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 six months ended December 31, 2021.
23
RESULTS OF OPERATIONS
The following table sets forth, for the three and six months ended December 31,
2021 and 2020, our statements of comprehensive income including data expressed
as a percentage of sales:
Three Months Ended Six Months Ended
December 31, December 31,
2021 2020 2021 2020
Net sales 100.0 % 100.0 % 100.0 % 100.0 %
Cost of goods sold 80.0 % 83.0 % 83.4 % 82.2 %
Gross profit 20.0 % 17.0 % 16.6 % 17.8 %
Operating expenses 117.1 % 3.9 % 81.9 % 3.9 %
(Loss) income from operations (97.1 %) 13.1 % (65.3 %) 13.9 %
Other income, net 7.4 % 0.6 % 5.2 % 0.3 %
Net income before income taxes (89.7 %) 13.7 % (60.1 %) 14.2 %
Income tax (benefit) provision (26.2 %) 3.2 % (17.2 %) 3.2 %
Net (loss) income (63.5 %) 10.5 % (42.9 %) 11.0 %
Less: non-controlling interest
in net income of subsidiary 1.6 % 0.2 % 1.4 % 0.3 %
Net (loss) income attributable
to Parent Company stockholders (65.1 %) 10.3 % (44.3 %) 10.7 %
THREE MONTHS ENDED DECEMBER 31, 2021 COMPARED TO THREE MONTHS ENDED DECEMBER 31,
2020
NET SALES - Net sales decreased by $64,425,989, or 97.3%, to $1,821,589 for the
three months ended December 31, 2021 from $66,247,578 for the corresponding
period of 2020. For the three months ended December 31, 2021, net sales by
geographic regions, consisting of the North America, the countries in the
Caribbean and South America, and Asia, were $1,284,850 (70.5% of net sales),
$2,375 (0.1% of net sales), and $534,364 (29.4%), respectively. For the three
months ended December 31, 2020, net sales by geographic regions, consisting of
the North America, the countries in the Caribbean and South America, and Asia,
were $66,229,782 (100.0% of net sales), $17,500 (0.0% of net sales) and $296
(0.0% of net sales), respectively.
Net sales in North America decreased by $64,944,932, or 98.1%, to $1,284,850 for
the three months ended December 31, 2021 from $66,229,782 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 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 Caribbean and South America decreased by $15,125, or 86.4%, to
$2,375 for the three months ended December 31, 2021 from $17,500 for the
corresponding period of 2020. 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 $534,068, or 180,428.4%, to
$534,364 for the three months ended December 31, 2021 from $296 for the
corresponding period of 2020. The increase in net sales was primarily due to the
revenue generated from the material sales by FTI, which typically vary from
period to period.
24
GROSS PROFIT - Gross profit decreased by $10,928,475, or 96.8%, to $363,980 for
the three months ended December 31, 2021 from $11,292,455 for the corresponding
period of 2020. The gross profit in terms of net sales percentage was 20.0% for
the three months ended December 31, 2021 compared to 17.0% for the corresponding
period of 2020. The increase 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 revenues generated from three newly launched
products sales during the three months ended December 31, 2021, which involved
higher sales prices, which was partially offset by the revenues generated from
material sales by FTI, which involved higher costs of goods sold.
OPERATING EXPENSES- Operating expenses decreased by $428,825, or 16.7%, to
$2,131,933 for the three months ended December 31, 2021 from $2,560,758 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 $190,000, as well as the
decreased payroll and bad debt expense, by approximately $110,000 and $94,000,
respectively.
OTHER INCOME, NET - Other income, net decreased by $247,700, or 64.8%, to
$134,833 for the three months ended December 31, 2021 from $382,533 for the
corresponding period of 2020. The decrease was primarily due to the completed
gain from the forgiveness of the Payroll Protection Plan loan for the
corresponding period of 2020 and the decreased product development funding
received by FTI from a government entity, which was partially offset by the gain
from the favorable changes in foreign currency exchange rates in FTI.
SIX MONTHS ENDED DECEMBER 31, 2021 COMPARED TO SIX MONTHS ENDED DECEMBER 31,
2020
NET SALES - Net sales decreased by $123,651,379, or 96.0%, to $5,165,649 for the
six months ended December 31, 2021 from $128,817,028 for the corresponding
period of 2020. For the six months ended December 31, 2021, net sales by
geographic regions, consisting of the North America, the countries in the
Caribbean and South America, and Asia, were $4,456,048 (86.3% of net sales),
$2,375 (0.0% of net sales), and $707,226 (13.7% of net sales), respectively. For
the six months ended December 31, 2020, net sales by geographic regions,
consisting of North America, the countries in the Caribbean and South America,
and Asia, were $128,798,920 (100.0% of net sales), $17,500 (0.0% of net sales),
and $608 (0.0% of net sales), respectively.
Net sales in North America decreased by $124,342,872, or 96.5%, to $4,456,048
for the six months ended December 31, 2021 from $128,798,920 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 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 six months ended
December 31, 2021 from $17,500 for the corresponding period of 2020. 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 $706,618, or 116,220.1%, to $707,226 for the six months ended
December 31, 2021 from $608 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 $22,106,742, or 96.3%, to $856,944 for
the six months ended December 31, 2021 from $22,963,686 for the corresponding
period of 2020. The gross profit in terms of net sales percentage was 16.6% for
the six months ended December 31, 2021 compared to 17.8% 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 and gross profit in
terms of net sales percentage was the mixed results of competitive selling
prices and the increase in production costs of the existing products, and the
revenues generated from material sales by FTI, which involved lower margin, and
the revenues generated from three newly launched products sales with the higher
sales prices for the three months ended December 31, 2021.
OPERATING EXPENSES- Operating expenses decreased by $828,959, or 16.4%, to
$4,231,650 for the six months ended December 31, 2021 from $5,060,609 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 $420,000, as well as the
decreased payroll and bad debt expense, by approximately $170,000 and $190,000,
respectively.
OTHER INCOME, NET - Other income, net decreased by $121,978, or 31.3%, to
$267,357 for the six months ended December 31, 2021 from $389,335 for the
corresponding period of 2020. The decrease was primarily due to the completed
gain from the forgiveness of the Payroll Protection Plan loan for the
corresponding period of 2020, which was partially offset by the increased
product development funding received by FTI from a government entity and the
gain from the favorable changes in foreign currency exchange rates in FTI.
25
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 December 31, 2021 consisted of cash and
cash equivalents as well as short-term investments of $42,089,000. 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 six months
ended December 31, 2021 was $8,435,836, compared to net cash provided by
operating activities for the six months ended December 31, 2020 of $37,070,294.
The $8,435,836 in net cash used by operating activities for the six months ended
December 31, 2021 was primarily due to the decrease in accounts payable of
$6,189,648 and increase in inventories of $947,842 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
$1,345,644.
The $37,070,294 in net cash provided by operating activities for the six months
ended December 31, 2020 was primarily due to the increase in accounts payable
and income tax payable of $21,856,374 and $1,935,576, respectively, as well as
our operating results (net income of $14,153,272 adjusted for depreciation,
amortization, and other non-cash charges), which were partially offset by the
increase in accounts receivable and inventories of $718,138 and $1,392,737,
respectively.
INVESTING ACTIVITIES- Net cash used in investing activities for the six months
ended December 31, 2021 and 2020 was $479,169 and $547,140, respectively.
The $479,169 in net cash used in investing activities for the six months ended
December 31, 2021 was primarily due to the payments for capitalized product
development of $453,689. The $547,140 in net cash used in investing activities
for the six months ended December 31, 2020 was primarily due to the payments for
purchase of capitalized product development of $533,146.
FINANCING ACTIVITIES- Net cash provided by financing activities for the six
months ended December 31, 2021 and 2020 was $21,595 and $6,055,998,
respectively.
The $21,595 in net cash provided by financing activities for the six months
ended December 31, 2021 was from cash received from exercise of stock options.
The $6,055,998 in net cash provided by financing activities for the six months
ended December 31, 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 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 December 31, 2021 and 2020 was $112,119
and $111,700, respectively. Rent expense for the six months ended December 31,
2021 and 2020 was $223,705 and $223,253, respectively.
Recently Issued Accounting Pronouncements
Refer to NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES in the Consolidated
Financial Statements.
OFF-BALANCE SHEET ARRANGEMENTS
None.
© Edgar Online, source Glimpses
FRANKLIN WIRELESS CORP. 
