls over financial reporting that occurred during the period covered by this report that have materially or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

For a description of our material pending legal proceedings, please refer to Note 4, “Contingencies – Legal Matters” of the Notes to Condensed Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q, which is incorporated herein by reference.

ITEM 1A. RISK FACTORS

This report contains forward-looking statements that involve risks and uncertainties, such as statements of our objectives, expectations and intentions. The cautionary statements made in this report are applicable to all forward-looking statements wherever they appear in this report. Our actual results could differ materially from those discussed herein. Factors that could cause or contribute to such differences include the risk factors contained in our Annual Report on Form 10-K for the year ended December 31, 2016, filed with the SEC on March 22, 2017, as well as those discussed in this report and in our other filings with the SEC.

There have not been any material changes from the risk factors previously disclosed under Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2016.

ITEM 6. EXHIBITS

Exhibit No.	Exhibit Description
10.1 (1)	Amendment to License Agreement, dated August 21, 2017, between Zoom Telephonics, Inc. and Motorola Mobility LLC.
31.1	Certification of Chief Executive Officer and Acting Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 (2)	Certifications of Chief Executive Officer and Acting Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema Document
101.CAL	XBRL Taxonomy Calculation Linkbase Document
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB	XBRL Taxonomy Label Linkbase Document
101.PRE	XBRL Taxonomy Presentation Linkbase Document

______________

(1)

Confidential treatment requested as to portions of the exhibit. Confidential materials omitted and filed separately with the Securities and Exchange Commission.

(2)

In accordance with Item 601(b)(32)(ii) of Regulation S-K, the certifications furnished in Exhibit 32.1 hereto is deemed to accompany this Form 10-Q and will not be deemed “filed” for purposes of Section 18 of the Exchange Act. Such certification will not be deemed to be incorporated by reference into any filings under the Securities Act or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference.

16

ZOOM TELEPHONICS, INC.

SIGNATURES

Pursuant to the requirements of the Securities and Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	ZOOM TELEPHONICS, INC. (Registrant)
Date: November 9, 2017	By:	/s/ Frank B. Manning
		Frank B. Manning, President, Chief Executive Officer and Acting Chief Financial Officer (Principal Executive Officer and Principal Financial and Accounting Officer)

17

EXHIBIT INDEX

Exhibit No.	Exhibit Description
10.1 (1)	Amendment to License Agreement, dated August 21, 2017, between Zoom Telephonics, Inc. and Motorola Mobility LLC.
31.1	Certification of Chief Executive Officer and Acting Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 (2)	Certifications of Chief Executive Officer and Acting Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema Document
101.CAL	XBRL Taxonomy Calculation Linkbase Document
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB	XBRL Taxonomy Label Linkbase Document
101.PRE	XBRL Taxonomy Presentation Linkbase Document

______________

(1)

Confidential treatment requested as to portions of the exhibit. Confidential materials omitted and filed separately with the Securities and Exchange Commission.

(2)

In accordance with Item 601(b)(32)(ii) of Regulation S-K, the certifications furnished in Exhibit 32.1 hereto is deemed to accompany this Form 10-Q and will not be deemed “filed” for purposes of Section 18 of the Exchange Act. Such certification will not be deemed to be incorporated by reference into any filings under the Securities Act or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference.

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EX-10.1

Exhibit 10.1

CONFIDENTIAL TREATMENT REQUESTED

The confidential portions of this exhibit have been delivered separately to the Securities and Exchange Commission pursuant to a confidential application for confidential treatment in accordance with Rule 24b-2 under the Securities Exchange Act of 1934, as amended.

REDACTED PORTIONS OF THIS EXHIBIT ARE MARKED BY AN [***].

TRADEMARK LICENSE AGREEMENT – AMENDMENT 3 (Revised)

THIS AMENDMENT is made on August 21, 2017 between:

(1) 

MOTOROLA MOBILITY LLC., a Delaware corporation, having its principal its principal office at 222 West Merchandise Mart Plaza, Chicago, IL 60654, USA (“Motorola”); and

(2) 

ZOOM TELEPHONICS, INC., a Delaware Corporation having its principal office at 99 High Street, Boston MA 02110 USA, and its wholly owned subsidiary MTRLC LLC, a Delaware limited liability company, having an office at 160 Greentree Drive, Suite 101, Dover, Delaware 19904 USA (“Licensee”).

WHEREAS, Licensee and Motorola entered into a Licensee Agreement for cable modems and gateways, effective January 1, 2016 (the “Agreement”), and;

WHEREAS, the Parties intend to amend the Agreement upon the terms and conditions contained herein.

NOW, THEREFORE, in consideration of the promises and covenants set forth herein, the adequacy of which is hereby acknowledged, the Parties hereto agree as follows:

1.

Grant of License. Section 2.1 of the Agreement shall be deleted in its entirety and replaced with the following:

“2.1 Motorola grants to Licensee, subject to the terms and conditions of this Agreement, the exclusive (except as otherwise stated in Exhibit A), non-assignable, limited right and license during the Term to use the Trademarks upon the Products and in connection with the manufacture, sale, marketing and distribution of the Products through Authorized Channels in the Territory.”

2.

Exhibit A to the Agreement shall be deleted in its entirety and replaced with the Attached Exhibit A.

3.

The terms of the Agreement shall remain in full force and effect except as specifically amended herein. Defined terms, not otherwise defined herein, shall have the same meaning as set forth in the Agreement.

4.

This Amendment is binding on the respective parties, their permitted successors in interest, assignees, executors, administrators and heirs of the parties.

5.

This Amendment may be executed in one or more counterparts, and by the different parties hereto in separate counterparts, each of which when executed will be deemed to be an original but all of which taken together will constitute one and the same agreement. This Amendment may be executed and delivered by electronic mail (email) or facsimile copies,

1

each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.

IN WITNESS WHEREOF, the Parties haves caused this Amendment to be executed by their duly authorized representatives on the dates indicated below:

MOTOROLA MOBILITY LLC.	ZOOM TELEPHONICS, INC
By: /s/ Nadim Halabi  Nadim Halabi	BY: /s/ Frank Manning                                              Frank Manning
Title: Director, Trademark Licensing	Title: President and CEO
Date: August 21, 2017	Date: August 14, 2017

2

EXHIBIT A

(Revised by Amendment #3)

License between Motorola and Zoom Telephonics, Inc.

Products:

1)

Modems—Consumer-Grade broadband cable, DSL/ADSL/VDSL and cellularmodems, including standalone modems; modems containing routers (i.e. gateways); and set-top boxes containing modems.

2)

Routers—Consumer-Grade routers, including wireless (Wi-Fi), wired, and routers with built-in Modems (i.e. gateways).

3)

Wi-Fi Range Extenders—Consumer-Grade Wi-Fi range extenders.

4)

MoCa Adapters—Consumer-Grade “Multimedia over Coax”adapters for distributing internet access over coaxial TV cabling, with or without WiFi capability.

5)

Powerline Network Adaptors—Consumer-Grade home powerline network adaptors (i.e. a device that extends wired or wireless broadband connections to an AC outlet using the existing electrical wiring).

6)

Wireless Access Points—Consumer-Grade wireless access points (i.e. networking hardware devices that allow a Wi-Fi enabled device to connect to a wired network).

7)

Cellular Sensors—Consumer-Grade cellular sensors designed to detect environmental changes within the home (e.g. temperature, pressure, movement, sound, water or gas leaks) and to communicate such changes exclusively and directly via a cellular network (i.e. not utilizing WiFi, DECT, BLE, or other non-cellular communication protocol). The cellular sensor may or may not have an ability to respond to commands such as sensor threshold settings and sensor queries from Internet-attached devices, and may include non-sensor devices such as LEDs, displays, speakers, and relays that control connected devices such as furnaces, heaters, fans, and/or air conditioners.

All of the foregoing are subject to the following:

1)

“Consumer-Grade” shall mean the product is designed, marketed, and sold for use by consumers for their personal, family or household use, consumption or enjoyment.

2)

Cellular modems and routers shall not be designed or marketed for use as a fixed antenna or receiver within automobiles to enable Wi-Fi connections within the automobile.

3)

The license grant for Cellular Sensors shall be non-exclusive..

4)

Modems may or may not include voice, Packetcable, or EMTA capability, provided such modems shall not be marketed or bundled with wireless, corded or cordless phones, or otherwise as an end-to-end solution for making phone calls.

Territory: Worldwide

Authorized Channels:

1)

Retail and cable operator stores, including department stores (e.g. Macys), chain consumer electronics stores (e.g. Best Buy), cable operator stores (e.g. Comcast), etailers (e.g. Amazon), warehouse clubs (e.g. Costco), Shop-at-home TV channels (e.g. QVC) and general merchandise stores (e.g. Walmart), but specifically excluding deep discount retailers, and liquidators (e.g. Big Lots).

2)

Service providers (e.g. Comcast)

3)

Distributors to these channels (e.g. Ingram).

Royalty Rate:

● [*.*]% of Net Sales for Products sold for use in the [*****], [*****], [*****], [*****], [*****], [*****], [*****], and the countries, territories and special sovereign areas of [*****], including [********************************************************************************************************************************** *********************************************************************************************************************************** *********************************************************************************************************************************** *********************************************************************************************************************************** ***********************************************************************************************************************************]

● [*]% of Net Sales for Products sold for use in the rest of the World.

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Minimum Royalty: $18.1 million, broken down as follows:

●

2016: $2M

●

2017: $3M

●

2018: $3.5M

●

2019: $4.5M

●

2020: $5.1M

Set-Up Fee: $[******], paid January 2016.

Term: January 1, 2016 – Dec 31, 2020

Sales Year: Jan. to December 31.

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EX-31.1

EXHIBIT 31.1

CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Frank B. Manning, President, Chief Executive Officer, and Acting Chief Financial Officer of Zoom Telephonics, Inc., certify that:

1) I have reviewed this Quarterly Report on Form 10-Q of Zoom Telephonics, Inc.;

2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4) As the registrant's certifying officer, I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a–15(e) and 15d–15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a–15(f) and 15d–15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5) As the registrant's certifying officer, I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 9, 2017	By:	/s/ Frank B. Manning
		Frank B. Manning President, Chief Executive Officer and Acting Chief Financial Officer (Principal Executive Officer and Principal Financial and Accounting Officer)

EX-32.1

EXHIBIT 32.1

CERTIFICATION

Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code).

In connection with the quarterly report on Form 10-Q of Zoom Telephonics, Inc. (the "Company") for the period ended September 30, 2017 as filed with the Securities and Exchange Commission on or about the date hereof (the "Report"), the undersigned, Frank B. Manning, President, Chief Executive Officer and Acting Chief Financial Officer, hereby certifies, pursuant to 18 U.S.C. Section 1350, that:

(1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: November 9, 2017	By:	/s/ Frank B. Manning
		Frank B. Manning President, Chief Executive Officer and Acting Chief Financial Officer (Principal Executive Officer and Principal Financial and Accounting Officer)

This certification accompanies the Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.

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Document and Entity Information - shares	9 Months Ended
	Sep. 30, 2017	Nov. 06, 2017
Document And Entity Information
Entity Registrant Name	Zoom Telephonics, Inc.
Entity Central Index Key	0001467761
Document Type	10-Q
Document Period End Date	Sep. 30, 2017
Amendment Flag	false
Current Fiscal Year End Date	--12-31
Is Entity a Well-known Seasoned Issuer?	No
Is Entity a Voluntary Filer?	No
Is Entity's Reporting Status Current?	Yes
Entity Filer Category	Smaller Reporting Company
Entity Common Stock, Shares Outstanding		15,067,790
Document Fiscal Period Focus	Q3
Document Fiscal Year Focus	2017

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Condensed Balance Sheets (Unaudited) - USD ($)	Sep. 30, 2017	Dec. 31, 2016
Current assets
Cash and cash equivalents	$ 90,853	$ 179,846
Accounts receivable, net of allowances of $661,892 at September 30, 2017 and $507,296 at December 31, 2016	2,104,555	2,498,259
Inventories	5,306,662	4,926,612
Prepaid expenses and other current assets	935,984	652,402
Total current assets	8,438,054	8,257,119
Other assets	398,824	588,907
Equipment, net	187,374	175,743
Total assets	9,024,252	9,021,769
Current liabilities
Bank debt	594,778	1,306,620
Accounts payable	3,761,662	2,502,323
Accrued expenses	1,214,240	1,051,616
Total liabilities	5,570,680	4,860,559
Commitments and contingencies (Note 4)
Stockholders' equity
Common stock: Authorized: 25,000,000 shares at $0.01 par value Issued and outstanding: 15,037,790 shares at September 30, 2017 and 14,685,290 shares at December 31, 2016	150,378	146,853
Additional paid-in capital	40,163,143	39,893,919
Accumulated deficit	(36,859,949)	(35,879,562)
Total stockholders' equity	3,453,572	4,161,210
Total liabilities and stockholders' equity	$ 9,024,252	$ 9,021,769

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Condensed Balance Sheets (Unaudited) (Parenthetical) - USD ($)	Sep. 30, 2017	Dec. 31, 2016
Assets
Accounts receivable allowances	$ 661,892	$ 507,296
Stockholders Equity
Common stock, par value	$ 0.01	$ 0.01
Common stock, authorized	25,000,000	25,000,000
Common stock, issued	15,037,790	14,685,290
Common stock, outstanding	15,037,790	14,685,290

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Condensed Statement of Operations and Comprehensive Income (Loss) (Unaudited) - USD ($)	3 Months Ended		9 Months Ended
	Sep. 30, 2017	Sep. 30, 2016	Sep. 30, 2017	Sep. 30, 2016
Income Statement [Abstract]
Net sales	$ 8,582,076	$ 5,990,432	$ 20,556,157	$ 12,688,142
Cost of goods sold	5,515,753	4,064,834	13,561,520	8,727,755
Gross profit	3,066,323	1,925,598	6,994,637	3,960,387
Operating expenses:
Selling	1,812,921	1,473,787	5,341,239	3,520,030
General and administrative	383,475	354,237	1,153,753	1,236,239
Research and development	457,309	352,849	1,367,718	1,154,789
Total	2,653,705	2,180,873	7,862,710	5,911,058
Operating income (loss)	412,618	(255,275)	(868,073)	(1,950,671)
Other income (expense):
Interest income	22	21	59	238
Interest expense	(30,636)	(27,778)	(87,178)	(32,115)
Other, net	65	41,482	(11,072)	42,232
Total other income (expense)	(30,549)	13,725	(98,191)	10,355
Income (loss) before income taxes	382,069	(241,550)	(966,264)	(1,940,316)
Income taxes	4,984	2,034	14,123	3,312
Net income (loss)	$ 377,085	$ (243,584)	$ (980,387)	$ (1,943,628)
Net income (loss) per share: Basic	$ 0.03	$ (0.02)	$ (0.07)	$ (0.14)
Net income (loss) per share: Diluted	$ 0.02	$ (0.02)	$ (0.07)	$ (0.14)
Weighted average common and common equivalent shares:
Basic	14,953,285	13,877,407	14,851,229	13,722,680
Diluted	16,419,374	13,877,407	14,851,229	13,722,680

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Condensed Statements of Cash Flows (Unaudited) - USD ($)	9 Months Ended
	Sep. 30, 2017	Sep. 30, 2016
Operating activities:
Net income (loss)	$ (980,387)	$ (1,943,628)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization	391,181	389,487
Stock based compensation	170,074	164,795
Provision for accounts receivable allowances	540	8,988
Provision for inventory reserves	186,440	10,450
Changes in operating assets and liabilities:
Accounts receivable	393,164	(1,801,446)
Inventories	(566,490)	(1,454,910)
Prepaid expenses and other assets	(327,462)	(193,245)
Accounts payable and accrued expenses	1,421,963	1,084,228
Net cash provided by (used in) operating activities	689,023	(3,735,281)
Investing activities:
Cost of other assets	(75,000)	(295,000)
Additions to plant and equipment	(93,849)	(32,303)
Net cash provided by (used in) investing activities'	(168,849)	(327,303)
Financing activities:
Net funds received from (to) bank credit lines	(711,842)	2,141,799
Proceeds from stock option exercises	102,675	249,389
Net cash provided by (used in) financing activities	(609,167)	2,391,188
Net change in cash	(88,993)	(1,671,396)
Cash and cash equivalents at beginning of period	179,846	1,846,704
Cash and cash equivalents at end of period	90,853	175,308
Supplemental disclosures of cash flow information:
Cash paid during the period for: Interest	87,178	32,115
Cash paid during the period for: Income taxes	$ 14,123	$ 3,312

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1. Summary of Significant Accounting Policies

9 Months Ended

Sep. 30, 2017

Notes to Financial Statements

Summary of Significant Accounting Policies

The accompanying condensed consolidated financial statements (“financial statements”) are unaudited. However, the condensed consolidated balance sheet as of December 31, 2016 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 Company has evaluated subsequent events from September 30, 2017 through the date of this filing and 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, 2016 included in the Company's 2016 Annual Report on Form 10-K for the year ended December 31, 2016.

Recently Adopted Accounting Standards

In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-09, Improvements to Employee Share-Based Payment Accounting ("ASU 2016-09"). 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. The Company adopted ASU 2016-09 as of January 1, 2017 and elected an accounting policy to record forfeitures as they occur. The impact of this change in accounting policy had an insignificant effect on accumulated deficit as of January 1, 2017. ASU 2016-09 also provides that companies no longer record excess tax benefits or certain tax deficiencies in additional paid-in capital. Instead, all excess tax benefits and tax deficiencies are recorded as income tax expense or benefit in the statement of operations. There was no financial statement impact of adopting this provision of ASU 2016-09 as the Company is currently in a net operating loss position and the excess tax benefits that existed from options previously exercised had a full valuation allowance. The effects of adopting the remaining provisions in ASU 2016-09 affecting the classification of awards as either equity or liabilities when an entity partially settles the award in cash in excess of the employer’s minimum statutory withholding requirements and classification in the statement of cash flows did not have a significant impact on the Company’s financial position, results of operations or cash flows.

Recently Issued Accounting Standards

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”). ASU 2014-09 supersedes the revenue recognition requirements in ASC Topic 605, “Revenue Recognition” and some cost guidance included in ASC Subtopic 605-35, “Revenue Recognition - Construction-Type and Production-Type Contracts.” The core principle of ASU 2014-09 is that revenue is recognized when the transfer of goods or services to customers occurs in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services. ASU 2014-09 requires the disclosure of sufficient information to enable readers of the Company’s financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts. ASU 2014-09 also requires disclosure of information regarding significant judgments and changes in judgments, and assets recognized from costs incurred to obtain or fulfill a contract. ASU 2014-09 provides two methods of retrospective application. The first method would require the Company to apply ASU 2014-09 to each prior reporting period presented. The second method would require the Company to retrospectively apply ASU 2014-09 with the cumulative effect recognized at the date of initial application.

There have been four new ASUs issued amending certain aspects of ASU 2014-09, ASU 2016-08, “Principal versus Agent Considerations (Reporting Revenue Gross Versus Net),” was issued in March 2016 to clarify certain aspects of the principal versus agent guidance in ASU 2014-09. In addition, ASU 2016-10, “Identifying Performance Obligations and Licensing,” issued in April 2016, amends other sections of ASU 2014-09 including clarifying guidance related to identifying performance obligations and licensing implementation. ASU 2016-12, “Revenue from Contracts with Customers - Narrow Scope Improvements and Practical Expedients” provides amendments and practical expedients to the guidance in ASU 2014-09 in the areas of assessing collectability, presentation of sales taxes received from customers, noncash consideration, contract modification and clarification of using the full retrospective approach to adopt ASU 2014-09. Finally, ASU 2016-20, “Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers,” was issued in December 2016, and provides elections regarding the disclosures required for remaining performance obligations in certain cases and also makes other technical corrections and improvements to the standard. With its evaluation of the impact of ASU 2014-09, the Company will also consider the impact on its financial statements related to the updated guidance provided by these four new ASUs. The Company will adopt the new guidance in fiscal 2018, and anticipates using the modified retrospective method. The Company is in the final process of evaluating the new standard against its existing account policies, including the timing of revenue recognition and its contracts with customers to determine the effect the guidance will have on its financial statements and what changes to systems and controls may be warranted.

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 Company is currently evaluating the potential impact that the adoption of ASU 2016-02 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.

In May 2017, the FASB issued ASU No. 2017-09, “Compensation-Stock Compensation (Topic 718), Scope of Modification Accounting.” ASU 2017-09 provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. An entity should account for the effects of a modification unless all of the following criteria are met: (1) The fair value of the modified award is the same as the fair value of the original award immediately before the original award is modified. If the modification does not affect any of the inputs to the valuation technique that the entity uses to value the award, the entity is not required to estimate the value immediately before and after the modification. (2) The vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified. (3) The classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the original award is modified. Disclosure requirements remain unchanged. ASU 2017-09 is effective for all entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted as described in ASU 2017-09. The Company is currently evaluating the potential impact that the adoption of ASU 2017-09 will have on its consolidated financial statements.

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2. Liquidity

9 Months Ended

Sep. 30, 2017

Notes to Financial Statements

Liquidity

The Company’s cash and cash equivalents balance on September 30, 2017 was approximately $91 thousand, down from $180 thousand on December 31, 2016. Major uses of cash were a $980 thousand loss for the nine months ended September 30, 2017, a decrease of approximately $712 thousand in bank debt, an increase of approximately $380 thousand in inventory, and an increase of approximately $284 thousand in prepaid expenses. These were offset by an increase of approximately $1.4 million in accounts payable and accrued expenses, a decrease of approximately $394 thousand in accounts receivable, and a decrease of approximately $190 thousand in other assets.

On September 30, 2017 the Company had approximately $595 thousand in bank debt for a $3.0 million asset-based credit line and had working capital of approximately $2.9 million, including approximately $91 thousand in cash and cash equivalents. On December 31, 2016 the Company had working capital of approximately $3.4 million including approximately $180 thousand in cash and cash equivalents. The Company’s current ratio at September 30, 2017 was 1.5 compared to 1.7 at December 31, 2016.

Although the Company has experienced losses in the past, the Company has experienced dramatic growth over the last year and one-half. Sales in 2016 were up 65% over sales in 2015 and sales in the first nine months of 2017 were up 62% over sales in the first nine months of 2016. The Company believes that year-over-year growth is likely to continue for the foreseeable future due to a number of factors including the strength of the Motorola brand, new product introductions, increased shelf space, growing online retailer sales, and international expansion. Because of projected sales increases, the associated improved net income, and its Financing Agreement (as defined below) with Rosenthal & Rosenthal, Inc., the Company expects to maintain acceptable levels of liquidity to meet its obligations as they become due for at least twelve months from the date of our quarterly filing of this Form 10-Q with the Securities Exchange Commission.

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3. Inventories

9 Months Ended

Sep. 30, 2017

Notes to Financial Statements

Inventories

Inventories consist of :	September 30, 2017		December 31, 2016
Materials	$	1,287,621	$	888,830
Work in process		209,694		27,708
Finished goods		3,809,347		4,010,074
Total	$	5,306,662	$	4,926,612

Finished goods includes consigned inventory held by our customers of $835,800 at September 30, 2017 and $442,300 at December 31, 2016. 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. The provision for inventory reserves was $60,096 for the three months ended September 30, 2017 and $7,838 for the three months ended September 30, 2016. The provision for inventory reserves was $186,440 for the nine months ended September 30, 2017 and $10,450 for the nine months ended September 30, 2016.

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4. Commitments and Contingencies

9 Months Ended

Sep. 30, 2017

Notes to Financial Statements

Commitments and Contingencies

(a)  Contingencies

From time to time 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 that it believes are without merit. The Company's management believes that the ultimate resolution of such matters will not materially and adversely affect the Company's business, financial position, or results of operations.

On May 17, 2016, Magnacross LLC ("Magnacross") filed a complaint in the U.S. District Court for the Eastern District of Texas (U.S.D.C., E.D.Tex.) against the Company alleging infringement of U.S. Patent No. 6,917,304 (“the ’304 patent”) entitled “Wireless Multiplex Data Transmission System.” Magnacross alleged that the Company’s wireless routers, including its Model 5363, 5360, and 5354 (N300, N600, and AC1900) Routers, infringe the '304 patent. In its complaint, Magnacross sought injunctive relief and unspecified compensatory damages. The case was resolved on February 2, 2017 with the entry by the judge of an Order of Dismissal with Prejudice.

(b)  Commitments

In May 2015 Zoom entered into a License Agreement with Motorola Mobility LLC (the “License Agreement”).  The License Agreement provides Zoom with an exclusive license to use certain trademarks owned by Motorola Trademark Holdings, LLC. for the manufacture, sale and marketing of consumer cable modem products in the United States and Canada through certain authorized sales channels.

In August 2016 Zoom entered into an amendment to the License Agreement with Motorola Mobility LLC (the “2016 Amendment”).  The 2016 Amendment expands Zoom’s exclusive license to use the Motorola trademark to a wide range of authorized channels worldwide, and expands the license from cable modems and gateways to also include consumer routers, WiFi range extenders, home powerline network adapters, and access points.

In August 2017 Zoom entered into an amendment to the License Agreement with Motorola Mobility LLC (the “2017 Amendment”).  The 2017 Amendment expands Zoom’s exclusive license to use the Motorola trademark to a wide range of authorized channels worldwide, and expands the license from cable modems, gateways, consumer routers, WiFi range extenders, home powerline network adapters, and access points to also include MoCa adapters, and cellular sensors. The License Agreement, as amended, has a five-year term beginning January 1, 2016 through December 31, 2020 and increased the minimum royalty payments as outlined below.

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:

Year ending December 31,
2017	$	3,000,000
2018	$	3,500,000
2019	$	4,500,000
2020	$	5,100,000

Royalty expense under the License Agreement was $583,333 for the third quarter of 2016 and $750,000 for the third quarter of 2017, and royalty expense is included in selling expense on the accompanying condensed consolidated statements of operations. The balance of the committed royalty expense for 2017 amounts to $750,000 for the remaining quarter of 2017.

In order to facilitate the Company’s current and planned increase in production demand, driven in part by the launch of Motorola branded products, the Company has committed with North American Production Sharing, Inc. (“NAPS”) to extend its existing lease used in connection with the Production Sharing Agreement (“PSA”) entered into between the Company and NAPS. The extension term is December 1, 2015 through November 30, 2018 and allows the Company to contract additional Mexican personnel to work in the Tijuana facility.

The Company moved its headquarters on June 29, 2016 from its long time location at 207 South Street, Boston, MA. to a nearby location at 99 High Street, Boston, MA. The Company signed a lease for 11,480 square feet that terminates on June 29, 2019. Payments under the lease are zero for the first 2 months, an aggregate of $413,280 for the next 12 months, an aggregate of $424,760 for the next 12 months, and an aggregate of $363,533 for the remaining term of the lease ending June 29, 2019. Rent expense was $102,338 for the third quarter of 2017.

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5. Customer Concentrations

9 Months Ended

Sep. 30, 2017

Notes to Financial Statements

Customer Concentrations

The Company sells its products primarily through high-volume retailers and distributors, Internet service providers, value-added resellers, Personal Computer (“PC”) system integrators, and original equipment manufacturers ("OEMs"). The Company supports its major accounts in their efforts to offer a well-chosen selection of attractive products and to maintain appropriate inventory levels.

Relatively few customers account for a substantial portion of the Company’s revenues.  In the third quarter of 2017, three customers accounted for 10% or greater separately and 92% combined of the Company’s total net sales. In the first nine months of 2017, three customers accounted for 10% or greater separately and 90% combined of the Company’s total net sales. At September 30, 2017, three customers with an accounts receivable balance of 10% or greater accounted for a combined 83% of the Company’s accounts receivable. In the third quarter of 2016, three customers accounted for 10% or greater separately and 86% combined of the Company’s total net sales. In the first nine months of 2016, three customers accounted for 10% or greater separately and 81% combined of the Company’s total net sales. At September 30, 2016 three customers with an accounts receivable balance of 10% or greater accounted for a combined 88% of the Company’s accounts receivable.

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.

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6. Bank Credit Lines

9 Months Ended

Sep. 30, 2017

Notes to Financial Statements

Bank Credit Lines

On December 18, 2012, the Company entered into a Financing Agreement with Rosenthal & Rosenthal, Inc. (the “Financing Agreement”). The Financing Agreement originally provided for up to $1.75 million of revolving credit, subject to a borrowing base formula and other terms and conditions. The Financing Agreement continued until November 30, 2014 with automatic renewals from year to year thereafter, unless sooner terminated by either party. The lender has the right to terminate the Financing Agreement at any time on 60 days’ prior written notice.Borrowings are secured by all of the Company assets including intellectual property. The Financing Agreement contains several covenants, including a requirement that the Company maintain tangible net worth of not less than $2.5 million and working capital of not less than $2.5 million.

On March 25, 2014, the Company entered into an amendment to the Financing Agreement (the “Amendment”) with an effective date of January 1, 2013. The Amendment clarified the definition of current assets in the Financing Agreement, reduced the size of the revolving credit line to $1.25 million, and revised the financial covenants so that Zoom is required to maintain tangible net worth of not less than $2.0 million and working capital of not less than $1.75 million.

On October 29, 2015, the Company entered into a second amendment to the Financing Agreement (the “Second Amendment”). Retroactive to October 1, 2015, the Second Amendment eliminated $2,500 in monthly charges for the Financing Agreement. Effective December 1, 2015, the Second Amendment reduces the effective rate of interest to 2.25% plus an amount equal to the higher of prime rate or 3.25%.

On July 19, 2016, the Company entered into a third amendment to the Financing Agreement. The Amendment increased the size of the revolving credit line to $2.5 million effective as of date of the amendment.

On September 1, 2016, the Company entered into a fourth amendment to the Financing Agreement. The Amendment increased the size of the revolving credit line to $3.0 million effective with the date of this amendment.

The Company is required to calculate its covenant compliance on a quarterly basis. As of September 30, 2017, the Company was in compliance with both its working capital and tangible net worth covenants. At September 30, 2017, the Company’s tangible net worth was approximately $3.1 million, while the Company’s working capital was approximately $2.9 million.

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7. Earnings (Loss) Per Share

9 Months Ended

Sep. 30, 2017

Earnings Loss Per Share

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, except for periods with a loss from operations.  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.

Diluted earnings (loss) per common share for the three-month period ended September 30, 2017 includes the effects of 1,466,089 common share equivalents. Diluted earnings (loss) per common share for the three-month period ended September 30, 2016 excludes the effects of 2,015,825 common share equivalents, since such inclusion would be anti-dilutive. Diluted earnings (loss) per common share for the nine-month periods ended September 30, 2017 and 2016 excludes the effects of 1,466,089 and 2,015,825 common share equivalents, respectively, since such inclusions would be anti-dilutive. The common share equivalents consist of common shares issuable upon exercise of outstanding stock options.

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1. Summary of Significant Accounting Policies (Policies)

9 Months Ended

Sep. 30, 2017

Summary Of Significant Accounting Policies Policies

Recently Adopted Accounting Standards

In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-09, Improvements to Employee Share-Based Payment Accounting ("ASU 2016-09"). 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. The Company adopted ASU 2016-09 as of January 1, 2017 and elected an accounting policy to record forfeitures as they occur. The impact of this change in accounting policy had an insignificant effect on accumulated deficit as of January 1, 2017. ASU 2016-09 also provides that companies no longer record excess tax benefits or certain tax deficiencies in additional paid-in capital. Instead, all excess tax benefits and tax deficiencies are recorded as income tax expense or benefit in the statement of operations. There was no financial statement impact of adopting this provision of ASU 2016-09 as the Company is currently in a net operating loss position and the excess tax benefits that existed from options previously exercised had a full valuation allowance. The effects of adopting the remaining provisions in ASU 2016-09 affecting the classification of awards as either equity or liabilities when an entity partially settles the award in cash in excess of the employer’s minimum statutory withholding requirements and classification in the statement of cash flows did not have a significant impact on the Company’s financial position, results of operations or cash flows.

Recently Issued Accounting Standards

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”). ASU 2014-09 supersedes the revenue recognition requirements in ASC Topic 605, “Revenue Recognition” and some cost guidance included in ASC Subtopic 605-35, “Revenue Recognition - Construction-Type and Production-Type Contracts.” The core principle of ASU 2014-09 is that revenue is recognized when the transfer of goods or services to customers occurs in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services. ASU 2014-09 requires the disclosure of sufficient information to enable readers of the Company’s financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts. ASU 2014-09 also requires disclosure of information regarding significant judgments and changes in judgments, and assets recognized from costs incurred to obtain or fulfill a contract. ASU 2014-09 provides two methods of retrospective application. The first method would require the Company to apply ASU 2014-09 to each prior reporting period presented. The second method would require the Company to retrospectively apply ASU 2014-09 with the cumulative effect recognized at the date of initial application.

There have been four new ASUs issued amending certain aspects of ASU 2014-09, ASU 2016-08, “Principal versus Agent Considerations (Reporting Revenue Gross Versus Net),” was issued in March 2016 to clarify certain aspects of the principal versus agent guidance in ASU 2014-09. In addition, ASU 2016-10, “Identifying Performance Obligations and Licensing,” issued in April 2016, amends other sections of ASU 2014-09 including clarifying guidance related to identifying performance obligations and licensing implementation. ASU 2016-12, “Revenue from Contracts with Customers - Narrow Scope Improvements and Practical Expedients” provides amendments and practical expedients to the guidance in ASU 2014-09 in the areas of assessing collectability, presentation of sales taxes received from customers, noncash consideration, contract modification and clarification of using the full retrospective approach to adopt ASU 2014-09. Finally, ASU 2016-20, “Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers,” was issued in December 2016, and provides elections regarding the disclosures required for remaining performance obligations in certain cases and also makes other technical corrections and improvements to the standard. With its evaluation of the impact of ASU 2014-09, the Company will also consider the impact on its financial statements related to the updated guidance provided by these four new ASUs. The Company will adopt the new guidance in fiscal 2018, and anticipates using the modified retrospective method. The Company is in the final process of evaluating the new standard against its existing account policies, including the timing of revenue recognition and its contracts with customers to determine the effect the guidance will have on its financial statements and what changes to systems and controls may be warranted.

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 Company is currently evaluating the potential impact that the adoption of ASU 2016-02 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.

In May 2017, the FASB issued ASU No. 2017-09, “Compensation-Stock Compensation (Topic 718), Scope of Modification Accounting.” ASU 2017-09 provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. An entity should account for the effects of a modification unless all of the following criteria are met: (1) The fair value of the modified award is the same as the fair value of the original award immediately before the original award is modified. If the modification does not affect any of the inputs to the valuation technique that the entity uses to value the award, the entity is not required to estimate the value immediately before and after the modification. (2) The vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified. (3) The classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the original award is modified. Disclosure requirements remain unchanged. ASU 2017-09 is effective for all entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted as described in ASU 2017-09. The Company is currently evaluating the potential impact that the adoption of ASU 2017-09 will have on its consolidated financial statements.

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3. Inventories (Tables)

9 Months Ended

Sep. 30, 2017

Inventories Tables

Inventories

Inventories consist of :	September 30, 2017		December 31, 2016
Materials	$	1,287,621	$	888,830
Work in process		209,694		27,708
Finished goods		3,809,347		4,010,074
Total	$	5,306,662	$	4,926,612

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3. Inventories (Details) - USD ($)	Sep. 30, 2017	Dec. 31, 2016
Inventories Details
Raw materials	$ 1,287,621	$ 888,830
Work in process	209,694	27,708
Finished goods	3,809,347	4,010,074
Total inventories	$ 5,306,662	$ 4,926,612

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3. Inventories (Details Narrative) - USD ($)	3 Months Ended		9 Months Ended
	Sep. 30, 2017	Sep. 30, 2016	Sep. 30, 2017	Sep. 30, 2016	Dec. 31, 2016
Inventories Details
Finished goods held by customer	$ 835,800		$ 835,800		$ 442,300
Provision for inventory reserves	$ 60,096	$ 7,838	$ 186,440	$ 10,450

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4. Commitments and Contingencies (Details Narrative)	Sep. 30, 2017 USD ($)
Future royalty payments for the year ending December 31,
2017	$ 3,000,000
2018	3,500,000
2019	4,500,000
2020	$ 5,100,000

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5. Customer Concentrations (Details Narrative)	3 Months Ended		9 Months Ended
	Sep. 30, 2017	Sep. 30, 2016	Sep. 30, 2017	Sep. 30, 2016
Three Customers Percentage of Sales
Percent concentration	92.00%	86.00%	90.00%	81.00%
Three Customers Percentage of Receivables
Percent concentration	83.00%	88.00%