Quarterly Report (10-q)

Table of Contents

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q

 

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2022

OR

 

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                          to                         .

 

Commission file number: 001-14891

 

FRANKLIN WIRELESS CORP.

(Exact name of Registrant as specified in its charter)

 

Nevada (State or other jurisdiction of incorporation or organization)		95-3733534 (I.R.S. Employer Identification Number)
9707 Waples Street Suite 150 San Diego, California (Address of principal executive offices)		92121 (Zip code)

 

[phone]

Registrant's telephone number, including area code

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes ☒    No ☐

 

Indicate by check mark whether the registrant has submitted electronically, if any, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes ☒ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ☐

Accelerated filer ☒

Non-accelerated filer ☐

Smaller reporting company ☒

Emerging Growth Company ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐  No ☒

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class	Trading symbol(s)	Name of each exchange on which registered
Common Stock, par value $.001 per share	FKWL	The Nasdaq Stock Market LLC

 

The Registrant has 11,594,280 shares of common stock outstanding as of May 10, 2022.

 

 

 

 

 

FRANKLIN WIRELESS CORP.

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2022

INDEX

 

 

		Page
PART I – Financial Information
Item 1:	Consolidated Financial Statements (unaudited)
	Consolidated Balance Sheets as of March 31, 2022 (unaudited) and June 30, 2021	4
	Consolidated Statements of Income and Comprehensive Income (unaudited) for the three and nine months ended March 31, 2022 and 2021	5
	Consolidated Statements of Stockholders' Equity (unaudited) for the three and nine months ended March 31, 2022 and 2021	6-7
	Consolidated Statements of Cash Flows (unaudited) for the nine months ended March 31, 2022 and 2021	8
	Notes to Consolidated Financial Statements	9
Item 2:	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24
Item 3:	Quantitative and Qualitative Disclosures About Market Risk	28
Item 4:	Controls and Procedures	28
PART II – Other Information
Item 1:	Legal Proceedings	29
Item 1A:	Risk Factors	29
Item 2:	Unregistered Sales of Equity Securities and Use of Proceeds	29
Item 3:	Defaults Upon Senior Securities	29
Item 4:	Mine Safety Disclosures	29
Item 5:	Other Information	29
Item 6:	Exhibits	29
Signatures		30

 

 

 

2

 

 

NOTE ON FORWARD LOOKING STATEMENTS

 

You should keep in mind the following points as you read this Report on Form 10-Q:

 

The terms “we,” “us,” “our,” “Franklin,” “Franklin Wireless,” or the “Company” refer to Franklin Wireless Corp.

 

This Report on Form 10-Q contains statements which, to the extent they do not recite historical fact, constitute “forward looking” statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward looking statements are used under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operation,” and elsewhere in this Quarterly Report on Form 10-Q. You can identify these statements by the use of words like “may,” “will,” “could,” “should,” “project,” “believe,” “anticipate,” “expect,” “plan,” “estimate,” “forecast,” “potential,” “intend,” “continue,” and variations of these words or comparable words. Forward looking statements do not guarantee future performance and involve risks and uncertainties. Actual results may differ substantially from the results that the forward looking statements suggest for various reasons, including those discussed under the caption “Risk Factors” in Item 1A of our Annual Report on Form 10-K for the year ended June 30, 2021. These forward looking statements are made only as of the date of this Report on Form 10-Q. We do not undertake to update or revise the forward looking statements, whether as a result of new information, future events or otherwise.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3

 

 

PART I – FINANCIAL INFORMATION

 

ITEM 1. Consolidated Financial Statements

 

FRANKLIN WIRELESS CORP.

Consolidated Balance Sheets

 

		March 31, 2022
		(Unaudited)				June 30, 2021
ASSETS
Current assets:
Cash and cash equivalents		$	36,454,056			$	45,796,006
Certificates of deposit account			6,626,410				5,386,034
Accounts receivable			2,026,963				2,542,429
Other receivables, net			64,570				50,040
Inventories, net			7,651,589				975,519
Prepaid income taxes			102,055				–
Prepaid expenses and other current assets			189,083				44,984
Advance payments to vendors			205,240				40,630
Total current assets			53,319,966				54,835,642
Property and equipment, net			123,075				151,610
Intangible assets, net			1,350,753				1,246,750
Deferred tax assets, non-current			1,558,893				387,548
Goodwill			273,285				273,285
Right of use assets			520,703				753,263
Other assets			35,602				140,539
TOTAL ASSETS		$	57,182,277			$	57,788,637
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable		$	12,252,684			$	9,718,989
Income tax payable			156,904				333,503
Unearned revenue from customers			361,527				–
Accrued liabilities			600,149				785,525
Lease liabilities, current			305,766				317,519
Total current liabilities			13,677,030				11,155,536
Lease liabilities, non-current			237,472				467,937
Total liabilities			13,914,502				11,623,473
Commitments and contingencies (Note 8)			–				–
Stockholders’ equity:
Parent Company stockholders’ equity
Preferred stock, par value $0.001 per share, authorized 10,000,000 shares; No preferred stock issued and outstanding as of March 31, 2022 and June 30, 2021			–				–
Common stock, par value $0.001 per share, authorized 50,000,000 shares; 11,594,280 and 11,590,281 shares issued and outstanding as of March 31, 2022 and June 30, 2021, respectively			14,073				14,069
Additional paid-in capital			13,367,437				12,972,234
Retained earnings			32,667,074				35,727,094
Treasury stock, 2,549,208 shares as of March 31, 2022 and June 30, 2021			(3,554,893	)			(3,554,893	)
Accumulated other comprehensive loss			(759,161	)			(472,502	)
Total Parent Company stockholders’ equity			41,734,530				44,686,002
Non-controlling interests			1,533,245				1,479,162
Total stockholders’ equity			43,267,775				46,165,164
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	57,182,277			$	57,788,637

 

See accompanying notes to consolidated financial statements.

 

 

 

4

 

FRANKLIN WIRELESS CORP.

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (LOSS)

(Unaudited) 

 

		Three Months Ended								Nine Months Ended
		March 31,								March 31,
		2022				2021				2022				2021
Net sales		$	6,687,287			$	44,330,954			$	11,852,936			$	173,147,982
Cost of goods sold			5,327,957				36,764,858				9,636,662				142,618,200
Gross profit			1,359,330				7,566,096				2,216,274				30,529,782
Operating expenses:
Selling, general and administrative			1,390,719				1,136,761				3,493,328				4,067,246
Research and development			1,050,180				1,199,525				3,179,221				3,329,649
Total operating expenses			2,440,899				2,336,286				6,672,549				7,396,895
(Loss) income from operations			(1,081,569	)			5,229,810				(4,456,275	)			23,132,887
Other income, net:
Interest income			1,745				1,954				5,555				6,608
Income from governmental subsidy			–				40,929				93,109				107,362
Gain from the forgiveness of payroll protection plan loan			–				–				–				487,300
Other income (loss), net			54,376				116,382				224,814				(52,670	)
Total other income, net			56,121				159,265				323,478				548,600
(Loss) income before (benefit) provision for income taxes			(1,025,448	)			5,389,075				(4,132,797	)			23,681,487
Income tax (benefit) provision			(238,852	)			1,192,277				(1,126,860	)			5,331,417
Net (loss) income			(786,596	)			4,196,798				(3,005,937	)			18,350,070
Less: non-controlling interests in net (loss) income of subsidiary at 33.7%			(15,778	)			258,245				54,083				634,546
Net (loss) income attributable to Parent Company		$	(770,818	)		$	3,938,553			$	(3,060,020	)		$	17,715,524
Basic (loss) income per share attributable to Parent Company stockholders		$	(0.07	)		$	0.34			$	(0.26	)		$	1.57
Diluted (loss) income per share attributable to Parent Company stockholders		$	(0.07	)		$	0.33			$	(0.26	)		$	1.54
Weighted average common shares outstanding – basic			11,594,280				11,581,629				11,593,857				11,271,168
Weighted average common shares outstanding – diluted			11,594,280				11,792,292				11,593,857				11,481,830
Comprehensive (loss) income
Net (loss) income		$	(786,596	)		$	4,196,798			$	(3,005,937	)		$	18,350,070
Translation adjustments			(85,973	)			(20,255	)			(286,659	)			264,265
Comprehensive (loss) income			(872,569	)			4,176,543				(3,292,596	)			18,614,335
Less: comprehensive (loss) income attributable to non-controlling interest			(15,778	)			258,245				54,083				634,546
Comprehensive (loss) income attributable to controlling interest		$	(856,791	)		$	3,918,298			$	(3,346,679	)		$	17,979,789

 

See accompanying notes to consolidated financial statements.

 

 

 

5

 

 

FRANKLIN WIRELESS CORP.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

For the Three and Nine Months Ended March 31, 2022 (unaudited)

 

		Common Stock								Additional Paid-in				Retained				Treasury				Accumulated Other Comprehensive Income				Non-controlling				Total Stockholders
		Shares				Amount				Capital				Earnings				Stock				(Loss)				Interest				Equity
Balance - June 30, 2021			11,590,281			$	14,069			$	12,972,234			$	35,727,094			$	(3,554,893	)		$	(472,502	)		$	1,479,162			$	46,165,164
Net loss attributable to Parent Company			–				–				–				(2,289,202	)			–				–				–				(2,289,202	)
Foreign exchange translation			–				–				–				–				–				(200,686	)			–				(200,686	)
Issuance of stock related to stock option exercised			3,999				4				21,591				–				–				–				–				21,595
Compensation expense related to stock option granted			–				–				192,465				–				–				–				–				192,465
Comprehensive income attributable to non-controlling interest			–				–				–				–				–				–				69,861				69,861
Balance - December 31, 2021 (unaudited)			11,594,280			$	14,073			$	13,186,290			$	33,437,892			$	(3,554,893	)		$	(673,188	)		$	1,549,023			$	43,959,197
Net loss attributable to Parent Company			–				–				–				(770,818	)			–				–				–				(770,818	)
Foreign exchange translation			–				–				–				–				–				(85,973	)			–				(85,973	)
Compensation expense related to stock option granted			–				–				181,147				–				–				–				–				181,147
Comprehensive income attributable to non-controlling interest			–				–				–				–				–				–				(15,778	)			(15,778	)
Balance - March 31, 2022 (unaudited)			11,594,280			$	14,073			$	13,367,437			$	32,667,074			$	(3,554,893	)		$	(759,161	)		$	1,533,245			$	43,267,775

 

See accompanying notes to consolidated financial statements.

 

 

 

6

 

 

FRANKLIN WIRELESS CORP.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

For the Three and Nine Months Ended March 31, 2021 (unaudited)

 

		Common Stock								Additional Paid-in				Retained				Treasury				Accumulated Other Comprehensive Income				Non-controlling				Total Stockholders
		Shares				Amount				Capital				Earnings				Stock				(Loss)				Interest				Equity
Balance - June 30, 2020			10,605,912			$	14,007			$	7,475,365			$	18,028,059			$	(4,513,479	)		$	(650,426	)		$	782,015			$	21,135,541
Net income attributable to Parent Company			–				–				–				13,776,971				–				–				–				13,776,971
Foreign exchange translation			–				–				–				–				–				284,520				–				284,520
Issuance of stock related to stock option exercised			47,291				47				55,943				–				–				–				–				55,990
Compensation expense related to stock option granted			–				–				184,229				–				–				–				–				184,229
Sales of treasury stock			923,078				–				5,041,422				–				958,586				–				–				6,000,008
Comprehensive income attributable to non-controlling interest			–				–				–				–				–				–				376,301				376,301
Balance – December 31, 2020 (unaudited)			11,576,281			$	14,054			$	12,756,959			$	31,805,030			$	(3,554,893	)		$	(365,906	)		$	1,158,316			$	41,813,560
Net income attributable to Parent Company			–				–				–				3,938,553				–				–				–				3,938,553
Foreign exchange translation			–				–				–				–				–				(20,255	)			–				(20,255	)
Issuance of stock related to stock option exercised			14,000				14				18,746				–				–				–				–				18,760
Compensation expense related to stock option granted			–				–				97,887				–				–				–				–				97,887
Comprehensive income attributable to non-controlling interest			–				–				–				–				–				–				258,245				258,245
Balance – March 31, 2021 (unaudited)			11,590,281			$	14,068			$	12,873,592			$	35,743,583			$	(3,554,893	)		$	(386,161	)		$	1,416,561			$	46,106,750

  

See accompanying notes to unaudited consolidated financial statements.

 

 

 

7

 

 

FRANKLIN WIRELESS CORP.

Consolidated Statements of Cash Flows (unaudited)

 

		Nine Months Ended March 31,
		2022				2021
CASH FLOW FROM OPERATING ACTIVITIES:
Net (loss) income		$	(3,005,937	)		$	18,350,070
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation			68,105				67,593
Amortization of intangible assets			396,535				342,070
Stock based compensation			373,612				282,116
Bad debt expense			23,781				338,485
Forgiveness of payroll protection plan loan			–				(487,300	)
Amortization of right of use assets			232,560				286,273
Deferred tax (benefit)			(1,171,345	)			195,115
(Decrease) increase in cash due to change in:
Accounts receivable			477,155				2,534,938
Inventories			(6,676,070	)			10,353,900
Prepaid expenses and other current assets			(144,099	)			(27,656	)
Prepaid income taxes			(102,055	)			–
Advance payments to vendors			(164,610	)			(20,276	)
Other assets			104,937				142,779
Accounts payable			2,533,695				(14,230,479	)
Income tax payable			(176,599	)			2,307,543
Unearned revenue from customers			361,527				–
Lease liabilities			(242,218	)			(295,931	)
Accrued liabilities			(185,376	)			322,567
Net cash (used) provided by operating activities			(7,296,402	)			20,461,807
CASH FLOW FROM INVESTING ACTIVITIES:
Purchases of short-term investments			(1,240,376	)			(3,345	)
Purchases of property and equipment			(39,570	)			(12,741	)
Payments for capitalized product development costs			(475,366	)			(587,246	)
Purchases of intangible assets			(25,172	)			(2,225	)
Net cash used in investing activities			(1,780,484	)			(605,557	)
CASH FLOW FROM FINANCING ACTIVITIES:
Sales of common stock sold from treasury stock			–				6,000,008
Cash received from exercise of stock options			21,595				74,750
Net cash provided by financing activities			21,595				6,074,758
Effect of foreign currency translation			(286,659	)			264,265
Net (decrease) increase in cash and cash equivalents			(9,341,950	)			26,195,273
Cash and cash equivalents, beginning of period			45,796,006				28,161,644
Cash and cash equivalents, end of period		$	36,454,056			$	54,356,917
Supplemental disclosure of cash flow information:
Cash paid during the periods for:
Income taxes		$	(316,355	)		$	(2,800,825	)

 

See accompanying notes to consolidated financial statements.

 

 

 

8

 

 

FRANKLIN WIRELESS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

  

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Principles of Consolidation

 

The consolidated financial statements include the accounts of the Company and its subsidiary, Franklin Technology Inc. ("FTI"), with a majority voting interest of 66.3% (33.7% is owned by non-controlling interests) as of March 31, 2022, and June 30, 2021. In the preparation of consolidated financial statements of the Company, intercompany transactions and balances are eliminated and net earnings are reduced by the portion of the net earnings of the subsidiary applicable to non-controlling interests.

 

As consolidated financial statements are based on the assumption that they represent the financial position and operating results of a single economic entity, the retained earnings or deficit of the subsidiary at the date of acquisition, October 1, 2009, by the parent are excluded from consolidated retained earnings. When a subsidiary is consolidated, the consolidated financial statements include the subsidiary’s revenues, expenses, gains, and losses only from the date the subsidiary is initially consolidated, and the non-controlling interest is reported in the consolidated statement of financial position within equity, separately from the parent’s equity. There are no shares of the Company held by any subsidiaries as of March 31, 2022, or June 30, 2021.

 

Non-controlling Interest in a Consolidated Subsidiary

 

As of March 31, 2022, the non-controlling interest was $1,533,245, which represents a $54,083 increase from $1,479,162 as of June 30, 2021.  The increase in the non-controlling interest of $54,083 was from income in the subsidiary of $160,385 incurred for the nine months ended March 31, 2022.

 

Segment Reporting

 

Accounting Standards Codification (“ASC”) 280, “Segment Reporting,” requires public companies to report financial and descriptive information about their reportable operating segments. We identify our operating segments based on how our chief operating decision maker internally evaluates separate financial information, business activities and management responsibility. We have one reportable segment, consisting of the sale of wireless access products.

 

We generate revenues from three geographic areas, consisting of North America, Caribbean and South America, and Asia. The following enterprise-wide disclosure is prepared on a basis consistent with the preparation of the consolidated financial statements. The following table contains certain financial information by geographic area:

		Three Months Ended								Nine Months Ended
		March 31,								March 31,
Net sales:		2022				2021				2022				2021
North America		$	6,687,287			$	44,054,824			$	11,143,335			$	17,285,374
Caribbean and South America			–				–				2,375				17,500
Asia			–				276,130				707,226				276,738
Totals		$	6,687,287			$	44,330,954			$	11,852,936			$	173,147,982

 

 

 

9

 

 

Long-lived assets, net (property and equipment and intangible assets):		March 31, 2022				June 30, 2021
North America		$	1,389,573			$	1,349,320
Asia			84,225				49,040
Totals		$	1,473,828			$	1,398,360

 

Use of Estimates

 

The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could materially differ from those estimates.

 

Fair Value of Financial Instruments

 

The carrying amounts of financial instruments such as cash equivalents, short-term investments, accounts receivable, accounts payable and debt approximate the related fair values due to the short-term maturities of these instruments. We invest our excess cash into financial instruments which are readily convertible into cash, such as money market funds and certificates of deposit.

  

Allowance for Doubtful Accounts

 

Based upon our review of our collection history as well as the current balances associated with all significant customers and associated invoices, as of March 31, 2022, we did not believe an allowance for doubtful accounts was necessary.

 

Revenue Recognition

 

Contracts with Customers

 

Revenue for sales of products and services is derived from contracts with customers. The products and services promised in contracts primarily consist of hotspot 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 quarter ended March 31, 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.

 

 

 

10

 

 

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:

		March 31, 2022				June 30, 2021
Accounts Receivable		$	2,026,963			$	2,542,429

 

The balance of contract assets was immaterial as we did not have a significant amount of un-invoiced receivables in the periods ended March 31, 2022, and June 30, 2021. 

 

Our contract liabilities are as follows:

		March 31, 2022				June 30, 2021
Undelivered products		$	501,527			$	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. In order 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 primarily satisfied at a point in time. Revenue from products transferred to customers at a single point in time accounted for 99.9% of net sales for the nine months ended March 31, 2022. Revenue recognized over a period of time for non-recurring engineering projects is based on the percent complete of a project and accounted for 0.1% of net sales for the nine months ended March 31, 2022. The majority of our revenue recognized at a point in time is for the sale of hotspot router products. Revenue from these contracts is recognized when the customer is able to 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 March 31, 2022, our contracts do not contain any unsatisfied performance obligations, except for undelivered products.

 

Cost of Goods Sold

 

All costs associated with our contract manufacturers, as well as distribution, fulfillment and repair services, are included in our cost of goods sold. Cost of goods sold also includes amortization expenses of approximately $79,284 and $238,109 associated with capitalized product development costs associated with complete technology for the three and nine months ended March 31, 2022, respectively, and $82,000 and $282,000 for the three and nine months ended March 31, 2021, respectively.

 

 

 

11

 

 

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 is 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 3 to Notes to Consolidated Financial Statements) include related licenses, certification costs, 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 greater of straight-line amortization or the ratio of the current gross revenues to the current and anticipated future gross revenues. The amortization begins when the products are available for general release to our customers.

 

As of March 31, 2022, and June 30, 2021, capitalized product development costs in progress were $178,100 and $602,388, respectively, and the amounts are included in intangible assets in our consolidated balance sheets. For the three and nine months ended March 31, 2022, we incurred $21,677 and $475,366, respectively, and for the three and nine months ended March 31, 2021, we incurred $54,100 and $587,246, respectively, in capitalized product development costs, and such amounts are primarily comprised of certifications and licenses. All costs incurred before technological feasibility is reached are expensed and included in our consolidated statements of comprehensive income.

 

Research and Development Costs

 

Costs associated with research and development are expensed as incurred. Research and development costs were $1,050,180 and $1,199,525 for the three months ended March 31, 2022 and 2021, respectively, and $3,179,221 and $3,329,649 for the nine months ended March 31, 2022 and 2021, respectively. 

 

Warranties

 

We provide a warranty for one year which is covered by our vendors and manufacturers under purchase agreements between the Company and the vendors. As a result, we believe we do not have any net warranty exposure and do not accrue any warranty expenses. Historically, the Company has not experienced any material net warranty expenditures.

 

Shipping and Handling Costs

 

Costs associated with product shipping and handling are expensed as incurred.  Shipping and handling costs, which are included in selling, general and administrative expenses on the consolidated statements of comprehensive income, were $42,706 and $147,202 for the three months ended March 31, 2022 and 2021, respectively, and $145,658 and $674,854 for the nine months ended March 31, 2022 and 2021, respectively. 

 

Cash and Cash Equivalents

 

For purposes of the consolidated statements of cash flow, we consider all highly liquid investments purchased with original maturities of three months or less to be cash equivalents. We invest our excess cash into financial instruments which management believes are readily convertible into cash, such as money market funds that are readily convertible to cash and have a $1.00 net asset value.

 

 

 

12

 

 

Short Term Investments

 

We have invested excess funds in short term liquid assets, such as certificates of deposit.

 

Inventories

 

Our inventories consist of finished goods and are stated at the lower of cost or net realizable value, cost being determined on a first-in, first-out basis. We assess the inventory carrying value and reduce it, if necessary, to its net realizable value based on customer orders on hand, and internal demand forecasts using management’s best estimates given information currently available. Our customer demand is highly unpredictable and can fluctuate significantly caused by factors beyond the control of the Company. We may write down our inventory value for potential obsolescence and excess inventory. As of March 31, 2022, and June 30, 2021, we did not record any reserve for inventories that we have identified as obsolete or slow-moving.

  

Property and Equipment

 

Property and equipment are recorded at cost. Significant additions or improvements extending useful lives of assets are capitalized. Maintenance and repairs are charged to expense as incurred. Depreciation is computed using the straight-line method over the estimated useful lives as follows:

Machinery		6 years
Office equipment		5 years
Molds		3 years
Vehicles		5 years
Computers and software		5 years
Furniture and fixtures		7 years
Facilities improvements		5 years or life of the lease, whichever is shorter

 

Goodwill and Intangible Assets

 

Goodwill and certain intangible assets were recorded in connection with the FTI acquisition in October 2009, and are accounted for in accordance with ASC 805, “Business Combinations.” Goodwill represents the excess of the purchase price over the fair value of the tangible and intangible net assets acquired. Intangible assets are recorded at their fair value at the date of acquisition. Goodwill and other intangible assets are accounted for in accordance with ASC 350, “Goodwill and Other Intangible Assets.” Goodwill and other intangible assets are tested for impairment at least annually and any related impairment losses are recognized in earnings when identified. No impairment was deemed necessary as of March 31, 2022 or June 30, 2021.

 

Long-lived Assets

 

In accordance with ASC 360, “Property, Plant, and Equipment,” we review for impairment of long-lived assets and certain identifiable intangibles whenever events or circumstances indicate that the carrying amount of assets may not be recoverable. We consider the carrying value of assets may not be recoverable based upon our review of the following events or changes in circumstances: the asset’s ability to continue to generate income from operations and positive cash flow in future periods; loss of legal ownership or title to the assets; significant changes in our strategic business objectives and utilization of the asset; or significant negative industry or economic trends. An impairment loss would be recognized when estimated future cash flows expected to result from the use of the asset are less than its carrying amount.

 

As of March 31, 2022, and June 30, 2021, we were not aware of any events or changes in circumstances that would indicate that the long-lived assets are impaired.

 

 

 

13

 

 

Stock-based Compensation

 

The Company’s employee share-based awards result in a cost that is measured at fair value on an award’s grant date, based on the estimated number of awards that are expected to vest. Compensation costs are recognized over the period that an employee provides service in exchange for the award, i.e. the vesting period. The Company estimates the fair value of stock options using a Black-Scholes option pricing model. Transactions with non-employees in which goods or services are the consideration received for the issuance of equity instruments are accounted for based on the fair value of the consideration received or the fair value of the equity instrument issued, whichever is more reliably measurable. Stock-based compensation costs are reflected in the accompanying consolidated statements of comprehensive income based upon the underlying recipients' roles within the Company.

 

Income Taxes

 

The Company uses the asset and liability method of accounting for income taxes. Accordingly, deferred tax assets and liabilities are determined based on the difference between the financial statement and income tax bases of assets and liabilities, using enacted tax rates in effect for the year in which the differences are expected to reverse. A valuation allowance is recorded to reduce the carrying amount of deferred tax assets, unless it is more likely than not such assets will be realized. Current income taxes are based on the year’s taxable income for federal and state income tax reporting purposes and the annual change in deferred taxes. 

 

The Company assesses its income tax positions and records tax benefits based upon management’s evaluation of the facts, circumstances, and information available at the reporting date. For those tax positions where it is more likely than not that a tax benefit will be sustained, the Company records the largest amount of tax benefit with a greater than 50% likelihood of being realized upon ultimate settlement with a taxing authority having full knowledge of all relevant information. For those income tax positions where it is not more likely than not that a tax benefit will be sustained, no tax benefit is recognized in the financial statements. The Company classifies interest and penalties associated with such uncertain tax positions as a component of income tax expense.

 

As of March 31, 2022, we have no material unrecognized tax benefits. We recorded an income tax benefit of $238,852 and $1,126,860 for the three and nine months ended March 31, 2022, respectively, and a provision for income taxes of $1,192,277 and $5,331,417 for the three and nine months ended March 31, 2021, respectively. We also recorded an increase in deferred tax asset, non-current, of $238,852 and $1,171,345 for the three and nine months ended March 31, 2022, respectively, and an increase in deferred tax asset, non-current, of $57,793 for the three months, and a decrease of $195,115 for nine months, ended March 31, 2021, respectively.

 

Earnings per Share Attributable to Common Stockholders

 

Earnings per share is calculated by dividing the net income by the weighted-average number of common shares that were outstanding for the period, without consideration for potential common shares. Diluted earnings per share is calculated by dividing the net income by the sum of the weighted-average number of dilutive potential common shares outstanding for the period determined using the treasury-stock method or the as-converted method. Potentially dilutive shares are comprised of common stock options outstanding under our stock plan.

 

 

 

14

 

 

Concentrations

 

We extend credit to our customers and perform ongoing credit evaluations of such customers. We evaluate our accounts receivable on a regular basis for collectability and provide for an allowance for potential credit losses as deemed necessary. No reserve was required or recorded for any of the periods presented.

 

Substantially all of our revenues are derived from sales of wireless data products. Any significant decline in market acceptance of our products or in the financial condition of our existing customers could impair our ability to operate effectively.

 

A significant portion of our revenue is derived from a small number of customers. For the nine months ended March 31, 2022, sales to our two largest customers accounted for 49% and 26% of our consolidated net sales, and 45% and 0% of our accounts receivable balance as of March 31, 2022. In the same period of 2021, sales to our two largest customers accounted for 61% and 32% of our consolidated net sales, and 0% and 96% of our accounts receivable balance as of March 31, 2021. No other customers accounted for more than ten percent of total net sales for the nine months ended March 31, 2022 and 2021. 

 

For the nine months ended March 31, 2022, we purchased the majority of our wireless data products from two manufacturing companies located in Asia. If these manufacturing companies were to experience delays, capacity constraints or quality control problems, product shipments to our customers could be delayed, or our customers could consequently elect to cancel the underlying product purchase order, which would negatively impact the Company's revenue. For the nine months ended March 31, 2022, we purchased wireless data products from these manufacturers in the amount of $15,758,962, or 99% of total purchases and had related accounts payable of $11,664,549 as of March 31, 2022. In the same period of 2021, we purchased wireless data products from these manufacturers in the amount of $130,256,593, or 99% of total purchases, and had related accounts payable of $27,250,783 as of March 31, 2021.

 

We maintain our cash accounts with established commercial banks. Such cash deposits exceed the Federal Deposit Insurance Corporation insured limit of $250,000 for each financial institution. However, we do not anticipate any losses on excess deposits.

 

NOTE 2 - 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 fifth generation and fourth generation (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.

 

 

 

15

 

 

NOTE 3 – BASIS OF PRESENTATION

 

The accompanying unaudited consolidated financial statements of Franklin Wireless Corp. have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and are presented in accordance with the requirements of Form 10-Q. In the opinion of management, the financial statements included herein contain all adjustments, including normal recurring adjustments, considered necessary to present fairly the financial position, the results of operations and comprehensive income (loss) and cash flows of the Company for the periods presented. These financial statements and notes hereto should be read in conjunction with the financial statements and notes thereto for the fiscal year ended June 30, 2021 included in our Form 10-K filed on September 28, 2021. The operating results or cash flows for the interim periods presented herein are not necessarily indicative of the results to be expected for any other interim period or the full year.

  

NOTE 4 – DEFINITE LIVED INTANGIBLE ASSETS

 

The definite lived intangible assets consisted of the following as of March 31, 2022:

Definite lived intangible assets:		Expected Life		Average Remaining life				Gross Intangible Assets				Less Accumulated Amortization				Net Intangible Assets
Complete technology		3 years			–			$	18,397				18,397				–
Technology in progress		Not Applicable			–				178,100				–				178,100
Software		5 years			2.6 years				424,728				302,610				122,118
Patents		10 years			3.1 years				21,360				14,567				6,793
Certifications & licenses		3 years			1.0 years				1,970,424				926,682				1,043,742
Total as of March 31, 2022								$	2,613,009			$	1,262,256			$	1,350,753

 

The definite lived intangible assets consisted of the following as of June 30, 2021:

Definite lived intangible assets:		Expected Life		Average Remaining life				Gross Intangible Assets				Less Accumulated Amortization				Net Intangible Assets
Complete technology		3 years			0.5 years			$	18,397			$	15,331			$	3,066
Technology in progress		Not Applicable			–				602,388				–				602,388
Software		5 years			3.0 years				399,811				268,495				131,316
Patents		10 years			3.9 years				21,105				12,951				8,154
Certifications & licenses		3 years			1.6 years				1,070,770				568,944				501,826
Total as of June 30, 2021								$	2,112,471			$	865,721			$	1,246,750

 

 

 

16

 

 

Amortization expense recognized for the three months ended March 31, 2022 and 2021 was $170,406 and $101,535, respectively, and for the nine months ended March 31, 2022 and 2021 was $396,535 and $342,070, respectively. The amortization expenses of the definite lived intangible assets for the future are as follows:

		FY2022				FY2023				FY2024				FY2025				FY2026				Thereafter
Total		$	199,371			$	474,955			$	323,897			$	136,637			$	10,291			$	27,500

 

NOTE 5 - PROPERTY AND EQUIPMENT 

 

Property and equipment consisted of the following as of:

		March 31, 2022				June 30, 2021
Machinery and Commercial Equipment		$	67,718			$	67,044
Office equipment			310,400				291,191
Molds			575,552				575,552
Vehicle			15,513				–
			969,183				933,787
Less accumulated depreciation			(846,108	)			(782,177	)
Total		$	123,075			$	151,610

 

Depreciation expense associated with property and equipment was $22,465 and $22,254 for the three months ended March 31, 2022 and 2021, respectively, and $68,105 and $67,593 for the nine months ended March 31, 2022 and 2021, respectively. We disposed of the fully depreciated property and equipment in the amount of $4,174 as we identified it has zero value.

 

NOTE 6 - ACCRUED LIABILITIES

 

Accrued liabilities consisted of the following as of:

		March 31, 2022				June 30, 2021
Accrued payroll deductions owed to government entities		$	46,202			$	66,307
Accrued commission to a customer			309,815				451,898
Accrued vacation			61,020				73,900
Accrued undelivered inventory			140,000				140,000
Accrued commission for service providers			42,500				52,500
Other accrued liabilities			612				920
Total		$	600,149			$	785,525

 

 

 

17

 

 

NOTE 7 – EARNINGS (LOSS) PER SHARE

 

For the three and nine months ended March 31, 2022, we were in a net loss position and have excluded 861,001 stock options from the calculation of diluted net loss per share because these securities are anti-dilutive. For the three and nine months ended March 31, 2021, we have calculated the dilutive effect of common stock arising from 485,000 stock options.

 

The weighted average number of shares outstanding used to compute earnings per share is as follows:

		Three Months ended March 31,								Nine Months Ended March 31,
		2022				2021				2022				2021
Net (loss) income attributable to Parent Company		$	(770,818	)		$	3,938,553			$	(3,060,020	)		$	17,715,524
Weighted-average shares of common stock outstanding:
Basic shares outstanding			11,594,280				11,581,629				11,593,857				11,271,168
Dilutive effect of common stock equivalents arising from stock options			–				210,663				–				210,662
Diluted shares outstanding			11,594,280				11,792,292				11,593,857				11,481,830
Basic (loss) income per share		$	(0.07	)		$	0.34			$	(0.26	)		$	1.57
Diluted (loss) income per share		$	(0.07	)		$	0.33			$	(0.26	)		$	1.54

  

NOTE 8 - COMMITMENTS AND CONTINGENCIES

 

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 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. Rent expense for this office space was $77,263 for the three months ended March 31, 2022 and 2021 and $231,789 for the nine months ended March 31, 2022 and 2021. 

 

Our Korea-based subsidiary, FTI, leases approximately 10,000 square feet of office space, located in Seoul, Korea, at a monthly rent of approximately $8,000 and additional office space consisting of approximately 2,682 square feet, also located in Seoul, Korea, at a monthly rent of approximately $2,700 that expires on August 31, 2022. Rent expense related to these leases was approximately $32,100 for the three months ended March 31, 2022 and 2021, and approximately $96,300 for the nine months ended March 31, 2022 and 2021. This facility is also covered by an appropriate level of insurance, and we believe it 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 related to this lease was $2,150 and $2,316 for the three months ended March 31, 2022 and 2021, and approximately $6,562 and $6,843 for the nine months ended March 31, 2022 and 2021.

 

As of March 31, 2022, we used discount rates of 4.0% and 2.8% in determining our operating lease liabilities for the office spaces in San Diego, California, and South Korea, respectively. These rates represented our incremental borrowing rates at that time. Short-term leases with initial terms of twelve months or less are not capitalized. Both our San Diego and Korean office leases were extensions of previous leases and neither contains any further extension provisions.

 

 

 

18

 

 

Future minimum payments under operating leases are as follows:

		Operating Leases
Fiscal 2022 remaining three months		$	80,483
Fiscal 2023			321,930
Fiscal 2024			160,965
Total lease payments			563,378
Less imputed interest			(20,140	)
Total		$	543,238

 

Litigation

 

We are from time to time involved in certain legal proceedings and claims arising in the ordinary course of business.

 

Verizon Jetpack Recall

 

On April 8, 2021, Verizon issued a press release announcing that it is working with the U.S. Consumer Product Safety Commission (CPSC) to conduct a voluntary recall of certain Verizon Ellipsis Jetpack mobile hotspot devices, indicating that the lithium-ion battery in the devices can overheat, posing a fire and burn hazard. According to the CPSC release, the recall affects approximately 2.5 million devices. We import the devices and supply them to Verizon.

 

Verizon first advised us of one alleged Jetpack device failure at the end of February 2021. We immediately began meeting with Verizon and requested access to the device. We also began internal testing to evaluate device performance. We did not receive any further incident information until the last week of March 2021. On April 1, 2021 we issued a press release announcing that we had received reports from Verizon about potential issues with the batteries in the devices. On April 9, 2021we issued a press release announcing the voluntary recall by Verizon.

 

As of the date of this report, we have been unable to recreate any device failures of the type identified by Verizon. All internal testing conducted to date has confirmed that the Jetpack devices are performing within normal parameters. We are not currently aware of any aspect of the Jetpack design that could cause the devices to fail in the way described in Verizon’s recall notice. 

 

Future Impact on Financial Performance

 

We are striving to avoid any litigation arising from the recall and have not been served with any legal action relating to the products covered by the recall. We are not currently able to estimate the financial impact of the recall on our future operations. At this time, we do not have information that identifies the cause of the alleged incidents. We also do not have any specific legal claims or theories of causation for device failure incidents that would help us estimate the cost of potential future litigation. We have, however, created a litigation budget for the future cost of litigation.

 

 

 

19

 

 

Shareholder Litigation

 

Ali

 

A shareholder action, Ali vs. Franklin Wireless Corp. et al. Case #3:21-cv-00687-AJB-MSB, was filed in the U.S. District Court, Southern District of California (San Diego) on April 16, 2021, alleging, among other things, that we had prior knowledge that the recall was likely and that we did not disclose that information to investors in a timely manner. We believe these allegations are not supported by the facts and we will vigorously defend against such claims. Discovery is ongoing at this time.

 

Harwood / Martin

 

A legal action was filed in the U.S. District Court, Southern District of California (San Diego) against Franklin, as a nominal defendant, Stephen Norwood Derivatively on Behalf of Nominal Defendant Franklin Wireless Corp. v. OC Kim, Et al., Case #21cv01837-JAH-DEB, on or about October 29, 2021, claiming among other things, that we had prior knowledge that the recall was likely and that we did not disclose that information to investors in a timely manner. We believe these allegations are not supported by the facts and we will vigorously defend against such claims.

 

A legal action was filed in the U.S. District Court, Southern District of California (San Diego) against Franklin, as a nominal defendant, by Debra Martin, derivatively on behalf of nominal defendant Franklin Wireless Corp. v. OC Kim, Et al., Case #21cv2091-CAB-KSC, on or about December 15, 2021, claiming among other things, that we had prior knowledge that the recall was likely and that we did not disclose that information to investors in a timely manner. We believe these allegations are not supported by the facts and we will vigorously defend against such claims.

 

Harwood and Martin actions have recently been consolidated into a single action in the U.S. District Court, Southern District of California (San Diego) titled “In re Franklin Wireless Corp. Derivative Litigation”, Case No.: 21cv1837-AJB (MSB). Discovery is ongoing at this time.

 

Pape

 

A legal action was filed in the Second Judicial District Court of Nevada in the County of Washoe against Franklin, as a nominal defendant, Barbara Pape, derivatively on behalf of nominal defendant Franklin Wireless Corp. v. OC Kim, Et al., Case # CV22-00471, on or about March 21, 2022, claiming among other things, that we had prior knowledge that the recall was likely and that we did not disclose that information to investors in a timely manner. We believe these allegations are not supported by the facts and we will vigorously defend against such claims. 

 

“Short-Swing” Profits Litigation

 

A legal action was filed in the U.S. District Court, Southern District of California (San Diego) against Franklin, as a nominal defendant, Nosirrah Management LLC v. Franklin Wireless et al. Case # 3:21-cv-01316-CAB-JLB, on or about July 22, 2021, claiming that our Chief Executive Officer, OC Kim, violated Section 16(b)b of the Securities Exchange Act of 1934 for receiving “short-swing” profits from a sale and purchase of Franklin shares, in violation of that Act. We believe the allegations are not supported by the facts and we intend to vigorously defend against these claims.

 

 

 

20

 

 

Franklin v. Anydata, Inc.

 

We entered into a Professional Services Agreement with Anydata Corp. (“Anydata”) for the product ACT233F Smart Link OBD device on May 5, 2017, for a minimum purchase commitment of 250,000 units. We have delivered approximately 25,000 units and 7,000 units during our second and fourth quarters of fiscal 2018, respectively, and an additional 18,000 units during our first quarter of fiscal 2019. Sales to Anydata were approximately $1.8 million for the year ended June 30, 2019. We have received information that Anydata may not be able to fulfill the entire purchase commitment for which parts have already been ordered with our main vendor, Quanta. We believe that the Company will be able to supply some of the products to another customer and has received personal guarantees from the ownership group of Anydata. As of June 30, 2019, the remaining unfulfilled purchase commitment was approximately $3.1 million. The total product purchase commitment with Quanta was approximately $2.9 million. We have not recorded a receivable from Anydata, nor a liability owed to Quanta. Management believes that, at this time, a loss contingency is reasonably possible but not estimable as to how much ultimately would be paid to Quanta. As of June 30, 2020, we paid $100,000 for the right to call on inventory and recorded an additional $49,580 as a prepaid expense related to pricing adjustments, which has been agreed with Quanta for other products to ensure demand is met, and for the quarter ended December 31, 2020, the prepaid expense of $149,580 has been recorded as a cost of goods sold. As of March 31, 2022, there is a reasonable possibility we may incur a loss; however, the amount is not estimable at this time. On January 25^th, 2021, we commenced legal action against Anydata and its principal officers in San Diego Superior Court, case number 37-2021-00003468-CU-BC-CTL. As of the date of this report, litigation is continuing, and the action is not yet resolved.

 

Entry into a Material Definitive Agreement.

 

On March 21, 2022, Franklin Wireless Corp. (the “Company”) entered into a Loan Agreement with Franklin Technology Incorporation, a Republic of Korea corporation (“FTI”), under which the Company agreed to loan US$10,000,000 to FTI. The Company owns a majority of the outstanding equity of FTI. FTI’s primary business is providing design and development services to the Company for our wireless products. As part of the loan transaction, FTI delivered a $10 million Promissory Note to the Company (the “Note”).

 

The purpose of the loan is to allow FTI to purchase a facility in South Korea to house its operations, and to provide it with additional working capital. The purchase of such a facility with the loan proceeds is subject to the Company’s reasonable approval. Upon acquisition of the facility, FTI is required to grant the Company a mortgage on it to secure payment of the Note.

 

The Note is for a term of five years, provides for annual payments of interest only at 2% per annum, and is due and payable upon maturity. The Note and Loan Agreement include customary provisions for default and acceleration upon default, and a default interest rate of 7% per annum.

 

COVID-19

 

In March 2020, the World Health Organization declared the outbreak of a novel coronavirus (COVID-19) as a pandemic which continues to spread throughout the United States. On March 19, 2020, the Governor of California declared a health emergency and issued an order to close all nonessential businesses until further notice. As a maker of wireless connectivity devices, we are deemed to be an essential business. Nonetheless, out of concern for our workers and pursuant to the government order, we reduced the scope of our operations and, where possible, certain workers began telecommuting from their homes. The continued spread of COVID-19 may result in a period of business disruption, including delays or disruptions in our supply chain. The spread of COVID-19, or another infectious disease, could also negatively affect the operations at our third-party manufacturers, which could result in delays or disruptions in the supply of our products. While we expect this situation may increase demand for its products, the related impact cannot be reasonably estimated at this time.

 

 

 

21

 

 

International Tariffs

 

We believe that our products are currently exempt from international tariffs upon import from our manufacturers to the United States. If this were to change at any point, a tariff of 10%-25% of the purchase price would be imposed. If such tariffs are imposed, they could have a materially adverse effect on sales and operating results.

 

Customer Indemnification

 

Under purchase orders and contracts for the sale of our products we may provide indemnification to our customers for potential intellectual property infringement claims for which we may have no corresponding recourse against our third-party licensors. This potential liability, if realized, could materially adversely affect our business, operating results and financial condition.  

 

NOTE 9 - LONG-TERM INCENTIVE PLAN AWARDS

 

We apply the provisions of ASC 718, “Compensation - Stock Compensation,” to all of our stock-based compensation awards and use the Black-Scholes option pricing model to value stock options. Under this application, we record compensation expense for all awards granted.

 

In 2009, we adopted the Stock Incentive Plan (“2009 Plan”), which provided for the grant of incentive stock options and non-qualified stock options to our employees and directors. Options granted under the 2009 Plan generally have a term of ten years and generally vest and become exercisable at the rate of 33% after one year and 33% on the second and third anniversaries of the option grant dates. Historically, some stock option grants have included shorter vesting periods ranging from one to two years.

 

In July of 2020, the Board of Directors adopted the 2020 Franklin Wireless Corp. Stock Option Plan (the “2020 Plan”), which covers 800,000 shares of Common Stock. The 2020 Plan provide for the grant of incentive stock options, non-qualified stock options and restricted stock to our employees, directors, and independent contractors. These options will have such vesting or other provisions as may be established by the Board of Directors at the time of each grant.

 

The estimated forfeiture rate considers historical turnover rates stratified into employee pools in comparison with an overall employee turnover rate, as well as expectations about the future. We periodically revise the estimated forfeiture rate in subsequent periods if actual forfeitures differ from those estimates. There were $373,612 and $282,116 in compensation expenses recorded under this method for the nine months ended March 31, 2022 and 2021, respectively.

 

A summary of the status of our stock options is presented below as of March 31, 2022:

										Weighted-
										Average
						Weighted-				Remaining
						Average				Contractual				Aggregate
						Exercise				Life				Intrinsic
Options		Shares				Price				(In Years)				Value
Outstanding as of June 30, 2021			484,000			$	3.67				2.83			$	2,662,830
Granted			388,000				3.38				–				–
Exercised			(3,999	)			5.40				–				–
Cancelled			–				–				–				–
Forfeited or expired			(7,000	)			5.40				–				–
Outstanding as of March 31, 2022			861,001			$	3.52				3.26			$	804,040
Exercisable as of March 31, 2022			382,588			$	3.04				1.88			$	589,219

 

 

 

22

 

 

The aggregate intrinsic value in the preceding table represents the total pretax intrinsic value, based upon the Company’s closing stock price of $3.985 as of March 31, 2022, which would have been received by the option holders had all option holders exercised their options as of that date. The weighted-average grant-date fair value of stock options outstanding as of March 31, 2022, in the amount of 861,001 shares was $2.92 per share. As of March 31, 2022, there was unrecognized compensation cost of $1,503,518 related to non-vested stock options granted.

 

A summary of the status of our stock options is presented below as of March 31, 2021:

										Weighted-
										Average
						Weighted-				Remaining
						Average				Contractual				Aggregate
						Exercise				Life				Intrinsic
Options		Shares				Price				(In Years)				Value
Outstanding as of June 30, 2020			251,291			$	1.05				1.95			$	1,124,525
Granted			299,000				5.40				–				–
Exercised			(61,291	)			(1.22	)			–				–
Cancelled			–				–				–				–
Forfeited or expired			(4,000	)			(5.40	)			–				–
Outstanding as of March 31, 2021			485,000			$	3.67				3.08			$	8,088,910
Exercisable as of March 31, 2021			190,000			$	0.99				1.20			$	3,678,650

 

The aggregate intrinsic value in the preceding table represents the total pretax intrinsic value, based upon our closing stock price of 20.35 as of March 31, 2021, which would have been received by the option holders had all option holders exercised their options as of that date. The weighted-average grant-date fair value of stock options outstanding as of March 31, 2021, in the amount of 485,000 shares, was $3.02 per share. As of March 31, 2021, there was unrecognized compensation cost of $909,276 related to non-vested stock options granted.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

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.

 

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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.

 

 

 

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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.

 

 

 

26

 

 

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.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

As a “smaller reporting company,” the Company is not required to respond to this item.

 

ITEM 4. CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

Our management has evaluated, under the supervision and with the participation of our President and Acting Chief Financial Officer, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based upon that evaluation, our President and our Acting Chief Financial Officer have concluded that, as of March 31, 2022, our disclosure controls and procedures were effective in ensuring that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is (i) recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the SEC and (ii) accumulated and communicated to our management, including our principal executive and principal accounting officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

 

Changes in Internal Control Over Financial Reporting

 

There have been no changes in our internal controls over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934 and as a result of adopting Topic 842) during the nine months ended March 31, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.  

 

 

 

28

 

 

PART II – OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

We have provided information about legal proceedings in which we are involved in Note 8 of the notes to consolidated financial statements for the nine months ended March 31, 2022, contained within this Quarterly Report on Form 10-Q.

 

ITEM 1A. RISK FACTORS

 

Our Annual Report on Form 10-K for the fiscal year ended June 30, 2021, filed with the SEC on September 28, 2021 (the “Annual Report”), includes a detailed discussion of our risk factors under the heading “PART I, ITEM 1A – RISK FACTORS.” You should carefully consider the risk factors discussed in our Annual Report, as well as other information in this quarterly report. Any of these risks could cause our business, financial condition, results of operations and future growth prospects to suffer. We are not aware of any material changes from the risk factors previously disclosed.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

None.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

None.

 

ITEM 5. OTHER INFORMATION

 

None.

 

ITEM 6. EXHIBITS

 

10.1		Loan Agreement between Franklin Technology Incorporation and Franklin Wireless Corporation
31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1		Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2		Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS		Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document)
101.SCH		Inline XBRL Taxonomy Extension Schema Document
101.CAL		Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF		Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB		Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE		Inline XBRL Taxonomy Extension Presentation Linkbase Document
104		Cover Page Interactive Data File (formatted in XBRL, and included in exhibit 101).

   

 

 

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SIGNATURES

 

In accordance with Section 13 of 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

	Franklin Wireless Corp.
	By:	/s/ OC Kim
		OC Kim President (Principal Chief Executive Officer)
	By:	/s/ David Brown
		David Brown
Dated: May 10, 2022		Acting Chief Financial Officer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

30