NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Principles of Consolidation
The consolidated financial
statements include the accounts of the Company and its subsidiary, Franklin Technology Inc. ("FTI"), with a majority voting
interest of 66.3% (33.7% is owned by non-controlling interests) as of December 31, 2021, and June 30, 2021. In the preparation of consolidated
financial statements of the Company, intercompany transactions and balances are eliminated and net earnings are reduced by the portion
of the net earnings of the subsidiary applicable to non-controlling interests.
As consolidated financial
statements are based on the assumption that they represent the financial position and operating results of a single economic entity, the
retained earnings or deficit of the subsidiary at the date of acquisition, October 1, 2009, by the parent are excluded from consolidated
retained earnings. When a subsidiary is consolidated, the consolidated financial statements include the subsidiary’s revenues, expenses,
gains, and losses only from the date the subsidiary is initially consolidated, and the non-controlling interest is reported in the consolidated
statement of financial position within equity, separately from the parent’s equity. There are no shares of the Company held by any
subsidiaries as of December 31, 2021, or June 30, 2021.
Non-controlling Interest in a Consolidated
Subsidiary
As of December 31, 2021, the
non-controlling interest was $1,549,023, which represents a $69,861 increase from $1,479,162 as of June 30, 2021. The increase in
the non-controlling interest of $69,861 was from income in the subsidiary of $207,564 incurred for the six months ended December 31, 2021.
Segment Reporting
Accounting Standards Codification
(“ASC”) 280, “Segment Reporting,” requires public companies to report financial and descriptive information about
their reportable operating segments. We identify our operating segments based on how our chief operating decision maker internally evaluates
separate financial information, business activities and management responsibility. We have one reportable segment, consisting of the sale
of wireless access products.
We generate revenues from
three geographic areas, consisting of North America, Caribbean and South America, and Asia. The following enterprise-wide disclosure
is prepared on a basis consistent with the preparation of the consolidated financial statements. The following table contains certain
financial information by geographic area:
|
Segment information by geographic areas
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
|
December 31,
|
|
December 31,
|
|
Net sales:
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
|
North America
|
|
$
|
1,284,850
|
|
|
$
|
66,229,782
|
|
|
$
|
4,456,048
|
|
|
$
|
128,798,920
|
|
|
Caribbean and South America
|
|
|
2,375
|
|
|
|
17,500
|
|
|
|
2,375
|
|
|
|
17,500
|
|
|
Asia
|
|
|
534,364
|
|
|
|
296
|
|
|
|
707,226
|
|
|
|
608
|
|
|
Totals
|
|
$
|
1,821,589
|
|
|
$
|
66,247,578
|
|
|
$
|
5,165,649
|
|
|
$
|
128,817,028
|
|
|
Long lived assets by geographic area
|
|
|
|
|
|
Long-lived assets, net (property and equipment and intangible assets):
|
|
December 31,
2021
|
|
June 30,
2021
|
|
North America
|
|
$
|
1,541,039
|
|
|
$
|
1,349,320
|
|
|
Asia
|
|
|
63,665
|
|
|
|
49,040
|
|
|
Totals
|
|
$
|
1,604,704
|
|
|
$
|
1,398,360
|
|
Use of Estimates
The preparation of the consolidated
financial statements in conformity with accounting principles generally accepted in the United States of America requires management to
make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results
could materially differ from those estimates.
Fair Value of Financial Instruments
The carrying amounts of financial
instruments such as cash equivalents, short-term investments, accounts receivable, accounts payable and debt approximate the related fair
values due to the short-term maturities of these instruments. We invest our excess cash into financial instruments which are readily convertible
into cash, such as money market funds and certificates of deposit.
Allowance for Doubtful Accounts
Based upon our review of our
collection history as well as the current balances associated with all significant customers and associated invoices, as of December 31,
2021, 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 December 31, 2021 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
|
|
|
|
|
|
|
|
|
December
31, 2021
|
|
|
|
June
30, 2021
|
|
|
Accounts Receivable
|
|
$
|
1,223,226
|
|
|
$
|
2,542,429
|
|
The balance of contract assets
was immaterial as we did not have a significant amount of un-invoiced receivables in the periods ended December 31, 2021, and June 30,
2021.
Our contract liabilities are
as follows:
|
Schedule of contract liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2021
|
|
|
|
June
30, 2021
|
|
|
Undelivered products
|
|
$
|
530,551
|
|
|
$
|
140,000
|
|
Performance Obligations
A performance obligation is
a promise in a contract to transfer a distinct good or service to the customer and is the unit of measurement in Topic 606. At contract
inception, we assess the products and services promised in our contracts with customers. We then identify performance obligations to transfer
distinct products or services to the customer. In order to identify performance obligations, we consider all the products or services
promised in the contract regardless of whether they are explicitly stated or are implied by customary business practices.
Our performance obligations
are primarily satisfied at a point in time. Revenue from products transferred to customers at a single point in time accounted for 99.9%
of net sales for the six months ended December 31, 2021. Revenue recognized over a period of time for non-recurring engineering projects
is based on the percent complete of a project and accounted for 0.1% of net sales for the six months ended December 31, 2021. The majority
of our revenue recognized at a point in time is for the sale of hotspot router products. Revenue from these contracts is recognized when
the customer is able to direct the use of and obtain substantially all of the benefits from the product which generally coincides with
title transfer at completion of the shipping process.
As of December 31, 2021, 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 $80,825 and $158,825 associated with
capitalized product development costs associated with complete technology for the three and six months ended December 31, 2021, respectively,
and $86,000 and $200,000 for the three and six months ended December 31, 2020, respectively.
Capitalized Product Development Costs
Accounting Standards Codification
(“ASC”) Topic 350, “Intangibles - Goodwill and Other” includes software that is part of a product or process to
be sold to a customer and is accounted for under Subtopic 985-20. Our products contain embedded software internally developed by FTI,
which is an integral part of these products because it allows the various components of the products to communicate with each other and
the products are clearly unable to function without this coding.
The costs of product development
that are capitalized once technological feasibility is determined (noted as technology in progress in the Intangible Assets table in Note
3 to Notes to Consolidated Financial Statements) include related licenses, certification costs, payroll, employee benefits, and other
headcount-related expenses associated with product development. We determine that technological feasibility for our products is reached
after all high-risk development issues have been resolved. Once the products are available for general release to our customers, we cease
capitalizing the product development costs and any additional costs, if any, are expensed. The capitalized product development costs are
amortized on a product-by-product basis using the greater of straight-line amortization or the ratio of the current gross revenues to
the current and anticipated future gross revenues. The amortization begins when the products are available for general release to our
customers.
As
of December 31, 2021, and June 30, 2021, capitalized product development costs in progress were $169,471 and $602,388, respectively, and
the amounts are included in intangible assets in our consolidated balance sheets. For the three and six months ended December 31, 2021,
we incurred $418,146 and $453,689, respectively , and for the three
and six months ended December 31, 2020, we incurred $454,804 and $533,146, respectively, in capitalized product development costs, and
such amounts are primarily comprised of certifications and licenses. All costs incurred before technological feasibility is reached are
expensed and included in our consolidated statements of comprehensive income.
Research and Development Costs
Costs associated with research
and development are expensed as incurred. Research and development costs were $1,107,139 and $1,151,732 for the three months ended December
31, 2021 and 2020, respectively, and $2,129,041 and $2,130,124 for the six months ended December 31, 2021 and 2020, respectively.
Warranties
We provide a warranty for
one year which is covered by our vendors and manufacturers under purchase agreements between the Company and the vendors. As a result,
we believe we do not have any net warranty exposure and do not accrue any warranty expenses. Historically, the Company has not experienced
any material net warranty expenditures.
Shipping and Handling Costs
Costs associated with product
shipping and handling are expensed as incurred. Shipping and handling costs, which are included in selling, general and administrative
expenses on the consolidated statements of comprehensive income, were $57,568 and $245,586 for the three months ended December 31, 2021
and 2020, respectively, and $102,952 and $527,652 for the six months ended December 31, 2021 and 2020, 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 December 31, 2021, and June 30, 2021, we did not record any reserve for inventories that we have identified
as obsolete or slow-moving.
Property and Equipment
Property and equipment are
recorded at cost. Significant additions or improvements extending useful lives of assets are capitalized. Maintenance and repairs are
charged to expense as incurred. Depreciation is computed using the straight-line method over the estimated useful lives as follows:
|
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 December 31, 2021 or June 30, 2021.
Long-lived Assets
In accordance with ASC 360,
“Property, Plant, and Equipment,” we review for impairment of long-lived assets and certain identifiable intangibles whenever
events or circumstances indicate that the carrying amount of assets may not be recoverable. We consider the carrying value of assets may
not be recoverable based upon our review of the following events or changes in circumstances: the asset’s ability to continue to
generate income from operations and positive cash flow in future periods; loss of legal ownership or title to the assets; significant
changes in our strategic business objectives and utilization of the asset; or significant negative industry or economic trends. An impairment
loss would be recognized when estimated future cash flows expected to result from the use of the asset are less than its carrying amount.
As of December 31, 2021, and
June 30, 2021, we were not aware of any events or changes in circumstances that would indicate that the long-lived assets are impaired.
Stock-based Compensation
The Company’s employee
share-based awards result in a cost that is measured at fair value on an award’s grant date, based on the estimated number of awards
that are expected to vest. Compensation costs are recognized over the period that an employee provides service in exchange for the award,
i.e. the vesting period. The Company estimates the fair value of stock options using a Black-Scholes option pricing model. Transactions
with non-employees in which goods or services are the consideration received for the issuance of equity instruments are accounted for
based on the fair value of the consideration received or the fair value of the equity instrument issued, whichever is more reliably measurable.
Stock-based compensation costs are reflected in the accompanying consolidated statements of comprehensive income based upon the underlying
recipients' roles within the Company.
Income Taxes
The Company uses the asset
and liability method of accounting for income taxes. Accordingly, deferred tax assets and liabilities are determined based on the difference
between the financial statement and income tax bases of assets and liabilities, using enacted tax rates in effect for the year in which
the differences are expected to reverse. A valuation allowance is recorded to reduce the carrying amount of deferred tax assets, unless
it is more likely than not such assets will be realized. Current income taxes are based on the year’s taxable income for federal
and state income tax reporting purposes and the annual change in deferred taxes.
The Company assesses its income
tax positions and records tax benefits based upon management’s evaluation of the facts, circumstances, and information available
at the reporting date. For those tax positions where it is more likely than not that a tax benefit will be sustained, the Company records
the largest amount of tax benefit with a greater than 50% likelihood of being realized upon ultimate settlement with a taxing authority
having full knowledge of all relevant information. For those income tax positions where it is not more likely than not that a tax benefit
will be sustained, no tax benefit is recognized in the financial statements. The Company classifies interest and penalties associated
with such uncertain tax positions as a component of income tax expense.
As
of December 31, 2021, we have no material unrecognized tax benefits. We recorded an income tax benefit of $476,752 and $888,008 for the
three and six months ended December 31, 2021, respectively, and a provision for income taxes of $2,138,406 and $4,139,140 for the three
and six months ended December 31, 2020, respectively. We also recorded an increase in deferred tax asset, non-current, of $492,925 and
$932,493 for the three and six months ended December 31,
2021, respectively, and a decrease in deferred tax asset, non-current, of $168,037 and $252,908 for the three and six months ended December
31, 2020, 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 six months ended December 31, 2021, sales to
our two largest customers accounted for 50%
and 19% of
our consolidated net sales, and 0%
and 36%
of our accounts receivable balance as of December 31, 2021. In the same period of 2020, sales to our two largest customers accounted
for 59%
and 33%
of our consolidated net sales, and 0%
and 92%
of our accounts receivable balance as of December 31, 2020. No other customers accounted for more than ten percent of total net
sales for the six months ended December 31, 2021 and 2020.
For
the six months ended December 31, 2021, we purchased the majority of our wireless data products from two manufacturing companies located
in Asia. If these manufacturing companies were to experience delays, capacity constraints or quality control problems, product shipments
to our customers could be delayed, or our customers could consequently elect to cancel the underlying product purchase order, which would
negatively impact the Company's revenue. For the six months ended December 31, 2021, we purchased wireless data products from these manufacturers
in the amount of $4,981,572,
or 99%
of total purchases, and had related accounts payable of $2,856,783
as of December 31, 2021. In the same period of 2020, we purchased
wireless data products from these manufacturers in the amount of $105,965,938,
or 99%
of total purchases, and had related accounts payable of $62,966,217
as of December 31, 2020.
We maintain our cash accounts
with established commercial banks. Such cash deposits exceed the Federal Deposit Insurance Corporation insured limit of $250,000 for each
financial institution. However, we do not anticipate any losses on excess deposits.
NOTE 2 - BUSINESS OVERVIEW
We are a leading provider
of intelligent wireless solutions including mobile hotspots, routers, trackers, and other devices. Our designs integrate innovative hardware
and software enabling machine-to-machine (M2M) applications and the Internet of Things (IoT). Our M2M and IoT solutions include embedded
modules, modems and gateways built to deliver reliable always-on connectivity supporting a broad spectrum of applications based on fifth
generation and fourth generation (5G/4G) wireless technology.
We have a majority ownership
position in Franklin Technology Inc. (“FTI”), a research and development company located in Seoul, South Korea. FTI primarily
provides design and development services to us for our wireless products.
Our products are generally
marketed and sold directly to wireless operators, and indirectly through strategic partners and distributors. Our global customer base
extends primarily from North America to Asia.
NOTE 3 – BASIS OF PRESENTATION
The accompanying unaudited
consolidated financial statements of Franklin Wireless Corp. have been prepared in accordance with accounting principles generally accepted
in the United States (“GAAP”) for interim financial information and are presented in accordance with the requirements of Form
10-Q. In the opinion of management, the financial statements included herein contain all adjustments, including normal recurring adjustments,
considered necessary to present fairly the financial position, the results of operations and comprehensive income (loss) and cash flows
of the Company for the periods presented. These financial statements and notes hereto should be read in conjunction with the financial
statements and notes thereto for the fiscal year ended June 30, 2021 included in our Form 10-K filed on September 28, 2021. The operating
results or cash flows for the interim periods presented herein are not necessarily indicative of the results to be expected for any other
interim period or the full year.
NOTE 4 – DEFINITE LIVED INTANGIBLE ASSETS
The definite lived intangible
assets consisted of the following as of December 31, 2021:
|
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
|
|
|
–
|
|
|
|
169,471
|
|
|
|
–
|
|
|
|
169,471
|
|
|
Software
|
|
5 years
|
|
|
2.8 years
|
|
|
|
401,351
|
|
|
|
290,776
|
|
|
|
110,575
|
|
|
Patents
|
|
10 years
|
|
|
3.4 years
|
|
|
|
21,365
|
|
|
|
14,029
|
|
|
|
7,336
|
|
|
Certifications & licenses
|
|
3 years
|
|
|
1.3 years
|
|
|
|
1,957,376
|
|
|
|
768,648
|
|
|
|
1,188,728
|
|
|
Total as of December 31, 2021
|
|
|
|
|
|
|
|
$
|
2,567,960
|
|
|
$
|
1,091,850
|
|
|
$
|
1,476,110
|
|
The definite lived intangible
assets consisted of the following as of June 30, 2021:
|
Definite lived intangible assets:
|
|
Expected Life
|
|
Average
Remaining
life
|
|
Gross
Intangible
Assets
|
|
Less Accumulated
Amortization
|
|
Net Intangible
Assets
|
|
Complete technology
|
|
3 years
|
|
|
0.5 years
|
|
|
$
|
18,397
|
|
|
$
|
15,331
|
|
|
$
|
3,066
|
|
|
Technology in progress
|
|
Not Applicable
|
|
|
–
|
|
|
|
602,388
|
|
|
|
–
|
|
|
|
602,388
|
|
|
Software
|
|
5 years
|
|
|
3.0 years
|
|
|
|
399,811
|
|
|
|
268,495
|
|
|
|
131,316
|
|
|
Patents
|
|
10 years
|
|
|
3.9 years
|
|
|
|
21,105
|
|
|
|
12,951
|
|
|
|
8,154
|
|
|
Certifications & licenses
|
|
3 years
|
|
|
1.6 years
|
|
|
|
1,070,770
|
|
|
|
568,944
|
|
|
|
501,826
|
|
|
Total as of June 30, 2021
|
|
|
|
|
|
|
|
$
|
2,112,471
|
|
|
$
|
865,721
|
|
|
$
|
1,246,750
|
|
Amortization expense recognized
for the three months ended December 31, 2021 and 2020 was $132,435 and $112,895, respectively, and for the six months ended December 31,
2021 and 2020 was $226,129 and $240,535, respectively. The amortization expenses of the definite lived intangible assets for the future
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Schedule of future amortization expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FY2022
|
|
|
|
FY2023
|
|
|
|
FY2024
|
|
|
|
FY2025
|
|
|
|
FY2026
|
|
|
|
Thereafter
|
|
|
Total
|
|
$
|
369,306
|
|
|
$
|
526,876
|
|
|
$
|
376,258
|
|
|
$
|
162,129
|
|
|
$
|
14,041
|
|
|
$
|
27,500
|
|
NOTE 5
- PROPERTY AND EQUIPMENT
Property and equipment consisted
of the following as of:
|
Schedule of property and equipment
|
|
|
|
|
|
|
|
December 31,
2021
|
|
June 30,
2021
|
|
Machinery and Commercial Equipment
|
|
$
|
67,542
|
|
|
$
|
67,044
|
|
|
Office equipment
|
|
|
313,317
|
|
|
|
291,191
|
|
|
Molds
|
|
|
575,552
|
|
|
|
575,552
|
|
|
|
|
|
956,411
|
|
|
|
933,787
|
|
|
Less accumulated depreciation
|
|
|
(827,817
|
)
|
|
|
(782,177
|
)
|
|
Total
|
|
$
|
128,594
|
|
|
$
|
151,610
|
|
Depreciation expense associated
with property and equipment was $22,854 and $22,933 for the three months ended December 31, 2021 and 2020, respectively, and $45,640 and
$45,339 for the six months ended December 31, 2021 and 2020, respectively.
NOTE 6 - ACCRUED LIABILITIES
Accrued liabilities consisted
of the following as of:
|
Schedule of accrued liabilities
|
|
|
|
|
|
|
|
December 31,
2021
|
|
June 30,
2021
|
|
Accrued payroll deductions owed to government entities
|
|
$
|
56,731
|
|
|
$
|
66,307
|
|
|
Accrued commission to a customer
|
|
|
369,165
|
|
|
|
451,898
|
|
|
Accrued vacation
|
|
|
45,832
|
|
|
|
73,900
|
|
|
Accrued undelivered inventory
|
|
|
140,000
|
|
|
|
140,000
|
|
|
Accrued commission for service providers
|
|
|
45,000
|
|
|
|
52,500
|
|
|
Other accrued liabilities
|
|
|
612
|
|
|
|
920
|
|
|
Total
|
|
$
|
657,340
|
|
|
$
|
785,525
|
|
NOTE 7 – EARNINGS (LOSS) PER SHARE
For the three and six months
ended December 31, 2021, we were in a net loss position and have excluded 863,001 stock options from the calculation of diluted net loss
per share because these securities are anti-dilutive. For the three and six months ended December 31, 2020, we have calculated the diluted
effect of common stock arising from 499,000 stock options.
The weighted average number
of shares outstanding used to compute earnings per share is as follows:
|
Schedule of earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months ended December 31,
|
|
Six Months Ended December 31,
|
|
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
|
Net (loss) income attributable to Parent Company
|
|
$
|
(1,185,597
|
)
|
|
$
|
6,856,611
|
|
|
$
|
(2,289,202
|
)
|
|
$
|
13,776,971
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares of common stock outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic shares outstanding
|
|
|
11,594,280
|
|
|
|
11,566,309
|
|
|
|
11,593,650
|
|
|
|
11,118,511
|
|
|
Dilutive effect of common stock equivalents arising from stock options
|
|
|
–
|
|
|
|
160,973
|
|
|
|
–
|
|
|
|
160,973
|
|
|
Diluted shares outstanding
|
|
|
11,594,280
|
|
|
|
11,727,282
|
|
|
|
11,593,650
|
|
|
|
11,279,483
|
|
|
Basic (loss) income per share
|
|
$
|
(0.10
|
)
|
|
$
|
0.59
|
|
|
$
|
(0.20
|
)
|
|
$
|
1.24
|
|
|
Diluted (loss) income per share
|
|
$
|
(0.10
|
)
|
|
$
|
0.58
|
|
|
$
|
(0.20
|
)
|
|
$
|
1.22
|
|
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 December 31, 2021 and 2020 and $154,526
for the six months ended December 31, 2021 and 2020.
Our Korea-based subsidiary,
FTI leases approximately 10,000 square feet of office space, located in Seoul, Korea, at a monthly rent of approximately $8,000 and the
additional office space consisting of approximately 2,682 square feet, also located in Seoul, Korea, at a monthly rent of approximately
$2,700 that expires on August 31, 2022. Rent expense related to these leases was approximately $32,100 for the three months ended December
31, 2021 and 2020, and approximately $64,200 for the six months ended December 31, 2021 and 2020. This facility is also covered by an
appropriate level of insurance, and we believe it to be suitable for our use and adequate for our present needs.
We
lease one corporate housing facility, located in Seoul, Korea, primarily for our employees who travel, under a non-cancelable
operating lease that expires on September 4, 2022. Rent expense related to this lease was $2,756 and
$2,337 for
the three months ended December 31, 2021 and 2020, and approximately $4,979 and
$ 4,527 for
the six months ended December 31, 2021 and 2020.
As of December 31, 2021, we
used discount rates of 4.0% and 2.8% in determining our operating lease liabilities for the office spaces in San Diego, California, and
South Korea, respectively. These rates represented our incremental borrowing rates at that time. Short-term leases with initial terms
of twelve months or less are not capitalized. Both our San Diego and Korean office leases were extensions of previous leases and neither
contains any further extension provisions.
Future minimum payments under
operating leases are as follows:
|
Schedule of future minimum rental payments for operating leases
|
|
|
|
|
|
Operating Leases
|
|
Fiscal 2022 remaining six months
|
|
$
|
160,966
|
|
|
Fiscal 2023
|
|
|
321,930
|
|
|
Fiscal 2024
|
|
|
160,965
|
|
|
Total lease payments
|
|
|
643,831
|
|
|
Less imputed interest
|
|
|
(26,070
|
)
|
|
Total
|
|
$
|
617,791
|
|
Litigation
We are from time to time involved
in certain legal proceedings and claims arising in the ordinary course of business.
Verizon
Jetpack Recall
On
April 8, 2021, Verizon issued a press release announcing that it is working with the U.S. Consumer Product Safety Commission (CPSC) to
conduct a voluntary recall of certain Verizon Ellipsis Jetpack mobile hotspot devices, indicating that the lithium-ion battery in the
devices can overheat, posing a fire and burn hazard. According to the CPSC release, the recall affects approximately 2.5 million devices.
We import the devices and supply them to Verizon.
Verizon
first advised us of one alleged Jetpack device failure at the end of February 2021. We immediately began meeting with Verizon and requested
access to the device. We also began internal testing to evaluate device performance. We did not receive any further incident information
until the last week of March 2021. On April 1 we issued a press release announcing that we had received reports from Verizon about potential
issues with the batteries in the devices. On April 9 we issued a press release announcing the voluntary recall by Verizon.
As
of the date of this report, we have been unable to recreate any device failures of the type identified by Verizon. All internal testing
conducted to date has confirmed that the Jetpack devices are performing within normal parameters. We are not currently aware of any aspect
of the Jetpack design that could cause the devices to fail in the way described in Verizon’s recall notice.
We
are continuing to investigate the alleged device failures. At the time of the recall announcement, only two of the devices involved in
the 15 alleged incidents had been physically inspected by Verizon. We have not yet had the opportunity to inspect any of these devices,
but we have retained an expert to assist in the process.
Future
Impact on Financial Performance
We
are striving to avoid any litigation arising from the recall and have not been served with any legal action relating to the products covered
by the recall. . We are not currently able to estimate the financial impact of the recall on our future operations. At this time, we do
not have information that identifies the cause of the alleged incidents. We also do not have any specific legal claims or theories of
causation for device failure incidents that would help us estimate the cost of potential future litigation. We have, however, created
a litigation budget for the future cost of litigation.
Shareholder
Litigation
Ali
A
shareholder action, Ali vs. Franklin Wireless Corp. et al. Case #3:21-cv-00687-AJB-MSB, was filed in the U.S. District Court, Southern
District of California (San Diego) on April 16, 2021, alleging, among other things, that we had prior knowledge that the recall was likely
and that we did not disclose that information to investors in a timely manner. We believe these allegations are not supported by the facts
and we will vigorously defend against such claims.
Harwood
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.
Martin
A
legal action was filed in the U.S. District Court, Southern District of California (San Diego) against Franklin, as a nominal defendant,
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.
“Short-Swing”
Profits Litigation
A
legal action was filed in the U.S. District Court, Southern District of California (San Diego) against Franklin, as a nominal defendant,
Nosirrah Management LLC v. Franklin Wireless et al. Case # 3:21-cv-01316-CAB-JLB, on or about July 22, 2021, claiming that our Chief Executive
Officer, OC Kim, violated Section 16(b)b of the Securities Exchange Act of 1934 for receiving “short-swing” profits from a
sale and purchase of Franklin shares, in violation of that Act. We believe the allegations are not supported by the facts and we intend
to vigorously defend against these claims.
Franklin
v. Anydata, Inc.
We entered into a Professional
Services Agreement with Anydata Corp. (“Anydata”) for the product ACT233F Smart Link OBD device on May 5, 2017, for a minimum
purchase commitment of 250,000 units. We have delivered approximately 25,000 units and 7,000 units during our second and fourth quarters
of fiscal 2018, respectively, and an additional 18,000 units during our first quarter of fiscal 2019. Sales to Anydata were approximately
$1.8 million for the year ended June 30, 2019. We have received information that Anydata may not be able to fulfill the entire purchase
commitment for which parts have already been ordered with our main vendor, Quanta. We believe that the Company will be able to supply
some of the products to another customer and has received personal guarantees from the ownership group of Anydata. As of June 30, 2019,
the remaining unfulfilled purchase commitment was approximately $3.1 million. The total product purchase commitment with Quanta was approximately
$2.9 million. We have not recorded a receivable from Anydata, nor a liability owed to Quanta. Management believes that, at this time,
a loss contingency is reasonably possible but not estimable as to how much ultimately would be paid to Quanta. As of June 30, 2020, we
paid $100,000 for the right to call on inventory and recorded an additional $49,580 as a prepaid expense related to pricing adjustments,
which has been agreed with Quanta for other products to ensure demand is met, and for the quarter ended December 31, 2020, the prepaid
expense of $149,580 has been recorded as a cost of goods sold. As of December 31, 2021, there is a reasonable possibility we may incur
a loss; however, the amount is not estimable at this time. On January 25th, 2021, we commenced legal action against Anydata
and its principal officers in San Diego Superior Court, case number 37-2021-00003468-CU-BC-CTL.
COVID-19
In March 2020, the World Health
Organization declared the outbreak of a novel coronavirus (COVID-19) as a pandemic which continues to spread throughout the United States.
On March 19, 2020, the Governor of California declared a health emergency and issued an order to close all nonessential businesses until
further notice. As a maker of wireless connectivity devices, we are deemed to be an essential business. Nonetheless, out of concern for
our workers and pursuant to the government order, we reduced the scope of our operations and, where possible, certain workers began telecommuting
from their homes. The continued spread of COVID-19 may result in a period of business disruption, including delays or disruptions in our
supply chain. The spread of COVID-19, or another infectious disease, could also negatively affect the operations at our third-party manufacturers,
which could result in delays or disruptions in the supply of our products. While we expect this situation may increase demand for its
products, the related impact cannot be reasonably estimated at this time.
International Tariffs
We believe that our products
are currently exempt from international tariffs upon import from our manufacturers to the United States. If this were to change at any
point, a tariff of 10%-25% of the purchase price would be imposed. If such tariffs are imposed, they could have a materially adverse effect
on sales and operating results.
Customer Indemnification
Under purchase orders and
contracts for the sale of our products we may provide indemnification to our customers for potential intellectual property infringement
claims for which we may have no corresponding recourse against our third-party licensors. This potential liability, if realized, could
materially adversely affect our business, operating results and financial condition.
NOTE 9 - LONG-TERM INCENTIVE PLAN AWARDS
We apply the provisions of
ASC 718, “Compensation - Stock Compensation,” to all of our stock-based compensation awards and use the Black-Scholes option
pricing model to value stock options. Under this application, we record compensation expense for all awards granted.
In 2009, we adopted the Stock
Incentive Plan (“2009 Plan”), which provided for the grant of incentive stock options and non-qualified stock options to our
employees and directors. Options granted under the 2009 Plan generally have a term of ten years and generally vest and become exercisable
at the rate of 33% after one year and 33% on the second and third anniversaries of the option grant dates. Historically, some stock option
grants have included shorter vesting periods ranging from one to two years.
In July of 2020, the Board
of Directors adopted the 2020 Franklin Wireless Corp. Stock Option Plan (the “2020 Plan”), which covers 800,000 shares of
Common Stock. The 2020 Plan provide for the grant of incentive stock options, non-qualified stock options and restricted stock to our
employees, directors, and independent contractors. These options will have such vesting or other provisions as may be established by the
Board of Directors at the time of each grant.
The estimated forfeiture
rate considers historical turnover rates stratified into employee pools in comparison with an overall employee turnover rate, as well
as expectations about the future. We periodically revise the estimated forfeiture rate in subsequent periods if actual forfeitures differ
from those estimates. There were $192,465 and $184,229 compensation expenses recorded under this method for the six months ended December
31, 2021 and 2020, respectively.
A summary of the status of
our stock options is presented below as of December 31, 2021:
The aggregate intrinsic value
in the preceding table represents the total pretax intrinsic value, based upon the Company’s closing stock price of $4.37 as of
December 31, 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 December 31, 2021, in the amount of 863,001 shares was $2.99
per share. As of December 31, 2021, there was unrecognized compensation cost of $1,750,766 related to non-vested stock options granted.
A summary of the status of
our stock options is presented below as of December 31, 2020:
The aggregate intrinsic value
in the preceding table represents the total pretax intrinsic value, based upon the Company’s closing stock price of $23.50 as of
December 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 December 31, 2020, in the amount of 499,000 shares, was
$2.97 per share. As of December 31, 2020, there was unrecognized compensation cost of $1,007,164 related to non-vested stock options granted.
