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,
2022, filed on September 13, 2022. 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 integrated wireless solutions utilizing the latest
in 4G LTE (fourth generation long-term evolution) and 5G (fifth generation)
technologies including mobile hotspots, routers, CPEs (Customer Premise
Equipment), and various trackers. Our integrated software subscription services
provide users remote capabilities including mobile device management (MDM) and
software defined wide area networking (SD-WAN).
We have majority ownership of Franklin Technology Inc. (FTI), a research and
development company based in Seoul, South Korea. FTI primarily provides design
and development services 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
primarily extends 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, 2022, 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, 2022.
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RESULTS OF OPERATIONS
The following table sets forth, for the three months ended September 30, 2022
and 2021, our statements of comprehensive income including data expressed as a
percentage of sales:
Three Months Ended
September 30,
2022 2021
Net sales 100.0% 100.0%
Cost of goods sold 80.3% 85.3%
Gross profit 19.7% 14.7%
Operating expenses 27.3% 62.8%
Loss from operations (7.6% ) (48.1% )
Other (expense) income, net (11.3% ) 4.0%
Net loss before income taxes (18.9% ) (44.1% )
Income tax benefits (1.3% ) (12.3% )
Net loss (17.6% ) (31.8% )
Less: non-controlling interest in net (loss)
income of subsidiary (3.7% ) 1.2%
Net loss attributable to Parent Company
stockholders (13.9% ) (33.0% )
THREE MONTHS ENDED SEPTEMBER 30, 2022 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2021
NET SALES - Net sales increased by $4,764,880, or 142.5%, to $8,108,940 for the
three months ended September 30, 2022 from $3,344,060 for the corresponding
period of 2021. For the three months ended September 30, 2022, net sales by
geographic regions, consisting of North America and Asia, were $8,107,451
(100.0% of net sales) and $1,489 (0.0% of net sales), respectively. For the
three months ended September 30, 2021, net sales by geographic regions,
consisting of North America and Asia, were $3,171,198 (94.8% of net sales) and
$172,862 (5.2% of net sales), respectively.
Net sales in North America increased by $4,936,253, or 155.7%, to $8,107,451 for
the three months ended September 30, 2022 from $3,171,198 for the corresponding
period of 2021. The increase in net sales in North America was primarily due to
the demand for a wireless product from one major carrier customer. Net sales in
Asia decreased by $171,373, or 99.1%, to $1,489 for the three months ended
September 30, 2022 from $172,862 for the corresponding period of 2021. The
decrease in net sales was primarily due to the decreased revenue generated from
the material sales and product development service by FTI, which typically vary
from period to period.
GROSS PROFIT - Gross profit increased by $1,100,898, or 223.3%, to $1,593,862
for the three months ended September 30, 2022 from $492,964 for the
corresponding period of 2021. The gross profit in terms of net sales percentage
was 19.7% for the three months ended September 30, 2022 compared to 14.7% for
the corresponding period of 2021. 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 a
major carrier customer, which involved higher gross margin compared the
corresponding period of 2021.
OPERATING EXPENSES - Operating expenses increased by $110,038, or 5.2%, to
$2,209,755 for the three months ended September 30, 2022 from $2,099,717 for the
corresponding period of 2021. Selling, general, and administrative expenses
increased by $161,820 to $1,239,635 for the three months ended September 30,
2022, from $1,077,815 for the corresponding period of 2021. The increase in
selling, general, and administrative expenses was primarily due to the increased
compensation expenses related to stock options granted for employees and legal
expenses of approximately $86,000 and $60,000, respectively. Research and
development expense decreased by $51,782 to $970,120 for the three months ended
September 30, 2022, from $1,021,902 for the corresponding period of 2021. The
decrease in research and development expense was primarily due to decreased
other research and development costs, which typically vary from period to
period.
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OTHER INCOME, NET - Other income, net decreased by $1,046,584, or 789.7%, to
$914,060 for the three months ended September 30, 2022 from $132,524 for the
corresponding period of 2021. The decrease was primarily due to the unfavorable
changes in foreign currency exchange rates in FTI.
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, 2022 consisted of cash and
cash equivalents as well as short-term investments of $40,760,941. 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, 2022 and 2021 was $1,012,140 and $6,368,586,
respectively.
The $1,012,140 in net cash used in operating activities for the three months
ended September 30, 2022 was primarily due to the increase in inventory of
$855,392 as well as our operating results (net loss adjusted for depreciation,
amortization, and other non-cash charges), which was partially offset by an
increase in accounts payable of $537,395.
The $6,368,586 in net cash used in 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.
INVESTING ACTIVITIES - Net cash provided by investing activities for the three
months ended September 30, 2022 was $553,881, and net cash used in investing
activities for the three months ended September 30, 2021 was $43,485.
The $553,881 in net cash provided by financial activities for the three months
ended September 30, 2022 was from the decreased short-term investments of
$1,080,659, which was partially offset by the payments for capitalized products
development and property and equipment of $493,250 and $26,674, 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.
FINANCING ACTIVITIES - Net cash provided by financing activities for the three
months ended September 30, 2022, and 2021 was $0 and $21,595, 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.
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CONTRACTUAL OBLIGATIONS AND OTHER COMMITMENTS
Leases
We lease approximately 12,775 square feet of office space in San Diego,
California, at a monthly rent of $25,754, pursuant to a lease expiring in
December 2023. In addition to monthly rent, the lease includes payment for
certain common area costs. Our facility is covered by an appropriate level of
insurance, and we believe it to be suitable for our use and adequate for our
present needs. 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
will expire on August 31, 2023. 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
will expire on September 4, 2023.
Rent expense for the three months ended September 30, 2022 and 2021 was $111,293
and $111,586, 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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