NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE
1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles
of Consolidation
The
consolidated financial statements include the accounts of the Company and its subsidiary, Franklin Technology Inc. ("FTI"),
with a majority voting interest of 66.3% (33.7% is owned by non-controlling interests) as of March 31, 2022, and June 30, 2021. In the
preparation of consolidated financial statements of the Company, intercompany transactions and balances are eliminated and net earnings
are reduced by the portion of the net earnings of the subsidiary applicable to non-controlling interests.
As
consolidated financial statements are based on the assumption that they represent the financial position and operating results of a single
economic entity, the retained earnings or deficit of the subsidiary at the date of acquisition, October 1, 2009, by the parent are excluded
from consolidated retained earnings. When a subsidiary is consolidated, the consolidated financial statements include the subsidiary’s
revenues, expenses, gains, and losses only from the date the subsidiary is initially consolidated, and the non-controlling interest is
reported in the consolidated statement of financial position within equity, separately from the parent’s equity. There are no shares
of the Company held by any subsidiaries as of March 31, 2022, or June 30, 2021.
Non-controlling
Interest in a Consolidated Subsidiary
As
of March 31, 2022, the non-controlling interest was $1,533,245, which represents a $54,083 increase from $1,479,162 as of June 30, 2021.
The increase in the non-controlling interest of $54,083 was from income in the subsidiary of $160,385 incurred for the nine months ended
March 31, 2022.
Segment
Reporting
Accounting
Standards Codification (“ASC”) 280, “Segment Reporting,” requires public companies to report financial and descriptive
information about their reportable operating segments. We identify our operating segments based on how our chief operating decision maker
internally evaluates separate financial information, business activities and management responsibility. We have one reportable segment,
consisting of the sale of wireless access products.
We
generate revenues from three geographic areas, consisting of North America, Caribbean and South America, and Asia. The following enterprise-wide
disclosure is prepared on a basis consistent with the preparation of the consolidated financial statements. The following table contains
certain financial information by geographic area:
Segment information by geographic areas
| |
| | | |
| | | |
| | | |
| | |
| |
Three Months Ended | | |
Nine Months Ended | |
| |
March 31, | | |
March 31, | |
Net sales: | |
2022 | | |
2021 | | |
2022 | | |
2021 | |
North America | |
$ | 6,687,287 | | |
$ | 44,054,824 | | |
$ | 11,143,335 | | |
$ | 17,285,374 | |
Caribbean and South America | |
| – | | |
| – | | |
| 2,375 | | |
| 17,500 | |
Asia | |
| – | | |
| 276,130 | | |
| 707,226 | | |
| 276,738 | |
Totals | |
$ | 6,687,287 | | |
$ | 44,330,954 | | |
$ | 11,852,936 | | |
$ | 173,147,982 | |
Long lived assets by geographic area
| |
| | | |
| | |
Long-lived assets, net (property and equipment and intangible assets): | |
March 31, 2022 | | |
June 30, 2021 | |
North America | |
$ | 1,389,573 | | |
$ | 1,349,320 | |
Asia | |
| 84,225 | | |
| 49,040 | |
Totals | |
$ | 1,473,828 | | |
$ | 1,398,360 | |
Use
of Estimates
The
preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States
of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could materially differ from those estimates.
Fair
Value of Financial Instruments
The
carrying amounts of financial instruments such as cash equivalents, short-term investments, accounts receivable, accounts payable and
debt approximate the related fair values due to the short-term maturities of these instruments. We invest our excess cash into financial
instruments which are readily convertible into cash, such as money market funds and certificates of deposit.
Allowance
for Doubtful Accounts
Based
upon our review of our collection history as well as the current balances associated with all significant customers and associated invoices,
as of March 31, 2022, we did not believe an allowance for doubtful accounts was necessary.
Revenue
Recognition
Contracts
with Customers
Revenue
for sales of products and services is derived from contracts with customers. The products and services promised in contracts primarily
consist of hotspot routers. Contracts with each customer generally state the terms of the sale, including the description, quantity and
price of each product or service. Payment terms are stated in the contract, primarily in the form of a purchase order. Since the customer
typically agrees to a stated rate and price in the purchase order that does not vary over the life of the contract, the majority of our
contracts do not contain variable consideration. We establish a provision for estimated warranty and returns. Using historical averages,
that provision for the quarter ended March 31, 2022 was not material.
Disaggregation
of Revenue
In
accordance with Topic 606, we disaggregate revenue from contracts with customers into geographical regions and by the timing of when
goods and services are transferred. We determined that disaggregating revenue into these categories meets the disclosure objective in
Topic 606, which is to depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by regional economic
factors.
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:
Schedule of receivables | |
| | |
| |
| |
March 31, 2022 | | |
June 30, 2021 | |
Accounts Receivable | |
$ | 2,026,963 | | |
$ | 2,542,429 | |
The
balance of contract assets was immaterial as we did not have a significant amount of un-invoiced receivables in the periods ended March
31, 2022, and June 30, 2021.
Our
contract liabilities are as follows:
Useful lives of property and equipment | |
| | |
| |
| |
March 31, 2022 | | |
June 30, 2021 | |
Undelivered products | |
$ | 501,527 | | |
$ | 140,000 | |
Performance
Obligations
A
performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of measurement
in Topic 606. At contract inception, we assess the products and services promised in our contracts with customers. We then identify performance
obligations to transfer distinct products or services to the customer. In order to identify performance obligations, we consider all
the products or services promised in the contract regardless of whether they are explicitly stated or are implied by customary business
practices.
Our
performance obligations are primarily satisfied at a point in time. Revenue from products transferred to customers at a single point
in time accounted for 99.9% of net sales for the nine months ended March 31, 2022. Revenue recognized over a period of time for non-recurring
engineering projects is based on the percent complete of a project and accounted for 0.1% of net sales for the nine months ended March
31, 2022. The majority of our revenue recognized at a point in time is for the sale of hotspot router products. Revenue from these contracts
is recognized when the customer is able to direct the use of and obtain substantially all of the benefits from the product which generally
coincides with title transfer at completion of the shipping process.
As
of March 31, 2022, our contracts do not contain any unsatisfied performance obligations, except for undelivered products.
Cost
of Goods Sold
All
costs associated with our contract manufacturers, as well as distribution, fulfillment and repair services, are included in our cost
of goods sold. Cost of goods sold also includes amortization expenses of approximately $79,284 and $238,109 associated with capitalized
product development costs associated with complete technology for the three and nine months ended March 31, 2022, respectively, and $82,000
and $282,000 for the three and nine months ended March 31, 2021, respectively.
Capitalized
Product Development Costs
Accounting
Standards Codification (“ASC”) Topic 350, “Intangibles - Goodwill and Other” includes software that is part of
a product or process to be sold to a customer and is accounted for under Subtopic 985-20. Our products contain embedded software internally
developed by FTI, which is an integral part of these products because it allows the various components of the products to communicate
with each other and the products are clearly unable to function without this coding.
The
costs of product development that are capitalized once technological feasibility is determined (noted as technology in progress in the
Intangible Assets table in Note 3 to Notes to Consolidated Financial Statements) include related licenses, certification costs, payroll,
employee benefits, and other headcount-related expenses associated with product development. We determine that technological feasibility
for our products is reached after all high-risk development issues have been resolved. Once the products are available for general release
to our customers, we cease capitalizing the product development costs and any additional costs, if any, are expensed. The capitalized
product development costs are amortized on a product-by-product basis using the greater of straight-line amortization or the ratio of
the current gross revenues to the current and anticipated future gross revenues. The amortization begins when the products are available
for general release to our customers.
As
of March 31, 2022, and June 30, 2021, capitalized product development costs in progress were $178,100 and $602,388, respectively, and
the amounts are included in intangible assets in our consolidated balance sheets. For the three and nine months ended March 31, 2022,
we incurred $21,677 and $475,366, respectively, and for the three and nine months ended March 31, 2021, we incurred $54,100 and $587,246,
respectively, in capitalized product development costs, and such amounts are primarily comprised of certifications and licenses. All
costs incurred before technological feasibility is reached are expensed and included in our consolidated statements of comprehensive
income.
Research
and Development Costs
Costs
associated with research and development are expensed as incurred. Research and development costs were $1,050,180 and $1,199,525 for
the three months ended March 31, 2022 and 2021, respectively, and $3,179,221 and $3,329,649 for the nine months ended March 31, 2022
and 2021, respectively.
Warranties
We
provide a warranty for one year which is covered by our vendors and manufacturers under purchase agreements between the Company and the
vendors. As a result, we believe we do not have any net warranty exposure and do not accrue any warranty expenses. Historically, the
Company has not experienced any material net warranty expenditures.
Shipping
and Handling Costs
Costs
associated with product shipping and handling are expensed as incurred. Shipping and handling costs, which are included in selling,
general and administrative expenses on the consolidated statements of comprehensive income, were $42,706 and $147,202 for the three months
ended March 31, 2022 and 2021, respectively, and $145,658 and $674,854 for the nine months ended March 31, 2022 and 2021, respectively.
Cash
and Cash Equivalents
For
purposes of the consolidated statements of cash flow, we consider all highly liquid investments purchased with original maturities of
three months or less to be cash equivalents. We invest our excess cash into financial instruments which management believes are readily
convertible into cash, such as money market funds that are readily convertible to cash and have a $1.00 net asset value.
Short
Term Investments
We
have invested excess funds in short term liquid assets, such as certificates of deposit.
Inventories
Our
inventories consist of finished goods and are stated at the lower of cost or net realizable value, cost being determined on a first-in,
first-out basis. We assess the inventory carrying value and reduce it, if necessary, to its net realizable value based on customer orders
on hand, and internal demand forecasts using management’s best estimates given information currently available. Our customer demand
is highly unpredictable and can fluctuate significantly caused by factors beyond the control of the Company. We may write down our inventory
value for potential obsolescence and excess inventory. As of March 31, 2022, and June 30, 2021, we did not record any reserve for inventories
that we have identified as obsolete or slow-moving.
Property
and Equipment
Property
and equipment are recorded at cost. Significant additions or improvements extending useful lives of assets are capitalized. Maintenance
and repairs are charged to expense as incurred. Depreciation is computed using the straight-line method over the estimated useful lives
as follows:
Useful lives of property and equipment
| |
|
Machinery | |
6 years |
Office equipment | |
5 years |
Molds | |
3 years |
Vehicles | |
5 years |
Computers and software | |
5 years |
Furniture and fixtures | |
7 years |
Facilities improvements | |
5 years or life of the lease, whichever is shorter |
Goodwill
and Intangible Assets
Goodwill
and certain intangible assets were recorded in connection with the FTI acquisition in October 2009, and are accounted for in accordance
with ASC 805, “Business Combinations.” Goodwill represents the excess of the purchase price over the fair value of the tangible
and intangible net assets acquired. Intangible assets are recorded at their fair value at the date of acquisition. Goodwill and other
intangible assets are accounted for in accordance with ASC 350, “Goodwill and Other Intangible Assets.” Goodwill and other
intangible assets are tested for impairment at least annually and any related impairment losses are recognized in earnings when identified.
No impairment was deemed necessary as of March 31, 2022 or June 30, 2021.
Long-lived
Assets
In
accordance with ASC 360, “Property, Plant, and Equipment,” we review for impairment of long-lived assets and certain identifiable
intangibles whenever events or circumstances indicate that the carrying amount of assets may not be recoverable. We consider the carrying
value of assets may not be recoverable based upon our review of the following events or changes in circumstances: the asset’s ability
to continue to generate income from operations and positive cash flow in future periods; loss of legal ownership or title to the assets;
significant changes in our strategic business objectives and utilization of the asset; or significant negative industry or economic trends.
An impairment loss would be recognized when estimated future cash flows expected to result from the use of the asset are less than its
carrying amount.
As
of March 31, 2022, and June 30, 2021, we were not aware of any events or changes in circumstances that would indicate that the long-lived
assets are impaired.
Stock-based
Compensation
The
Company’s employee share-based awards result in a cost that is measured at fair value on an award’s grant date, based on
the estimated number of awards that are expected to vest. Compensation costs are recognized over the period that an employee provides
service in exchange for the award, i.e. the vesting period. The Company estimates the fair value of stock options using a Black-Scholes
option pricing model. Transactions with non-employees in which goods or services are the consideration received for the issuance of equity
instruments are accounted for based on the fair value of the consideration received or the fair value of the equity instrument issued,
whichever is more reliably measurable. Stock-based compensation costs are reflected in the accompanying consolidated statements of comprehensive
income based upon the underlying recipients' roles within the Company.
Income
Taxes
The
Company uses the asset and liability method of accounting for income taxes. Accordingly, deferred tax assets and liabilities are determined
based on the difference between the financial statement and income tax bases of assets and liabilities, using enacted tax rates in effect
for the year in which the differences are expected to reverse. A valuation allowance is recorded to reduce the carrying amount of deferred
tax assets, unless it is more likely than not such assets will be realized. Current income taxes are based on the year’s taxable
income for federal and state income tax reporting purposes and the annual change in deferred taxes.
The
Company assesses its income tax positions and records tax benefits based upon management’s evaluation of the facts, circumstances,
and information available at the reporting date. For those tax positions where it is more likely than not that a tax benefit will be
sustained, the Company records the largest amount of tax benefit with a greater than 50% likelihood of being realized upon ultimate settlement
with a taxing authority having full knowledge of all relevant information. For those income tax positions where it is not more likely
than not that a tax benefit will be sustained, no tax benefit is recognized in the financial statements. The Company classifies interest
and penalties associated with such uncertain tax positions as a component of income tax expense.
As
of March 31, 2022, we have no material unrecognized tax benefits. We recorded an income tax benefit of $238,852 and $1,126,860 for the
three and nine months ended March 31, 2022, respectively, and a provision for income taxes of $1,192,277 and $5,331,417 for the three
and nine months ended March 31, 2021, respectively. We also recorded an increase in deferred tax asset, non-current, of $238,852 and
$1,171,345 for the three and nine months ended March 31, 2022, respectively, and an increase in deferred tax asset, non-current, of $57,793
for the three months, and a decrease of $195,115 for nine months, ended March 31, 2021, respectively.
Earnings
per Share Attributable to Common Stockholders
Earnings
per share is calculated by dividing the net income by the weighted-average number of common shares that were outstanding for the period,
without consideration for potential common shares. Diluted earnings per share is calculated by dividing the net income by the sum of
the weighted-average number of dilutive potential common shares outstanding for the period determined using the treasury-stock method
or the as-converted method. Potentially dilutive shares are comprised of common stock options outstanding under our stock plan.
Concentrations
We
extend credit to our customers and perform ongoing credit evaluations of such customers. We evaluate our accounts receivable on a regular
basis for collectability and provide for an allowance for potential credit losses as deemed necessary. No reserve was required or recorded
for any of the periods presented.
Substantially
all of our revenues are derived from sales of wireless data products. Any significant decline in market acceptance of our products or
in the financial condition of our existing customers could impair our ability to operate effectively.
A
significant portion of our revenue is derived from a small number of customers. For the nine months ended March 31, 2022, sales to our
two largest customers accounted for 49% and 26% of our consolidated net sales, and 45% and 0% of our accounts receivable balance as of
March 31, 2022. In the same period of 2021, sales to our two largest customers accounted for 61% and 32% of our consolidated net sales,
and 0% and 96% of our accounts receivable balance as of March 31, 2021. No other customers accounted for more than ten percent of total
net sales for the nine months ended March 31, 2022 and 2021.
For
the nine months ended March 31, 2022, we purchased the majority of our wireless data products from two manufacturing companies located
in Asia. If these manufacturing companies were to experience delays, capacity constraints or quality control problems, product shipments
to our customers could be delayed, or our customers could consequently elect to cancel the underlying product purchase order, which would
negatively impact the Company's revenue. For the nine months ended March 31, 2022, we purchased wireless data products from these manufacturers
in the amount of $15,758,962, or 99% of total purchases and had related accounts payable of $11,664,549 as of March 31, 2022. In the
same period of 2021, we purchased wireless data products from these manufacturers in the amount of $130,256,593, or 99% of total purchases,
and had related accounts payable of $27,250,783 as of March 31, 2021.
We
maintain our cash accounts with established commercial banks. Such cash deposits exceed the Federal Deposit Insurance Corporation insured
limit of $250,000 for each financial institution. However, we do not anticipate any losses on excess deposits.
NOTE
2 - BUSINESS OVERVIEW
We
are a leading provider of intelligent wireless solutions including mobile hotspots, routers, trackers, and other devices. Our designs
integrate innovative hardware and software enabling machine-to-machine (M2M) applications and the Internet of Things (IoT). Our M2M and
IoT solutions include embedded modules, modems and gateways built to deliver reliable always-on connectivity supporting a broad spectrum
of applications based on fifth generation and fourth generation (5G/4G) wireless technology.
We
have a majority ownership position in Franklin Technology Inc. (“FTI”), a research and development company located in Seoul,
South Korea. FTI primarily provides design and development services to us for our wireless products.
Our
products are generally marketed and sold directly to wireless operators, and indirectly through strategic partners and distributors.
Our global customer base extends primarily from North America to Asia.
NOTE
3 – BASIS OF PRESENTATION
The
accompanying unaudited consolidated financial statements of Franklin Wireless Corp. have been prepared in accordance with accounting
principles generally accepted in the United States (“GAAP”) for interim financial information and are presented in accordance
with the requirements of Form 10-Q. In the opinion of management, the financial statements included herein contain all adjustments, including
normal recurring adjustments, considered necessary to present fairly the financial position, the results of operations and comprehensive
income (loss) and cash flows of the Company for the periods presented. These financial statements and notes hereto should be read in
conjunction with the financial statements and notes thereto for the fiscal year ended June 30, 2021 included in our Form 10-K filed on
September 28, 2021. The operating results or cash flows for the interim periods presented herein are not necessarily indicative of the
results to be expected for any other interim period or the full year.
NOTE
4 – DEFINITE LIVED INTANGIBLE ASSETS
The
definite lived intangible assets consisted of the following as of March 31, 2022:
Schedule of definite lived intangible assets
| |
| |
| | | |
| | | |
| | | |
| | |
Definite lived intangible assets: | |
Expected Life | |
Average Remaining life | | |
Gross Intangible Assets | | |
Less Accumulated Amortization | | |
Net Intangible Assets | |
Complete technology | |
3 years | |
| – | | |
$ | 18,397 | | |
| 18,397 | | |
| – | |
Technology in progress | |
Not Applicable | |
| – | | |
| 178,100 | | |
| – | | |
| 178,100 | |
Software | |
5 years | |
| 2.6 years | | |
| 424,728 | | |
| 302,610 | | |
| 122,118 | |
Patents | |
10 years | |
| 3.1 years | | |
| 21,360 | | |
| 14,567 | | |
| 6,793 | |
Certifications & licenses | |
3 years | |
| 1.0 years | | |
| 1,970,424 | | |
| 926,682 | | |
| 1,043,742 | |
Total as of March 31, 2022 | |
| |
| | | |
$ | 2,613,009 | | |
$ | 1,262,256 | | |
$ | 1,350,753 | |
The
definite lived intangible assets consisted of the following as of June 30, 2021:
Definite lived intangible assets: | |
Expected Life | |
Average Remaining life | | |
Gross Intangible Assets | | |
Less Accumulated Amortization | | |
Net Intangible Assets | |
Complete technology | |
3 years | |
| 0.5 years | | |
$ | 18,397 | | |
$ | 15,331 | | |
$ | 3,066 | |
Technology in progress | |
Not Applicable | |
| – | | |
| 602,388 | | |
| – | | |
| 602,388 | |
Software | |
5 years | |
| 3.0 years | | |
| 399,811 | | |
| 268,495 | | |
| 131,316 | |
Patents | |
10 years | |
| 3.9 years | | |
| 21,105 | | |
| 12,951 | | |
| 8,154 | |
Certifications & licenses | |
3 years | |
| 1.6 years | | |
| 1,070,770 | | |
| 568,944 | | |
| 501,826 | |
Total as of June 30, 2021 | |
| |
| | | |
$ | 2,112,471 | | |
$ | 865,721 | | |
$ | 1,246,750 | |
Amortization
expense recognized for the three months ended March 31, 2022 and 2021 was $170,406
and $101,535,
respectively, and for the nine months ended March 31, 2022 and 2021 was $396,535
and $342,070,
respectively. The amortization expenses of the definite lived intangible assets for the future are as follows:
Schedule of future amortization expense
| |
| | |
| | |
| | |
| | |
| | |
| |
| |
FY2022 | | |
FY2023 | | |
FY2024 | | |
FY2025 | | |
FY2026 | | |
Thereafter | |
Total | |
$ | 199,371 | | |
$ | 474,955 | | |
$ | 323,897 | | |
$ | 136,637 | | |
$ | 10,291 | | |
$ | 27,500 | |
NOTE
5 - PROPERTY AND EQUIPMENT
Property and equipment consisted
of the following as of:
Schedule of property and equipment
| |
| | | |
| | |
| |
March 31, 2022 | | |
June 30, 2021 | |
Machinery and Commercial Equipment | |
$ | 67,718 | | |
$ | 67,044 | |
Office equipment | |
| 310,400 | | |
| 291,191 | |
Molds | |
| 575,552 | | |
| 575,552 | |
Vehicle | |
| 15,513 | | |
| – | |
| |
| 969,183 | | |
| 933,787 | |
Less accumulated depreciation | |
| (846,108 | ) | |
| (782,177 | ) |
Total | |
$ | 123,075 | | |
$ | 151,610 | |
Depreciation
expense associated with property and equipment was $22,465 and $22,254 for the three months ended March 31, 2022 and 2021, respectively,
and $68,105 and $67,593 for the nine months ended March 31, 2022 and 2021, respectively. We disposed of the fully depreciated property
and equipment in the amount of $4,174 as we identified it has zero value.
NOTE
6 - ACCRUED LIABILITIES
Accrued
liabilities consisted of the following as of:
Schedule of accrued liabilities
| |
| | | |
| | |
| |
March 31, 2022 | | |
June 30, 2021 | |
Accrued payroll deductions owed to government entities | |
$ | 46,202 | | |
$ | 66,307 | |
Accrued commission to a customer | |
| 309,815 | | |
| 451,898 | |
Accrued vacation | |
| 61,020 | | |
| 73,900 | |
Accrued undelivered inventory | |
| 140,000 | | |
| 140,000 | |
Accrued commission for service providers | |
| 42,500 | | |
| 52,500 | |
Other accrued liabilities | |
| 612 | | |
| 920 | |
Total | |
$ | 600,149 | | |
$ | 785,525 | |
NOTE
7 – EARNINGS (LOSS) PER SHARE
For
the three and nine months ended March 31, 2022, we were in a net loss position and have excluded 861,001 stock options from the calculation
of diluted net loss per share because these securities are anti-dilutive. For the three and nine months ended March 31, 2021, we have
calculated the dilutive effect of common stock arising from 485,000 stock options.
The
weighted average number of shares outstanding used to compute earnings per share is as follows:
Schedule of earnings per share
| |
| | | |
| | | |
| | | |
| | |
| |
Three Months ended March 31, | | |
Nine Months Ended March 31, | |
| |
2022 | | |
2021 | | |
2022 | | |
2021 | |
Net (loss) income attributable to Parent Company | |
$ | (770,818 | ) | |
$ | 3,938,553 | | |
$ | (3,060,020 | ) | |
$ | 17,715,524 | |
| |
| | | |
| | | |
| | | |
| | |
Weighted-average shares of common stock outstanding: | |
| | | |
| | | |
| | | |
| | |
Basic shares outstanding | |
| 11,594,280 | | |
| 11,581,629 | | |
| 11,593,857 | | |
| 11,271,168 | |
Dilutive effect of common stock equivalents arising from stock options | |
| – | | |
| 210,663 | | |
| – | | |
| 210,662 | |
Diluted shares outstanding | |
| 11,594,280 | | |
| 11,792,292 | | |
| 11,593,857 | | |
| 11,481,830 | |
Basic (loss) income per share | |
$ | (0.07 | ) | |
$ | 0.34 | | |
$ | (0.26 | ) | |
$ | 1.57 | |
Diluted (loss) income per share | |
$ | (0.07 | ) | |
$ | 0.33 | | |
$ | (0.26 | ) | |
$ | 1.54 | |
NOTE
8 - COMMITMENTS AND CONTINGENCIES
Leases
On
September 9, 2015, we signed a lease for new office space consisting of approximately 12,775 square feet, located in San Diego, California,
which commenced on October 28, 2015. In addition to monthly rent, the new lease includes payment for certain common area costs. The term
of the lease for the new office space was four years from the lease commencement date and was then extended by an additional fifty months,
to December 31, 2023. Our facility is covered by an appropriate level of insurance, and we believe it to be suitable for our use and
adequate for our present needs. Rent expense for this office space was $77,263 for the three months ended March 31, 2022 and 2021 and
$231,789 for the nine months ended March 31, 2022 and 2021.
Our
Korea-based subsidiary, FTI, leases approximately 10,000 square feet of office space, located in Seoul, Korea, at a monthly rent of approximately
$8,000 and additional office space consisting of approximately 2,682 square feet, also located in Seoul, Korea, at a monthly rent of
approximately $2,700 that expires on August 31, 2022. Rent expense related to these leases was approximately $32,100 for the three months
ended March 31, 2022 and 2021, and approximately $96,300 for the nine months ended March 31, 2022 and 2021. This facility is also covered
by an appropriate level of insurance, and we believe it to be suitable for our use and adequate for our present needs.
We
lease one corporate housing facility, located in Seoul, Korea, primarily for our employees who travel, under a non-cancelable operating
lease that expires on September 4, 2022. Rent expense related to this lease was $2,150 and $2,316 for the three months ended March 31,
2022 and 2021, and approximately $6,562 and $6,843 for the nine months ended March 31, 2022 and 2021.
As
of March 31, 2022, we used discount rates of 4.0% and 2.8% in determining our operating lease liabilities for the office spaces in San
Diego, California, and South Korea, respectively. These rates represented our incremental borrowing rates at that time. Short-term leases
with initial terms of twelve months or less are not capitalized. Both our San Diego and Korean office leases were extensions of previous
leases and neither contains any further extension provisions.
Future
minimum payments under operating leases are as follows:
Schedule of future minimum rental payments for operating leases
| |
| | |
| |
Operating Leases | |
Fiscal 2022 remaining three months | |
$ | 80,483 | |
Fiscal 2023 | |
| 321,930 | |
Fiscal 2024 | |
| 160,965 | |
Total lease payments | |
| 563,378 | |
Less imputed interest | |
| (20,140 | ) |
Total | |
$ | 543,238 | |
Litigation
We
are from time to time involved in certain legal proceedings and claims arising in the ordinary course of business.
Verizon
Jetpack Recall
On
April 8, 2021, Verizon issued a press release announcing that it is working with the U.S. Consumer Product Safety Commission (CPSC) to
conduct a voluntary recall of certain Verizon Ellipsis Jetpack mobile hotspot devices, indicating that the lithium-ion battery in the
devices can overheat, posing a fire and burn hazard. According to the CPSC release, the recall affects approximately 2.5 million devices.
We import the devices and supply them to Verizon.
Verizon
first advised us of one alleged Jetpack device failure at the end of February 2021. We immediately began meeting with Verizon and requested
access to the device. We also began internal testing to evaluate device performance. We did not receive any further incident information
until the last week of March 2021. On April 1, 2021 we issued a press release announcing that we had received reports from Verizon about
potential issues with the batteries in the devices. On April 9, 2021we issued a press release announcing the voluntary recall by Verizon.
As
of the date of this report, we have been unable to recreate any device failures of the type identified by Verizon. All internal testing
conducted to date has confirmed that the Jetpack devices are performing within normal parameters. We are not currently aware of any aspect
of the Jetpack design that could cause the devices to fail in the way described in Verizon’s recall notice.
Future
Impact on Financial Performance
We
are striving to avoid any litigation arising from the recall and have not been served with any legal action relating to the products
covered by the recall. We are not currently able to estimate the financial impact of the recall on our future operations. At this time,
we do not have information that identifies the cause of the alleged incidents. We also do not have any specific legal claims or theories
of causation for device failure incidents that would help us estimate the cost of potential future litigation. We have, however, created
a litigation budget for the future cost of litigation.
Shareholder
Litigation
Ali
A
shareholder action, Ali vs. Franklin Wireless Corp. et al. Case #3:21-cv-00687-AJB-MSB, was filed in the U.S. District Court, Southern
District of California (San Diego) on April 16, 2021, alleging, among other things, that we had prior knowledge that the recall was likely
and that we did not disclose that information to investors in a timely manner. We believe these allegations are not supported by the
facts and we will vigorously defend against such claims. Discovery is ongoing at this time.
Harwood
/ Martin
A
legal action was filed in the U.S. District Court, Southern District of California (San Diego) against Franklin, as a nominal defendant,
Stephen Norwood Derivatively on Behalf of Nominal Defendant Franklin Wireless Corp. v. OC Kim, Et al., Case #21cv01837-JAH-DEB, on or
about October 29, 2021, claiming among other things, that we had prior knowledge that the recall was likely and that we did not disclose
that information to investors in a timely manner. We believe these allegations are not supported by the facts and we will vigorously
defend against such claims.
A
legal action was filed in the U.S. District Court, Southern District of California (San Diego) against Franklin, as a nominal defendant,
by Debra Martin, derivatively on behalf of nominal defendant Franklin Wireless Corp. v. OC Kim, Et al., Case #21cv2091-CAB-KSC, on or
about December 15, 2021, claiming among other things, that we had prior knowledge that the recall was likely and that we did not disclose
that information to investors in a timely manner. We believe these allegations are not supported by the facts and we will vigorously
defend against such claims.
Harwood
and Martin actions have recently been consolidated into a single action in the U.S. District Court, Southern District of California (San
Diego) titled “In re Franklin Wireless Corp. Derivative Litigation”, Case No.: 21cv1837-AJB (MSB). Discovery is ongoing at
this time.
Pape
A
legal action was filed in the Second Judicial District Court of Nevada in the County of Washoe against Franklin, as a nominal defendant,
Barbara Pape, derivatively on behalf of nominal defendant Franklin Wireless Corp. v. OC Kim, Et al., Case # CV22-00471, on or about March
21, 2022, claiming among other things, that we had prior knowledge that the recall was likely and that we did not disclose that information
to investors in a timely manner. We believe these allegations are not supported by the facts and we will vigorously defend against such
claims.
“Short-Swing”
Profits Litigation
A
legal action was filed in the U.S. District Court, Southern District of California (San Diego) against Franklin, as a nominal defendant,
Nosirrah Management LLC v. Franklin Wireless et al. Case # 3:21-cv-01316-CAB-JLB, on or about July 22, 2021, claiming that our Chief
Executive Officer, OC Kim, violated Section 16(b)b of the Securities Exchange Act of 1934 for receiving “short-swing” profits
from a sale and purchase of Franklin shares, in violation of that Act. We believe the allegations are not supported by the facts and
we intend to vigorously defend against these claims.
Franklin
v. Anydata, Inc.
We
entered into a Professional Services Agreement with Anydata Corp. (“Anydata”) for the product ACT233F Smart Link OBD device
on May 5, 2017, for a minimum purchase commitment of 250,000 units. We have delivered approximately 25,000 units and 7,000 units during
our second and fourth quarters of fiscal 2018, respectively, and an additional 18,000 units during our first quarter of fiscal 2019.
Sales to Anydata were approximately $1.8 million for the year ended June 30, 2019. We have received information that Anydata may not
be able to fulfill the entire purchase commitment for which parts have already been ordered with our main vendor, Quanta. We believe
that the Company will be able to supply some of the products to another customer and has received personal guarantees from the ownership
group of Anydata. As of June 30, 2019, the remaining unfulfilled purchase commitment was approximately $3.1 million. The total product
purchase commitment with Quanta was approximately $2.9 million. We have not recorded a receivable from Anydata, nor a liability owed
to Quanta. Management believes that, at this time, a loss contingency is reasonably possible but not estimable as to how much ultimately
would be paid to Quanta. As of June 30, 2020, we paid $100,000 for the right to call on inventory and recorded an additional $49,580
as a prepaid expense related to pricing adjustments, which has been agreed with Quanta for other products to ensure demand is met, and
for the quarter ended December 31, 2020, the prepaid expense of $149,580 has been recorded as a cost of goods sold. As of March 31, 2022,
there is a reasonable possibility we may incur a loss; however, the amount is not estimable at this time. On January 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.
As of the date of this report, litigation is continuing, and the action is not yet resolved.
Entry
into a Material Definitive Agreement.
On
March 21, 2022, Franklin Wireless Corp. (the “Company”) entered into a Loan Agreement with Franklin Technology Incorporation,
a Republic of Korea corporation (“FTI”), under which the Company agreed to loan US$10,000,000 to FTI. The Company owns a
majority of the outstanding equity of FTI. FTI’s primary business is providing design and development services to the Company for
our wireless products. As part of the loan transaction, FTI delivered a $10 million Promissory Note to the Company (the “Note”).
The
purpose of the loan is to allow FTI to purchase a facility in South Korea to house its operations, and to provide it with additional
working capital. The purchase of such a facility with the loan proceeds is subject to the Company’s reasonable approval. Upon acquisition
of the facility, FTI is required to grant the Company a mortgage on it to secure payment of the Note.
The
Note is for a term of five years, provides for annual payments of interest only at 2% per annum, and is due and payable upon maturity.
The Note and Loan Agreement include customary provisions for default and acceleration upon default, and a default interest rate of 7%
per annum.
COVID-19
In
March 2020, the World Health Organization declared the outbreak of a novel coronavirus (COVID-19) as a pandemic which continues to spread
throughout the United States. On March 19, 2020, the Governor of California declared a health emergency and issued an order to close
all nonessential businesses until further notice. As a maker of wireless connectivity devices, we are deemed to be an essential business.
Nonetheless, out of concern for our workers and pursuant to the government order, we reduced the scope of our operations and, where possible,
certain workers began telecommuting from their homes. The continued spread of COVID-19 may result in a period of business disruption,
including delays or disruptions in our supply chain. The spread of COVID-19, or another infectious disease, could also negatively affect
the operations at our third-party manufacturers, which could result in delays or disruptions in the supply of our products. While we
expect this situation may increase demand for its products, the related impact cannot be reasonably estimated at this time.
International
Tariffs
We
believe that our products are currently exempt from international tariffs upon import from our manufacturers to the United States. If
this were to change at any point, a tariff of 10%-25% of the purchase price would be imposed. If such tariffs are imposed, they could
have a materially adverse effect on sales and operating results.
Customer
Indemnification
Under
purchase orders and contracts for the sale of our products we may provide indemnification to our customers for potential intellectual
property infringement claims for which we may have no corresponding recourse against our third-party licensors. This potential liability,
if realized, could materially adversely affect our business, operating results and financial condition.
NOTE
9 - LONG-TERM INCENTIVE PLAN AWARDS
We
apply the provisions of ASC 718, “Compensation - Stock Compensation,” to all of our stock-based compensation awards and use
the Black-Scholes option pricing model to value stock options. Under this application, we record compensation expense for all awards
granted.
In
2009, we adopted the Stock Incentive Plan (“2009 Plan”), which provided for the grant of incentive stock options and non-qualified
stock options to our employees and directors. Options granted under the 2009 Plan generally have a term of ten years and generally vest
and become exercisable at the rate of 33% after one year and 33% on the second and third anniversaries of the option grant dates. Historically,
some stock option grants have included shorter vesting periods ranging from one to two years.
In
July of 2020, the Board of Directors adopted the 2020 Franklin Wireless Corp. Stock Option Plan (the “2020 Plan”), which
covers 800,000 shares of Common Stock. The 2020 Plan provide for the grant of incentive stock options, non-qualified stock options and
restricted stock to our employees, directors, and independent contractors. These options will have such vesting or other provisions as
may be established by the Board of Directors at the time of each grant.
The
estimated forfeiture rate considers historical turnover rates stratified into employee pools in comparison with an overall employee turnover
rate, as well as expectations about the future. We periodically revise the estimated forfeiture rate in subsequent periods if actual
forfeitures differ from those estimates. There were $373,612 and $282,116 in compensation expenses recorded under this method for the
nine months ended March 31, 2022 and 2021, respectively.
A
summary of the status of our stock options is presented below as of March 31, 2022: