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" below. 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.
8
We have a majority ownership position in 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 countries in the Caribbean and South
America, and 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 for 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
Revenue Recognition
Contracts with Customers
Revenue from sales of products and services is derived from contracts with
customers. The products and services covered by contracts primarily consist of
hot spot routers. Contracts with each customer generally state the terms of the
sale, including the description, quantity and price of each product or service.
Payment terms are stated in the contract, primarily in the form of a purchase
order. Since the customer typically agrees to a stated rate and price in the
purchase order that does not vary over the life of the contract, the majority of
our contracts do not contain variable consideration. We establish a provision
for estimated warranty and returns. Using historical averages, that provision
for the year ended June 30, 2022, was not material.
Disaggregation of Revenue
In accordance with Topic 606, we disaggregate revenue from contracts with
customers into geographical regions and by the timing of when goods and services
are transferred. We determined that disaggregating revenue into these categories
meets the disclosure objective in Topic 606, which is to depict how the nature,
amount, timing and uncertainty of revenue and cash flows are affected by
regional economic factors.
Contract Balances
We perform our obligations under a contract with a customer by transferring
products in exchange for consideration from the customer. We typically invoice
our customers as soon as control of an asset is transferred, and a receivable is
established. We, however, recognize a contract liability when a customer prepays
for goods and/or services, or we have not delivered goods under the contract
since we have not yet transferred control of the goods and/or services.
The balances of our trade receivables are as follows:
June 30, 2022 June 30, 2021
Accounts Receivable, net $ 1,322,619 $ 2,542,429The balance of contract assets was immaterial as we did not have a significant
amount of un-invoiced receivables in the periods ended June 30, 2022 and June
30, 2021.
9
Included in the Accounts Receivable balance is a passthrough amount of
$837,000.00. These transactions were a direct result of an agreement between our
vendor and our customer. There is a corresponding balance of $837,000 in our
Accounts Payable account to offset.
Our contract liabilities, which are included in accrued liabilities on our
balance sheet, are as follows:
June 30, 2022 June 30, 2021
Undelivered products $ 371,624 $ 140,000
Performance Obligations
A performance obligation is a promise in a contract to transfer a distinct good
or service to the customer and is the unit of measurement in Topic 606. At
contract inception, we assess the products and services promised in our
contracts with customers. We then identify performance obligations to transfer
distinct products or services to the customer. To identify performance
obligations, we consider all the products or services promised in the contract
regardless of whether they are explicitly stated or are implied by customary
business practices.
Our performance obligations are satisfied at a point in time. Revenue from
products transferred to customers at a single point in time accounted for over
99% of net sales for the year ended June 30, 2022. Revenue for non-recurring
engineering projects is based on the percentage completion of a project and
accounted for under 1% of net sales for the year ended June 30, 2022. Most of
our revenue that is recognized at a point in time is for the sale of hot-spot
router products. Revenue from these contracts is recognized when the customer
can direct the use of and obtain substantially all of the benefits from the
product, which generally coincides with title transfer at completion of the
shipping process.
As of June 30, 2022, our contracts do not contain any unsatisfied performance
obligations, except for undelivered products.
Capitalized Product Development Costs
Accounting Standards Codification ("ASC") Topic 350, "Intangibles - Goodwill and
Other" includes software that is part of a product or process to be sold to a
customer and shall be accounted for under Subtopic 985-20. Our products contain
embedded software internally developed by FTI, which is an integral part of
these products because it allows the various components of the products to
communicate with each other and the products are clearly unable to function
without this coding.
The costs of product development that are capitalized once technological
feasibility is determined (noted as Technology in progress in the Intangible
Assets table, in Note 2 to Notes to Consolidated Financial Statements) include
certifications, licenses, payroll, employee benefits, and other
headcount-related expenses associated with product development. We determine
that technological feasibility for our products is reached after all high-risk
development issues have been resolved. Once the products are available for
general release to our customers, we cease capitalizing the product development
costs and any additional costs, if any, are expensed. The capitalized product
development costs are amortized on a product-by-product basis using the
straight-line amortization. The amortization begins when the products are
available for general release to our customers.
As of June 30, 2022, and June 30, 2021, capitalized product development costs in
progress were $187,343 and $602,388, respectively, and these amounts are
included in intangible assets in our consolidated balance sheets. During the
year ended June 30, 2022, we incurred $658,544 in capitalized product
development costs, and all costs incurred before technological feasibility is
reached are expensed and included in our consolidated statements of
comprehensive income.
Income Taxes
Deferred income tax assets and liabilities are recorded for differences between
the financial statement and tax basis of the assets and liabilities that will
result in taxable or deductible amounts in the future based on enacted laws and
rates applicable to the periods in which the differences are expected to affect
taxable income. Valuation allowances are established when necessary to reduce
deferred tax assets to the amount expected to be realized. As of June 30, 2022,
we have federal and state net operating loss carryforwards of approximately $3.3
million and $40,000, respectively.
10
Under the Tax Cuts and Jobs Act (the "Act"), which was signed into law on
December 22, 2017, the federal net operating loss of approximately $2.5 million,
which was recognized on or after January 1, 2018, will carry forward
indefinitely. The federal net operating loss of approximately $0.8 million,
which was recognized on or before December 31, 2017, will expire through 2035.
The state net operating loss of approximately $40,000 will begin to expire
through 2042. The utilization of net operating loss carryforwards may be subject
to limitations under provisions of the Internal Revenue Code Section 382 and
similar state provisions.
Under the provision of ASC 740 "Application of the Uncertain Tax Position
Provisions" related to accounting for uncertain tax positions, which prescribes
a recognition threshold and measurement process for recording in the financial
statements, uncertain tax positions taken or expected to be taken in a tax
return, the impact of an uncertain income tax position on the income tax return
must be recognized at the largest amount that is more-likely-than-not to be
sustained upon audit by the relevant taxing authority. Tax benefits of an
uncertain tax position will not be recognized if it has less than a 50%
likelihood of being sustained based on technical merits.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Refer to NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES in the Consolidated
Financial Statements.
RESULTS OF OPERATIONS
The following table sets forth, for the years ended June 30, 2022, 2021, and
2020, our statements of operations including data expressed as a percentage of
sales:
2022 2021 2020
(as a percentage of sales)
Net sales 100.0% 100.0% 100.0%
Cost of goods sold 84.1% 82.4% 80.7%
Gross profit 15.9% 17.6% 19.3%
Operating expenses 36.6% 5.2% 9.9%
(Loss) income from operations (20.7% ) 12.4% 9.4%
Other income, net 1.1% 0.3% 0.3%
Net (loss) income before income taxes (19.6% ) 12.7% 9.7%
Income tax (benefit) provision (4.3% ) 2.7% 1.8%
Net (loss) income (15.3% ) 10.0% 7.9%
Less: non-controlling interest in net income
of subsidiary 0.4% 0.4% 0.5%
Net (loss) income attributable to Parent
Company stockholders (15.7% ) 9.6% 7.4%
YEAR ENDED JUNE 30, 2022, COMPARED TO YEAR ENDED JUNE 30, 2021
NET SALES - Net sales decreased by $160,117,583, or 87.0%, to $23,997,762 for
the year ended June 30, 2022 from $184,115,345 for the corresponding period of
2021. For the year ended June 30, 2022, net sales by geographic regions,
consisting of North America, the Caribbean and South America, and Asia were
$23,305,366 (97.1% of net sales), $2,375 (0.0% of net sales), and $690,021 (2.9%
of net sales), respectively. For the year ended June 30, 2021, net sales by
geographic regions, consisting of North America, the Caribbean and South
America, and Asia were $183,771,146 (99.8% of net sales), $17,500 (0.0% of net
sales), and $326,699 (0.2% of net sales), respectively.
Net sales in North America decreased by $160,465,780, or 87.3%, to $23,305,366
for the year ended June 30, 2022, from $183,771,146 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 the Caribbean and South America decreased by
$15,125, or 86.4%, to $2,375 for the year ended June 30, 2022, from $17,500 for
the corresponding period of 2021. Net sales in Asia increased by $363,322, or
111.2%, to $690,021 for the year ended June 30, 2022, from $326,699 for the
corresponding period of 2021. 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.
11
GROSS PROFIT- Gross profit decreased by $28,647,438, or 88.2%, to $3,816,583 for
the year ended June 30, 2022, from $32,464,021 for the corresponding period of
2021. The gross profit in terms of net sales percentage was 15.9% for the year
ended June 30, 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 decrease in gross profit in terms of net sales percentage
was primarily due to variations in customer and product mix, competitive selling
prices and product costs which generally vary from period to period and region
to region.
OPERATING EXPENSES- Operating expenses decreased by $854,236, or 8.9%, to
$8,791,475 for the year ended June 30, 2022, from $9,645,711 for the
corresponding period of 2021.
Selling, general, and administrative expenses decreased by $568,504 to
$4,509,344 for the year ended June 30, 2022, from $5,077,848 for the
corresponding period of 2021. The decrease in selling, general, and
administrative expenses was primarily due to decreased shipping and handling
charges of approximately $480,000, decreased payroll expense as well as bad debt
expense of approximately $340,000, which are partially offset by the increased
compensation expense related to stock options granted for employees and
amortization expense of approximately $165,000 and $141,000, respectively.
Research and development expense decreased by $285,732 to $4,282,131 for the
year ended June 30, 2022, from $4,567,863 for the corresponding period of 2021.
The decrease in research and development expense was primarily due to the
decreased payroll expense for employees involved in research and development and
other research and development costs of approximately $104,000 and $182,000,
respectively.
OTHER INCOME, NET - Other income, net decreased by $351,748, or 57.0%, to
$265,419 for the year ended June 30, 2022, from $617,167 for the corresponding
period of 2021. The decrease was primarily due to the forgiveness of the Payroll
Protection Plan loan during the fiscal year 2021, with no similar transaction in
fiscal year 2022, as well as decreased product development funding received by
FTI from a government entity. This was partially offset by the gain from the
favorable changes in foreign currency exchange rates in FTI and the increased
interest income earned from the money market accounts and certificates of
deposit.
YEAR ENDED JUNE 30, 2021, COMPARED TO YEAR ENDED JUNE 30, 2020
NET SALES - Net sales increased by $109,043,047, or 145.3%, to $184,115,345 for
the year ended June 30, 2021 from $75,072,298 for the corresponding period of
2020. For the year ended June 30, 2021, net sales by geographic regions,
consisting of North America, the Caribbean and South America, and Asia were
$183,771,146 (99.8% of net sales), $17,500 (0.0% of net sales), and $326,699
(0.2% of net sales), respectively. For the year ended June 30, 2020, net sales
by geographic regions, consisting of North America, the Caribbean and South
America, and Asia were $74,839,778 (99.7% of net sales), $0 (0.0% of net sales),
and $232,520 (0.3% of net sales), respectively.
Net sales in North America increased by $108,931,368, or 145.6%, to $183,771,146
for the year ended June 30, 2021, from $74,839,778 for the corresponding period
of 2020. The increase in net sales in North America resulted primarily from
increased demand for wireless connectivity due to people working and attending
school remotely. High volume sales to school districts rapidly rolling out
remote learning programs was a significant driver for increased sales through
our primary customers due to the Covid-19 pandemic. Net sales also increased due
to the timing of orders placed by a carrier customer, from which a significant
portion of our revenue was derived (approximately 63% of our consolidated net
sales for this period). Net sales in the Caribbean and South America increased
by $17,500, or 100.0%, to $17,500 for the year ended June 30, 2021, from $0 for
the corresponding period of 2020. Net sales in Asia increased by $94,179, or
40.5%, to $326,699 for the year ended June 30, 2021, from $232,520 for the
corresponding period of 2020. The increase in net sales was primarily due to
product development service revenue generated by FTI, which typically varies
from period to period.
GROSS PROFIT- Gross profit increased by $17,939,536, or 123.5%, to $32,464,021
for the year ended June 30, 2021, from $14,524,485 for the corresponding period
of 2020. The gross profit in terms of net sales percentage was 17.6% for the
year ended June 30, 2021, compared to 19.3% for the corresponding period of
2020. The increase 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 competitive selling prices and the increase in
production costs.
OPERATING EXPENSES- Operating expenses increased by $2,199,350, or 29.5%, to
$9,645,711 for the year ended June 30, 2021, from $7,446,361 for the
corresponding period of 2020.
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Selling, general, and administrative expenses increased by $1,377,989 to
$5,077,848 for the year ended June 30, 2021, from $3,699,859 for the
corresponding period of 2020. The increase in selling, general, and
administrative expenses was primarily due to increased payroll expense as well
as compensation expense related to stock options granted for employees
(approximately $560,000), increased bad debt expense of approximately $340,000,
increased professional fees of approximately $130,000, and increased shipping
and handling charges of approximately $80,000.
Research and development expense increased by $821,361 to $4,567,863 for the
year ended June 30, 2021, from $3,746,502 for the corresponding period of 2020.
The increase in research and development expense was primarily due to the
increased payroll expense for employees involved in research and development and
other research and development costs.
OTHER INCOME, NET - Other income, net increased by $396,403, or 179.6%, to
$617,167 for the year ended June 30, 2021, from $220,764 for the corresponding
period of 2020. The increase was primarily due to the gain from the forgiveness
of the Payroll Protection Plan loan and increased product development funding
received by FTI from a government entity, which was partially offset by the loss
from the unfavorable changes in foreign currency exchange rates in FTI and the
decreased interest income earned from the money market accounts and certificates
of deposit.
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 June 30, 2022. 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 June 30, 2022, consisted of cash and
cash equivalents as well as short-term investments of $42,614,077. We believe
we have sufficient available capital to cover our existing operations and
obligations through at least June 30, 2023. 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 year ended
June 30, 2022, was $7,407,355, and net cash provided by operating activities for
the year ended June 30, 2021 was $12,104,199.
The $7,407,355 in net cash used in operating activities for the year ended June
30, 2022, was primarily due to the increase in inventory and decrease in
accounts payable of $3,222,344 and $1,537,287, respectively, as well as our
operating results (net loss adjusted for depreciation, amortization, and other
non-cash charges), which was offset by the decrease of accounts receivable of
$1,205,938.
The $12,104,199 in net cash provided by operating activities for the year ended
June 30, 2021, was primarily due to the decrease in accounts receivable and
inventory of $13,103,973 and $10,807,884, respectively, as well as our operating
results (net income adjusted for depreciation, amortization and other non-cash
charges), which was offset by the decrease in accounts payable of $32,364,266.
INVESTING ACTIVITIES- Net cash used in investing activities for the years ended
June 30, 2022, and 2021 was $11,675,028 and $722,520, respectively.
The $11,675,028 in net cash used in investing activities for the year ended June
30, 2022, was primarily due to the purchases of short-term investments and
capitalized product development of $10,950,625 and $658,544, respectively. The
$722,520 in net cash used in investing activities for the year ended June 30,
2021, was primarily due to the purchases of capitalized product development and
property and equipment of $694,909 and $21,043, respectively.
FINANCING ACTIVITIES- Net cash provided by financing activities for the years
ended June 30, 2022, and 2021 was $75,445 and $6,074,759, respectively.
The $75,445 in net cash provided by financing activities for the year ended June
30, 2022, was from the exercise of stock options. The $6,074,759 in net cash
provided by financing activities for the year ended June 30, 2021, was primarily
due to the $6,000,008 aggregate purchase price, paid to us in cash by investors
for the issuance of 923,078 shares of Common Stock, as well as $74,751 received
from the exercise of stock options.
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OFF-BALANCE SHEET ARRANGEMENTS
None.
CONTRACTUAL OBLIGATIONS AND OTHER COMMITMENTS
The following table summarizes our contractual obligations and commitments as of
June 30, 2022, and the effect such obligations could have on our liquidity and
cash flow in future periods:
Payments due by June 30,
2023 2024 2025 Total
Total Obligations $ 321,930 $ 160,965 $ - $ 482,895
LEASES
Refer to ITEM 2. PROPERTIES.
FUTURE LIQUIDITY AND CAPITAL REQUIREMENTS
For the next twelve months, we may require in excess of $5 million for capital
expenditures, software licenses and for testing and certifying new products.
We believe we will be able to fund our future cash requirements for operations
from our cash available, operating cash flows, bank lines of credit and issuance
of equity securities. We believe these sources of funds will be sufficient to
continue our operations and planned capital expenditures. However, we will be
required to raise additional debt or equity capital if we are unable to generate
sufficient cash flow from operations to fund the expansion of our sales and to
satisfy the related working capital requirements for the next twelve months. Our
ability to satisfy such obligations also depends upon our future performance,
which in turn is subject to general economic conditions and regional risks, and
to financial, business and other factors affecting our operations, including
factors beyond our control. See Item 1A, "Risk Factors" included in this report.
If we are unable to generate sufficient cash flow from operations to meet our
obligations and commitments, we will be required to raise additional debt or
equity capital. Additionally, we may be required to sell material assets or
operations or delay or forego expansion opportunities. We might not be able to
affect these alternative strategies to raise funds including credit lines and
loans, on satisfactory terms, if at all.
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