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 nine months ended March 31, 2022.
24
RESULTS OF OPERATIONS
The following table sets forth, for the three and nine months ended March 31,
2022 and 2021, our statements of comprehensive income including data expressed
as a percentage of sales:
Three Months Ended Nine Months Ended
March 31, March 31,
2022 2021 2022 2021
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 79.7% 82.9% 81.3% 82.4%
Gross profit 20.3% 17.1% 18.7% 17.6%
Operating expenses 36.5% 5.3% 56.3% 4.2%
(Loss) income from operations (16.2% ) 11.8% (37.6% ) 13.4%
Other income, net 0.9% 0.4% 2.7% 0.3%
Net (loss) income before income
taxes (15.3% ) 12.2% (34.9% ) 13.7%
Income tax (benefit) provision (3.6% ) 2.7% (9.5% ) 3.1%
Net (loss) income (11.7% ) 9.5% (25.4% ) 10.6%
Less: non-controlling interest in
net (loss) income of subsidiary (0.2% ) 0.6% 0.4% 0.4%
Net (loss) income attributable to
Parent Company stockholders (11.5% ) 8.9% (25.8% ) 10.2%
THREE MONTHS ENDED MARCH 31, 2022 COMPARED TO THREE MONTHS ENDED MARCH 31, 2021
NET SALES - Net sales decreased by $37,643,667, or 84.9%, to $6,687,287 for the
three months ended March 31, 2022 from $44,330,954 for the corresponding period
of 2021. For the three months ended March 31, 2022, net sales by geographic
regions, consisting of North America and Asia, were $6,687,287 (100.0% of net
sales) and $0 (0.0%), respectively. For the three months ended March 31, 2021,
net sales by geographic regions, consisting of North America and Asia, were
$44,054,824 (99.4% of net sales) and $276,130 (0.6% of net sales), respectively.
Net sales in North America decreased by $37,367,537, or 84.8%, to $6,687,287 for
the three months ended March 31, 2022 from $44,054,824 for the corresponding
period of 2021. The decrease in net sales in North America was primarily due to
the reduction of demand for wireless products from one major carrier customer,
resulting from the unprecedented high volume of demand for wireless products
during the prior period, which coincided with the early stages of the Covid-19
Pandemic period. Net sales in Asia decreased by $276,130, or 100.0%, to $0 for
the three months ended March 31, 2022 from $276,130 for the corresponding period
of 2021. The decrease in net sales was primarily due to the discontinued revenue
generated from the material sales by FTI, which typically vary from period to
period.
GROSS PROFIT - Gross profit decreased by $6,206,766, or 82.0%, to $1,359,330 for
the three months ended March 31, 2022 from $7,566,096 for the corresponding
period of 2021. The gross profit in terms of net sales percentage was 20.3% for
the three months ended March 31, 2022 compared to 17.1% for the corresponding
period of 2021. The decrease in gross profit was primarily due to the change in
net sales as described above. The increase in gross profit in terms of net sales
percentage was primarily due to the increased service revenues with a higher
profit.
25
OPERATING EXPENSES - Operating expenses increased by $104,613, or 4.5%, to
$2,440,899 for the three months ended March 31, 2022 from $2,336,286 for the
corresponding period of 2021. The increase in operating expenses was primarily
due to the increased compensation expense incurred from the options granted, by
approximately $80,000.
OTHER INCOME, NET - Other income, net decreased by $103,144, or 64.8%, to
$56,121 for the three months ended March 31, 2022 from $159,265 for the
corresponding period of 2021. The decrease was primarily due to the discontinued
product development funding received by FTI from a government entity and the
decreased gain from the changes in foreign currency exchange rates in FTI.
NINE MONTHS ENDED MARCH 31, 2022 COMPARED TO NINE MONTHS ENDED MARCH 31, 2021
NET SALES - Net sales decreased by $161,295,046, or 93.2%, to $11,852,936 for
the nine months ended March 31, 2022 from $173,147,982 for the corresponding
period of 2021. For the nine months ended March 31, 2022, net sales by
geographic regions, consisting of North America, the countries in the Caribbean
and South America, and Asia, were $11,143,335 (94.0% of net sales), $2,375 (0.0%
of net sales), and $707,226 (6.0% of net sales), respectively. For the nine
months ended March 31, 2021, net sales by geographic regions, consisting of
North America, the countries in the Caribbean and South America, and Asia, were
$172,853,744 (99.8% of net sales), $17,500 (0.0% of net sales), and $276,738
(0.2% of net sales), respectively.
Net sales in North America decreased by $161,710,409, or 93.6%, to $11,143,335
for the nine months ended March 31, 2022 from $172,853,744 for the corresponding
period of 2021. The decrease in net sales in North America was primarily due to
the reduction of demand for wireless products from two major carrier customers,
resulting from the unprecedented high volume of demand for wireless products
during the prior period, which coincided with the early stages of the Covid-19
Pandemic period. Net sales in the Caribbean and South America decreased by
15,125, or 86.4%, to $2,375 for the nine months ended March 31, 2022 from
$17,500 for the corresponding period of 2021. The decrease in net sales was
primarily due to the general nature of sales in these regions, which often
fluctuate significantly from period to period due to timing of orders placed by
a relatively small number of customers. Net sales in Asia increased by $430,488,
or 155.6%, to $707,226 for the nine months ended March 31, 2022 from $276,738
for the corresponding period of 2021. 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 $28,313,508, or 92.7%, to $2,216,274
for the nine months ended March 31, 2022 from $30,529,782 for the corresponding
period of 2021. The gross profit in terms of net sales percentage was 18.7% for
the nine months ended March 31, 2022 compared to 17.6% for the corresponding
period of 2021. The decrease in gross profit was primarily due to the change in
net sales as described above. The increase in gross profit in terms of net sales
percentage was primarily due to the increased service revenues with a higher
profit.
OPERATING EXPENSES - Operating expenses decreased by $724,346, or 9.8%, to
$6,672,549 for the nine months ended March 31, 2022 from $7,396,895 for the
corresponding period of 2021. 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 $529,000, as well as the
decreased bad debt expense, by approximately $163,000.
OTHER INCOME, NET - Other income, net decreased by $225,122, or 41.0%, to
$323,478 for the nine months ended March 31, 2022 from $548,600 for the
corresponding period of 2021. The decrease was primarily due to the completed
gain of $487,300 from the forgiveness of the Payroll Protection Plan loan for
the corresponding period of 2021, which was partially offset by the increased
gain from the favorable changes in foreign currency exchange rates in FTI.
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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 March 31, 2022 consisted of cash and
cash equivalents as well as short-term investments of $43,080,466. 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 nine months
ended March 31, 2022 was $7,296,402, compared to net cash provided by operating
activities for the nine months ended March 31, 2021 of $20,461,807.
The $7,296,402 in net cash used by operating activities for the nine months
ended March 31, 2022 was primarily due to the increase in inventories of
$6,676,070 as well as our operating results (net loss of $3,005,937 adjusted for
depreciation, amortization, and other non-cash charges), which was partially
offset by an increase in accounts payable of $2,533,695.
The $20,461,807 in net cash provided by operating activities for the nine months
ended March 31, 2021 was primarily due to the decrease in inventory and accounts
receivable of $10,353,900 and $2,534,938, respectively, as well as our operating
results (net income of $18,350,070 adjusted for depreciation, amortization, and
other non-cash charges) and the increase in income tax payable of $2,307,543,
which were partially offset by the decrease in accounts payable of $14,230,479.
INVESTING ACTIVITIES - Net cash used in investing activities for the nine months
ended March 31, 2022 and 2021 was $1,780,484 and $605,557, respectively.
The $1,780,484 in net cash used in investing activities for the nine months
ended March 31, 2022 was primarily due to the purchases of short-term
investments of $1,240,376 and the payments for capitalized product development
of $475,366. The $605,557 in net cash used in investing activities for nine
months ended March 31, 2021 was primarily due to the payments for purchase of
capitalized product development of $587,246.
FINANCING ACTIVITIES - Net cash provided by financing activities for the nine
months ended March 31, 2022 and 2021 was $21,595 and $6,074,758, respectively.
The $21,595 in net cash provided by financing activities for the nine months
ended March 31, 2022 was from cash received from exercise of stock options. The
$6,074,758 in net cash provided by financing activities for the nine months
ended March 31, 2021 was primarily due to the issuance of 923,078 shares of
Common Stock to investors for $6,000,008 in cash and $74,750 received from the
exercise of stock options.
27
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, 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 expire on 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 expires on September 4, 2022.
Rent expense for the three months ended March 31, 2022 and 2021 was $111,513 and
$111,679, respectively. Rent expense for the nine months ended March 31, 2022
and 2021 was $334,651 and $334,932, 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. 
