See accompanying notes to consolidated financial statements.
See accompanying notes to consolidated financial statements.
See accompanying notes to consolidated
financial statements.
See accompanying notes to consolidated
financial statements.
See accompanying notes to consolidated financial statements.
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% (approximately 33.7% is owned by non-controlling interests) as of September 30, 2022 and 2021. In the preparation of consolidated
financial statements of the Company, intercompany transactions and balances are eliminated and net earnings are reduced by the portion
of the net earnings of the subsidiary applicable to non-controlling interests.
As consolidated financial statements
are based on the assumption that they represent the financial position and operating results of a single economic entity, the retained
earnings or deficit of the subsidiary at the date of acquisition, October 1, 2009, by the parent are excluded from consolidated retained
earnings. When a subsidiary is consolidated, the consolidated financial statements include the subsidiary’s revenues, expenses,
gains, and losses only from the date the subsidiary is initially consolidated, and the non-controlling interest is reported in the consolidated
statement of financial position within equity, separately from the parent’s equity. There are no shares of the Company held by any
subsidiaries as of September 30, 2022, or June 30, 2022.
Non-controlling Interest in a Consolidated Subsidiary
As of September 30, 2022,
the non-controlling interest was $1,270,026, which represents a $299,579 decrease from $1,569,605 as of June 30, 2022. The decrease
in the non-controlling interest of $299,579 was from loss in the subsidiary of $890,082 incurred for the three months ended
September 30, 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.
| Segment information by geographic areas | |
| | | |
| | |
| | |
Three Months Ended September 30, | |
| Net sales: | |
2022 | | |
2021 | |
| North America | |
$ | 8,107,451 | | |
$ | 3,171,198 | |
| Asia | |
| 1,489 | | |
| 172,862 | |
| Totals | |
$ | 8,108,940 | | |
$ | 3,344,060 | |
| Long lived assets by geographic area | |
| | | |
| | |
| Long-lived assets, net (property and equipment and intangible assets): | |
September 30,
2022 | | |
June 30,
2022 | |
| North America | |
$ | 1,681,253 | | |
$ | 1,374,747 | |
| Asia | |
| 105,820 | | |
| 81,261 | |
| Totals | |
$ | 1,787,073 | | |
$ | 1,456,008 | |
Use of Estimates
The preparation of the consolidated
financial statements in conformity with accounting principles generally accepted in the United States of America requires management to
make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results
could materially differ from those estimates.
Fair Value of Financial Instruments
The carrying amounts of financial
instruments such as cash equivalents, short-term investments, accounts receivable, accounts payable and debt approximate the related fair
values due to the short-term maturities of these instruments. We invest our excess cash into financial instruments which are readily convertible
into cash, such as money market funds and certificates of deposit.
Allowance for Doubtful Accounts
Based upon our review of our collection
history as well as the current balances associated with all significant customers and associated invoices, as of September 30, 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 September 30, 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 | |
| | |
| |
| | |
September 30,
2022 | | |
June 30,
2022 | |
| Accounts Receivable | |
$ | 946,006 | | |
$ | 1,322,619 | |
The balance of contract assets
was immaterial as we did not have a significant amount of un-invoiced receivables in the periods ended September 30, 2022, and June 30,
2022.
Our contract liabilities are as
follows:
| Schedule of contract liabilities | |
| | |
| |
| | |
September 30,
2022 | | |
June 30,
2022 | |
| Undelivered products | |
$ | 441,737 | | |
$ | 371,624 | |
Performance Obligations
A performance obligation is a
promise in a contract to transfer a distinct good or service to the customer and is the unit of measurement in Topic 606. At contract
inception, we assess the products and services promised in our contracts with customers. We then identify performance obligations to transfer
distinct products or services to the customer. In order to identify performance obligations, we consider all the products or services
promised in the contract regardless of whether they are explicitly stated or are implied by customary business practices.
Our performance obligations are
primarily satisfied at a point in time. Revenue from products transferred to customers at a single point in time accounted for 99.9% of
net sales for the three months ended September 30, 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 three months ended September 30, 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 September 30, 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 $166,000 and $78,000 associated with capitalized product development costs associated
with complete technology for the three months ended September 30, 2022 and 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 September 30, 2022, and
June 30, 2022, capitalized product development costs in progress were $680,593 and $187,343, respectively, and the amounts are included
in intangible assets in our consolidated balance sheets. During the three months ended September 30, 2022 and 2021, we incurred $493,250
and $35,543, 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 $970,120 and $1,021,902 for the three months ended September
30, 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 (loss), were $40,553 and $45,384 for the three months ended September
30, 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 September 30, 2022, and June 30, 2022, we have recorded inventory reserves in the amount of $557,155
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 September 30, 2022 or June 30, 2022.
Long-lived Assets
In accordance with ASC 360, “Property,
Plant, and Equipment,” we review for impairment of long-lived assets and certain identifiable intangibles whenever events or circumstances
indicate that the carrying amount of assets may not be recoverable. We consider the carrying value of assets may not be recoverable based
upon our review of the following events or changes in circumstances: the asset’s ability to continue to generate income from operations
and positive cash flow in future periods; loss of legal ownership or title to the assets; significant changes in our strategic business
objectives and utilization of the asset; or significant negative industry or economic trends. An impairment loss would be recognized when
estimated future cash flows expected to result from the use of the asset are less than its carrying amount.
As of September 30, 2022, and
June 30, 2022, we were not aware of any events or changes in circumstances that would indicate that the long-lived assets are impaired.
Stock-based Compensation
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 September 30, 2022, we have
no material unrecognized tax benefits. We recorded income tax benefits of $103,383 and $411,256 for the three months ended September 30,
2022, and 2021, respectively. We also recorded an increase in deferred tax asset, non-current, of $104,183 and $439,568 for the three
months ended September 30, 2022, and 2021, respectively.
Earnings (loss) per Share Attributable to Common
Stockholders
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 three months ended September 30, 2022, sales to our one largest customer accounted
for 92% of our consolidated net sales, and 0% of our accounts receivable balance as of September 30, 2022. In the same period of 2021,
sales to our two largest customers accounted for 64% and 16% of our consolidated net sales, and 0% and 33% of our accounts receivable
balance as of September 30, 2021. No other customers accounted for more than ten percent of total net sales for the three months ended
September 30, 2022 and 2021.
For the three months ended
September 30, 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 three months ended September 30, 2022, we purchased wireless data
products from these manufacturers in the amount of $7,067,055,
or 99%
of total purchases, and had related accounts payable of $7,990,867
as of September 30, 2022. In the same period of 2021, we purchased wireless data products from these manufacturers in the amount of
$2,473,117,
or 99%
of total purchases, and had related accounts payable of $3,159,529
as of September 30, 2021.
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
integrated wireless solutions utilizing the latest in 4G LTE (fourth generation long-term evolution) and 5G (fifth generation) technologies
including mobile hotspots, routers, CPEs (Customer Premise Equipment), and various trackers. Our integrated software subscription services
provide users remote capabilities including mobile device management (MDM) and software defined wide area networking (SD-WAN).
We have majority ownership of
Franklin Technology Inc. (FTI), a research and development company based in Seoul, South Korea. FTI primarily provides design and development
services for our wireless products.
Our products are generally marketed
and sold directly to wireless operators and indirectly through strategic partners and distributors. Our global customer base primarily
extends from North America to Asia.
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, 2022 included in our Form 10-K filed on September 13, 2022. The operating
results or cash flows for the interim periods presented herein are not necessarily indicative of the results to be expected for any other
interim period or the full year.
NOTE 4 – DEFINITE LIVED INTANGIBLE ASSETS
The definite lived intangible
assets consisted of the following as of September 30, 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 |
|
– |
|
|
680,593 |
|
|
|
– |
|
|
|
680,593 |
| Software |
|
5 years |
|
2.3 years |
|
|
423,147 |
|
|
|
327,182 |
|
|
|
95,964 |
| Patents |
|
10 years |
|
3.2 years |
|
|
28,397 |
|
|
|
16,500 |
|
|
|
11,898 |
| Certifications & licenses |
|
3 years |
|
0.8 years |
|
|
2,144,359 |
|
|
|
1,262,548 |
|
|
|
881,811 |
|
Total as of September 30,
2022 |
|
|
|
|
|
$ |
3,294,893 |
|
|
$ |
1,624,627 |
|
|
$ |
1,670,266 |
The definite lived intangible
assets consisted of the following as of June 30, 2022:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Definite lived intangible assets: |
|
Expected
Life |
|
Average
Remaining
Life |
|
Gross
Intangible
Assets |
|
|
Less Accumulated
Amortization |
|
|
Net Intangible
Assets |
| Complete technology |
|
3 years |
|
– |
|
|
18,397 |
|
|
|
18,397 |
|
|
|
– |
| Technology in progress |
|
Not Applicable |
|
– |
|
|
187,343 |
|
|
|
– |
|
|
|
187,343 |
| Software |
|
5 years |
|
2.6 years |
|
|
423,147 |
|
|
|
314,855 |
|
|
|
108,292 |
| Patents |
|
10 years |
|
2.5 years |
|
|
21,543 |
|
|
|
15,122 |
|
|
|
6,421 |
| Certifications & licenses |
|
3 years |
|
1.1 years |
|
|
2,144,359 |
|
|
|
1,096,359 |
|
|
|
1,048,000 |
| Total as of June 30, 2022 |
|
|
|
|
|
$ |
2,794,789 |
|
|
|
1,444,733 |
|
|
|
1,350,056 |
Amortization expense recognized
during the three months ended September 30, 2022 and 2021 was $179,894 and $93,694, respectively.
The amortization expenses of
the definite lived intangible assets for the future are as follows:
| Schedule of future amortization expense | |
| | |
| | |
| | |
| | |
| | |
| |
| | |
FY2023 | | |
FY2024 | | |
FY2025 | | |
FY2026 | | |
FY2027 | | |
Thereafter | |
| Total | |
$ | 370,841 | | |
$ | 393,046 | | |
$ | 183,177 | | |
$ | 13,981 | | |
$ | 10,188 | | |
$ | 18,440 | |
NOTE 5 – PROPERTY AND EQUIPMENT
Property and equipment consisted
of the following as of:
| Schedule of property and equipment | |
| | | |
| | |
| | |
September 30,
2022 | | |
June 30,
2022 | |
| Machinery and Commercial Equipment | |
$ | 68,004 | | |
$ | 67,848 | |
| Office equipment | |
| 312,993 | | |
| 312,785 | |
| Molds | |
| 601,862 | | |
| 575,552 | |
| Vehicle | |
| 15,513 | | |
| 15,513 | |
| | |
| 998,372 | | |
| 971,698 | |
| Less accumulated depreciation | |
| (881,565 | ) | |
| (865,746 | ) |
| Total | |
$ | 116,807 | | |
$ | 105,952 | |
Depreciation expense associated
with property and equipment was $15,819 and $22,786 for the three months ended September 30, 2022 and 2021, respectively.
NOTE 6 – ACCRUED LIABILITIES
Accrued liabilities consisted
of the following as of:
| Schedule of accrued liabilities |
|
|
|
|
|
|
|
|
| |
|
September 30,
2022 |
|
|
June 30,
2022 |
|
| Accrued payroll deductions owed to government entities |
|
$ |
52,356 |
|
|
$ |
55,387 |
|
| Accrued vacation |
|
|
62,563 |
|
|
|
65,602 |
|
| Accrued undelivered inventory |
|
|
140,000 |
|
|
|
140,000 |
|
| Accrued commission for service providers |
|
|
37,500 |
|
|
|
40,000 |
|
| Accrued commission to a customer |
|
|
248,549 |
|
|
|
288,306 |
|
| Other accrued liabilities |
|
|
11,172 |
|
|
|
612 |
|
| Total |
|
$ |
552,140 |
|
|
$ |
589,907 |
|
NOTE 7 – EARNINGS (LOSS) PER SHARE
For the three months ended September
30, 2022 and 2021, we were in a net loss position and have excluded 756,001 and 477,001 stock options, respectively, from the calculation
of diluted net loss per share because these securities are anti-dilutive.
The weighted average number of
shares outstanding used to compute earnings per share is as follows:
| Schedule of earnings per share | |
| | | |
| | |
| | |
Three Months Ended September 30, | |
| | |
2022 | | |
2021 | |
| Net loss attributable to Parent Company | |
$ | (1,126,991 | ) | |
$ | (1,103,605 | ) |
| | |
| | | |
| | |
| Weighted-average shares of common stock outstanding: | |
| | | |
| | |
| Basic shares outstanding | |
| 11,684,280 | | |
| 11,593,006 | |
| Dilutive effect of common stock equivalents arising from stock options | |
| – | | |
| – | |
| Diluted shares outstanding | |
| 11,684,280 | | |
| 11,593,006 | |
| Basic loss per share | |
$ | (0.10 | ) | |
$ | (0.10 | ) |
| Diluted loss per share | |
$ | (0.10 | ) | |
$ | (0.10 | ) |
NOTE 8 – COMMITMENTS AND CONTINGENCIES
Leases
On September 9, 2015, we signed
a lease for new office space consisting of approximately 12,775 square feet, located in San Diego, California, at a monthly rent of $23,115,
which commenced on October 28, 2015. In addition to monthly rent, the new lease includes payment for certain common area costs. The term
of the lease for the new office space was four years from the lease commencement date and was then extended by an additional fifty months,
to December 31, 2023. Our facility is covered by an appropriate level of insurance, and we believe it to be suitable for our use and adequate
for our present needs. Rent expense for this office space was $77,263 for the three months ended September 30, 2022 and 2021.
Our Korea-based subsidiary, FTI,
leases approximately 10,000 square feet of office space, at a monthly rent of approximately $8,000, and additional office space consisting
of approximately 2,682 square feet at a monthly rent of approximately $2,700, both located in Seoul, Korea. These leases will expire on
August 31, 2023. In addition to monthly rent, the leases provide for periodic cost of living increases in the base rent and payment for
certain common area costs. These facilities are covered by an appropriate level of insurance, and we believe them to be suitable for our
use and adequate for our present needs. Rent expense related to these leases was approximately $32,100 for the three months ended September
30, 2022 and 2021.
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, 2023. Rent expense related to this lease was $1,930 and $2,223 for the three months ended September 30, 2022 and 2021, respectively.
As of September 30, 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 2023 | |
$ | 241,448 | |
| Fiscal 2024 | |
| 160,965 | |
| Total lease payments | |
| 402,413 | |
| Less imputed interest | |
| (10,532 | ) |
| Total | |
$ | 391,881 | |
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 imported the devices and
supplied 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, 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
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. 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 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.
The 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.
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 at this time.
“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) 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. 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.
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.
COVID-19
In March 2020, the World Health
Organization declared the outbreak of a novel coronavirus (COVID-19) as a pandemic which continues to spread throughout the United States.
On March 19, 2020, the Governor of California declared a health emergency and issued an order to close all nonessential businesses until
further notice. As a maker of wireless connectivity devices, we are deemed to be an essential business. Nonetheless, out of concern for
our workers and pursuant to the government order, we reduced the scope of our operations and, where possible, certain workers began telecommuting
from their homes. The continued spread of COVID-19 may result in a period of business disruption, including delays or disruptions in our
supply chain. The spread of COVID-19, or another infectious disease, could also negatively affect the operations at our third-party manufacturers,
which could result in delays or disruptions in the supply of our products. While we expect this situation may increase demand for its
products, the related impact cannot be reasonably estimated at this time.
Change of Control Agreements
On 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 we experience a change of control. The term includes the acquisition
of our Common Stock 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 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 our outstanding Common Stock, or a liquidation or dissolution or sale of substantially
all of our assets.
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.
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 $180,745 and $94,538 compensation expenses recorded under this method for the three months ended September 30, 2022 and 2021,
respectively.
A summary of the status of our
stock options is presented below as of September 30, 2022:
The aggregate intrinsic
value in the preceding table represents the total pretax intrinsic value, based upon the Company’s closing stock price of $2.92
as of September 30, 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 September 30, 2022, in the amount of 756,001 shares
was $3.17 per share. As of September 30, 2022, there was unrecognized compensation cost of $1,102,036 related to non-vested stock options
granted.
A summary of the status of our
stock options is presented below as of September 30, 2021:
The aggregate intrinsic
value in the preceding table represents the total pretax intrinsic value, based upon the Company’s closing stock price of $7.26
as of September 30, 2021, which would have been received by the option holders had all option holders exercised their options as of that
date. The weighted-average grant-date fair value of stock options outstanding as of September 30, 2021, in the amount of 477,001 shares
was $3.00 per share. As of September 30, 2021, there was unrecognized compensation cost of $700,605 related to non-vested stock options
granted.
