UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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OR
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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Securities registered pursuant to Section 12(b) of the Act:
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The Registrant has shares of common stock outstanding as of February 14, 2024.
FRANKLIN WIRELESS CORP.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2023
INDEX
| 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, 2023. 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
December 31, 2023 |
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| (Unaudited) | June 30, 2023 | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Short-term investments | ||||||||
| Accounts receivable | ||||||||
| Advance to vendors | ||||||||
| Other receivables, prepaid expenses, and other current assets | ||||||||
| Inventories, net | ||||||||
| Prepaid income taxes | ||||||||
| Loan to an employee | ||||||||
| Total current assets | ||||||||
| Property and equipment, net | ||||||||
| Intangible assets, net | ||||||||
| Deferred tax assets, non-current | ||||||||
| Goodwill | ||||||||
| Right of use assets | ||||||||
| Other assets | ||||||||
| TOTAL ASSETS | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Income tax payable | ||||||||
| Contract liabilities | ||||||||
| Advance from customers | ||||||||
| Accrued legal contingency expense | ||||||||
| Accrued liabilities | ||||||||
| Lease liabilities, current | ||||||||
| Total current liabilities | ||||||||
| Total liabilities | ||||||||
| Commitments and contingencies (Note 6) | ||||||||
| Stockholders’ equity: | ||||||||
| Parent Company stockholders’ equity | ||||||||
| Preferred stock, par value $ per share, authorized shares; issued and outstanding as of December 31, and June 30, 2023 | ||||||||
| Common stock, par value $ per share, authorized shares; shares issued and outstanding as of December 31, and June 30, 2023, respectively | ||||||||
| Additional paid-in capital | ||||||||
| Retained earnings | ||||||||
| Treasury stock, shares as of December 31, and June 30, 2023 | ( | ) | ( | ) | ||||
| Accumulated other comprehensive loss | ( | ) | ( | ) | ||||
| Total Parent Company stockholders’ equity | ||||||||
| Noncontrolling interests | ||||||||
| Total stockholders’ equity | ||||||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | $ | ||||||
See accompanying notes to consolidated financial statements.
| 4 |
FRANKLIN WIRELESS CORP.
Consolidated Statements of Comprehensive (Loss) Income (Unaudited)
| Three Months Ended | Six Months Ended | |||||||||||||||
| December 31, | December 31, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Net sales | $ | $ | $ | $ | ||||||||||||
| Cost of goods sold | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Gross profit | ||||||||||||||||
| Operating expenses: | ||||||||||||||||
| Selling, general and administrative | ||||||||||||||||
| Research and development | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| Loss from operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other income, net: | ||||||||||||||||
| Interest income | ||||||||||||||||
| Income from governmental subsidy | ||||||||||||||||
| Gain from the forgiveness of accounts payable and accrued liabilities | ||||||||||||||||
| Gain from foreign currency transactions | ||||||||||||||||
| Other income, net | ||||||||||||||||
| Total other income, net | ||||||||||||||||
| (Loss) income before provision (benefit) for income taxes | ( | ) | ( | ) | ( | ) | ||||||||||
| Income tax (benefit) provision | ( | ) | ( | ) | ||||||||||||
| Net (loss) income | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Less: noncontrolling interests in net income (loss) of subsidiary at 33.7% | ( | ) | ||||||||||||||
| Net (loss) attributable to Parent Company | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Loss per share attributable to Parent Company stockholders – basic and diluted | $ | ) | $ | ) | $ | ) | $ | ) | ||||||||
| Weighted average common shares outstanding – basic and diluted | ||||||||||||||||
| Comprehensive (loss) income | ||||||||||||||||
| Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Translation adjustments | ||||||||||||||||
| Comprehensive (loss) income | ( | ) | ( | ) | ( | ) | ||||||||||
| Less: comprehensive income (loss) attributable to noncontrolling interest | ( | ) | ||||||||||||||
| Comprehensive (loss) income attributable to controlling interest | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | ||||||
See accompanying notes to consolidated financial statements.
| 5 |
FRANKLIN WIRELESS CORP.
Consolidated Statements of Stockholders’ Equity
For the Three and Six Months Ended December 31, 2023 (Unaudited)
| Common Stock | Additional Paid-in | Retained | Treasury | Accumulated Other Comprehensive Income | Noncontrolling | Total Stockholders | ||||||||||||||||||||||||||
| Shares | Amount | Capital | Earnings | Stock | (Loss) | Interest | Equity | |||||||||||||||||||||||||
| Balance - June 30, 2023 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | |||||||||||||||||||||
| Net loss attributable to Parent Company | – | ( | ) | ( | ) | |||||||||||||||||||||||||||
| Foreign exchange translation | – | ( | ) | ( | ) | |||||||||||||||||||||||||||
| Comprehensive loss attributable to noncontrolling interest | – | ( | ) | ( | ) | |||||||||||||||||||||||||||
| Stock based compensation | – | |||||||||||||||||||||||||||||||
| Balance – September 30, 2023 (unaudited) | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | |||||||||||||||||||||
| Net loss attributable to Parent Company | – | ( | ) | ( | ) | |||||||||||||||||||||||||||
| Foreign exchange translation | – | |||||||||||||||||||||||||||||||
| Comprehensive income attributable to noncontrolling interest | – | |||||||||||||||||||||||||||||||
| Stock based compensation | – | |||||||||||||||||||||||||||||||
| Balance – December 31, 2023 (unaudited) | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | |||||||||||||||||||||
See accompanying notes to consolidated financial statements.
| 6 |
FRANKLIN WIRELESS CORP.
Consolidated Statements of Stockholders’ Equity
For the Three and Six Months Ended December 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, 2022 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | |||||||||||||||||||||
| Net loss attributable to Parent Company | – | ( | ) | ( | ) | |||||||||||||||||||||||||||
| Foreign exchange translation | – | ( | ) | ( | ) | |||||||||||||||||||||||||||
| Comprehensive loss attributable to non-controlling interest | – | ( | ) | ( | ) | |||||||||||||||||||||||||||
| Stock based compensation | – | |||||||||||||||||||||||||||||||
| Balance – September 30, 2022 (unaudited) | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | |||||||||||||||||||||
| Net loss attributable to Parent Company | – | ( | ) | ( | ) | |||||||||||||||||||||||||||
| Foreign exchange translation | – | |||||||||||||||||||||||||||||||
| Comprehensive income attributable to non-controlling interest | – | |||||||||||||||||||||||||||||||
| Issuance of stock related to stock option exercised | ||||||||||||||||||||||||||||||||
| Stock based compensation | – | |||||||||||||||||||||||||||||||
| Balance – December 31, 2022 (unaudited) | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | |||||||||||||||||||||
See accompanying notes to consolidated financial statements.
| 7 |
FRANKLIN WIRELESS CORP.
Consolidated Statements of Cash Flows (Unaudited)
Six Months Ended December 31, | ||||||||
| 2023 | 2022 | |||||||
| CASH FLOW FROM OPERATING ACTIVITIES: | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
| Depreciation | ||||||||
| Amortization of intangible assets | ||||||||
| Stock based compensation | ||||||||
| Forgiveness of debt | ( | ) | ||||||
| Amortization of right of use assets | ||||||||
| Deferred tax (benefit) provision | ( | ) | ||||||
| Increase (decrease) in cash due to change in: | ||||||||
| Accounts receivable | ( | ) | ( | ) | ||||
| Advance to vendors | ( | ) | ( | ) | ||||
| Other receivables, prepaid expenses, and other current assets | ( | ) | ( | ) | ||||
| Prepaid income taxes | ( | ) | ||||||
| Inventories | ( | ) | ||||||
| Other assets | ( | ) | ( | ) | ||||
| Accounts payable | ( | ) | ||||||
| Income tax payable | ( | ) | ( | ) | ||||
| Contract liabilities | ||||||||
| Lease liabilities | ( | ) | ( | ) | ||||
| Advance from customers | ( | ) | ||||||
| Accrued liabilities | ||||||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| CASH FLOW FROM INVESTING ACTIVITIES: | ||||||||
| Purchases of short-term investments | ( | ) | ( | ) | ||||
| Purchases of property and equipment | ( | ) | ( | ) | ||||
| Payments for capitalized product development costs | ( | ) | ( | ) | ||||
| Purchases of intangible assets | ( | ) | ( | ) | ||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| CASH FLOW FROM FINANCING ACTIVITIES: | ||||||||
| Loan to an employee | ( | ) | ( | ) | ||||
| Cash received from exercise of stock options | ||||||||
| Net cash (used in) provided by financing activities | ( | ) | ||||||
| Effect of foreign currency translation | ||||||||
| Net decrease in cash and cash equivalents | ( | ) | ( | ) | ||||
| Cash and cash equivalents, beginning of period | ||||||||
| Cash and cash equivalents, end of period | $ | $ | ||||||
| Supplemental disclosure of cash flow information: | ||||||||
| Cash paid during the periods for: | ||||||||
| Income taxes | $ | ( | ) | $ | ( | ) | ||
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
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 noncontrolling 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 December 31, 2023, or June 30, 2023.
Reclassifications
Certain amounts on the prior year’s consolidated balance sheets were reclassified to conform to current-year presentation, with no effect on ending stockholders’ equity.
Noncontrolling Interest in a Consolidated Subsidiary
As of December 31, 2023, the
noncontrolling interest was $
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.
| Three Months Ended | Six Months Ended | |||||||||||||||
| December 31, | December 31, | |||||||||||||||
| Net sales: | 2023 | 2022 | 2023 | 2022 | ||||||||||||
| North America | $ | $ | $ | $ | ||||||||||||
| Asia | ||||||||||||||||
| Totals | $ | $ | $ | $ | ||||||||||||
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| Long-lived assets, net (property and equipment and intangible assets): | December 31, 2023 | June 30, 2023 | ||||||
| North America | $ | $ | ||||||
| Asia | ||||||||
| Totals | $ | $ | ||||||
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
On July 1, 2023, we adopted
ASU 2016-13 Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which replaces the
incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss (“CECL”)
methodology. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized
cost, including loan receivables and held to maturity debt securities. It also applies to Off-Balance Sheet (“OBS”) credit
exposures not accounted for as insurance (loan commitments, standby letters of credit, financial guarantees, and other similar instruments)
and net investments and leases recognized by a lessor in accordance with Topic 842 on leases. Upon adoption of ASC 326 and based upon
our review of our collection history as well as the current balances associated with all significant customers and associated invoices,
as of December 31, 2023, we did
Cash Flows Reporting
We follow ASC 230, Statements of Cash Flows, for cash flows reporting, which classifies cash receipts and payments according to whether they stem from operating, investing, or financing activities and provides definitions of each category. We use the indirect or reconciliation method (“Indirect method”) as defined by ASC 230, Statement of Cash Flows, to report net cash flow from operating activities by adjusting net income to reconcile it to net cash flow from operating activities by removing the effects of all deferrals of past operating cash receipts and payments and all accruals of expected future operating cash receipts and payments and all items that are included in net (loss) income that do not affect operating cash receipts and payments.
Related Parties
We follow ASC 850, “Related Party Disclosures,” for the identification of related parties and disclosure of related party transactions. Related parties are any entities or individuals that, through employment, ownership or other means, possess the ability to direct or cause the direction of our management and policies of the Company. (Refer to NOTE 8–RELATED PARTY TRANSACTIONS)
| 10 |
Foreign Currency Translations
We have a majority-owned subsidiary in a foreign country, South Korea. Fluctuations in foreign currency impact the amount of total assets, liabilities, earnings and cash flows that we report for our foreign subsidiary upon the translation of these amounts into U.S. Dollars for, and as of the end of, each reporting period. In particular, the strengthening of the U.S. Dollar generally will reduce the reported amount of our foreign-denominated cash, cash equivalents, total revenues and total expense that we translate into U.S. Dollars and report in our consolidated financial statements for, and as of the end of, each reporting period. However, a majority of our consolidated revenue is denominated in U.S. Dollars, and therefore, our revenue is not directly subject to foreign currency risk.
In accordance with ASC 830, when an operation has transactions denominated in a currency other than its functional currency, they are measured in the functional currency. Changes in the expected functional currency cash flows caused by changes in exchange rates are included in net income (loss) for the period.
Leases
In accordance with ASC 842, we determine whether an arrangement contains a lease at inception. A lease is a contract that provides the right to control an identified asset for a period of time in exchange for consideration. For identified leases, we determine whether it should be classified as an operating or finance lease. Operating leases are recorded in the balance sheet as right-of-use asset (“ROU asset”) and operating lease obligation. ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payment arising from the lease ROU assets and operating lease liabilities are recognized at the commencement date of the lease and measure based on the present value of lease payment over the lease term. The ROU asset also includes deferred rent liabilities. Our lease arrangement generally does not provide an implicit interest rate. As a result, in such situations, we use its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. We include options to extend or terminate the lease when it is reasonably certain that it will exercise that option in the measurement of its ROU assts and liabilities.
Lease expense for operating leases is recognized on a straight-line basis over the lease term. We are also electing not to apply the recognition requirements to short-term leases of twelve months or less and instead will recognize lease payments as expense on a straight-line basis over the lease term.
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. The Company adopted ASU 2014-09 on July 1, 2018 using the modified retrospective method.
Contracts with Customers
Revenue from 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 provisions for the six months ended December 31, 2023 and 2022 were not material.
| 11 |
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:
December 31, 2023 | June 30, 2023 | |||||||
| Accounts Receivable | $ | $ | ||||||
The balance of contract assets was immaterial as we did not have a significant amount of un-invoiced receivables in the periods ended December 31, 2023, and June 30, 2023.
Our contract liabilities are as follows:
December 31, 2023 | June 30, 2023 | |||||||
| Undelivered products | $ | $ |
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
As of December 31, 2023 and 2022, our contracts do not contain any unsatisfied performance obligations, except for undelivered products.
| 12 |
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 $
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 December 31, 2023, and
June 30, 2023, capitalized product development costs in progress were $
Research and Development Costs
Costs associated with research
and development are expensed as incurred. Research and development costs were $
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 $
| 13 |
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 December 31, 2023, and June 30, 2023, we have recorded inventory reserves in the amount of $
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 | |
| Office equipment | |
| Molds | |
| Vehicles | |
| Computers and software | |
| Furniture and fixtures | |
| Facilities improvements |
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.
| 14 |
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 December 31, 2023, and June 30, 2023, we were not aware of any events or changes in circumstances that would indicate that the long-lived assets are impaired.
Our 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. We estimate 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
We use 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.
We assess 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, we record 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. We classify interest and penalties associated with such uncertain tax positions as a component of income tax expense.
As of December 31, 2023, we
have no material unrecognized tax benefits. We recorded the income tax benefit of $
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Earnings (loss) per share is calculated by dividing the net income (loss) 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 (loss) 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 six months ended December 31, 2023, sales to our two largest customers accounted
for
For the six months ended December 31, 2023, 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 six months ended December
31, 2023, we purchased wireless data products from these manufacturers in the amount of $
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.
Recently Issued Accounting Pronouncements
In September 2022, the FASB issued ASU No. 2022-04, Liabilities—Supplier Finance Programs (Subtopic 405-50). The ASU requires disclosure of the key terms of outstanding supplier finance programs and a rollforward of the related obligations. The ASU does not affect the recognition, measurement or financial statement presentation of supplier finance program obligations. The ASU is effective for annual and interim periods beginning after December 15, 2022, except for the rollforward requirement, which is effective for annual periods beginning after December 15, 2023. There was no impact to the consolidated financial statements based on the management’s assessment.
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NOTE 2 – BUSINESS OVERVIEW
We are a leading provider of integrated wireless solutions utilizing the latest in 5G (fifth generation) and 4G LTE (fourth generation long-term evolution) technologies including mobile hotspots, routers, fixed wireless routers, and various trackers. Our integrated software subscription services provide users remote capabilities including mobile device management (MDM) and software defined wide area networking (SD-WAN).
We have majority ownership of Franklin Technology Inc. (FTI), a research and development company based in Seoul, South Korea. FTI primarily provides design and development services for our wireless products.
Our products are generally marketed and sold directly to wireless operators and indirectly through strategic partners and distributors. Our global customer base primarily extends from North America to Asia.
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, 2023 included in our Form 10-K filed on September 28, 2023. 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, NET
The definite lived intangible assets consisted of the following as of December 31, 2023:
| Definite lived intangible assets: | Expected Life | Average Remaining life | Gross Intangible Assets | Less Accumulated Amortization | Net Intangible Assets | |||||||||||||
| Complete technology | – | $ | $ | $ | ||||||||||||||
| Technology in progress | Not Applicable | – | ||||||||||||||||
| Software | ||||||||||||||||||
| Patents | ||||||||||||||||||
| Certifications & licenses | ||||||||||||||||||
| Total as of December 31, 2023 | $ | $ | $ | |||||||||||||||
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The definite lived intangible assets consisted of the following as of June 30, 2023:
| Definite lived intangible assets: | Expected Life | Average Remaining life | Gross Intangible Assets | Less Accumulated Amortization | Net Intangible Assets | |||||||||||||
| Complete technology | – | $ | $ | $ | ||||||||||||||
| Technology in progress | Not Applicable | – | ||||||||||||||||
| Software | ||||||||||||||||||
| Patents | ||||||||||||||||||
| Certifications & licenses | ||||||||||||||||||
| Total as of June 30, 2023 | $ | |||||||||||||||||
Amortization expense recognized
for the three months ended December 31, 2023 and 2022 were $
The amortization expenses of the definite lived intangible assets for the future are as follows:
| FY2024 | FY2025 | FY2026 | FY2027 | FY2028 | Thereafter | |||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
NOTE 5 - ACCRUED LIABILITIES
Accrued liabilities consisted of the following as of:
December 31, 2023 | June 30, 2023 | |||||||
| Accrued payroll deductions owed to government entities | $ | $ | ||||||
| Accrued salaries and bonuses | ||||||||
| Accrued vacation | ||||||||
| Accrued commission for service providers | ||||||||
| Accrued commission to a customer | ||||||||
| Accrued rent expenses | ||||||||
| Total | $ | $ | ||||||
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NOTE 6 - COMMITMENTS AND CONTINGENCIES
Leases
We adopted ASC 842 new lease accounting on July 1, 2019. We had an operating lease principally for both Franklin Wireless Corp. and Franklin Technologies Inc., in accordance with ASC 842.
We determine whether an arrangement contains a lease at inception. A lease is a contract that provides the right to control an identified asset for a period of time in exchange for consideration. Operating leases are recorded in the balance sheet as right-of-use asset (“ROU asset”) and operating lease obligation. ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payment arising from the lease ROU assets and operating lease liabilities are recognized at the commencement date of the lease and measure based on the present value of lease payment over the lease term. The ROU asset also includes deferred rent liabilities. Our lease arrangement generally does not provide an implicit interest rate. As a result, in such situations, we use its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. We include options to extend or terminate the lease when it is reasonably certain that it will exercise that option in the measurement of its ROU assts and liabilities. Lease expense for operating lease is recognized on a straight-line basis over the lease term. We are also electing not to apply the recognition requirements to short-term leases of twelve months or less and instead will recognize lease payments as expense on a straight-line basis over the lease term.
On or about December 7th,
2023, we received an invoice from our prior landlord, Hunsaker & Associates, requesting payment of additional rent on our completed
and expired lease of office space located at 9707 Waples Street, San Diego, CA as of December 31, 2023. This invoice purports to represent
charges for variable cost increases during the prior 7 years of the lease. We are currently reviewing these charges and will be requesting
further validation of these charges, in accordance with our rights granted under the lease. For the three months ended December 31, 2023,
we recorded an additional rent expense reflecting this pending invoice of $
Short-term leases with initial terms of twelve months or less are not capitalized, and our leases of the South Korean offices and corporate housing facility have been considered as short-term lease.
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We used discount rates of
| Six Months Ended December 31, | ||||||||
| 2023 | 2022 | |||||||
| Operating lease expense | $ | $ | ||||||
| Additional charges for the prior operating lease in debate | ||||||||
| Short term lease cost | ||||||||
| Total lease expense | $ | $ | ||||||
| Remaining lease term-operating leases | years | |||
| Discount rate-operating lease | ||||
Warranty repairs
The following table sets forth the percentages of return rates and warranty repairs for all products currently marketed, in the aggregate from the date each product was introduced.
| Current Devices | ||
| Device Type | Return Rate | Warranty Repairs |
| 4G Wireless Devices | ||
| 5G Wireless Devices | ||
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 was 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 imported the devices and supplied them to Verizon.
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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, 2021 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.
Future Impact on Financial Performance
We are striving to avoid any litigation with Verizon arising from the recall and have not been served with any legal action by Verizon 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. No liability has been recorded for this litigation because the Company believes that any such liability is not probable and reasonably estimable at this time.
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 Verizon recall was likely and that we
did not disclose that information to investors in a timely manner. The Class and Defendants have executed a Stipulation and Agreement
of Settlement under which the Class releases all claims against Defendants in exchange for a payment by Defendants of $
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, by Stephen Harwood, derivatively on behalf of nominal defendant Franklin Wireless Corp. v. O.C. Kim, et al., Case #21cv01837-AJB-MSB, 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. O.C. Kim, et al., Case #21cv2091-AJB-MSB, 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.
The Harwood and Martin actions have 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 has been completed and we are awaiting rulings on pretrial motions at the reporting date.
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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. O.C. 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.
The Company will vigorously defend such shareholder litigation and proceedings. No liability has been recorded for these litigations because the Company believes that any such liability is not probable and reasonably estimable the reporting date.
“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-RSH-JLB, on or about July 22, 2021, claiming that our Chief Executive Officer, O.C. Kim, violated Section 16(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. On October 19, 2023, the jury returned a verdict for $2,000,000 in favor of the Company against the Company’s Chief Executive Officer, O.C. Kim. Mr. Kim has filed a notice indicating he intends to appeal the verdict.
Loan Agreement with Subsidiary
On March 21, 2022, Franklin
Wireless Corp. (the “Company”) entered into a Loan Agreement with Franklin Technologies, Inc. a Korean corporation (“FTI”),
under which the Company agreed to loan US$
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 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.
Employment Contracts
On October 1, 2020, 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. These agreements were for an initial term of three years but have now been extended through October 2024.
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The Change of Control Agreement with Mr. Kim calls for a payment of $5 million upon a change of control, and the agreement with Mr. Lee calls for a payment of $2 million upon a change of control.
On November 10, 2022, the Company and OC Kim, its President, entered into an amendment of the existing employment letter agreement dated September 7, 2021. The amendment provides for a severance payment of $3 million if Mr. Kim voluntarily terminates his employment by the Company or if he voluntarily terminates his employment due to a “change in circumstances,” generally defined as a material breach by the Company of its salary and benefit obligations or a significant reduction in Mr. Kim’s title or responsibilities. In the case of a termination of employment by the Company for cause (generally defined as conviction of a felony, or a misdemeanor where imprisonment is imposed, commission of any act of theft, fraud, dishonesty, or material falsification of any employment or Company records, or improper disclosure of the Company's confidential or proprietary information), the Company is to make a severance payment of $1,500,000. In either case, any unvested options become immediately vested.
In the amendment, Mr. Kim also agrees that, for a period of two years after termination, he will not disparage the Company or its officers, solicit any of its employees to terminate their employment, or disclose any of the Company’s proprietary information.
In addition, the amendment provides for the payment of an incentive bonus to Mr. Kim of $125,000 for each calendar quarter during the remaining four-year term of the employment letter, with the first such bonus due on December 31, 2022.
The Change in Control Agreement with Mr. Kim, dated October 1, 2020, has not been terminated and remains in effect at this time.
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.
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. The fair value of each share option award on the date of grant was estimated using the Black-Scholes method based on the following weighted average assumptions: The risk-free interest rate is based on the U.S. treasury yield curve in effect at the time of grant for periods corresponding with the expected term of options award; the expected term represents awards granted are expected to be outstanding giving considerations vesting schedules and historical participant exercise behavior; the expected volatility is based upon historical volatility of the dividend yield is based upon the company’s dividend rate at the time fair value is measure and future expectations. Under this application, we record compensation expense for all awards granted.
In July of 2020, the Board of Directors adopted the 2020 Franklin Wireless Corp. Stock Option Plan (the “2020 Plan”), which covers shares of Common Stock. The 2020 Plan provides 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.
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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 $ and $ compensation expenses recorded under this method for the six months ended December 31, 2023 and 2022, respectively.
A summary of the status of our stock options is presented below as of December 31, 2023:
| Options | Shares | Weighted- Average Exercise Price | Weighted- Average Remaining Contractual Life (In Years) | Aggregate Intrinsic Value | ||||||||||||
| Outstanding as of June 30, 2023 | $ | $ | ||||||||||||||
| Granted | – | – | ||||||||||||||
| Exercised | – | – | ||||||||||||||
| Cancelled | – | – | ||||||||||||||
| Forfeited or expired | ( | ) | – | – | ||||||||||||
| Outstanding as of December 31, 2023 | $ | $ | ||||||||||||||
| Exercisable as of December 31, 2023 | $ | $ | ||||||||||||||
The aggregate intrinsic
value in the preceding table represents the total pretax intrinsic value, based upon the Company’s closing stock price of 3.39 as
of December 31, 2023, 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 December 31, 2023, in the amount of
A summary of the status of our stock options is presented below as of December 31, 2022:
| Options | Shares | Weighted- Average Exercise Price | Weighted- Average Remaining Contractual Life (In Years) | Aggregate Intrinsic Value | ||||||||||||
| Outstanding as of June 30, 2022 | $ | $ | ||||||||||||||
| Granted | – | – | ||||||||||||||
| Exercised | ( | ) | – | – | ||||||||||||
| Cancelled | – | – | ||||||||||||||
| Forfeited or expired | ( | ) | – | – | ||||||||||||
| Outstanding as of December 31, 2022 | $ | $ | ||||||||||||||
| Exercisable as of December 31, 2022 | $ | $ | ||||||||||||||
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The aggregate intrinsic value
in the preceding table represents the total pretax intrinsic value, based upon the Company’s closing stock price of $4.46 as of
December 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 December 31, 2022, in the amount of
NOTE 8 – RELATED PARTY TRANSACTIONS
For the three and six months ended December 31, 2023, and 2022, there have not been any transactions entered into or been a participant in which a related person had or will have a direct or indirect material interest.
NOTE 9 - SUBSEQUENT EVENTS
The FASB issued ASC 855, “Subsequent Events.” ASC 855 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. The Company has evaluated all events or transactions that occurred after December 31, 2023, up through the date the financial statements were available to be issued. During these periods, the Company did not have any material recognizable subsequent events required to be disclosed to the financial statements as of February 14, 2024.
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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, 2023, filed on September 28, 2023. In light of these risks, uncertainties and assumptions, the forward-looking events discussed in this report might not occur.
BUSINESS OVERVIEW
We are a leading provider of integrated wireless solutions utilizing the latest in 5G (fifth generation) and 4G LTE (fourth generation long-term evolution) technologies including mobile hotspots, routers, fixed wireless routers, and various trackers. Our integrated software subscription services provide users remote capabilities including mobile device management (MDM) and software defined wide area networking (SD-WAN).
We have majority ownership of Franklin Technology Inc. (FTI), a research and development company based in Seoul, South Korea. FTI primarily provides design and development services for our wireless products.
Our products are generally marketed and sold directly to wireless operators and indirectly through strategic partners and distributors. Our global customer base primarily extends from North America to Asia.
The Company is constantly evaluating opportunities to increase shareholder value, both based on internal initiatives and in response to suggestions from shareholders and others.
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.
There is always a risk of disputes and disagreements with our business partners and suppliers, and the costs associated with enforcing our rights in those matters could negatively impact operating capital and reserves.
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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, 2023, 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 for the three and six months ended December 31, 2023.
RESULTS OF OPERATIONS
The following table sets forth, for the three and six months ended December 31, 2023 and 2022, our statements of comprehensive (loss) income (unaudited) including data expressed as a percentage of sales:
| Three Months Ended | Six Months Ended | |||||||||||||||
| December 31, | December 31, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Net sales | 100.0% | 100.0% | 100.0% | 100.0% | ||||||||||||
| Cost of goods sold | 90.5% | 89.5% | 87.3% | 85.1% | ||||||||||||
| Gross profit | 9.5% | 10.5% | 12.7% | 14.9% | ||||||||||||
| Operating expenses | 27.1% | 25.7% | 24.3% | 26.5% | ||||||||||||
| Loss from operations | (17.6% | ) | (15.2% | ) | (11.6% | ) | (11.6% | ) | ||||||||
| Other income, net | 7.8% | 15.6% | 4.8% | 2.9% | ||||||||||||
| Net income (loss) before income taxes | (9.8% | ) | 0.4% | (6.8% | ) | (8.7% | ) | |||||||||
| Income tax provision (benefit) | (2.5% | ) | 1.3% | (1.5% | ) | 0.1% | ||||||||||
| Net loss | (7.3% | ) | (0.9% | ) | (5.3% | ) | (8.8% | ) | ||||||||
| Less: non-controlling interest in net income (loss) of subsidiary | 1.3% | 3.3% | 0.2% | 0.0% | ||||||||||||
| Net loss attributable to Parent Company stockholders | (8.6% | ) | (4.2% | ) | (5.5% | ) | (8.8% | ) | ||||||||
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THREE MONTHS ENDED DECEMBER 31, 2023 COMPARED TO THREE MONTHS ENDED DECEMBER 31, 2022
NET SALES - Net sales decreased by $135,864, or 1.5%, to $8,847,779 for the three months ended December 31, 2023 from $8,983,643 for the corresponding period of 2022. For the three months ended December 31, 2023, net sales by geographic regions, consisting of North America and Asia, were $8,753,451 (98.9% of net sales) and $94,328 (1.1% of net sales), respectively. For the three months ended December 31, 2022, net sales by geographic regions, consisting of North America and Asia, were $8,950,134 (99.6% of net sales) and $33,509 (0.4% of net sales), respectively.
Net sales in North America decreased by $196,683, or 2.2%, to $8,753,451 for the three months ended December 31, 2023 from $8,950,134 for the corresponding period of 2022. For the three months ended December 31 ,2023, the decrease in net sales in North America was primarily due to the lack of sales to one major carrier (which was the second largest customer for the six months ended December 31, 2023, but its purchase was concentrated in the period of the three months ended September 30, 2023), which was offset by the increased sales from several customers. Net sales in Asia increased by $60,819, or 181.5%, to $94,328 for the three months ended December 31, 2023 from $33,509 for the corresponding period of 2022. The increase in net sales was primarily due to the increased revenue generated from Wi-Fi routers sales by FTI, which typically vary from period to period.
GROSS PROFIT - Gross profit decreased by $108,967, or 11.5%, to $837,075 for the three months ended December 31, 2023 from $946,042 for the corresponding period of 2022. The gross profit in terms of net sales percentage was 9.5% for the three months ended December 31, 2023 compared to 10.5% for the corresponding period of 2022. 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 for the three months ended December 31, 2023, was primarily due to the mixed results of competitive selling prices and the increase in production costs as well as the increased amortization expenses associated with the completed capitalized product development costs that are included in the cost of goods sold compared to the corresponding period of 2022.
OPERATING EXPENSES - Operating expenses increased by $80,634, or 3.5%, to $2,393,016 for the three months ended December 31, 2023 from $2,312,382 for the corresponding period of 2022.
Selling, general, and administrative expenses increased by $204,195 to $1,540,162 for the three months ended December 31, 2023, from $1,335,967 for the corresponding period of 2022. The increase in selling, general, and administrative expenses was primarily due to increased legal fees and operating lease expense of approximately $200,000 and $143,000, which was offset by the decreased compensation expenses related to stock options granted for employees and commission expense for sales of approximately $93,000 and $50,000, respectively.
Research and development expense decreased by $123,561 to $852,854 for the three months ended December 31, 2023, from $976,415 for the corresponding period of 2022. The decrease in research and development expense was primarily due to the decreased research and development costs and the related payroll expense of approximately $92,000 and $32,000, respectively, which is the mixed result of the timing of research and development activities and the number of active projects and typically vary from period to period.
OTHER INCOME, NET - Other income, net decreased by $710,290, or 50.7%, to $691,125 for the three months ended December 31, 2023 from $1,401,415 for the corresponding period of 2022. The decrease was primarily due to the decreased gain from the favorable changes in foreign currency exchange rates in FTI and the decreased forgiven liabilities of approximately $726,000 and $165,000, respectively, which were partially offset by the increased unrealized gain and interest income from the money market accounts and certificates of deposits of approximately $103,000 and $89,000.
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SIX MONTHS ENDED DECEMBER 31, 2023 COMPARED TO SIX MONTHS ENDED DECEMBER 31, 2022
NET SALES - Net sales increased by $1,410,742, or 8.3%, to $18,503,325 for the six months ended December 31, 2023 from $17,092,583 for the corresponding period of 2022. For the six months ended December 31, 2023, net sales by geographic regions, consisting of North America and Asia, were $18,408,997 (99.5% of net sales) and $94,328 (0.5% of net sales), respectively. For the six months ended December 31, 2022, net sales by geographic regions, consisting of North America and Asia, were $17,057,585 (99.8% of net sales) and $34,998 (0.2% of net sales), respectively.
Net sales in North America increased by $1,351,412, or 7.9%, to $18,408,997 for the six months ended December 31, 2023 from $17,057,585 for the corresponding period of 2022. The increase in net sales in North America was primarily due to the increased demand for a wireless product from one major carrier customer for this fiscal period, which represents 317% (or approximately $5.3M) increase compared to the corresponding period of 2022, which were offset by the decreased demand of another major carrier customer. Net sales in Asia increased by $59,330, or 169.5%, to $94,328 for the six months ended December 31, 2023 from $34,998 for the corresponding period of 2022. The increase in net sales was primarily due to the increased revenue generated from the Wi-Fi routers sales by FTI, which typically vary from period to period.
GROSS PROFIT – Gross profit decreased by $189,669, or 7.5%, to $2,350,235 for the six months ended December 31, 2023 from $2,539,904 for the corresponding period of 2022. The gross profit in terms of net sales percentage was 12.7% for the six months ended December 31, 2023 compared to 14.9% for the corresponding period of 2022. The decrease in gross profit was primarily due to the lower gross profit in terms of net sales percentage. The decrease in gross profit in terms of net sales percentage for the six months ended December 31, 2023, was primarily due to the mixed results of competitive selling prices and the increase in production costs as well as the increased amortization expenses associated with the completed capitalized product development costs that are included in the cost of goods sold compared to the corresponding period of 2022.
OPERATING EXPENSES – Operating expenses decreased by $31,444, or 0.7%, to $4,490,693 for the six months ended December 31, 2023 from $4,522,137 for the corresponding period of 2022.
Selling, general, and administrative expenses increased by $195,282 to $2,770,884 for the six months ended December 31, 2023, from $2,575,602 for the corresponding period of 2022. The increase in selling, general, and administrative expenses was primarily due to the increased legal fees, operating lease expenses, and payroll expenses of approximately $180,000, $130,000, and $90,000, respectively, which was offset by the decreased compensation expenses related to stock options granted for employees for sales of approximately $220,000.
Research and development expense decreased by $226,726 to $1,719,809 for the six months ended December 31, 2023, from $1,946,535 for the corresponding period of 2022. The decrease in research and development expense was primarily due to the decreased research and development costs and the related payroll expense of approximately $154,000 and $72,000, respectively, which is the mixed result of the timing of research and development activities and the number of active projects and typically vary from period to period.
OTHER INCOME, NET – Other income, net increased by $401,026, or 82.3%, to $888,381 for the six months ended December 31, 2023 from $487,355 for the corresponding period of 2022. The increase was primarily due to the increased unrealized gain from the money market accounts of approximately $276,000 and the increased interest income from certificates of deposits of approximately $283,000, which was partially offset by the decreased forgiven liabilities of $165,000.
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LIQUIDITY AND CAPITAL RESOURCES
Our historical operating results, capital resources and financial position, in combination with current projections and estimates, were considered in management’s plan and intentions to fund our operations over a reasonable period of time, which we define as the twelve-month period ending from the date of the filing of this Form 10-Q. For purposes of liquidity disclosures, we assess the likelihood that we have sufficient available working capital and other principal sources of liquidity to fund our operating activities and obligations as they become due.
Our principal source of liquidity as of December 31, 2023 consisted of cash and cash equivalents as well as short-term investments of $32,749,752. We believe we have sufficient available capital to cover our existing operations and obligations through at least one year from the date of the filing of this Form 10-Q. Our long-term future cash requirements will depend on numerous factors, including our revenue base, profit margins, product development activities, market acceptance of our products, future expansion plans and ability to control costs. If we are unable to achieve our current business plan or secure additional funding that may be required, we would need to curtail our operations or take other similar actions outside the ordinary course of business in order to continue to operate as a going concern.
OPERATING ACTIVITIES – Net cash used in operating activities for the six months ended December 31, 2023 and 2022 was $6,193,534 and $7,098,190, respectively.
The $6,193,534 in net cash used in operating activities for the six months ended December 31, 2023 was primarily due to the increase in accounts receivable of $4,495,638 and the decrease in accounts payable of $3,869,191 as well as our operating results (net loss adjusted for depreciation, amortization, and other non-cash charges), which was partially offset by the decrease in inventories of $2,581,682.
The $7,098,190 in net cash used in operating activities for the six months ended December 31, 2022 was primarily due to the increase in accounts receivable and inventories of $6,748,926 and $3,191,635, respectively, as well as our operating results (net loss adjusted for depreciation, amortization, and other non-cash charges), which was partially offset by an increase in accounts payable of $3,771,831.
INVESTING ACTIVITIES – Net cash used in investing activities for the six months ended December 31, 2023 and 2022 was $869,481 and $1,393,764, respectively.
The $869,481 in net cash used in investing activities for the six months ended December 31, 2023 was primarily due to the purchase of short-term investments of $779,571 and the payments for capitalized product development of $68,733. The $1,393,764 in net cash used in investing activities for the six months ended December 31, 2022 was primarily due to the payments for capitalized product development of $1,046,980 and purchase of short-term investments of $293,545.
FINANCING ACTIVITIES – Net cash used in financing activities for six months ended December 31, 2023 was $2,046, and net cash provided by financing activities for the six months ended December 31, 2022 was $45,000.
The $2,046 in net cash used in financial activities for the six months ended December 31, 2023 was from the increased loan interest to an employee. The $45,000 in net cash provided by financing activities for the six months ended December 31, 2022 were from cash received from exercise of stock options of $134,000, which was partially offset by the loan to an employee of $89,000.
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CONTRACTUAL OBLIGATIONS AND OTHER COMMITMENTS
Leases
We leased approximately 12,775 square feet of office space in San Diego, California, at a monthly rent of $25,754, pursuant to a lease that expired in December 2023. On October 19, 2023, we signed a lease for office space consisting of approximately 11,400 square feet, located in San Diego, California, at a monthly rent of $23,370, which commenced on January 1, 2024. In addition to monthly rent, the lease includes payment for certain common area costs. The term of the lease for the office space is 65 months from the lease commencement date. 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.
On or about December 7, 2023, we received an invoice from our prior landlord, Hunsaker & Associates, requesting payment of additional rent on our completed and expired lease of office space located at 9707 Waples Street, San Diego, CA as of December 31, 2023. This invoice purports to represent charges for variable cost increases during the prior 7 years of the lease. We are currently reviewing these charges and will be requesting further validation of these charges, in accordance with our rights granted under the lease. For the three months ended December 31, 2023, we recorded an additional rent expense reflecting this pending invoice of $142,978 and a credit of $24,656 for our deposit on the leasehold property.
Our Korea-based subsidiary, FTI, leases approximately 10,000 square feet of office space, at a monthly rent of approximately $8,000, and additional office space consisting of approximately 2,682 square feet at a monthly rent of approximately $2,700, both located in Seoul, Korea. These leases will expire on August 31, 2024. 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 will expire on September 4, 2024.
Rent expense for the three months ended December 31, 2023 and 2022 were $254,402 and $111,384, respectively. Rent expense for the six months ended December 31, 2022 and 2021 were $365,819 and $222,677, 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.
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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 December 31, 2023, 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 six months ended December 31, 2023 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 and six months ended December 31, 2023, 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, 2023, filed with the SEC on September 28, 2023 (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 |
| 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 Executive Officer) | ||
| By: | /s/ Bill Bauer | |
| Bill Bauer | ||
| Acting Chief Financial Officer | ||
| (Principal Financial Officer) | ||
Dated: February 14, 2024
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