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FRANKLIN WIRELESS CORP - Quarter Report: 2021 September (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q

 

 

x

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

 

For the quarterly period ended September 30,2021

 

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)

 

 

(858) 623-0000

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 x    No o

 

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 x 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 o   Accelerated filer x   Non-accelerated filer o   Smaller reporting company x   Emerging Growth Company o

 

 

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

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 November 9, 2021.

 

 

 

   

 

 

FRANKLIN WIRELESS CORP.

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2021

INDEX

 

 

    Page
PART I – Financial Information
     
Item 1: Consolidated Financial Statements (unaudited)  
  Consolidated Balance Sheets as of September 30, 2021 (unaudited) and June 30, 2021 4
  Consolidated Statements of Income and Comprehensive Income (unaudited) for the three months ended September 30, 2021 and 2020 5
  Consolidated Statements of Stockholders' Equity (unaudited) for the three months ended September 30, 2021 and 2020 6-7
  Consolidated Statements of Cash Flows (unaudited) for the three months ended September 30, 2021 and 2020 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 27
Item 4: Controls and Procedures 27
     
PART II – Other Information
     
Item 1: Legal Proceedings 28
Item 1A: Risk Factors 28
Item 2: Unregistered Sales of Equity Securities and Use of Proceeds 28
Item 3: Defaults Upon Senior Securities 28
Item 4: Mine Safety Disclosures 28
Item 5: Other Information 28
Item 6: Exhibits 28
     
Signatures   29

 

 

 

 

 

 

 

 

 

 

 

 

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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

 

           
  

September 30,

2021

     
   (Unaudited)   June 30, 2021 
ASSETS          
Current assets:          
Cash and cash equivalents  $39,277,925   $45,796,006 
Certificates of deposit account   5,386,619    5,386,034 
Accounts receivable   1,561,747    2,542,429 
Other receivables, net   30,321    50,040 
Inventories, net   727,943    975,519 
Prepaid income taxes   102,055     
Prepaid expenses and other current assets   34,440    44,984 
Advance payments to vendors   128,744    40,630 
Total current assets   47,249,794    54,835,642 
Property and equipment, net   134,856    151,610 
Intangible assets, net   1,189,924    1,246,750 
Deferred tax assets, non-current   827,116    387,548 
Goodwill   273,285    273,285 
Right of use assets   662,629    753,263 
Other assets   135,218    140,539 
TOTAL ASSETS  $50,472,822   $57,788,637 
           
LIABILITIES AND STOCKHOLDERS' EQUITY          
Current liabilities:          
Accounts payable  $3,562,323   $9,718,989 
Income tax payable   263,519    333,503 
Unearned revenue from customers   125,701     
Accrued liabilities   738,957    785,525 
Lease liabilities, current   299,721    317,519 
Total current liabilities   4,990,221    11,155,536 
Lease liabilities, non-current   391,882    467,937 
Total liabilities   5,382,103    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 September 30, 2021 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 September 30, 2021 and June 30, 2021, respectively   14,073    14,069 
Additional paid-in capital   13,088,363    12,972,234 
Retained earnings   34,623,489    35,727,094 
Treasury stock, 2,549,208 shares as of September 30, 2021 and June 30, 2021   (3,554,893)   (3,554,893)
Accumulated other comprehensive loss   (600,107)   (472,502)
Total Parent Company stockholders’ equity   43,570,925    44,686,002 
Non-controlling interests   1,519,794    1,479,162 
Total stockholders’ equity   45,090,719    46,165,164 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY  $50,472,822   $57,788,637 

 

See accompanying notes to consolidated financial statements.

 

 

 

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FRANKLIN WIRELESS CORP.

Consolidated Statements of Comprehensive Income (Loss) (unaudited)

 

           
   Three Months Ended
September 30,
 
   2021   2020 
Net sales  $3,344,060   $62,569,450 
Cost of goods sold   2,851,096    50,898,219 
Gross profit   492,964    11,671,231 
Operating expenses:          
Selling, general and administrative   1,077,815    1,521,459 
Research and development   1,021,902    978,392 
Total operating expenses   2,099,717    2,499,851 
(Loss) income from operations   (1,606,753)   9,171,380 
Other income, net:          
Interest income   1,923    2,894 
Income from governmental subsidy   84,746    22,086 
Other income (expense), net   45,855    (18,178)
Total other income, net   132,524    6,802 
(Loss) income before provision for income taxes   (1,474,229)   9,178,182 
Income tax (benefit) provision   (411,256)   2,000,734 
Net (loss) income   (1,062,973)   7,177,448 
Less: non-controlling interests in net income of subsidiary at 33.7%   40,632    257,088 
Net (loss) income attributable to Parent Company  $(1,103,605)  $6,920,360 
           
Basic (loss) earnings per share attributable to Parent Company stockholders  $(0.10)  $0.65 
Diluted (loss) earnings per share attributable to Parent Company stockholders  $(0.10)  $0.64 
           
Weighted average common shares outstanding - basic   11,593,006    10,666,059 
Weighted average common shares outstanding - diluted   11,593,006    10,818,050 
           
Comprehensive (loss) income          
Net (loss) income  $(1,062,973)  $7,177,448 
Translation adjustments   (127,605)   66,424 
Comprehensive (loss) income   (1,190,578)   7,243,872 
Less: comprehensive income attributable to non-controlling interest   40,632    257,088 
Comprehensive income attributable to controlling interest  $(1,231,210)  $6,986,784 

 

See accompanying notes to consolidated financial statements.

 

 

  

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FRANKLIN WIRELESS CORP.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

For the Three Months Ended September 30, 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 at 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               (1,103,605)               (1,103,605)
Foreign exchange translation                       (127,605)       (127,605)
Issuance of stock related to stock option exercised   3,999    4    21,591                    21,595 
Comprehensive income attributable to non-controlling interest                           40,632    40,632 
Stock based compensation           94,538                    94,538 
Balance at September 30, 2021
(unaudited)
   11,594,280   $14,073   $13,088,363   $34,623,489   $(3,554,893)  $(600,107)  $1,519,794   $45,090,719 

 

 

See accompanying notes to consolidated financial statements.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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FRANKLIN WIRELESS CORP.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

For the Three Months Ended September 30, 2020 (unaudited)

 

    Common Stock     Additional Paid-in     Retained     Treasury     Accumulated Other Comprehensive    

Non-

controlling

    Total Stockholders  
    Shares     Amount     Capital     Earnings     Stock     Loss     Interest     Equity  
Balance at 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                       6,920,360                         6,920,360  
Foreign exchange translation                                   66,424             66,424  
Issuance of stock related to stock option exercised     13,000       13       17,407                               17,420  
Compensation expense related to stock option granted                     85,987                                       85,987  
Sales of treasury stock     923,078             5,041,422             958,586                   6,000,008  
Comprehensive income attributable to non-controlling interest                                         257,088       257,088  
Balance at September 30, 2020 (unaudited)     11,541,990     $ 14,020     $ 12,620,181     $ 24,948,419     $ (3,554,893 )   $ (584,002 )   $ 1,039,103     $ 34,482,828  

 

 

See accompanying notes to unaudited consolidated financial statements.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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FRANKLIN WIRELESS CORP.

Consolidated Statements of Cash Flows (unaudited)

 

           
  

Three Months Ended

September 30,

 
   2021   2020 
CASH FLOW FROM OPERATING ACTIVITIES:          
Net income (loss)  $(1,062,973)  $7,177,448 
Adjustments to reconcile net income to net cash provided by operating activities:          
Depreciation   22,786    22,406 
Amortization of intangible assets   93,694    127,640 
Stock based compensation   94,538    85,987 
Bad debt expense       93,151 
Amortization of right of use assets   90,634    92,651 
Deferred tax (benefit)   (439,568)   84,871 
Increase (decrease) in cash due to change in:          
Accounts receivable   1,000,401    (11,945,931)
Inventories   247,576    9,018,037 
Prepaid expenses and other current assets   10,544    9,192 
Prepaid income taxes   (102,055)    
Advance payments to vendors   (88,114)   (9,870)
Other assets   5,321    (2,925)
Accounts payable   (6,156,666)   2,766,929 
Income tax payable   (69,984)   1,883,173 
Unearned revenue from customers   125,701     
Lease liabilities   (93,853)   (95,871)
Accrued liabilities   (46,568)   (148,193)
Net cash (used) provided by operating activities   (6,368,586)   9,158,695 
           
CASH FLOW FROM INVESTING ACTIVITIES:          
Purchases of short-term investments   (585)   (1,621)
Purchases of property and equipment   (6,032)   (5,704)
Payments for capitalized product development costs   (35,543)   (78,342)
Purchases of intangible assets   (1,325)   (938)
Net cash used in investing activities   (43,485)   (86,605)
           
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    17,420 
Net cash provided by financing activities   21,595    6,017,428 
           
Effect of foreign currency translation   (127,605)   66,424 
Net (decrease) increase in cash and cash equivalents   (6,518,081)   15,155,942 
Cash and cash equivalents, beginning of year   45,796,006    28,161,644 
Cash and cash equivalents, end of year  $39,277,925   $43,317,586 
           
Supplemental disclosure of cash flow information:          
Cash paid during the periods for:          
Income taxes  $(200,350)  $(7,335)

 

See accompanying notes to consolidated financial statements.

 

 

 

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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 September 30, 2021, 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 September 30, 2021, or June 30, 2021.

 

Non-controlling Interest in a Consolidated Subsidiary

 

As of September 30, 2021, the non-controlling interest was $1,519,794, which represents a $40,632 increase from $1,479,162 as of June 30, 2021.  The increase in the non-controlling interest of $40,632 was from income in the subsidiary of $120,723 incurred for the three months ended September 30, 2021.

 

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 two geographic areas, consisting of North 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

September 30,

 
Net sales:  2021   2020 
North America  $3,171,198   $62,569,138 
Asia   172,862    312 
Totals  $3,344,060   $62,569,450 

 

          
Long-lived assets, net (property and equipment and intangible assets): 

September 30,

2021

  

June 30,

2021

 
North America  $1,272,674   $1,349,320 
Asia   52,106    49,040 
Totals  $1,324,780   $1,398,360 

 

 

 

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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 September 30, 2021, we did not believe an allowance for doubtful accounts was necessary.

 

Revenue Recognition

 

In April 2016, the FASB issued Accounting Standards Update No. 2016-10, Revenue from Contracts with Customers (Topic 606) (ASU 2016-10), which amends and adds clarity to certain aspects of the guidance set forth in the original revenue standard (ASU 2014-09) related to identifying performance obligations and licensing. In May 2016, the FASB issued Accounting Standards Update No. 2016-11, Revenue Recognition (Topic 605), which amends and rescinds certain revenue recognition guidance previously released within ASU 2014-09. In May 2016 the FASB issued Accounting Standards Update No. 2016-12, Revenue from Contracts with Customers (Topic 606) (ASU 2016-12), which provides narrow scope improvements and practical expedients related to ASU 2014-09.

 

On July 1, 2018, we adopted ASU 2014-09 using the modified retrospective method applied to those contracts that were not completed or substantially complete as of June 30, 2018. Results for the reporting period beginning after July 1, 2018 are presented under Topic 606. We recorded no change in retained earnings as of July 1, 2018 as a result of the cumulative impact of adopting Topic 606.

 

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 September 30, 2021 was not material.

 

 

 

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Disaggregation of Revenue

 

In accordance with Topic 606, we disaggregate revenue from contracts with customers into geographical regions and by the timing of when goods and services are transferred. We determined that disaggregating revenue into these categories meets the disclosure objective in Topic 606, which is to depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by regional economic factors.

 

Contract Balances

 

We perform our obligations under a contract with a customer by transferring products in exchange for consideration from the customer. We typically invoice our customers as soon as control of an asset is transferred, and a receivable is established. We, however, recognize a contract liability when a customer prepays for goods and/or services, or we have not delivered goods under the contract since we have not yet transferred control of the goods and/or services.

 

The balances of our trade receivables are as follows:

          
   September 30, 2021   June 30, 2021 
Accounts Receivable  $1,561,747   $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 September 30, 2021, and June 30, 2021. 

 

Our contract liabilities are as follows: 

          
   September 30, 2021   June 30, 2021 
Undelivered products  $265,701   $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 three months ended September 30, 2021. 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 three months ended September 30, 2021. 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 September 30, 2021, our contracts do not contain any unsatisfied performance obligations, except for undelivered products.

 

 

 

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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 $78,000 and $114,000 associated with capitalized product development costs associated with complete technology for the three months ended September 30, 2021 and 2020, respectively.

 

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 September 30, 2021, and June 30, 2021, capitalized product development costs in progress were $635,782 and $602,388, respectively, and the amounts are included in intangible assets in our consolidated balance sheets. During the three months ended September 30, 2021 and 2020, we incurred $35,543 and $78,342, 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 $1,021,902 and $978,392 for the three months ended September 30, 2021 and 2020, 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 $45,384 and $282,066 for the three months ended September 30, 2021 and 2020, respectively. 

 

 

 

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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.

 

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 September 30, 2021, 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 September 30, 2021 or June 30, 2021.

 

 

 

 13 

 

 

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 September 30, 2021, 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.

 

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 September 30, 2021, we have no material unrecognized tax benefits. We recorded income tax benefit of $411,256 for the three months ended September 30, 2021, and income tax provision of $2,000,734 for the three months ended September 30, 2020. We also recorded an increase in deferred tax asset, non-current, of $439,568 and a decrease in deferred tax asset, non-current, of $84,871 for the three months ended September 30, 2021 and 2020, respectively.

 

 

 

 14 

 

 

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.

 

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 three months ended September 30, 2021, sales to our two largest customers accounted for 64% and 16% of our consolidated net sales, and 0% and 33% of our accounts receivable balance as of September 30, 2021. In the same period of 2020, sales to our two largest customers accounted for 48% and 43% of our consolidated net sales, and 4% and 91% of our accounts receivable balance as of September 30, 2020. No other customers accounted for more than ten percent of total net sales for the three months ended September 30, 2021 and 2020.

 

For the three months ended September 30, 2021, 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 three months ended September 30, 2021, we purchased wireless data products from these manufacturers in the amount of $2,473,117, or 99% of total purchases, and had related accounts payable of $3,159,529 as of September 30, 2021. In the same period of 2020, we purchased wireless data products from these manufacturers in the amount of $41,210,624, or 98% of total purchases, and had related accounts payable of $44,081,107 as of September 30, 2020.

 

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 September 30, 2021: 

                       
Definite lived intangible assets:  Expected Life 

Average

Remaining

life

  

Gross

Intangible

Assets

  

Less Accumulated

Amortization

  

Net Intangible

Assets

 
Complete technology  3 years   0.3 years   $18,397   $16,864   $1,533 
Technology in progress  Not Applicable       635,782        635,782 
Software  5 years   2.9 years    401,136    279,625    121,511 
Patents  10 years   3.7 years    21,105    13,483    7,622 
Certifications & licenses  3 years   1.4 years    1,072,919    649,443    423,476 

Total as of September 30, 2021

          $2,149,339   $959,415   $1,189,924 

 

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 

 

Amortization expense recognized during the three months ended September 30, 2021 and 2020 was $93,694 and $127,640, respectively.

 

 

 

 16 

 

 

The amortization expenses of the definite lived intangible assets for the future are as follows: 

                        
   FY2022   FY2023   FY2024   FY2025   FY2026   Thereafter 
Total  $406,199   $341,849   $199,660   $148,422   $14,192   $79,602 

 

NOTE 5 - PROPERTY AND EQUIPMENT

 

Property and equipment consisted of the following as of:  

          
  

September 30,

2021

  

June 30,

2021

 
Machinery and Commercial Equipment  $67,305   $67,044 
Office equipment   296,962    291,191 
Molds   575,552    575,552 
    939,819    933,787 
Less accumulated depreciation   (804,963)   (782,177)
Total  $134,856   $151,610 

 

Depreciation expense associated with property and equipment was $22,786 and $22,406 for the three months ended September 30, 2021 and 2020, respectively.

 

NOTE 6 - ACCRUED LIABILITIES

 

Accrued liabilities consisted of the following as of:

          
  

September 30,

2021

  

June 30,

2021

 
Accrued payroll deductions owed to government entities  $64,486   $66,307 
Accrued commission to a customer   417,567    451,898 
Accrued vacation   67,480    73,900 
Accrued undelivered inventory   140,000    140,000 
Accrued commission for service providers   48,750    52,500 
Other accrued liabilities   674    920 
Total  $738,957   $785,525 

 

 

 

 17 

 

 

NOTE 7 – EARNINGS PER SHARE

 

For the three months ended September 30, 2021, we were in a net loss position and have excluded 477,001 stock options from the calculation of diluted net loss per share because these securities are anti-dilutive. For the three months ended September 30, 2020, we have calculated the diluted effect of common stock arising from 537,291 stock options.

 

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

          
   Three Months Ended September 30, 
   2021   2020 
Net (loss) income attributable to Parent Company  $(1,103,605)  $6,920,360 
           
Weighted-average shares of common stock outstanding:          
Basic shares outstanding   11,593,006    10,666,059 
Dilutive effect of common stock equivalents arising from stock options       151,991 
Diluted shares outstanding   11,593,006    10,818,050 
Basic (loss) earnings per share  $(0.10)  $0.65 
Diluted (loss) earnings per share  $(0.10)  $0.64 

 

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, at a monthly rent of $23,115, which commenced on October 28, 2015. In addition to monthly rent, the new lease includes payment for certain common area costs. The term of the lease for the new office space was four years from the lease commencement date and was then extended by an additional fifty months, to December 31, 2023. Our 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 September 30, 2021 and 2020.

 

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 the additional office space consisting of approximately 2,682 square feet, also located in Seoul, Korea, at a monthly rent of approximately $2,700 that expired on August 31, 2021, and extended by an additional twelve months to August 31, 2022. We lease one corporate housing facility, located in Seoul, Korea, primarily for our employees who travel, under a non-cancelable operating lease that expired on September 4, 2021, and extended by an additional twelve months to September 4, 2022. Rent expense related to these leases was approximately $32,100 for the three months ended September 30, 2021 and 2020. 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 expired on September 4, 2021, and extended by an additional twelve months to September 4, 2022. Rent expense related to this lease was $2,223 and $2,190 for the three months ended September 30, 2021 and 2020, respectively.

 

 

 

 18 

 

 

As of September 30, 2020, 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.

 

Future minimum payments under operating leases are as follows: 

     
     

Operating Leases

 
Fiscal 2022 remaining nine months   $241,448 
Fiscal 2023    321,930 
Fiscal 2024    160,965 
Total lease payments    724,343 
Less imputed interest    (32,740)
Total   $691,603 

 

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 8th, 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 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 we 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.

 

We are continuing to investigate the alleged device failures. At the time of the recall announcement, only two of the devices involved in the 15 alleged incidents had been physically inspected by Verizon. We have not yet had the opportunity to inspect any of these devices, but we have retained an expert to assist in the process.

 

We are actively discussing ways to resolve the consequences of the recall, including the costs to Verizon of conducting the recall, impacts on our manufacturing partners and our future business relationship with Verizon. Our suppliers and component manufacturers, as well as relevant insurance carriers, have been notified and are also participating.

 

 

 

 19 

 

 

Future Impact on Financial Performance

 

We need to resolve the recall to ensure future sales to Verizon. Discussions are ongoing but no agreement for future products have been reached at this time. We are striving to avoid litigation arising from the recall and have not received court filings from any of the parties involved at this time.

 

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 allow us to estimate the ultimate cost of potential future litigation. Although the recall notice identified 2.5 million devices, we are unable to predict the number of units that may be returned or the costs and damages that may be alleged in the future.

 

Shareholder Litigation

 

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.

 

“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 the Act. We believe the allegations are not supported by the facts and we intend to vigorously defend against these claims.

 

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 June 30, 2021, there is a reasonable possibility we may incur a loss; however, the amount is not estimable at this time. On January 25th, 2021, we commenced legal action against Anydata and its principal officers in San Diego Superior Court, case number 37-2021-00003468-CU-BC-CTL.

 

 

 

 20 

 

 

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.

 

Change of Control Agreements

 

On September 21, 2009, we entered into Change of Control Agreements with OC Kim, our President, and Yun J. (David) Lee, our Chief Operating Officer. Each Change of Control Agreement provides for a lump sum payment to the officer in case of a change of control of the Company. The term includes the acquisition of Common Stock of the Company resulting in one person or company owning more than 50% of the outstanding shares, a significant change in the composition of the Board of Directors of the Company during any 12-month period, a reorganization, merger, consolidation or similar transaction resulting in the transfer of ownership of more than fifty percent (50%) of the Company's outstanding Common Stock, or a liquidation or dissolution of the Company or sale of substantially all of the Company's assets.

 

The Change of Control Agreement with Mr. Kim calls for a payment of $5 million upon a change of control; the agreement with Mr. Lee calls for a payment of $2 million upon a change of control.

 

The Board of Directors has approved extension of the Change of Control Agreements with Mr. Kim and Mr. Lee through October 1, 2024. On October 1, 2021, the Board of Directors renewed Franklin’s management agreement with its Chief Executive Officer, OC Kim.

 

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.

 

 

 

 21 

 

 

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 $94,538 and $85,987 compensation expenses recorded under this method for the three months ended September 30, 2021 and 2020, respectively.

 

A summary of the status of our stock options is presented below as of September 30, 2021: 

                    
           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                
Exercised   (3,999)   5.40         
Cancelled                
Forfeited or expired   (3,000)   5.40         
Outstanding as of September 30, 2021   477,001   $3.64    2.56   $1,725,372 
                     
Exercisable as of September 30, 2021   303,622   $2.64    0.70   $1,402,888 

 

The aggregate intrinsic value in the preceding table represents the total pretax intrinsic value, based upon the Company’s closing stock price of $7.26 as of September 30, 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 September 30, 2021, in the amount of 477,001 shares was $3.00 per share. As of September 30, 2021, there was unrecognized compensation cost of $700,605 related to non-vested stock options granted.

 

 

 

 22 

 

 

A summary of the status of our stock options is presented below as of September 30, 2020:  

           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    4.04         
Exercised   (13,000)   (1.34)        
Cancelled                
Forfeited or expired                
Outstanding as of September 30, 2020   537,291   $2.65    3.42   $6,731,502 
                     
Exercisable as of September 30, 2020   537,291   $1.03    1.70   $3,565,092 

 

The aggregate intrinsic value in the preceding table represents the total pretax intrinsic value, based upon the Company’s closing stock price of $15.99 as of September 30, 2020, 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 September 30, 2020, in the amount of 537,291 shares, was $2.65 per share. As of September 30, 2020, there was no unrecognized compensation cost related to non-vested stock options granted.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 23 

 

 

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 three months ended September 30, 2021.

 

 

 

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RESULTS OF OPERATIONS

 

The following table sets forth, for the three months ended September 30, 2021 and 2020, our statements of comprehensive income including data expressed as a percentage of sales:

 

   Three Months Ended 
   September 30, 
   2021   2020 
         
Net sales   100.0%    100.0% 
Cost of goods sold   85.3%    81.3% 
Gross profit   14.7%    18.7% 
Operating expenses   62.8%    4.0% 
(Loss) income from operations   (48.1%)   14.7% 
Other income, net   4.0%    0.0% 
Net income before income taxes   (44.1%)   14.7% 
Income tax (benefit) provision   (12.3%)   3.2% 
Net (loss) income   (31.8%)   11.5% 
Less: non-controlling interest in net income of subsidiary   1.2%    0.4% 
Net (loss) income attributable to Parent Company stockholders   (33.0%)   11.1% 

 

THREE MONTHS ENDED SEPTEMBER 30, 2021 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2020

 

NET SALES - Net sales decreased by $59,225,390, or 94.7%, to $3,344,060 for the three months ended September 30, 2021 from $62,569,450 for the corresponding period of 2020. For the three months ended September 30, 2021, net sales by geographic regions, consisting of the North America and Asia, were $3,171,198 (94.8% of net sales) and $172,862 (5.2% of net sales), respectively. For the three months ended September 30, 2020, net sales by geographic regions, consisting of North America and Asia, were $62,569,138 (100.0% of net sales) and $312 (0.0% of net sales), respectively.

 

Net sales in North America decreased by $59,397,940, or 94.9%, to $3,171,198 for the three months ended September 30, 2021 from $62,569,138 for the corresponding period of 2020. The decrease in net sales in North America was primarily due to the reduction of demand for wireless products from two major carrier customers, principally due to the unprecedently high volume of demand for wireless products during the prior period, which coincided with the early stages of the Covid-19 Pandemic period, as well as the delayed launch of a new product. Net sales in Asia increased by $172,550, or 55,304.5%, to $172,862 for the three months ended September 30, 2021 from $312 for the corresponding period of 2020. The increase in net sales was primarily due to the revenue generated from the material sales and product development service by FTI, which typically vary from period to period.

 

GROSS PROFIT - Gross profit decreased by $11,178,267, or 95.8%, to $492,964 for the three months ended September 30, 2021 from $11,671,231 for the corresponding period of 2020. The gross profit in terms of net sales percentage was 14.7% for the three months ended September 30, 2021 compared to 18.7% for the corresponding period of 2020. The decrease in gross profit was primarily due to the change in net sales as described above. The decrease in gross profit in terms of net sales percentage was primarily due to the revenues generated from material sales by FTI, which involved higher costs of goods sold.

 

 

 

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OPERATING EXPENSES - Operating expenses decreased by $400,134, or 16.0%, to $2,099,717 for the three months ended September 30, 2021 from $2,499,851 for the corresponding period of 2020. The decrease in operating expenses was primarily due to the decreased shipping and handling costs related to the reduced volume of product shipments and sales, by approximately $235,000, as well as decreased bad debt expense.

 

OTHER INCOME, NET - Other income, net increased by $125,722, or 1,848.3%, to $132,524 for the three months ended September 30, 2021 from $6,802 for the corresponding period of 2020. The increase was primarily due to product development funding received by FTI from a government entity.

 

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, 2021 consisted of cash and cash equivalents as well as short-term investments of $44,664,544.  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, 2021 was $6,368,586, compared to net cash provided by operating activities for the three months ended September 30, 2020 of $9,158,695.  

 

The $6,368,586 in net cash used by 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.

 

The $9,158,695 in net cash provided by operating activities for the three months ended September 30, 2020 was primarily due to the decrease in inventories of $9,018,037 and increases in accounts payable and income tax payable of $2,766,929 and $1,883,173, respectively, as well as our operating results (net income adjusted for depreciation, amortization, and other non-cash charges), which was partially offset by the increase in accounts receivable of $11,945,931.

 

INVESTING ACTIVITIES - Net cash used in investing activities for the three months ended September 30, 2021 and 2020 was $43,485 and $86,605, 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, and the $86,605 in net cash used in investing activities for the three months ended September 30, 2020 was primarily due to the payments for capitalized product development of $78,342.

  

FINANCING ACTIVITIES - Net cash provided by financing activities for the three months ended September 30, 2021 and 2020 was $21,595 and $6,017,428, 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. The $6,017,428 in net cash provided by financing activities for the three months ended September 30, 2020 was primarily due to the issuance of 923,078 shares of Common Stock to investors for $6,000,008 in cash.

 

 

 

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CONTRACTUAL OBLIGATIONS AND OTHER COMMITMENTS

 

Leases

 

On September 9, 2015, we signed a lease for new office space consisting of approximately 12,775 square feet, located in San Diego, California, at a monthly rent of $23,115, which commenced on October 28, 2015. In addition to monthly rent, the new lease includes payment for certain common area costs. The term of the lease for the new office space was four years from the lease commencement date and was then extended by an additional fifty months, to December 31, 2023. Our Korea-based subsidiary, FTI, leases approximately 10,000 square feet of office space, at a monthly rent of approximately $8,000, and additional office space consisting of approximately 2,682 square feet at a monthly rent of approximately $2,700, both located in Seoul, Korea. These leases expired on August 31, 2021 but were extended by an additional twelve months to 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 expired on September 4, 2021, and extended by an additional twelve months to September 4, 2022.

 

Rent expense for the three months ended September 30, 2021 and 2020 was $111,586 and $111,553, 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 September 30, 2021, 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 three months ended September 30, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

 

 

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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 three months ended September 30, 2021, 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

 

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 iXBRL, 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: November 9, 2021   Acting Chief Financial Officer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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