Good morning. My name is Christel, and I will be your conference operator today. At this time, I would like to welcome everyone to the Zoom Telephonics Third Quarter Earnings Call. .

We advise you that today's conference call contains forward-looking statements. Forward-looking statements include statements regarding the future, including expected revenue, operating margins, expenses and future business outlook. Actual results or trends could differ materially from those contemplated by these forward-looking statements.

For more information, please refer to the Investor Relations page for additional risk factors discussed in Zoom Telephonics' periodic filings with the SEC, including the most recent Form 10-Q. .

Please note, too, that today's call may include the use of non-GAAP numbers. The slides that accompany today's call can be found on Zoom Telephonics website at zoom.net/investors..

I will now turn the call over to Jeremy Hitchcock, Executive Chair. .

Good morning, and welcome to Zoom Telephonics' Third quarter Conference Call. On our last call, I said that Zoom is at an exciting inflection point, and I'm delighted to talk more about the results of the quarter and also the recently announced merger agreement. .

We have signed a definitive agreement to merge with software company, Minim, an AI-driven WiFi management and security platform. Zoom and Minim have already partnered on next-generation product offerings.

The combined company will integrate Zoom's market recognized Motorola hardware with Minim's connected software to offer integrated intelligent connectivity solutions for the home and ISP markets..

On today's call, first, I'll provide the high-level rationale for and opportunities provided by the merger as well as an operational update on Zoom's third quarter.

Second, Jacquelyn Barry Hamilton, our CFO, will share more details on the third quarter financial results; and third, Gray Chynoweth, CEO of Minim, will provide more detail into the combined company's objectives and product direction before we open for questions. .

Now is a great time to turn to the slide information that's provided on investors.zoom.net in the slide packet that was released this morning. If you look at Slide 5 in detail, we share the rationale for this exciting merger.

As you know, at Zoom, we design, develop and sell innovative modems and other home networking products under the Motorola brand name and our benchmark show that our modem products are top 3 ranked products in certain retail consumer markets. Zoom was founded in 1977 and remains committed to addressing consumer connectivity needs as they evolve. .

You were already familiar with Minim, the AI-driven WiFi management security platform that is integrated into our latest wireless product, the Motorola MH7022. With this merger, we can work together on an ongoing basis, from development through sales, to build a vertically integrated franchise with an innovative road map.

Together, we will offer new products in expanded markets, led by an experienced team with proven results. In other words, the merger of Minim brand hardware and proven AI software enables not only an enhanced product, but also strengthens our positioning as a company..

I would next like to turn your attention to Slide 6, which provides more information about Minim. By way of background, as you may recall, Minim was founded in 2017 following the sale of my prior company, Dyn, an Internet performance management company to Oracle.

Dyn was focused on the enterprise market, big corporations in need of security and network management. But it turns out that consumer networking space also has a profound need for security and network management, more so today, with work from home and all the different devices running of your home network.

This was no more visible than the 2016 cybersecurity Denial-of-Service attack against Dyn on October 21, 2016. So I cofounded Minim to offer safe, reliable Internet home..

As noted on the slide, Minim's proprietary AI-driven platform offers mobile and web applications sold on a SaaS basis through Internet service providers, an important product and sales channel enhancement to the current Zoom business model.

In addition to adding software to Zoom's market-leading hardware, with Minim, we also have the opportunity to add ISPs to Zoom's retail distribution.

Minim has also begun to address the enterprise and small business market with its products with the so many distributed workforces looking for that security and network management, and we are confident that our combined offering is well positioned to gain traction in this large and growing market..

With Minim and Zoom in combination, we are truly the future of connectivity, a positive development for our customers, our employees and our shareholders. We are excited to have reached this point, and I'm looking forward to partnering with Gray Chynoweth again, who helped me lead Dyn to approximately 10x revenue growth from his joining of Dyn.

Gray will share more details about our opportunities together shortly and will continue on as CEO of the combined company. .

Let me now turn on to Slide 7 to a quick overview of the financial highlights for the third quarter. Net sales for Q3 were $12 million, our highest Zoom Telephonics quarterly revenue in recent history, up 17% sequentially and 11% year-over-year. If you look at the growth since 2016, when we started under the Motorola name, that is a 26% CAGR.

So we are pleased with this progress. .

Gross profit margin this quarter has expanded from 20.7% in the prior quarter to 32.2%, an increase of over 11 percentage points. This was largely due to improvements made by moving to manufacturing in Vietnam and shipping via ocean trading. We have substantially migrated production to Vietnam, therefore, alleviating the impact of U.S.

tariffs, and we're transitioning to ocean freight from higher cost air freight. We expect to see some further cost savings from the continued shift to ocean freight in Q4..

EBITDA continues to improve this quarter and a loss of $114,000. And we see a similar story in earnings per share with a $0.01 reported loss. .

On the balance sheet, our cash position is strong at $4.8 million. With strong sales performance and improved gross margins, we are seeing better bottom line results..

Last, in terms of our market position, with strong tailwinds in home connectivity and our leadership, we are top 3 in retail market share. This is a testament to the strength of our distribution and a position we intend to leverage with the combined company offerings..

Moving to our product update, starting on Slide 8, we show a few highlights first from our gateways and modems. Our products are selling through well, and we saw a 45% increase in demand for retailer inventory in Q3.

Retailers tell us that there is no signs of slowing down as the pandemic continues and people increasingly rely on home connectivity for work and life. We continue to invest in our road map, launching powerful DOCSIS 3.1 products, including our first Minim enabled gateway this quarter.

This increases the value of our gateway product by granting end users access to the MotoManage app..

Moving on to our WiFi products on Slide 9, which includes the MH7022 WiFi system, our first product powered by Minim, we're excited to enter the Mesh WiFi market where overall demand is up 126% year-over-year according to NPD Group's market research. .

Notably this quarter, Minim has been our largest sales channel for the MH7022, and we are seeing a 90% user adoption rate of the standard MotoManage app. In R&D, we are aggressively pursuing what's next on the product road map, a WiFi 6 mesh system. .

Last, on Slide 10, I want to share an update on the MotoManage app we mentioned last quarter, which was approved by the Apple and Google Play stores. This past quarter, MotoManage received a significant update for better usability and expanded functionality, showing our commitment out of the gate to delivering great software. .

And with that, I will now turn the call over to Jacquelyn to take us through the third quarter financial results. .

Thank you, Jeremy, and good morning, everyone. I will be reviewing our financials for both the third quarter and year-to-date 2020. For those who are following with our earnings presentation from our website, I will be starting with Slide 12. .

We have a great revenue story to tell this quarter. We have significantly reduced tariff exposure and are employing the use of ocean freight where possible for cost reductions, [indiscernible] factors that have previously weighed down our performance this year. On the top line, our revenues were strong, with Q3 revenue of $12 million.

As Jeremy mentioned, this is our highest quarterly revenue result in recent history, up 11% or $1.2 million over revenue recognized in Q3 2019 and up 17% or $1.8 million sequentially over Q2 of this year. .

Year-to-date, our revenues have increased $7.2 million or 26.7%, from $27 million for the 9 months ended September 30, 2019, to $34.3 million for the 9 months ending September 30, 2020.

The growth in our top line continues to be driven by strength in retail demand associated with more working and studying from home due to the pandemic, with particular strength in sales to Target and to Best Buy during the third quarter. .

We continue to reduce the impact of tariffs as we moved our manufacturing to Vietnam, which as of the end of the third quarter represented approximately 98% of total production. As a result, our gross profit margins improved on a sequential quarter basis, increasing from 20.7% in Q2 2020 to 32.2% in Q3 2020. .

During the third quarter, we decreased our reliance on airfreight to ship our products from Vietnam to the U.S., which reduced our total freight expense as a percentage of sales by 36%. We will continue to utilize airfreight only if necessary to meet demand and to drive continued growth..

On a year-to-date basis, net loss was $2.6 million, including $2.6 million in tariffs. Excluding these tariffs, non-GAAP net income year-to-date would have been just over breakeven. We also incurred $1.4 million in temporary supplemental airfreight expense in the second and third quarters of this year.

Excluding both the tariffs and the temporary supplemental airfreight expense, year-to-date non-GAAP net income would have been approximately $1.5 million. .

Net loss per share improved on a sequential quarter basis from a loss of $0.07 per share in Q2 to a loss of $0.01 per share in Q3. Year-over-year, net loss per share was unchanged at $0.01 per share in both Q3 2020 and Q3 2019.

For the 9 months ending September 30, 2020, net loss was $0.12 per share as compared to a loss of $0.11 per share for the same period in 2019..

Moving on to Slide 13. Slide 13 provides balance sheet highlights. The company has $4.8 million in cash as of September 30, 2020, including $800,000 of restricted cash related to prior period issuance of performance bonds for the payment of tariffs.

Tariffs are fully paid as invoiced, and we expect these performance bonds to start being released beginning in mid-2021. You can see an increase in current assets this period, which includes inventory as we work to meet increased demand for our products.

And an increase in current liabilities, which includes higher accounts payable, reflecting payments not yet due for the inventory purchased during the quarter to support that growth. As a result of these 2 dynamics, working capital is essentially unchanged from Q3 2019. .

As of September 30, 2020, the company had outstanding debt of $583,000 related to a PPP loan and nothing drawn against the company's $4 million line of credit. .

In summary, we have entered the third quarter with strong top line growth, improved profitability and a strong balance sheet to support our exciting road map for the future. .

With that, I'll hand the call over to Gray Chynoweth for additional insights into the Minim market. .

Thank you, Jackie. I'm really delighted to be here with you and Jeremy this morning. By way of introduction, I'm currently the CEO of Minim, and was previously Chief Operating Officer of Dyn.

While I worked closely with Jeremy to grow the company from 10 employees to more than 500 and set the course for annual revenues to increase from $3 million to $100 million per year.

By the time Oracle bought Dyn in 2016, we were providing internet optimization decisions daily for more than 3,500 enterprise customers, including some preeminent digital brands, such as Netflix, Twitter, Pfizer and CNBC. .

Today, I want to share with you some reasons that we are just so enthusiastic about the combining strengths of Zoom and Minim. Together, we're an extraordinarily well positioned company. We'll be able to drive innovation and growth for the benefit of customers, employees and shareholders. .

Looking at the management team of the combined company on Slide 15. You can see that we have an experienced top notch group that blends people and capabilities. I'm just simply thrilled to be here back in the side of Jeremy.

We experienced great success together at Dyn, and I look forward to working with him and the rest of the management team to generate similar success with the combined company. .

I'm particularly excited that Alec Rooney and Nicole Hayward, who'll be key members of the combined management team. Alec was a Co-founder of Minim, and his background includes networking and security at HP, Agilent, Meetinghouse and Cisco.

Nicole Hayward, also a Co-founder of Minim, previously served as Chief Marketing Officer, as software companies Antidote Technologies and OnSIP, which was recently acquired by Intrado. .

In terms of the structure of the combined company, the merger -- this is a merger of equals that transforms us into a hardware-software business with higher-value products, superior technology and a team that is capable of driving accelerated growth.

As Jeremy noted, we've reached a definitive agreement for the merger, subject to completion of customary closing conditions, which we expect to finalize in the later part of this quarter. .

To help Zoom's Board strategy and committee consider how this combination would transform Zoom's opportunity, Zoom secured a third-party valuation for Minim. Accordingly, the all-stock transaction, which values Minim at $30 million, is structured technically as a reverse triangular merger.

Going forward, we expect to rebrand the company and change the ticker symbol to maintain staffing levels at approximately 70 FTEs, and most importantly, to deliver our talent and our technology to power sustainable business growth..

As a combined company, we're positioned to operate in a truly exciting global wireless technology market, as shown on Slide 16. This market is expected to exceed $141 billion in global spend by 2025. That's a 15.4% CAGR over the next 5 years. I'm sure the drivers of this growth are familiar to all of you. First, we see the title shift to work from home.

More and more employees need top-level home connectivity to ensure their economic [indiscernible].

Second, network upgrades are driving continued product refreshes with higher performance technologies such as WiFi 6 and 5G, for example, there is continued spend on upgrading wireless technology in the home. .

Third, with increased adoption of smart home devices, growing to 20 devices per home in 2025, gaming devices at the home and over-the-top media streaming devices instead of regular cable, the demand for reliable, secure home connectivity will continue to grow. We have a simply massive market opportunity that depends on our quick action and focus.

And we honestly, could not be more ready or more excited to get down to work. .

To underscore this point, and to emphasize why Minim's acquisition was key to unlocking this opportunity, I want to share a look at the sales channels and growth opportunities afforded by Minim on Slide 17. First, Minim's business models anchored in sales through Internet service providers, which brings a new sales channel for Zoom hardware.

Second, as a software as a service or SaaS offering, Minim employs a subscription revenue model that scales with the number of home networks managed by Minim. For a given customer, our revenue starts with a minimum commit and scales automatically with user growth.

As such, Minim's revenue growth is driven both by new customers and greater penetration into the user base of existing customers. .

In addition to selling software into the ISP market, Minim recently launched a new product targeted at small and medium-sized businesses.

This product, Minim for remote workers, ensures that small or medium-sized businesses can provide their remote workforce with the connectivity, security and support necessary to ensure worker productivity in home working environments.

This affords Minim another important sales channel as well as a higher value offering in another substantial and growing market, the productivity management software market, which is currently valued at $102.98 billion by Grand View Research. .

I also point you to the logos of our key channel partners and industry affiliation partners, including Microsoft Airband Initiative and Telarus. In summary, I look forward to leveraging my experience and working with our combined team to capture this exciting opportunity that we see today and in the years ahead. .

And with that, I'll turn it back to Jeremy. .

Thank you, Gray. There's no question that this merger provides a clear path forward with a sustainable business plan that allows us to participate in an exciting and growing market, global wireless technology, with proprietary products on a SaaS basis.

I look forward to building a vertically integrated franchise with an innovative hardware-software road map with higher market multiples and a healthy growing business..

Operator, we are now ready for questions. .

[Operator Instructions] Your first question comes from the line of [ Albert Hanser ]. .

Congratulations on a great pathway. 2 separate but quick questions.

One, can you break down the $30 million headline number? Are there benchmarks or earn-outs associated with that number in time if certain metrics are hit and kind of give us more color on the structure of that number? And then separately, with the new product 720, just some of the metrics around the device and its Wi-Fi capacity and kind of drill down into the differentiator of that product cycle?.

Thanks, Albert. Good to hear you. I'll take the first question on new products and metrics. I believe you'll be seeing more to come on that. We think that SaaS revenue will be an important part on an ongoing basis.

Certainly, the way that the numbers lay out, it takes a while for the SaaS numbers to show up in a meaningful number, but on a counted as a customer acquisition number and more traditional SaaS metrics, I think, are ways to blend that. So stay tuned to that question. .

And then for the first part of the question around the acquisition valuation and the structure, I'll turn it over to Jackie. .

With respect to the acquisition valuation, the company conducted its own analysis, and we also employed the assistance of third parties to help the company develop a fair and unbiased valuation for Minim. All aspects of the company's financials were looked at. We also looked at the company's prior credit company valuations.

And looked at comparables in the market. .

Is all $30 million being issued today upfront? Or is it staggered according to certain earn-outs and metrics hit by the company as you integrate the 2?.

There are no earnouts or staggering based on performance metrics. It is a stock transaction. And it will all take place at the same time. .

[Operator Instructions] Presenters, we have no further questions. .

Thanks to everyone for joining us this morning, and we look forward to updating you on our progress. Thanks, and be well. .

This concludes today's conference call. You may now disconnect..