The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our financial statements and
related notes included elsewhere in this report. This report contains certain
forward-looking statements relating to future events or our future financial
performance. These statements are subject to risks and uncertainties which could
cause actual results to differ materially from those discussed in this
report. You are cautioned not to place undue reliance on this information, which
speaks only as of the date of this report. We are not obligated to publicly
update this information, whether as a result of new information, future events
or otherwise, except to the extent we are required to do so in connection with
our obligation to file reports with the SEC. For a discussion of the important
risks to our business and future operating performance, see the discussion under
the caption "Item 1A. Risk Factors" and under the caption "Factors That May
Influence Future Results of Operations" in the Company's Form 10-K for the year
ended June 30, 2021, filed on September 28, 2021. In light of these risks,
uncertainties and assumptions, the forward-looking events discussed in this
report might not occur.
BUSINESS OVERVIEW
We are a leading provider of intelligent wireless solutions including mobile
hotspots, routers, trackers, and other devices. Our designs integrate innovative
hardware and software enabling machine-to-machine (M2M) applications and the
Internet of Things (IoT). Our M2M and IoT solutions include embedded modules,
modems and gateways built to deliver reliable always-on connectivity supporting
a broad spectrum of applications based on 5G/4G wireless technology.
We have a majority ownership position in Franklin Technology Inc. ("FTI"), a
research and development company located in Seoul, South Korea. FTI primarily
provides design and development services to us for our wireless products.
Our products are generally marketed and sold directly to wireless operators, and
indirectly through strategic partners and distributors. Our global customer base
extends primarily from North America to Asia.
FACTORS THAT MAY INFLUENCE FUTURE RESULTS OF OPERATIONS
We believe that our revenue growth will be influenced largely by (1) the
successful maintenance of our existing customers, (2) the rate of increase in
demand for wireless data products, (3) customer acceptance of our new products,
(4) new customer relationships and contracts, and (5) our ability to meet
customers' demands.
We have entered into and expect to continue to enter into new customer
relationships and contracts for the supply of our products, and this may require
significant demands on our resources, resulting in increased operating, selling,
and marketing expenses associated with such new customers.
CRITICAL ACCOUNTING POLICIES
Our discussion and analysis of our financial condition and results of operations
are based upon our consolidated financial statements, which are prepared in
accordance with accounting principles generally accepted in the United States of
America (GAAP). The preparation of these financial statements in accordance with
GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and the disclosure of contingencies
at the date of the financial statements, as well as the reported amounts of
revenues and expenses during the reporting periods. Management evaluates these
estimates and assumptions on an ongoing basis. Our estimates and assumptions
have been prepared on the basis of the most current reasonably available
information. The results of these estimates form the basis for making judgments
about the carrying values of assets and liabilities that are not readily
apparent from other sources. Actual results could differ from these estimates
under different assumptions and conditions.
We have several critical accounting policies, which were described in our Annual
Report on Form 10-K for the year ended June 30, 2021, that are both important to
the portrayal of our financial condition and results of operations and require
management's most difficult, subjective and complex judgments. Typically, the
circumstances that make these judgments difficult, subjective and complex have
to do with making estimates about the effect of matters that are inherently
uncertain. There were no material changes to our critical accounting policies
during the three months ended September 30, 2021.
24
RESULTS OF OPERATIONS
The following table sets forth, for the three months ended September 30, 2021
and 2020, our statements of comprehensive income including data expressed as a
percentage of sales:
Three Months Ended
September 30,
2021 2020
Net sales 100.0% 100.0%
Cost of goods sold 85.3% 81.3%
Gross profit 14.7% 18.7%
Operating expenses 62.8% 4.0%
(Loss) income from operations (48.1% ) 14.7%
Other income, net 4.0% 0.0%
Net income before income taxes (44.1% ) 14.7%
Income tax (benefit) provision (12.3% ) 3.2%
Net (loss) income (31.8% ) 11.5%
Less: non-controlling interest in net income of
subsidiary 1.2% 0.4%
Net (loss) income attributable to Parent Company
stockholders (33.0% ) 11.1%
THREE MONTHS ENDED SEPTEMBER 30, 2021 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2020
NET SALES - Net sales decreased by $59,225,390, or 94.7%, to $3,344,060 for the
three months ended September 30, 2021 from $62,569,450 for the corresponding
period of 2020. For the three months ended September 30, 2021, net sales by
geographic regions, consisting of the North America and Asia, were $3,171,198
(94.8% of net sales) and $172,862 (5.2% of net sales), respectively. For the
three months ended September 30, 2020, net sales by geographic regions,
consisting of North America and Asia, were $62,569,138 (100.0% of net sales) and
$312 (0.0% of net sales), respectively.
Net sales in North America decreased by $59,397,940, or 94.9%, to $3,171,198 for
the three months ended September 30, 2021 from $62,569,138 for the corresponding
period of 2020. The decrease in net sales in North America was primarily due to
the reduction of demand for wireless products from two major carrier customers,
principally due to the unprecedently high volume of demand for wireless products
during the prior period, which coincided with the early stages of the Covid-19
Pandemic period, as well as the delayed launch of a new product. Net sales in
Asia increased by $172,550, or 55,304.5%, to $172,862 for the three months ended
September 30, 2021 from $312 for the corresponding period of 2020. The increase
in net sales was primarily due to the revenue generated from the material sales
and product development service by FTI, which typically vary from period to
period.
GROSS PROFIT - Gross profit decreased by $11,178,267, or 95.8%, to $492,964 for
the three months ended September 30, 2021 from $11,671,231 for the corresponding
period of 2020. The gross profit in terms of net sales percentage was 14.7% for
the three months ended September 30, 2021 compared to 18.7% for the
corresponding period of 2020. The decrease in gross profit was primarily due to
the change in net sales as described above. The decrease in gross profit in
terms of net sales percentage was primarily due to the revenues generated from
material sales by FTI, which involved higher costs of goods sold.
25
OPERATING EXPENSES- Operating expenses decreased by $400,134, or 16.0%, to
$2,099,717 for the three months ended September 30, 2021 from $2,499,851 for the
corresponding period of 2020. The decrease in operating expenses was primarily
due to the decreased shipping and handling costs related to the reduced volume
of product shipments and sales, by approximately $235,000, as well as decreased
bad debt expense.
OTHER INCOME, NET - Other income, net increased by $125,722, or 1,848.3%, to
$132,524 for the three months ended September 30, 2021 from $6,802 for the
corresponding period of 2020. The increase was primarily due to product
development funding received by FTI from a government entity.
LIQUIDITY AND CAPITAL RESOURCES
Our historical operating results, capital resources and financial position, in
combination with current projections and estimates, were considered in
management's plan and intentions to fund our operations over a reasonable period
of time, which we define as the twelve-month period ending from the date of the
filing of this Form 10-Q. For purposes of liquidity disclosures, we assess the
likelihood that we have sufficient available working capital and other principal
sources of liquidity to fund our operating activities and obligations as they
become due.
Our principal source of liquidity as of September 30, 2021 consisted of cash and
cash equivalents as well as short-term investments of $44,664,544. We believe
we have sufficient available capital to cover our existing operations and
obligations through at least one year from the date of the filing of this Form
10-Q. Our long-term future cash requirements will depend on numerous factors,
including our revenue base, profit margins, product development activities,
market acceptance of our products, future expansion plans and ability to control
costs. If we are unable to achieve our current business plan or secure
additional funding that may be required, we would need to curtail our operations
or take other similar actions outside the ordinary course of business in order
to continue to operate as a going concern.
OPERATING ACTIVITIES- Net cash used in operating activities for the three months
ended September 30, 2021 was $6,368,586, compared to net cash provided by
operating activities for the three months ended September 30, 2020 of
$9,158,695.
The $6,368,586 in net cash used by operating activities for the three months
ended September 30, 2021 was primarily due to the decrease in accounts payable
of $6,156,666 as well as our operating results (net loss adjusted for
depreciation, amortization, and other non-cash charges), which was partially
offset by a decrease in accounts receivable of $1,000,401.
The $9,158,695 in net cash provided by operating activities for the three months
ended September 30, 2020 was primarily due to the decrease in inventories of
$9,018,037 and increases in accounts payable and income tax payable of
$2,766,929 and $1,883,173, respectively, as well as our operating results (net
income adjusted for depreciation, amortization, and other non-cash charges),
which was partially offset by the increase in accounts receivable of
$11,945,931.
INVESTING ACTIVITIES- Net cash used in investing activities for the three months
ended September 30, 2021 and 2020 was $43,485 and $86,605, respectively.
The $43,485 in net cash used in investing activities for the three months ended
September 30, 2021 was primarily due to the payments for capitalized product
development of $35,543, and the $86,605 in net cash used in investing activities
for the three months ended September 30, 2020 was primarily due to the payments
for capitalized product development of $78,342.
FINANCING ACTIVITIES- Net cash provided by financing activities for the three
months ended September 30, 2021 and 2020 was $21,595 and $6,017,428,
respectively.
The $21,595 in net cash provided by financial activities for the three months
ended September 30, 2021 was from cash received from exercise of stock options.
The $6,017,428 in net cash provided by financing activities for the three months
ended September 30, 2020 was primarily due to the issuance of 923,078 shares of
Common Stock to investors for $6,000,008 in cash.
26
CONTRACTUAL OBLIGATIONS AND OTHER COMMITMENTS
Leases
On September 9, 2015, we signed a lease for new office space consisting of
approximately 12,775 square feet, located in San Diego, California, at a monthly
rent of $23,115, which commenced on October 28, 2015. In addition to monthly
rent, the new lease includes payment for certain common area costs. The term of
the lease for the new office space was four years from the lease commencement
date and was then extended by an additional fifty months, to December 31, 2023.
Our Korea-based subsidiary, FTI, leases approximately 10,000 square feet of
office space, at a monthly rent of approximately $8,000, and additional office
space consisting of approximately 2,682 square feet at a monthly rent of
approximately $2,700, both located in Seoul, Korea. These leases expired on
August 31, 2021 but were extended by an additional twelve months to August 31,
2022. In addition to monthly rent, the leases provide for periodic cost of
living increases in the base rent and payment for certain common area costs.
These facilities are covered by an appropriate level of insurance and we believe
them to be suitable for our use and adequate for our present needs.
We lease one corporate housing facility, located in Seoul, Korea, primarily for
our employees who travel, under a non-cancelable operating lease that expired on
September 4, 2021, and extended by an additional twelve months to September 4,
2022.
Rent expense for the three months ended September 30, 2021 and 2020 was $111,586
and $111,553, respectively.
Recently Issued Accounting Pronouncements
Refer to NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES in the Consolidated
Financial Statements.
OFF-BALANCE SHEET ARRANGEMENTS
None.
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FRANKLIN WIRELESS CORP. 
