Company Quick10K Filing
Franklin Wireless
Price2.05 EPS-0
Shares11 P/E-19
MCap22 P/FCF4
Net Debt-6 EBIT-1
TEV15 TEV/EBIT-13
TTM 2019-06-30, in MM, except price, ratios
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8-K 2018-04-06

FKWL 10Q Quarterly Report

Part I - Financial Information
Item 1. Financial Statements
Note 1 - Basis of Presentation
Note 2 - Business Overview
Note 3 - Summary of Significant Accounting Policies
Note 4 - Property and Equipment
Note 5 - Accrued Liabilities
Note 6 - Earnings (Loss) per Share
Note 7 - Commitments and Contingencies
Note 8 - Long - Term Incentive Plan Awards
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II - Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
EX-31.1 franklin_ex3101.htm
EX-31.2 franklin_ex3102.htm
EX-32.1 franklin_ex3201.htm
EX-32.2 franklin_ex3202.htm

Franklin Wireless Earnings 2020-03-31

Balance SheetIncome StatementCash Flow
40322416802012201420172020
Assets, Equity
25191494-12012201420172020
Rev, G Profit, Net Income
4.93.11.2-0.6-2.5-4.32012201420172020
Ops, Inv, Fin

10-Q 1 franklin_10q-033120.htm FORM 10-Q

Table of Contents

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q

 

 

x

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

 

For the quarterly period ended March 31, 2020

 

OR

 

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

 

For the transition period from                          to                         .

 

Commission file number: 001-14891

 

FRANKLIN WIRELESS CORP.

(Exact name of Registrant as specified in its charter)

 


Securities registered pursuant to Section 12(b) of the Act: None

 

Securities registered pursuant to Section 12(g) of the Act: None

 

Nevada

(State or other jurisdiction of incorporation or organization)

 

95-3733534

(I.R.S. Employer Identification Number)

     

 

9707 Waples Street

Suite 150

San Diego, California

(Address of principal executive offices)

 

 

92121

(Zip code)

 

     

 

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

 

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

 

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

 

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

 

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

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  [_]    No  [_]

 

The Registrant has 10,601,912 shares of common stock outstanding as of May 15, 2020.

 

 

   

 

 

FRANKLIN WIRELESS CORP.

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2020

INDEX

 

 

 

    Page
PART I – Financial Information
     
Item 1: Consolidated Financial Statements (unaudited)  
  Consolidated Balance Sheets as of March 31, 2020 (unaudited) and June 30, 2019 4
  Consolidated Statements of Comprehensive Income (Loss) (unaudited) for the three and nine months ended March 31, 2020 and 2019 5
  Consolidated Statements of Stockholders' Equity (unaudited) for the three and nine months ended March 31, 2020 and 2019 6
  Consolidated Statements of Cash Flows (unaudited) for the nine months ended March 31, 2020 and 2019 7
  Notes to Consolidated Financial Statements (unaudited) 8
Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations 21
Item 3: Quantitative and Qualitative Disclosures About Market Risk 25
Item 4: Controls and Procedures 25
     
PART II – Other Information
     
Item 1: Legal Proceedings 26
Item 1A: Risk Factors 26
Item 2: Unregistered Sales of Equity Securities and Use of Proceeds 26
Item 3: Defaults Upon Senior Securities 26
Item 4: Mine Safety Disclosures 26
Item 5: Other Information 26
Item 6: Exhibits 26
     
Signatures   27

 

 

 

 

 

 

 

 

 

 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, 2019. 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. Financial Statements

FRANKLIN WIRELESS CORP.

CONSOLIDATED BALANCE SHEETS

 

   March 31, 2020   June 30, 
   (unaudited)   2019 
ASSETS          
Current assets:          
Cash and cash equivalents  $7,614,126   $6,447,505 
Certificates of deposit account   5,358,054    5,380,226 
Accounts receivable   11,236,606    4,138,469 
Other receivables, net   51,404    40,807 
Inventories, net   818,532    1,052,740 
Prepaid expenses and other current assets   14,359    28,042 
Advance payments to vendors   28,224    51,340 
Total current assets   25,121,305    17,139,129 
Property and equipment, net   221,738    131,879 
Intangible assets, net   1,260,107    1,109,911 
Deferred tax assets, non-current   1,924,611    2,282,975 
Goodwill   273,285    273,285 
Right of use asset   1,231,330     
Other assets   281,402    258,097 
TOTAL ASSETS  $30,313,778   $21,195,276 
           
LIABILITIES AND STOCKHOLDERS' EQUITY          
Current liabilities:          
Accounts payable  $11,357,842   $5,672,514 
Income tax payable   49,799    654 
Advance payments from customers   612     
Accrued liabilities   350,490    247,658 
Lease liabilities, current   394,769     
Total current liabilities   12,153,512    5,920,826 
Lease liabilities, non-current   884,851     
Total liabilities   13,038,363    5,920,826 
Commitments and contingencies (Note 7)          
Stockholders’ equity:          
Parent Company stockholders’ equity          
Preferred stock, par value $0.001 per share, authorized 10,000,000 shares; No preferred stock issued and outstanding as of March 31, 2020 and June 30, 2019        
Common stock, par value $0.001 per share, authorized 50,000,000 shares; 10,601,912 and 10,570,203 shares issued and outstanding as of March 31, 2020 and June 30, 2019, respectively   14,004    13,972 
Additional paid-in capital   7,470,009    7,442,272 
Retained earnings   14,300,565    12,477,441 
Treasury stock, 3,472,286 shares as of March 31, 2020 and June 30, 2019   (4,513,479)   (4,513,479)
Accumulated other comprehensive loss   (670,392)   (634,802)
Total Parent Company stockholders’ equity   16,600,707    14,785,404 
Non-controlling interests   674,708    489,046 
Total stockholders’ equity   17,275,415    15,274,450 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY  $30,313,778   $21,195,276 

 

See accompanying notes to consolidated financial statements.

 

 

 

 4 

 

 

FRANKLIN WIRELESS CORP.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

 

   Three Months Ended   Nine Months Ended 
   March 31,   March 31, 
   2020   2019   2020   2019 
Net sales  $15,546,182   $8,966,140   $37,680,312   $31,480,832 
Cost of goods sold   12,511,391    7,371,035    30,033,382    26,431,444 
Gross profit   3,034,791    1,595,105    7,646,930    5,049,388 
                     
Operating expenses:                    
Selling, general and administrative   988,096    1,268,674    2,606,600    3,849,296 
Research and development   834,478    714,092    2,754,414    2,186,755 
Total operating expenses   1,822,574    1,982,766    5,361,014    6,036,051 
Income (loss) from operations   1,212,217    (387,661)   2,285,916    (986,663)
                     
Other income, net:                    
Interest income   38,679    48,921    134,270    82,673 
Income from governmental subsidy           4,114    64,824 
Other income (loss), net   42,000    2,984    68,378    (3,322)
Total other income, net   80,679    51,905    206,762    144,175 
Income (loss) before provision for income taxes   1,292,896    (335,756)   2,492,678    (842,488)
Income tax provision (benefit)   233,032    (108,244)   408,892    (185,284)
Net income (loss)   1,059,864    (227,512)   2,083,786    (657,204)
Less: non-controlling interests in net loss of subsidiary at 48.2%               (55,564)
Less: non-controlling interests in net (loss) income of subsidiary at 35.8%       (69,698)   189,106    (107,181)
Less: non-controlling interests in net income of subsidiary at 33.7%   71,556        71,556     
Net income (loss) attributable to Parent Company  $988,308   $(157,814)  $1,823,124   $(494,459)
                     
                     
Basic income (loss) per share attributable to Parent Company stockholders  $0.09   $(0.01)  $0.17   $(0.05)
Diluted income (loss) per share attributable to Parent Company stockholders  $0.09   $(0.01)  $0.17   $(0.05)
                     
Weighted average common shares outstanding – basic   10,580,576    10,570,203    10,574,841    10,570,203 
Weighted average common shares outstanding – diluted   10,699,773    10,570,203    10,694,038    10,570,203 
                     
Comprehensive income (loss)                    
Net income (loss)  $1,059,864   $(227,512)  $2,083,786   $(657,204)
Translation adjustments   (54,340)   (4,351)   (35,590)   (7,650)
Comprehensive income (loss)   1,005,524    (231,863)   2,048,196    (664,854)
Less: comprehensive income (loss) attributable to non-controlling interest   71,556    (69,698)   260,662    (162,745)
Comprehensive income (loss) attributable to controlling interest  $933,968   $(162,165)  $1,787,534   $(502,109)

 

See accompanying notes to consolidated financial statements.

 

 

 

 5 

 

 

FRANKLIN WIRELESS CORP.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

For the Three and Nine Months Ended March 31, 2020 (unaudited)

 

    Common Stock     Additional Paid-in     Retained     Treasury     Accumulated Other Comprehensive     Non-controlling     Total Stockholders  
    Shares     Amount     Capital     Earnings     Stock     Loss     Interest     Equity  
Balance - June 30, 2019     10,570,203     $ 13,972     $ 7,442,272     $ 12,477,441     $ (4,513,479 )   $ (634,802 )   $ 489,046     $ 15,274,450  
Net income attributable to Parent Company                       834,816                         834,816  
Foreign exchange translation                                   18,750             18,750  
Comprehensive income attributable to non-controlling interest                                         189,106       189,106  
Balance – December 31, 2019 (unaudited)     10,570,203     $ 13,972     $ 7,442,272     $ 13,312,257     $ (4,513,479 )   $ (616,052 )   $ 678,152     $ 16,317,122  
Net income attributable to Parent Company                       988,308                         988,308  
Foreign exchange translation                                   (54,340           (54,340
Comprehensive income attributable to non-controlling interest                                         71,556       71,556  
Purchases of shares of a subsidiary                                         (75,000 )     (75,000 )

Issuance of stock related to stock option exercised

    31,709       32       27,737                               27,769  
Balance – March 31, 2020 (unaudited)     10,601,912     $ 14,004     $ 7,470,009     $ 14,300,565     $ (4,513,479 )   $ (670,392 )   $ 674,708     $ 17,275,415  

 

 

 

FRANKLIN WIRELESS CORP.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

For the Three and Nine Months Ended March 31, 2019 (unaudited)

 

    Common Stock     Additional Paid-in     Retained     Treasury     Accumulated Other Comprehensive     Non-controlling     Total Stockholders  
    Shares     Amount     Capital     Earnings     Stock     Loss     Interest     Equity  
Balance - June 30, 2018     10,570,203     $ 13,972     $ 7,442,272     $ 13,753,565     $ (4,513,479 )   $ (581,983 )   $ 921,010     $ 17,035,357  
Net loss attributable to Parent Company                       (336,645)                         (336,645 )
Foreign exchange translation                                   (3,299           (3,299
Comprehensive loss attributable to non-controlling interest                                         (93,047 )     (93,047
Purchase of shares of a subsidy                                         (234,330     (234,330 )
Balance – December 31, 2018 (unaudited)     10,570,203     $ 13,972     $ 7,442,272     $ 13,416,920     $ (4,513,479 )   $ (585,282 )   $ 593,633     $ 16,368,036  
Net loss attributable to Parent Company                       (157,814                       (157,814 )
Foreign exchange translation                                   (4,351 )           (4,351 )
Comprehensive loss attributable to non-controlling interest                                         (69,698 )     (69,698 )
Balance – March 31, 2019 (unaudited)     10,570,203     $ 13,972     $ 7,442,272     $ 13,259,106     $ (4,513,479 )   $ (589,633 )   $ 523,935     $ 16,136,173  

 

 

See accompanying notes to consolidated financial statements.

 

 

 

 6 

 

 

FRANKLIN WIRELESS CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

   

Nine Months Ended

March 31,

 
    2020   2019 
CASH FLOWS FROM OPERATING ACTIVITIES:           
Net income (loss)   $2,083,786   $(657,204)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:           
Depreciation    67,829    72,459 
Amortization of intangible assets    344,382    339,708 
Deferred tax (benefit)    358,364    (186,126)
Amortization of right of use asset    48,290     
Increase (decrease) in cash due to change in:           
Accounts receivable    (7,098,137)   (31,885)
Other receivables    (10,597)   97,752 
Inventories    234,208    844,090 
Prepaid expenses and other current assets    13,683    (5,148)
Prepaid income tax        25,144 
Advance payments to vendors    23,116    24,688 
Other assets    (23,305)   (97,698)
Accounts payable    5,685,328    (969,177)
Advance payments from customers    612    (157,138)
Income tax payable    49,145     
Accrued liabilities    102,832    (16,491)
Net cash provided by (used in) operating activities    1,879,536    (717,026)
            
CASH FLOWS FROM INVESTING ACTIVITIES:           
Sales of short-term investments    22,172     
Purchases of shares of a subsidiary    (75,000)   (234,330)
Purchases of property and equipment    (157,688)   (63,779)
Payments for capitalized development costs    (343,360)   (168,910)
Purchases of intangible assets    (151,218)   (20,928)
Net cash used in investing activities    (705,094)   (487,947)
            
CASH FLOWS FROM FINANCING ACTIVITIES:           
Proceeds from issuance of stock related to stock options exercised    27,769     
Net cash provided by financing activities    27,769     
            
Effect of foreign currency translation    (35,590)   (7,650)
Net increase (decrease) in cash and cash equivalents    1,166,621    (1,212,623)
Cash and cash equivalents, beginning of period    6,447,505    11,975,944 
Cash and cash equivalents, end of period   $7,614,126   $10,763,321 
            

Supplemental disclosure of cash flow information:

          
Cash paid during the periods for:           
Interest   $   $ 
Income taxes   $(800)  $(800)

 

See accompanying notes to consolidated financial statements.

 

 

 

 7 

 

 

FRANKLIN WIRELESS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

NOTE 1 – BASIS OF PRESENTATION

 

The accompanying unaudited consolidated financial statements of Franklin Wireless Corp. (“the Company”) 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, 2019 included in the Company’s Form 10-K filed on September 30, 2019. 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 2 - BUSINESS OVERVIEW

 

We are a provider of intelligent wireless solutions including mobile hotspots, routers and modems as well as innovative hardware and software products that support 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. These products are designed to solve wireless connectivity challenges in a variety of vertical markets including video surveillance, digital signage, home security, oil and gas exploration, kiosks, fleet management, smart grid, vehicle diagnostics, telematics and many more.

 

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 the United States to countries in South America, the Caribbean, Europe, the Middle East and Africa ("EMEA") and Asia.

 

NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Principles of Consolidation

 

The consolidated financial statements include the accounts of the Company and its subsidiary with a majority voting interest of 66.3% (33.7% is owned by non-controlling interests) and 64.2% (35.8% is owned by non-controlling interests) as of March 31, 2020 and as of June 30, 2019, respectively. 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.

 

Non-controlling Interest in a Consolidated Subsidiary

 

As of March 31, 2020, the non-controlling interest was $674,708, which represents a $185,662 increase from $489,046 as of June 30, 2019. The increase in the non-controlling interest of $185,662 was comprised of two components (1) an addition of $260,663 from the income in the subsidiary of $740,295 incurred during the nine month period March 31, 2020 and (2) a reduction in the ownership percentage of the non-controlling interests due to the purchase by the Company of 43,333 shares of the subsidiary for $75,000 ($1.73 per share) from three non-controlling shareholders.  The purchase decreased the non-controlling interests’ ownership percentage from 35.8% to 33.7%. 

 

 

 

 8 

 

 

As of March 31, 2019, the purchase of by the Company of 246,663 shares of the subsidiary for $234,330 ($0.95 per share) from three non-controlling shareholders decreased the non-controlling interests’ ownership percentage from 48.2% to 35.8%.

 

Segment Reporting

 

Public companies are required 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 the United States, EMEA and Asia. The following enterprise-wide disclosure is prepared on a basis consistent with the preparation of the consolidated financial statements. The following table contains certain financial information by geographic area:

 

   Three Months Ended   Nine Months Ended 
   March 31,   March 31, 
Net sales:  2020   2019   2020   2019 
United States  $15,444,110   $8,898,775   $37,342,577   $31,234,107 
Europe, the Middle East and Africa (“EMEA”)       63,347        224,427 
Asia   102,072    4,018    337,735    22,298 
Totals  $15,546,182   $8,966,140   $37,680,312   $31,480,832 

 

 

Long-lived assets, net (property and equipment, intangible assets, and right of use asset):  March 31, 2020   June 30, 2019 
United States  $1,436,258   $1,209,159 
Asia   45,587    32,631 
Totals  $1,481,845   $1,241,790 

 

Use of Estimates

 

The preparation of the consolidated financial statements in conformity with GAAP 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.

 

 

 

 9 

 

 

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, we do not believe an allowance for doubtful accounts was necessary as of March 31, 2020 and June 30, 2019.

 

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

 

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

 

Contracts with Customers

 

Revenue for sales of products and services is derived from contracts with customers. The products and services promised in contracts primarily consist of hot spot 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 nine months ended March 31, 2020 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.

 

 

 

 10 

 

 

The balances of our trade receivables are as follows:

 

   March 31, 2020   June 30, 2019 
Accounts Receivable  $11,236,606   $4,138,469 

 

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, 2020 and June 30, 2019.

 

Our contract liabilities are as follows:

 

   March 31, 2020   June 30, 2019 
Undelivered products  $140,612   $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% of net sales for the nine months ended March 31, 2020. Revenue recognized over a period of time for non-recurring engineering projects is based on the percent complete of a project and accounted for 1% of net sales for the nine months ended March 31, 2020. The majority of our revenue recognized at a point in time is for the sale of hot-spot 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, 2020, 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 expense associated with capitalized product development costs associated with complete technology.

 

Capitalized Product Development Costs

 

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.

 

 

 

 11 

 

 

The costs of product development that are capitalized once technological feasibility is determined (noted as Technology in progress in the Intangible Assets table) include certifications, licenses, 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, 2020, and June 30, 2019, capitalized product development costs in progress were $140,193 and $465,352, respectively, and these amounts are included in intangible assets in our consolidated balance sheets. For the three and nine months ended March 31, 2020, we incurred $9,692 and $343,360, respectively, and for the three and nine months ended March 31, 2019, we incurred $104,505 and $168,910, 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 (loss).

 

Research and Development Costs

 

Costs associated with research and development are expensed as incurred. Research and development costs were $834,478 and $714,092 for the three months ended March 31, 2020 and 2019, respectively, and $2,754,414 and $2,186,755 for the nine months ended March 31, 2020 and 2019, 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 $166,701 and $262,596 for the three months ended March 31, 2020 and 2019, respectively, and $339,849 and $978,275 for the nine months ended March 31, 2020 and 2019, 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.

 

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, 2020, and June 30, 2019, we have recorded an inventory reserve in the amounts of $468,165 and $553,281, respectively, for inventories that we have identified as obsolete or slow-moving.

 

 

 

 12 

 

 

Property and Equipment

 

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

 

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

 

Goodwill and Intangible Assets

 

Goodwill and certain intangible assets were recorded in connection with the FTI acquisition in October 2009, and are accounted for in accordance with ASC 805, “Business Combinations.” Goodwill represents the excess of the purchase price over the fair value of the tangible and intangible net assets acquired. Intangible assets are recorded at their fair value at the date of acquisition. Goodwill and other intangible assets are accounted for in accordance with ASC 350, “Goodwill and Other Intangible Assets.” Goodwill and other intangible assets are tested for impairment at least annually and any related impairment losses are recognized in earnings when identified. No impairment was recognized as of March 31, 2020 and June 30, 2019.

 

The definite lived intangible assets consisted of the following as of March 31, 2020:

 

Definite lived intangible assets:  Expected Life 

Average

Remaining

life

  

Gross

Intangible

Assets

  

Accumulated

Amortization

  

Net Intangible

Assets

 
Complete technology  3 years   2.0 years   $18,397   $6,132   $12,265 
Technology in progress  Not Applicable       140,192        140,192 
Software  5 years   2.2 years    524,834    320,656    204,178 
Patents  10 years   6.0 years    59,016    10,282    48,734 
Certifications & licenses  3 years   1.1 years    4,037,669    3,182,931    854,738 
Total as of March 31, 2020          $4,780,108   $3,520,001   $1,260,107 

 

 

 

 13 

 

 

The definite lived intangible assets consisted of the following as of June 30, 2019:

 

Definite lived intangible assets:  Expected Life 

Average

Remaining

life

  

Gross

Intangible

Assets

  

Accumulated

Amortization

  

Net Intangible

Assets

 
Complete technology  3 years   3.0 years   $18,397   $   $18,397 
Technology in progress  Not Applicable       465,352        465,352 
Software  5 years   2.7 years    423,436    278,266    145,170 
Patents  10 years   6.3 years    58,884    8,729    50,155 
Certifications & licenses  3 years   0.8 years    3,319,461    2,888,624    430,837 
Total as of June 30, 2019          $4,285,530   $3,175,619   $1,109,911 

 

Amortization expense recognized for the three months ended March 31, 2020 and 2019 was $146,114 and $93,777 respectively, and for the nine months ended March 31, 2020 and 2019 was $344,382 and $339,708, respectively.

 

Long-lived Assets

 

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 asset; 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, 2020, we are 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. Stock-based compensation is recognized on a straight-line basis over the award’s 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. The measurement date of the fair value of the equity instrument issued is the earlier of the date on which the counterparty's performance is complete or the date on which it is probable that performance will occur. Stock-based compensation costs are reflected in the accompanying consolidated statements of comprehensive income (loss) 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.

 

 

 

 14 

 

 

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, 2020, we have no material unrecognized tax benefits. We recorded an income tax expense of $233,032 and $408,892 for the three and nine months ended March 31, 2020, respectively. We also recorded a decrease in deferred tax asset, non-current, of $233,195 and $358,364 for the three and nine months ended March 31, 2020, respectively, and an increase in deferred tax asset, non-current, of $108,251 and $186,126 for the three and nine months ended March 31, 2019, 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, 2020, sales to our two largest customers accounted for 42% and 32% of our consolidated net sales, and 53% and 25% of our accounts receivable balance as of March 31, 2020. In the same period in 2019, sales to our two largest customers accounted for 57% and 23% of our consolidated net sales, and 70% and 22% of our accounts receivable balance as of March 31, 2019. No other customers accounted for more than ten percent of total net sales for the nine months ended March 31, 2020 and 2019, and no other customers accounted for more than ten percent of total accounts receivable as of March 31, 2020 and 2019.

 

For the nine months ended March 31, 2020, we purchased the majority of our wireless data products from one manufacturing company located in Asia. If this manufacturing company 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, 2019, 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. No other manufacturing companies accounted for more than ten percent of total purchase for the nine months ended March 31, 2020 and 2019.

 

 

 

 

 15 

 

 

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, Franklin Wireless is deemed to be an essential business. Nonetheless, out of concern for our workers and pursuant to the government order, Franklin Wireless reduced the scope of its 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 the Company expects this situation may increase demand for its products, the related impact cannot be reasonably estimated at this time.

 

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 Adopted Accounting Pronouncements

 

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2016-02, Leases (ASC Topic 842) (ASU 2016-02), which amends existing standards for leases to increase transparency and comparability among organizations by requiring recognition of lease assets and liabilities on the balance sheet and requiring disclosure of key information about such arrangements. We adopted the standard as of July 1, 2019 using the modified retrospective approach. The adoption of the new standard resulted in the recording of operating lease right-of-use (“ROU”) assets and operating lease liabilities of $1,501,203 and $1,507,367, respectively, as of July 1, 2019, with the difference due to the existing lease liabilities of $6,164. As of the adoption date, we have no finance leases. As permitted under ASC 842, we elected several practical expedients that permit us to not reassess (1) whether existing contracts are or contain a lease, (2) the classification of existing leases, and (3) whether previously capitalized costs continue to qualify as initial indirect costs. The application of the practical expedients did not have a significant impact on the measurement of the operating lease liability. The standard did not affect our consolidated net income or cash flows. See Note 7 for the further details.

 

NOTE 4 – PROPERTY AND EQUIPMENT

 

Property and equipment consisted of the following as of:

 

   March 31, 2020   June 30, 2019 
Machinery and facility  $363,782   $363,022 
Office equipment   420,166    396,222 
Molds   917,154    784,170 
    1,701,102    1,543,414 
Less accumulated depreciation   (1,479,364)   (1,411,535)
Total  $221,738   $131,879 

 

Depreciation expense associated with property and equipment was $23,958 and $17,889 for the three months ended March 31, 2020 and 2019, respectively, and $67,829 and $72,459 for the nine months ended March 31, 2020 and 2019, respectively.

 

 

 

 16 

 

 

NOTE 5 – ACCRUED LIABILITIES

 

Accrued liabilities consisted of the following as of:

 

   March 31, 2020   June 30, 2019 
Accrued salaries and payroll deductions owed to government entities  $73,608   $44,752 
Accrued vacation   45,625    56,335 
Accrued undelivered inventory   140,000    140,000 
Taxes   13,257    408 
Other accrued liabilities   78,000    6,163 
Total  $350,490   $247,658 

 

NOTE 6 – EARNINGS (LOSS) PER SHARE

 

Basic earnings (loss) per share are computed using the weighted average number of shares outstanding during the period. Diluted earnings per share represent basic earnings per share adjusted to include the potentially dilutive effect of outstanding stock options.

 

For the three and nine months ended March 31, 2019, we were in a net loss position and have excluded 299,000 stock options from the calculation of diluted net loss per shares because these securities are anti-dilutive. The weighted average number of shares outstanding used to compute loss per share is as follows:

 

  

Three Months ended

March 31,

  

Nine Months Ended

March 31,

 
   2020   2019   2020   2019 
Net income (loss) attributable to Parent Company  $988,308   $(157,814)  $1,823,124   $(494,459)
                     
Weighted-average shares of common stock outstanding:                    
Basic shares outstanding   10,580,576    10,570,203    10,574,841    10,570,203 
Dilutive effect of common stock equivalents arising from stock options   119,197        119,197     
Diluted shares outstanding   10,699,773    10,570,203    10,694,038    10,570,203 
Basic income (loss) per share  $0.09   $(0.01)  $0.17   $(0.05)
Diluted income (loss) earnings per share  $0.09   $(0.01)  $0.17   $(0.05)

 

NOTE 7 - COMMITMENTS AND CONTINGENCIES

 

Leases

 

We lease approximately 12,775 square feet of office space in San Diego, California, at a monthly rent of $23,115, pursuant to a lease that expired in October 2019 and was then extended at a monthly rent of $25,754 to December 31, 2023. In addition to monthly rent, the lease includes payment for certain common area costs. 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 and $69,345 for the three months ended March 31, 2020 and 2019 and $221,231 and $208,035 for the nine months ended March 31, 2020 and 2019.

 

 

 

 17 

 

 

Our Korea-based subsidiary, FTI, leases approximately 10,000 square feet of office space in Seoul, Korea, at a monthly rent of approximately $8,000, pursuant to a lease that expired on September 1, 2019 and was extended to August 31, 2021. Beginning on June 12, 2015, FTI leased additional office space, consisting of approximately 2,682 square feet, also located in Seoul, Korea, at a monthly rent of approximately $2,700, and the lease was extended to August 31, 2021. In addition to monthly rent, the lease provides 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 March 31, 2020 and 2019, and approximately $96,300 for the nine months ended March 31, 2020 and 2019.

 

We lease one corporate housing facility primarily for our employees who travel, under a non-cancelable operating lease that expired September 4, 2019 and was extended to September 4, 2020. Rent expense related to this lease was approximately $2,146 and $2,535 for the three months ended March 31, 2020 and 2019, and approximately $6,667 and $7,626 for the nine months ended March 31, 2020 and 2019.

 

As of March 31, 2020, we used discount rates of 4.0% and 2.8% in determining our operating lease liabilities for the office spaces in San Diego, California, and South Korea, respectively. These rates represented our incremental borrowing rates at that time. Short-term leases with initial terms of twelve months or less are not capitalized. Both our San Diego and Korean office leases were extensions of previous leases and neither contains any further extension provisions.

 

Maturities of lease liabilities are as follows:

 

   Operating Leases 
Fiscal 2020  $109,378 
Fiscal 2021   437,510 
Fiscal 2022   341,193 
Fiscal 2023   321,930 
Fiscal 2024   160,965 
Total lease payments   1,370,976 
Less imputed interest   (91,356)
Total  $1,279,620 

 

Other Contingencies

 

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 by Anydata of 250,000 units, which is associated with Anydata’s irrevocable purchase orders received from its customer. 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 we have already ordered parts from our main vendor, Quanta. Management believes that the Company will be able to supply some of the products to another customer and has received personal guarantees from the principals of Anydata. As of March 31, 2020, the remaining purchase commitment unfulfilled by Anydata to the Company was approximately $3.1 million. The total remaining product purchase commitment with Quanta was approximately $2.0 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 March 31, 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. As of March 31, 2020, there is a reasonable possibility we may incur a loss, however, the amount is not estimable at this time.

 

 

 

 18 

 

 

Litigation

 

We are from time to time involved in certain legal proceedings and claims arising in the ordinary course of business. Management does not believe that the outcome of these matters will have any material adverse effect on the Company.

 

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, Franklin Wireless is deemed to be an essential business. Nonetheless, out of concern for our workers and pursuant to the government order, Franklin Wireless reduced the scope of its 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 the Company expects this situation may increase demand for its products, the related impact cannot be reasonably estimated at this time.

 

Change of Control Agreements

 

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

 

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

 

The Board of Directors has approved extension of the Change of Control Agreements with Mr. Kim and Mr. Lee, through September 30, 2021.

 

NOTE 8 – LONG-TERM INCENTIVE PLAN AWARDS

 

We adopted the 2009 Stock Incentive Plan (“2009 Plan”) on June 11, 2009, 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.

 

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 was no compensation expense recorded under this method for the three and nine months ended March 31, 2020 and 2019.

 

 

 

 19 

 

 

A summary of the status of our stock options is presented below as of March 31, 2020:

 

           Weighted-     
           Average     
       Weighted-   Remaining     
       Average   Contractual   Aggregate 
       Exercise   Life   Intrinsic 
Options  Shares   Price   (In Years)   Value 
                 
Outstanding as of June 30, 2019   299,000   $1.04    2.75   $420,620 
Granted                
Exercised   (31,709)   0.88        129,373 
Cancelled                
Forfeited or Expired   (12,000)   1.35        48,960 
Outstanding as of March 31, 2020   255,291   $1.05    2.20   $773,626 
                     
Exercisable as of March 31, 2020   255,291   $1.05    2.20   $773,626 

 

The aggregate intrinsic value in the preceding table represents the total pretax intrinsic value, based upon the Company’s closing stock price of $4.08 as of March 31, 2020, which would have been received by the option holders had all option holders exercised their options as of that date. The weighted-average grant-date fair value of stock options outstanding as of March 31, 2020, in the amount of 255,291 shares, was $0.93 per share.

 

As of March 31, 2020, there was no unrecognized compensation cost related to non-vested stock options granted.

 

A summary of the status of our stock options is presented below as of March 31, 2019:

 

                Weighted-        
                Average        
          Weighted-     Remaining        
          Average     Contractual     Aggregate  
          Exercise     Life     Intrinsic  
Options   Shares     Price     (In Years)     Value  
                         
Outstanding as of June 30, 2018     299,000     $ 1.04       2.75     $ 241,220  
Granted                        
Exercised                        
Cancelled                        
Forfeited or Expired                        
Outstanding as of March 31, 2019     299,000     $ 1.04       2.00     $ 525,270  
                                 
Exercisable as of March 31, 2019     299,000     $ 1.04       2.00     $ 525,270  

 

The aggregate intrinsic value in the preceding table represents the total pretax intrinsic value, based upon the Company’s closing stock price of $2.80 as of March 31, 2019, which would have been received by the option holders had all option holders exercised their options as of that date. The weighted-average grant-date fair value of stock options outstanding as of March 31, 2019, in the amount of 299,000 shares, was $0.92 per share.

 

As of March 31, 2019, there was no unrecognized compensation cost related to non-vested stock options granted.

 

 

 

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

 

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our financial statements and related notes included elsewhere in this report. This report contains certain forward-looking statements relating to future events or our future financial performance. These statements are subject to risks and uncertainties which could cause actual results to differ materially from those discussed in this report. You are cautioned not to place undue reliance on this information, which speaks only as of the date of this report. We are not obligated to publicly update this information, whether as a result of new information, future events or otherwise, except to the extent we are required to do so in connection with our obligation to file reports with the SEC. For a discussion of the important risks to our business and future operating performance, see the discussion under the caption “Item 1A. Risk Factors” and under the caption “Factors That May Influence Future Results of Operations” in the Company’s Form 10-K for the year ended June 30, 2019, filed on September 30, 2019.  In light of these risks, uncertainties and assumptions, the forward-looking events discussed in this report might not occur.

 

BUSINESS OVERVIEW

 

We are a provider of intelligent wireless solutions including mobile hotspots, routers and modems as well as innovative hardware and software products that support 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. These products are designed to solve wireless connectivity challenges in a variety of vertical markets including video surveillance, digital signage, home security, oil and gas exploration, kiosks, fleet management, smart grid, vehicle diagnostics, telematics and many more.

 

We have a majority ownership position in 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 the United States to countries in EMEA and Asia.

 

FACTORS THAT MAY INFLUENCE FUTURE RESULTS OF OPERATIONS

 

We believe that our revenue growth will be influenced largely by (1) the successful maintenance of our existing customers, (2) the rate of increase in demand for wireless data products, (3) customer acceptance of our new products, (4) new customer relationships and contracts, and (5) our ability to meet customers’ demands.

 

We have entered into and expect to continue to enter into new customer relationships and contracts for the supply of our products, and this may require significant demands on our resources, resulting in increased operating, selling, and marketing expenses associated with such new customers.

 

CRITICAL ACCOUNTING POLICIES

 

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which are prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). The preparation of these financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingencies at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting periods. Management evaluates these estimates and assumptions on an ongoing basis. Our estimates and assumptions have been prepared on the basis of the most current reasonably available information. The results of these estimates form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from these estimates under different assumptions and conditions.

 

 

 

 

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We have several critical accounting policies, which were described in our Annual Report on Form 10-K for the year ended June 30, 2019, 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 nine months ended March 31, 2020.

 

RESULTS OF OPERATIONS

 

The following table sets forth, for the three and nine months ended March 31, 2020 and 2019, our statements of comprehensive income including data expressed as a percentage of sales:

 

   Three Months Ended   Nine Months Ended 
   March 31,   March 31, 
   2020   2019   2020   2019 
                 
Net sales   100.0%    100.0%    100.0%    100.0% 
Cost of goods sold   80.5%    82.2%    79.7%    84.0% 
Gross profit   19.5%    17.8%    20.3%    16.0% 
Operating expenses   11.7%    22.1%    14.2%    19.2% 
Income (loss) from operations   7.8%    (4.3%)   6.1%    (3.2%)
Other income (expense), net   0.5%    0.6%    0.5%    0.5% 
Net income (loss) before income taxes   8.3%    (3.7%)   6.6%    (2.7%)
Income tax provision (benefit)   1.5%    (1.2%)   1.1%    (0.6%)
Net income (loss)   6.8%    (2.5%)   5.5%    (2.1%)
Less: non-controlling interest in net income (loss) of subsidiary   0.4%    (0.8%)   0.7%    (0.5%)
Net income (loss) attributable to Parent Company stockholders   6.4%    (1.7%)   4.8%    (1.6%)

 

THREE MONTHS ENDED MARCH 31, 2020 COMPARED TO THREE MONTHS ENDED MARCH 31, 2019

 

NET SALES - Net sales increased by $6,580,042, or 73.4%, to $15,546,182 for the three months ended March 31, 2020 from $8,966,140 for the corresponding period of 2019. For the three months ended March 31, 2020, net sales by geographic regions, consisting of the United States and Canada, EMEA, and Asia were $15,444,110 (99.3% of net sales), $0 (0.0% of net sales), and $102,072 (0.7% of net sales), respectively. For the three months ended March 31, 2019, net sales by geographic regions, consisting of the United States and Canada, EMEA, and Asia were $8,898,775 (99.2% of net sales), $63,347 (0.7% of net sales), and $4,018 (0.1% of net sales), respectively.

 

Net sales in the United States and Canada increased by $6,545,335, or 73.6%, to 15,444,110 for the three months ended March 31, 2020 from $8,898,775 for the corresponding period of 2019. The increase in net sales in the United States and Canada resulted primarily from increased demand for wireless connectivity due to people working and attending school remotely. Net sales also increased due to a newly launched product and the timing of orders placed by a new carrier customer, from which a significant portion of our revenue was derived (35% of our consolidated net sales for the three months ended March 31, 2020), as well as increased product demand (up 24%) from one major carrier customer compared to the corresponding period of 2019. Net sales in EMEA decreased by $63,347, or 100.0%, to $0 for the three months ended March 31, 2020 from $63,347 for the corresponding period of 2019. The decrease in net sales was due to the discontinued orders for a product placed by a carrier customer in Africa compared to the corresponding period of 2019. Net sales in Asia increased by $98,054, or 2,440.4%, to $102,072 for the three months ended March 31, 2020 from $4,018 for the corresponding period of 2019. The increase in net sales was primarily due to product development service revenue generated by FTI, which typically varies from period to period.

 

 

 

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GROSS PROFIT - Gross profit increased by $1,439,686, or 90.3%, to $3,034,791 for the three months ended March 31, 2020 from $1,595,105 for the corresponding period of 2019. The gross profit in terms of net sales percentage was 19.5% for the three months ended March 31, 2020 compared to 17.8% for the corresponding period of 2019. The increase in gross profit was primarily due to the change in net sales as described above. The increase in gross profit in terms of net sales percentage was primarily due to a newly launched product, which involves higher selling price, as well as the product development service revenues generated by FTI, which involve lower costs of goods sold.

 

OPERATING EXPENSES - Operating expenses decreased by $160,192, or 8.1%, to $1,822,574 for the three months ended March 31, 2020 from $1,982,766 for the corresponding period of 2019. The decrease in operating expenses was primarily due to the significantly decreased shipping and handling costs resulting from the positively restructured shipping terms with a major vendor despite the increased volume of product shipments.

 

OTHER INCOME (LOSS), NET - Other income (loss), net increased by $28,774, or 55.4%, to $80,679 for the three months ended March 31, 2020 from $51,905 for the corresponding period of 2019. The increase was primarily due to increased other income recognized from the forgiven vacation liabilities for the three months ended March 31, 2020.

 

NINE MONTHS ENDED MARCH 31, 2020 COMPARED TO NINE MONTHS ENDED MARCH 31, 2019

 

NET SALES - Net sales increased by $6,199,480, or 19.7%, to $37,680,312 for the nine months ended March 31, 2020 from $31,480,832 for the corresponding period of 2019. For the nine months ended March 31, 2020, net sales by geographic regions, consisting of the United States and Canada, EMEA, and Asia were $37,342,577 (99.1% of net sales), $0 (0.0% of net sales) and $337,735 (0.0% of net sales), respectively. For the nine months ended March 31, 2019, net sales by geographic regions, consisting of the United States and Canada, South America and the Caribbean, EMEA and Asia, were $31,234,107 (99.2% of net sales), $0 (0.0% of net sales), $224,427 (0.7% of net sales) and $22,298 (0.1% of net sales), respectively.

 

Net sales in the United States and Canada increased by $6,108,470, or 19.6%, to $37,342,577 for the nine months ended March 31, 2020 from $31,234,107 for the corresponding period of 2019. The increase in net sales in the United States and Canada resulted primarily from increased demand for wireless connectivity due to people working and attending school remotely. Net sales also increased due to a newly launched product and the timing of orders placed by a new carrier customer, from which a significant portion of our revenue was derived. (32% of our consolidated net sales for the nine months ended March 31, 2020). Net sales in EMEA decreased by $224,427, or 100.0%, to $0 for the nine months ended March 31, 2020 from $224,427 for the corresponding period of 2019. The decrease in net sales was due to the discontinued orders for a product placed by a carrier customer in Africa compared to the corresponding period of 2019. Net sales in Asia increased by $315,437, or 1,414.6%, to $337,735 for the nine months ended March 31, 2020 from $22,298 for the corresponding period of 2019. The increase in net sales was primarily due to product development service revenue generated by FTI, which typically varies from period to period.

 

GROSS PROFIT - Gross profit increased by $2,597,542, or 51.4%, to $7,646,930 for the nine months ended March 31, 2020 from $5,049,388 for the corresponding period of 2018. The gross profit in terms of net sales percentage was 20.3% for the nine months ended March 31, 2020, compared to 16.0% for the corresponding period of 2019. The increase in gross profit was primarily due to increased demand for wireless connectivity due to people working and attending school remotely. Net sales also increased due to the change in net sales as described above. The increase in gross profit and gross profit in terms of net sales percentage was primarily due to a newly launched product, which involves higher selling price, as well as the product development service revenues generated by Franklin and FTI, which involve lower costs of goods sold.

 

OPERATING EXPENSES - Operating expenses decreased by $675,037, or 11.2%, to $5,361,014 for the nine months ended March 31, 2020 from $6,036,051 for the corresponding period of 2019. The decrease in operating expenses was primarily due to the significantly decreased shipping and handling costs resulting from the positively restructured shipping terms with a major vendor despite the increased volume of product shipments.

 

 

 

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OTHER INCOME (LOSS), NET - Other income (loss), net increased by $62,587, or 43.4%, to $206,762 for the nine months ended March 31, 2020 from $144,175 for the corresponding period of 2019. The increase in other income (loss), net was primarily due to the higher interest income earned from the newly opened money market account and the certificate of deposit account as well as the increased favorable effect in foreign currency exchange rates that occurred in FTI, which is partially offset by the discontinued product development funding received by FTI from the South Korean government during the nine months ended March 31, 2020.

 

LIQUIDITY AND CAPITAL RESOURCES

 

Our historical operating results, capital resources and financial position, in combination with current projections and estimates, were considered in management's plan and intentions to fund our operations over a reasonable period of time, which we define as the twelve-month period ending from the date of the filing of this Form 10-Q.  For purposes of liquidity disclosures, we assess the likelihood that we have sufficient available working capital and other principal sources of liquidity to fund our operating activities and obligations as they become due.

 

Our principal source of liquidity as of March 31, 2020 consisted of cash and cash equivalents as well as short-term investments of $12,972,180.  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 provided in operating activities for the nine months ended March 31, 2020 was $1,879,536, and net cash used in operating activities for nine months ended March 31, 2019 was $717,026.

 

The $1,879,536 in net cash provided by operating activities for the nine months ended March 31, 2020 was primarily due to the increase in accounts payable of $5,685,328 and our operating results of $2,902,651 (net income adjusted for depreciation, amortization, and other non-cash charges), which were partially offset by the increase in accounts receivable of $7,098,137.

 

The $717,026 in net cash used in operating activities for the nine months ended March 31, 2019 was primarily due to the decrease in accounts payable and advance payments from customers of $969,177 and $157,138, respectively, as well as our operating results (net income adjusted for depreciation, amortization and other non-cash charges), which were partially offset by the decreases in inventories of $844,090.

 

INVESTING ACTIVITIES - Net cash used in investing activities for the nine months ended March 31, 2020 and 2019 was $705,094 and $487,947, respectively.

 

The $705,094 in net cash used in investing activities for the nine months ended March 31, 2020 was primarily due to the payments for capitalized product development, intangible assets, and property and equipment of $343,360, $151,218, and $157,688, respectively, as well as the payments for purchase of additional shares of the subsidiary of $75,000.

 

The $487,947 in net cash used in investing activities for nine months ended March 31, 2019 was primarily due to the payments for purchase of additional shares of the subsidiary of $234,330 as well as the purchase of capitalized product development of $168,910. The $351,704 in net cash used in investing activities for the nine months ended March 31, 2018 was primarily due to the payments for capitalized product development of $291,386 as well as the purchases of intangible assets of $38,520.

 

 

 

 24 

 

 

FINANCING ACTIVITIES - Net cash provided by financing activities for the nine months ended March 31, 2020 and 2019 was $27,769 and $0, respectively, which was due to the cash received from the exercise of stock options for the nine months ended March 31,2020.

 

CONTRACTUAL OBLIGATIONS AND OTHER COMMITMENTS

 

Refer to NOTE 7 - COMMITMENTS AND CONTINGENCIES in the Consolidated Financial Statements.

 

Recently Issued Accounting Pronouncements

 

Refer to NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES in the Consolidated Financial Statements.

 

OFF-BALANCE SHEET ARRANGEMENTS

 

None.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

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

 

ITEM 4. CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

Our management has evaluated, under the supervision and with the participation of our President and Acting Chief Financial Officer, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based upon that evaluation, our President and Acting Chief Financial Officer have concluded that, as of March 31, 2020, our disclosure controls and procedures were effective in ensuring that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is (i) recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the SEC and (ii) accumulated and communicated to our management, including our principal executive and principal accounting officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

 

Changes in Internal Control Over Financial Reporting

 

There have been no changes in our internal controls over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934 and as a result of adopting Topic 842) during the nine months ended March 31, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

 

 

 

 

 

 

 25 

 

 

PART II - OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

We have provided information about legal proceedings in which we are involved in Note 7 of the notes to consolidated financial statements for the nine months ended March 31, 2020, 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, 2019, filed with the SEC on September 30, 2019 (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.

 

 

 

 

 

 

 

 

 

 26 

 

 

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/ OC Kim

 

   

OC Kim

Acting Chief Financial Officer

(Principal Financial Officer)

Dated: May 15, 2020    

 

 

 

 

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