UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For fiscal year ended June 30, 20192021
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)
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) |
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.001 per share
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨☐ No x☒
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨☐ No x☒
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 x☒ 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 and post such files.files). Yes x☒ 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. (Check one)
| Large accelerated filer | Accelerated filer | |
| Non-accelerated filer | Smaller reporting company | |
| Emerging growth company |
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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. Yes ☐ No ☒
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨☐ No x☒
The aggregate market value of the voting common stock held by non-affiliates of the Registrant, based on the closing price of the Registrant’s common stock on December 31, 2018,2020, as reported by the OTCQB, was approximately $10,410,000.$137,599,000. For the purpose of this calculation only, shares owned by officers, directors (and their affiliates) and 5% or greater stockholders have been excluded. The Registrant does not have any non-voting stock issued or outstanding.
The Registrant has 10,570,20311,590,281 shares of common stock outstanding as of September 30, 2019.28, 2021.
FRANKLIN WIRELESS CORP.
INDEX TO ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED JUNE 30, 20192021
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NOTE ON FORWARD LOOKING STATEMENTS
You should keep in mind the following points as you read this Report on Form 10-K:
| the terms "we," "us," "our," “Franklin,” “Franklin Wireless,” or the "Company" refer to Franklin Wireless Corp. |
| our fiscal year ends on June 30; references to fiscal |
This Annual Report on Form 10-K 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 captions "Business," "Management's Discussion and Analysis of Financial Condition and Results of Operations," and elsewhere in this Annual Report on Form 10-K. 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." These forward looking statements are made only as of the date of this Annual Report on Form 10-K. We do not undertake to update or revise the forward looking statements, whether as a result of new information, future events or otherwise.
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PART I
We are a leading provider of intelligent wireless solutions including mobile hotspots, routers, trackers, and modems as well asother devices. Our designs integrate innovative hardware and software products that supportenabling 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 solveapplications based on fifth generation and fourth generation (5G/4G) 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.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 the United States to countries inCaribbean and South America the Caribbean, Europe, the Middle East and Africa ("EMEA") and Asia.
OUR STRUCTURE
We incorporated in 1982 in California and reincorporated in Nevada on January 2, 2008. The reincorporation had no effect on the nature of our business or our management. Our headquarters office is located in San Diego, California. The office is principally composed of marketing, sales, operations, finance and administrative support. It is responsible for all customer-related activities, such as marketing communications, product planning, product management and customer support, along with sales and business development activities on a worldwide basis.
The consolidated financial statements include the accounts of the Company and its subsidiary with a majority voting interest of 64.2% (35.8%66.3% (33.7% is owned by non-controlling interests) as of June 30, 20192021 and 51.8% (48.2% is owned by non-controlling interests) as of2020. For the year ended June 30, 2018.2020, the increase in the majority voting interest in percentage from 64.2% to 66.3% was 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%. 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. The increase in the majority voting interest in percentage from 51.8% to 64.2% was due to the purchase of an additional 246,663 shares of the subsidiary, at $0.95 per share by the parent company from three shareholders of the subsidiary.
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 fourthree geographic areas, consisting of the United States,North America, the Caribbean and South America, 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:
| Fiscal Year Ended June 30, | ||||||||
| Net sales: | 2019 | 2018 | ||||||
| United States | $ | 36,217,387 | $ | 29,235,011 | ||||
| Caribbean and South America | – | 238,970 | ||||||
| Europe, the Middle East and Africa ("EMEA") | 224,427 | 335,845 | ||||||
| Asia | 27,086 | 256,007 | ||||||
| Totals | $ | 36,468,900 | $ | 30,065,833 | ||||
| Long-lived assets, net (property and equipment and intangible assets): | June 30, 2019 | June 30, 2018 | ||||||||||||||
| United States | $ | 1,209,159 | $ | 1,073,640 | ||||||||||||
| Fiscal Year Ended June 30, | ||||||||||||||||
| Net sales: | 2021 | 2020 | ||||||||||||||
| North America | $ | 183,771,146 | $ | 74,839,778 | ||||||||||||
| Caribbean and South America | 17,500 | – | ||||||||||||||
| Asia | 32,631 | 47,140 | 326,699 | 232,520 | ||||||||||||
| Totals | $ | 1,241,790 | $ | 1,120,780 | $ | 184,115,345 | $ | 75,072,298 | ||||||||
| Long-lived assets, net (property and equipment and intangible assets): | June 30, 2021 | June 30, 2020 | ||||||
| United States | $ | 1,349,320 | $ | 1,302,353 | ||||
| Asia | 49,040 | 43,688 | ||||||
| Totals | $ | 1,398,360 | $ | 1,346,041 | ||||
OUR PRODUCTS
We wereare a global leader and innovator in providing the world’s first supplier of both CDMA EVDO Rev A and dual-mode (CDMA Rev A/WiMAX) Universal Serial Bus (USB) modems. Ourlatest mobile broadband products include a variety of wireless USB modems as well as Wi-Fi mobile hotspot routers and embedded modules, which operate over LTE, HSPA, or CDMA networks. Our products provide consumers with an easy and convenient way in which to wirelessly connecttechnologies to the mass market, which include 5G/4G Mobile Hotspots, 5G/4G Customer Premises Equipment, and MDM solutions. We are a leading enabler of the Digital Divide initiative, and our expertise extends to innovation in Internet from laptop or desktop computers. These high-speed devices support the viewing of web pagesThings (IOT) and sending and receiving email with large file attachments, as well as downloading pictures, videos and music content.machine-to-machine (M2M) applications.
The following are representative selectionsis a sample of our current wireless data products:the products we offer:
Mobile5G/4G Wireless Broadband Products:Products
Routers:5G/4G LTE Wi-Fi Mobile Hotspot
USB Modems:5G/4G Consumer Home Gateway CPE (Customer-Premises Equipment)
5G/4G Enterprise Gateway CPE
Connected Devices and IoT Solutions:
| o | Enhanced routing gateway equipped with enterprise features offering solutions for enterprise customers looking to replace wired service, or wireless back-up for wired connections in a mission-critical environment or instant wireless connection in temporal locations. |
IoT GatewayTracking Devices and Connected Devices:
Smart IoT tracking device
Embedded Modules:Connected Car
Bus Information System:Home Phone Connect
Voice Device:
| Franklin’s Voice Over LTE (VoLTE) device provides a landline alternative, connecting instantly and |
Vehicle Diagnostics SolutionsIOT Server Platform and Application
| o | Pintrac Mobile Device Management (MDM) for LTE hotspots allows schools, government agencies and others to remotely manage and configure hotspots. |
| o | Pintrac Pet is a complete pet tracking application, allowing monitoring and tracking household pets and their activity using Franklin’s Trackers. |
| o | Pintrac Auto tracks, locates, and manages vehicles for consumers and businesses using Franklin’s LTE OBD devices. |
CUSTOMERS
Our global customer base is comprised of wireless operators, strategic partners and distributors located primarily in the United States,North America, the Caribbean and South America, EMEA and Asia.
SALES AND MARKETING
We market and sell our products primarily to wireless operators located in North America, the United States, EMEA,Caribbean and South America, and the CaribbeanAsia regions mainly through our internal, direct sales organization and, to a lesser degree, indirectly through strategic partners and distributors. The sales process is supported with a range of marketing activities, including trade shows, product marketing and public relations.
All of our wireless devices must pass Federal Communications Commission (FCC) testing in order to be sold in United States markets. CDMA Development GroupGlobal Certification Forum (“CDG”GCF”) test certifications are required in order to launch any CDMA wireless data products with wireless operators in North America, the Caribbean and South America. PCS Type Certification Review Board (“PTCRB”) test certifications also are required for all LTE and HSPA/GSM wireless data products. Other LTE and 5G test certifications, as defined by the 3GPP governing body, are required for LTE and 5G wireless data products. Certifications are issued as being a qualifier of CDG 1, CDG 2GCF, PTCRB, IEEE, CE, UL, Wi-Fi alliance certification and CDG 3, PTCRB and 3GPP.3GPP standards.
PRODUCTION AND MANUFACTURING OPERATIONS
For the fiscal year ended June 30, 2019,2021, the manufacturing of the majority of our products was contracted out toperformed by two independent companies located in Asia.
EMPLOYEES
As of June 30, 2019,2021, we had 71 employees.74 total employees at Franklin and FTI combined. We also use the services of consultants and contract workers from time to time. Our employees are not represented by any collective bargaining organization, and we have never experienced a work stoppage.
The following risk factors do not purport to be a complete explanation of the risks involved in our business.
WE MAY NEED ADDITIONAL FINANCING DUE TO LIMITED RESOURCES.FOR PRODUCT DEVELOPMENT. Our financial resources are limited, andsufficient for current operational needs, however, the amount of funding that is required to develop and commercialize our products and technologies is highly uncertain. Adequate funds may not be available when needed or on terms satisfactory to us. Lack of funds may cause us to delay, reduce and/or abandon certain or all aspects of our development and commercialization programs. We may seek additional financing through the issuance of equity or convertible debt securities. In such event, the percentage ownership of our stockholders would be reduced, stockholders may experience additional dilution, and such securities may have rights, preferences, and privileges senior to those of our Common Stock. There can be no assurance that additional financing will be available on terms favorable to us or at all. If adequate funds are not available or are not available on acceptable terms, we may not be able to fund our expansion, take advantage of desirable acquisition opportunities, develop, or enhance services or products or respond to competitive pressures. Such inability could have a materially adverse effect on our business, results of operations and financial conditions.
WE MAY INFRINGE THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS. The industry in which we operate has many participants that own, or claim to own, proprietary intellectual property. In the past we have received, and in the future may receive, claims from third parties alleging that we, and possibly our customers, violate their intellectual property rights. Rights to intellectual property can be difficult to verify and litigation may be necessary to establish whether or not we have infringed the intellectual property rights of others. In many cases, these third parties are companies with substantially greater resources than us, and they may be able to, and may choose to, pursue complex litigation to a greater degree than we could. Regardless of whether these infringement claims have merit or not, we may be subject to the following:
| We may be liable for potentially substantial damages, liabilities, and litigation costs, including attorneys’ fees; |
| We may be prohibited from further use of the intellectual property and may be required to cease selling our products that are subject to the claim; |
| We may have to license the |
| We may have to develop a non-infringing alternative, which could be costly and delay or result in the loss of sales. In addition, there is no assurance that we will be able to develop such a non-infringing alternative; |
| The diversion of management’s attention and resources; |
| Our relationships with customers may be adversely affected; and, |
| We may be required to indemnify our customers for certain costs and damages they incur in such a claim. |
In the event of an unfavorable outcome in such a claim and our inability to either obtain a license from the third party or develop a non-infringing alternative, then our business, operating results and financial condition may be materially adversely affected and we may have to restructure our business.
Absent a specific claim for infringement of intellectual property, from time to time we have and expect to continue to license technology, intellectual property, and software from third parties. There is no assurance that we will be able to maintain our third partythird-party licenses or obtain new licenses when required and this inability could materially adversely affect our business and operating results and the quality and functionality of our products. In addition, there is no assurance that third party licenses we execute will be on commercially reasonable terms.
Under purchase orders and contracts for the sale of our products we may provide indemnification to our customers for potential intellectual property infringement claims for which we may have no corresponding recourse against our third-party licensors. This potential liability, if realized, could materially adversely affect our business, operating results, and financial condition.
WE OPERATE IN AN INTENSIVELY COMPETITIVE MARKET. The wireless broadband data access market is highly competitive, and we may be unable to compete effectively. Many of our competitors or potential competitors have significantly greater financial, technical, and marketing resources than we do. To survive and be competitive, we will need to continuously invest in research and development, sales and marketing, and customer support. Increased competition could result in price reductions, and smaller customer orders. Our failure to compete effectively could seriously impair our business.
WE OPERATE IN THE HIGH-RISK TELECOM SECTOR. We are in a volatile industry. In addition, our revenue model is evolving and relies substantially on the assumption that we will be able to successfully complete the development and sales of our products and services in the marketplace. Our prospects must be considered in the light of the risk, uncertainties, expenses, and difficulties frequently encountered by companies in the early stages of development and marketing new products. In order toTo be successful in the market we must, among other things:
| Complete development and introduction of functional and attractive products and services; |
| Attract and maintain customer loyalty; |
| Establish and increase awareness of our brand and develop customer loyalty; |
| o | Provide desirable products and services to customers at attractive prices; |
| Establish and maintain strategic relationships with strategic partners and affiliates; |
| Rapidly respond to competitive and technological developments; |
| Build operations and customer service infrastructure to support our business; and |
| Attract, retain, and motivate qualified personnel. |
We cannot guarantee that we will be able to achieve these goals, and our failure to achieve them could adversely affect our business, results of operations, and financial condition. We expect that revenues and operating results will fluctuate in the future. There is no assurance that any or all of our efforts will produce a successful outcome.
POTENTIAL DESIGN AND MANUFACTURING DEFECTS COULD OCCUR. Our product and service offerings may have quality issues from time to time, due to defects in software design, hardware design or component manufacturing. As a result, our products and services may not perform as anticipated and may not meet customer expectations. Component defects could make our products unsafe and create a risk of environmental or property damage and personal injury. There can be no assurance we will be able to detect and address all issues and defects in the hardware, software, and services we offer. Failure to do so could result in widespread technical and performance issues affecting our products and services. In addition, we may be exposed to product liability claims, recalls, product replacements or modifications, write-offs of inventory, property, plant and equipment, and/or intangible assets, and significant warranty and other expenses, including litigation costs and regulatory fines.
WE OPERATE IN A FIELD WITH RAPIDLY CHANGING TECHNOLOGY. We cannot be certain that our products and services will function as anticipated or be desirable to our intended markets. Our current or future products and services may fail to function properly, and if our products and services do not achieve and sustain market acceptance, our business, results of operations and profitability may suffer. If we are unable to predict and comply with evolving wireless standards, our ability to introduce and sell new products will be adversely affected. If we fail to develop and introduce products on time, we may lose customers and potential product orders.
WE DEPEND ON THE DEMAND FOR WIRELESS NETWORK CAPACITY. The demand for our products is completely dependent on the demand for broadband wireless access to networks. If wireless operators do not deliver acceptable wireless service, our product sales may dramatically decline. Thus, if wireless operators experience financial or network difficulties, it will likely reduce demand for our products. These are beyond our ability to control and can either increase or decrease demand for our products.
PANDEMIC OUTBREAKS CAN CAUSE VOLATILE CHANGES IN THE MARKET. Demand for wireless access can rise and fall greatly during times of pandemic outbreaks, such as COVID-19, as more people may be required to work remotely, and schools may be required to operate remote classrooms. When an outbreak ends, or becomes more controlled, demand for wireless devices could decline rapidly, decreasing demand for our products. Pandemic outbreaks can also disrupt supply chains, manufacturing operations, and shipping. These disruptions can make product fulfilment difficult, delayed, or impossible. All these changes are beyond our ability to control and can cause revenue and income to change dramatically.
WE DEPEND ON COLLABORATIVE ARRANGEMENTS. The development and commercialization of our products and services depend in large part upon our ability to selectively enter into and maintain collaborative arrangements with developers, distributors, service providers, network systems providers, core wireless communications technology providers and manufacturers, among others.
THE LOSS OF ANY OF OUR MATERIAL CUSTOMERS COULD ADVERSELY AFFECT OUR REVENUES AND PROFITABILITY, AND THEREFORE SHAREHOLDER VALUE. We depend on a small number of customers for a significant portion of our revenues. For the year ended June 30, 2019,2021, net revenues from our two largest customers represented 56%63% and 26%30% of our consolidated net sales, respectively. We have a written agreement with each of these customers that governs the sale of products to them, but the agreements do not obligate them to purchase any quantity of products from us. If these customers were to reduce their business with us, our revenues and profitability could materially decline.
OUR PRODUCT DELIVERIES ARE SUBJECT TO LONG LEAD TIMES. We often experience long-lead times to ship products, often in excess ofmore than 45 days. This could cause us to lose customers, who may be able to secure faster delivery times from our competitors and require us to maintain higher levels of working capital.
OUR PRODUCT-TO-MARKET CHALLENGE IS CRITICAL. Our success depends on our ability to quickly enter the market and establish an early mover advantage. We must implement an aggressive sales and marketing campaign to solicit customers and strategic partners. Any delay could seriously affect our ability to establish and exploit effectively an early-to-market strategy.
AS OUR BUSINESS EXPANDS INTERNATIONALLY, WE WILL BE EXPOSED TO ADDITIONAL RISKS RELATING TO INTERNATIONAL OPERATIONS. Our expansion into international operations exposes us to additional risks unique to such international markets, including the following:
| Increased credit management risks and greater difficulties in collecting accounts receivable; |
| Unexpected changes in regulatory requirements, wireless communications standards, exchange rates, trading policies, tariffs, and other barriers; |
| Uncertainties of laws and enforcement relating to the protection of intellectual property; |
| Language barriers; and |
| Potential adverse tax consequences. |
Furthermore, if we are unable to further develop distribution channels in countries in North America, the Caribbean and South America, EMEA (Europe, the Middle East and Africa), and Asia, we may not be able to grow our international operations, and our ability to increase our revenue will be negatively impacted.
We believe that our products are currently exempt from Chineseinternational tariffs. If this were to change at any point, a tariff of 10%-25% of the purchase price wouldcould be imposed. If such tariffs are imposed, they could have a materially adverse effect on sales and operating results.
GOVERNMENT REGULATION COULD RESULT IN INCREASED COSTS AND INABILITY TO SELL OUR PRODUCTS. Our products are subject to certain mandatory regulatory approvals in the United States and other regions in which we operate. In the United States, the Federal Communications Commission regulates many aspects of communications devices. Although we have obtained all the necessary Federal Communications Commission and other required approvals for the products we currently sell, we may not obtain approvals for future products on a timely basis, or at all. In addition, regulatory requirements may change, or we may not be able to obtain regulatory approvals from countries other than the United States in which we may desire to sell products in the future.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
On September 9, 2015, we signed aWe lease for new office space consisting of approximately 12,775 square feet locatedof office space in San Diego, California, at a monthly rent of $23,115, which commenced on October 28, 2015.$25,754, pursuant to a lease expiring in December 2023. 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 related to these leasesthis property was $277,377$309,053 and $298,494 for the years ended June 30, 20192021, and 2018.
2020, respectively.
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 wasboth located in Seoul, Korea. These leases expired on August 31, 2021 but were extended by an additional twelve months to August 31, 2021.2022. In addition to monthly rent, the lease providesleases provide for periodic cost of living increases in the base rent and payment for certain common area costs. These facilities are covered by an appropriate level of insurance and we believe them to be suitable for our use and adequate for our present needs. Rent expense related to these leases was approximately $128,000$128,400 for each of the years ended June 30, 20192021, and 2018.2020.
We lease one corporate housing facility, located in Seoul, Korea, primarily for our employees who travel, under a non-cancelable operating lease that expired on September 4, 20192021, and was extended by an additional twelve months to September 4, 2020.2022. Rent expense related to this lease was $10,066$9,161 and $8,875$8,789 for the years ended June 30, 20192021, and 2018,2020, respectively.
Refer to NOTE 8 - COMMITMENTS AND CONTINGENCIES in the Consolidated Financial Statements.
ITEM 4. MINE SAFETY DISCLOSURES
None.
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ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
MARKET PRICE OF OUR COMMON STOCK
Shares of our Common Stock are quoted and traded on the OTCQBNASDAQ under the trading symbol "FKWL." We have one class of common stock. As of June 30, 2019,2021, we had 730733 shareholders of record. Since many of the shares of our common stock are held by brokers and other institutions on behalf of shareholders, the total number of beneficial holders represented by these record holders is not practicably determinable.
EQUITY COMPENSATION PLAN INFORMATION
The following table summarizes share and exercise price information about our equity compensation plans as of June 30, 2019: 2021:
| Plan Category | Number of securities to be issued upon exercise of outstanding options, warrants and rights | Weighted-average exercise price of outstanding options, warrants and rights | Number of securities remaining available for future issuance under equity compensation plans | Number of securities to be issued upon exercise of outstanding options, warrants and rights | Weighted-average exercise price of outstanding options, warrants and rights | Number of securities remaining available for future issuance under equity compensation plans | ||||||||||||||||||
| Equity compensation plans approved by security holders | 299,000 | $ | 1.04 | 1,190,000 | 484,000 | $ | 3.67 | 903,003 | ||||||||||||||||
| Equity compensation plans not approved by security holders | – | N/A | – | – | N/A | – | ||||||||||||||||||
| Total | 299,000 | $ | 1.04 | 1,190,000 | 484,000 | $ | 3.67 | 903,003 | ||||||||||||||||
ITEM 6. SELECTED FINANCIAL DATA[RESERVED]
As a “smaller reporting company” as defined by Rule 12b-2 of the Exchange Act, we are not required to include this item.
ITEM 7. 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” below. In light of these risks, uncertainties and assumptions, the forward-looking events discussed in this report might not occur.
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BUSINESS OVERVIEW
We are a leading provider of intelligent wireless solutions including mobile hotspots, routers, trackers, and modems as well asother devices. Our designs integrate innovative hardware and software, products that supportenabling 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 solveapplications based on 5G/4G 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.technology.
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 StatesNorth America to countries in South America, the Caribbean Europe, the Middle East and Africa ("EMEA")South America, 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 for 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
Revenue Recognition
Through June 30, 2018, we recognized revenue in accordance with Accounting Standards Codification ("ASC") 605, “Revenue Recognition,” when persuasive evidence of an arrangement exists, the price is fixed or determinable, collection is reasonably assured, and delivery of products has occurred or services have been rendered. Accordingly, we recognized revenues from product sales upon shipment of the products to the customers or when the products are received by the customers in accordance with shipping or delivery terms. We provided a warranty for one year from the shipment or delivery date, which was covered by our vendors pursuant to purchase agreements. Any net warranty related expenditures made by us have historically not been material. Under our sales return policy, customers may generally return products that are under warranty for repair or replacement. 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, while prior period amounts have not been adjusted and continue to be reported in accordance with our historic accounting under Topic 605. 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 forfrom sales of products and services is derived from contracts with customers. The products and services promised incovered by 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 year ended June 30, 20192021, 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.
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The balances of our trade receivables are as follows:
| June 30, 2019 | June 30, 2018 | |||||||
| Accounts Receivable | $ | 4,138,470 | $ | 7,907,117 | ||||
| June 30, 2021 | June 30, 2020 | |||||||
| Accounts Receivable | $ | 2,542,429 | $ | 15,973,537 | ||||
The balance of contract assets was immaterial as we did not have a significant amount of un-invoiced receivables in the periods ended June 30, 20192021 and June 30, 2018.2020.
Our contract liabilities, which are included in accrued liabilities on our balance sheet, are as follows:
| June 30, 2019 | June 30, 2018 | |||||||
| Advance payments from customers | $ | – | $ | 228,598 | ||||
| Undelivered products | 140,000 | 140,000 | ||||||
| Totals | $ | 140,000 | $ | 368,598 | ||||
| June 30, 2021 | June 30, 2020 | |||||||
| Undelivered products | $ | 140,000 | $ | 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 toTo 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 satisfied at a point in time. Revenue from products transferred to customers at a single point in time accounted for over 99% of net sales for the year ended June 30, 2019.2021. Revenue for non-recurring engineering projects is based on the percentage completion of a project and accounted for 1.0%under 1% of net sales for the year ended June 30, 2019. The majority2021. Most of our revenue that is 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 tocan 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 June 30, 2019,2021, our contracts do not contain any unsatisfied performance obligations, except for undelivered products.
Capitalized Product Development Costs
ASCAccounting 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 shall be 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 2 to Notes to Consolidated Financial Statements) 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 straight-line amortization. The amortization begins when the products are available for general release to our customers.
As of June 30, 2019,2021, and June 30, 2018,2020, capitalized product development costs in progress were $465,352$602,388 and $100,000,$140,192, respectively, and these amounts are included in intangible assets in our consolidated balance sheets. During the year ended June 30, 2019,2021, we incurred $465,352$694,909 in capitalized product development costs, and such amounts areIn addition, we disposed of certain technology in progress, primarily comprised of certifications and licenses.licenses, in the amount of $140,192, as we concluded it had little likelihood of economic success based on its performance test results.. All costs incurred before technological feasibility is reached are expensed and included in our consolidated statements of comprehensive income.
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Income Taxes
Deferred income tax assets and liabilities are recorded for differences between the financial statement and tax basis of the assets and liabilities that will result in taxable or deductible amounts in the future based on enacted laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. As of June 30, 2019,2021, we have federal and state net operating loss carryforwards of approximately $5.6$0.8 million and no state net operating loss carryforwards. Under the Tax Cuts and Jobs Act (the “Act”), which was signed into law on December 22, 2017, the federal net operating loss recognized on or after January 1, 2018, will carryforwardcarry forward indefinitely. The federal net operating loss of $2.5$0.8 million, which was recognized on or before December 31, 2017, will expire through 2035, and the federal net operating loss of $3.1 million recognized on or after January 1, 2018, which will carryforward indefinitely.carry forward indefinitely, is $0. The utilization of net operating loss carryforwards may be subject to limitations under provisions of the Internal Revenue Code Section 382 and similar state provisions.
Under the provision of ASC 740 “Application of the Uncertain Tax Position Provisions” related to accounting for uncertain tax positions, which prescribes a recognition threshold and measurement process for recording in the financial statements, uncertain tax positions taken or expected to be taken in a tax return, the impact of an uncertain income tax position on the income tax return must be recognized at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant taxing authority. Tax benefits of an uncertain tax position will not be recognized if it has less than a 50% likelihood of being sustained based on technical merits.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Refer to NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES in the Consolidated Financial Statements.
RESULTS OF OPERATIONS
The following table sets forth, for the years ended June 30, 20192021, 2020, and 2018,2019, our statements of operations including data expressed as a percentage of sales:
| 2019 | 2018 | |||||||
| (as a percentage of sales) | ||||||||
| Net sales | 100.0% | 100.0% | ||||||
| Cost of goods sold | 84.3% | 82.7% | ||||||
| Gross profit | 15.7% | 17.3% | ||||||
| Operating expenses | 21.5% | 26.2% | ||||||
| Loss from operations | (5.8% | ) | (8.9% | ) | ||||
| Other income, net | 0.6% | 1.1% | ||||||
| Net loss before income taxes | (5.2% | ) | (7.8% | ) | ||||
| Income tax benefit | (1.2% | ) | (0.6% | ) | ||||
| Net loss | (4.0% | ) | (7.2% | ) | ||||
| Non-controlling interest in net loss of subsidiary | 0.5% | 0.2% | ||||||
| Net loss attributable to Parent Company stockholders | (3.5% | ) | (7.0% | ) | ||||
| 2021 | 2020 | 2019 | ||||||||||
| (as a percentage of sales) | ||||||||||||
| Net sales | 100.0% | 100.0% | 100.0% | |||||||||
| Cost of goods sold | 82.4% | 80.7% | 84.3% | |||||||||
| Gross profit | 17.6% | 19.3% | 15.7% | |||||||||
| Operating expenses | 5.2% | 9.9% | 21.5% | |||||||||
| Income (loss) from operations | 12.4% | 9.4% | (5.8% | ) | ||||||||
| Other income, net | 0.3% | 0.3% | 0.6% | |||||||||
| Net income (loss) before income taxes | 12.7% | 9.7% | (5.2% | ) | ||||||||
| Income tax provision (benefit) | 2.7% | 1.8% | (1.2% | ) | ||||||||
| Net income (loss) | 10.0% | 7.9% | (4.0% | ) | ||||||||
| Less: non-controlling interest in net income (loss) of subsidiary | 0.4% | 0.5% | (0.5% | ) | ||||||||
| Net income (loss) attributable to Parent Company stockholders | 9.6% | 7.4% | (3.5% | ) | ||||||||
YEAR ENDED JUNE 30, 20192021 COMPARED TO YEAR ENDED JUNE 30, 20182020
NET SALES - Net sales increased by $6,403,067,$109,043,047, or 21.3%145.3%, to $36,468,900$184,115,345 for the year ended June 30, 20192021 from $30,065,833$75,072,298 for the corresponding period of 2018.2020. For the year ended June 30, 2019,2021, net sales by geographic regions, consisting of North America, the United States,Caribbean and South America, and Asia were $183,771,146 (99.8% of net sales), $17,500 (0.0% of net sales), and $326,699 (0.2% of net sales), respectively. For the year ended June 30, 2020, net sales by geographic regions, consisting of North America, the Caribbean EMEA (Europe, the Middle East and Africa)South America, and Asia were $36,217,387 (99.3%$74,839,778 (99.7% of net sales), $0 (0.0% of net sales), $224,427 (0.6% of net sales) and $27,086 (0.1%$232,520 (0.3% of net sales), respectively.
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Net sales in the United StatesNorth America increased by $6,982,376,$108,931,368, or 23.9%145.6%, to $36,217,387$183,771,146 for the year ended June 30, 2019,2021, from $29,235,011$74,839,778 for the corresponding period of 2018.2020. The increase in net sales in North America resulted primarily from increased demand for wireless connectivity due to people working and attending school remotely. High volume sales to school districts rapidly rolling out remote learning programs was a significant driver for increased sales through our primary customers due to the Covid-19 pandemic. Net sales also increased due to the timing of orders placed by a carrier customer, from which a significant portion of our revenue was derived (approximately 63% of our consolidated net sales for this period). Net sales in the Caribbean and South America increased by $17,500, or 100.0%, to $17,500 for the year ended June 30, 2021, from $0 for the corresponding period of 2020. Net sales in Asia increased by $94,179, or 40.5%, to $326,699 for the year ended June 30, 2021, from $232,520 for the corresponding period of 2020. The increase in net sales was primarily due to the average of 46% increased product demand from four major carrier customers,development service revenue generated by FTI, which was increased by the favorable effect of sales that fluctuate significantlytypically varies from period to period due to timing of orders placedperiod.
GROSS PROFIT- Gross profit increased by several customers. Net sales in the South American and Caribbean regions decreased by $238,970,$17,939,536, or 100%123.5%, to $0$32,464,021 for the year ended June 30, 2019,2021, from $238,970$14,524,485 for the corresponding period of 2018. The decrease was primarily due to the general nature of sales in these regions, which often fluctuate significantly from period to period due to timing of orders placed by a relatively small number of customers. Net sales in EMEA decreased by $111,418, or 33.2%, to $224,427 for the year ended June 30, 2019, from $335,845 for the corresponding period of 2018. The decrease in net sales was due to the discontinued orders of a product placed by a carrier customer in Africa. Net sales in Asia decreased by $228,921, or 89.4%, to $27,086 for the year ended June 30, 2019, from $256,007 for the corresponding period of 2018. The decrease in net sales was primarily due to lower component sales generated by FTI, which typically vary from period to period in connection with its customers’ production schedule.
GROSS PROFIT- Gross profit increased by $547,775, or 10.6%, to $5,739,489 for the year ended June 30, 2019, from $5,191,714 for the corresponding period of 2018.2020. The gross profit in terms of net sales percentage was 15.7%17.6% for the year ended June 30, 2019,2021, compared to 17.3%19.3% for the corresponding period of 2018.2020. The increase in gross profit was primarily due to the change in net sales as described above. The decrease in gross profit in terms of net sales percentage was primarily due to variations in customer and product mix, competitive selling prices and product costs which generally vary from period to period and region to region.the increase in production costs.
OPERATING EXPENSES - Operating expenses decreasedincreased by $36,638,$2,199,350, or 0.5%29.5%, to $7,846,946$9,645,711 for the year ended June 30, 2019,2021, from $7,883,584$7,446,361 for the corresponding period of 2018. For the year ended June 30, 2019, operating expenses consisted of selling, general, and administrative costs of $4,891,365 and research and development costs of $2,955,581, respectively.2020.
Selling, general, and administrative costsexpenses increased by $379,797, or 8.4%,$1,377,989 to $4,891,365$5,077,848 for the year ended June 30, 2019,2021, from $4,511,568$3,699,859 for the corresponding period of 2018.2020. The increase in selling, general, and administrative costsexpenses was primarily due to the increase in deliveryincreased payroll expense as well as compensation expense related to stock options granted for employees (approximately $560,000), increased bad debt expense of approximately $340,000, increased professional fees of approximately $130,000, and increased shipping and handling charges by $325,303 due to the increased sales. of approximately $80,000.
Research and development costs decreasedexpense increased by $416,435, or 12.3%,$821,361 to $2,955,581$4,567,863 for the year ended June 30, 2019,2021, from $3,372,016$3,746,502 for the corresponding period of 2018.2020. The decreaseincrease in research and development costsexpense was primarily due to the decreaseincreased payroll expense for employees involved in research and development payroll expense and the related expenses from a cost reduction effort especially for the early portion of fiscal 2019, as well as increased capitalized productother research and development cost.costs.
OTHER INCOME, NET - Other income, net decreasedincreased by $127,368,$396,403, or 38.33%179.6%, to $204,954$617,167 for the year ended June 30, 2019,2021, from $332,322$220,764 for the corresponding period of 2018.2020. The decreaseincrease was primarily due to the gain from the forgiveness of the Payroll Protection Plan loan and increased product development funding received by FTI from a government entity, which was partially offset by the loss from the unfavorable changes in foreign currency exchange rates in FTI and the decreased interest income earned from the money market accounts and certificates of deposit.
YEAR ENDED JUNE 30, 2020 COMPARED TO YEAR ENDED JUNE 30, 2019
NET SALES - Net sales increased by $38,603,398, or 105.9%, to $75,072,298 for the year ended June 30, 2020 from $36,468,900 for the corresponding period of 2019. For the year ended June 30, 2020, net sales by geographic regions, consisting of the United States, EMEA (Europe, the Middle East and Africa) and Asia were $74,839,778 (99.7% of net sales), $0 (0.0% of net sales), and $232,520 (0.3% of net sales), respectively. For the year ended June 30, 2019, net sales by geographic regions, consisting of the United States, EMEA (Europe, the Middle East and Africa) and Asia were $36,217,387 (99.3% of net sales), $224,427 (0.6% of net sales) and $27,086 (0.1% of net sales), respectively.
Net sales in the United States increased by $38,622,391, or 106.6%, to $74,839,778 for the year ended June 30, 2020, from $36,217,387 for the corresponding period of 2019. The increase in net sales in the United States resulted primarily from increased demand for wireless connectivity due to people working and attending school remotely. High volume sales to school districts rapidly rolling out remote learning programs was a significant driver for increased sales through our primary customers during the Covid-19 Pandemic period. 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. (46% of our consolidated net sales for the year ended June 30, 2020). Net sales in EMEA decreased by $224,427, or 100.0%, to $0 for the year ended June 30, 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 $205,434, or 105.9%, to $232,520 for the year ended June 30, 2020, from $27,086 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 $8,784,996, or 153.1%, to $14,524,485 for the year ended June 30, 2020, from $5,739,489 for the corresponding period of 2019. The gross profit in terms of net sales percentage was 19.3% for the year ended June 30, 2020, compared to 15.7% 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 and gross profit in terms of net sales percentage was primarily due to a newly launched product, with a 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 $400,585, or 5.1%, to $7,446,361 for the year ended June 30, 2020, from $7,846,946 for the corresponding period of 2019. Selling, general, and administrative expenses decreased by $1,191,506 to $3,699,859 for the year ended June 30, 2020, from $4,891,365. The decrease in selling, general, and administrative was primarily due to the decreased payroll expense for employees involved in selling, general, and administrative capacities by approximately $700,000 as well as the significant decrease in shipping and handling costs within selling, general, and administrative costs by $497,298, resulting from the positively restructured shipping terms with a major vendor despite the increased volume of product shipments. Research and development expense increased by $790,921 to $3,746,502 for the year ended June 30, 2020, from $2,955,581. The increase in research and development expense was primarily due to the increased reimbursement in payroll expense for employees involved in research and development.
OTHER INCOME, NET - Other income, net increased by $15,810, or 7.71%, to $220,764 for the year ended June 30, 2020, from $204,954 for the corresponding period of 2019. The increase was primarily due to the increased interest income earned from money market accounts and certificates of deposit, as well as the gain from appreciation on favorable foreign currency change, which is partially offset by the decreased product development funding received by FTI from a government entity as the periods of the associated projects expired, which is partially offset by the increased interest income earned from the newly opened money market accounts and the certificates of deposit.entity.
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 June 30, 2019.2021. 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 June 30, 20192021 consisted of cash and cash equivalents as well as short-term investments of $11,827,731.$51,182,040. We believe we have sufficient available capital to cover our existing operations and obligations through at least June 30, 2020.2022. 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 by operating activities for year ended June 30, 20192021, and 2020 was $775,090,$12,104,199 and net cash used in operating activities for year ended June 30, 2018 was $2,008,694.$22,004,304, respectively.
The $775,090$12,104,199 in net cash provided by operating activities for the year ended June 30, 20192021, was primarily due to the decrease in accounts receivable and inventory of $3,852,985$13,103,973 and $10,807,884, respectively, as well as the decrease in inventory of $304,813,our operating results (net income adjusted for depreciation, amortization and other non-cash charges), which was partially offset by the decrease in accounts payable of $1,937,071.$32,364,266.
The $2,008,694$22,004,304 in net cash used inprovided by operating activities for the year ended June 30, 20182020, was primarily due to the decreaseincrease in accounts payable of $5,250,597$36,410,741, caused by a sudden increase in Wi-Fi hotspot production, as well as our operating results (net loss adjusted for depreciation, amortization and other non-cash charges), which were partially offset by the decreasean increase in accounts receivable of $3,039,951 and$11,855,351 as well as the decreaseincrease in inventory of $1,613,733.$10,730,663.
INVESTING ACTIVITIES – Net cash used in investing activities for the years ended June 30, 20192021 and 20182020 was $6,250,710$722,520 and $399,185,$794,969, respectively.
The $6,250,710 in net cash used in investing activities for nine months ended June 30, 2019 was primarily due to the payments for purchase of short-term investments of $5,380,226 and additional shares of the subsidiary of $234,330 as well as the purchases of capitalized product development, intangible assets, and property and equipment of $465,352, $70,034, and $100,768, respectively.
The $399,185$722,520 in net cash used in investing activities for the year ended June 30, 20182021, was primarily due to the payments forpurchases of capitalized product development of $291,386 and purchases of intangible assets and property and equipment of $83,896$694,909 and $23,903,$21,043, respectively.
The $794,969 in net cash used in investing activities for the year ended June 30, 2020, was primarily due to the purchases of capitalized product development, intangible asset, and property and equipment of $343,360, $193,171, and $181,746, respectively, as well as the payments for additional shares of a subsidiary of $75,000.
FINANCING ACTIVITIES – Net cash provided by financing activities for the years ended June 30, 20192021 and 20182020 was $0$6,074,759 and $67,000,$520,428, respectively.
The $67,000$6,074,759 in net cash provided by financing activities for the yearsyear ended June 30, 20182021, was primarily due to the $6,000,008 aggregate purchase price, paid to us in cash by investors for the issuance of 923,078 shares of Common Stock, as well as $74,751 received from the exercise of stock options.
The $520,418 in net cash provided by financing activities for the year ended June 30, 2020, was due to the cash received from a loan under the Payroll Protection Program and the exercise of stock options.options of $487,300 and $33,128, respectively.
OFF-BALANCE SHEET ARRANGEMENTS
None.
CONTRACTUAL OBLIGATIONS AND OTHER COMMITMENTS
The following table summarizes our contractual obligations and commitments as of June 30, 2019,2021, and the effect such obligations could have on our liquidity and cash flow in future periods:
| Payments Due by June 30, | ||||||||||||||||||||||||||
| 2020 | 2021 | 2022 | 2023 | 2024 | Total | |||||||||||||||||||||
| Leases | $ | 451,556 | $ | 452,808 | $ | 343,330 | $ | 321,930 | $ | 160,965 | $ | 1,730,589 | ||||||||||||||
| Payments due by June 30, | ||||||||||||||||
| 2022 | 2023 | 2024 | Total | |||||||||||||
| Total Obligations | $ | 342,779 | $ | 321,930 | $ | 160,965 | $ | 825,674 | ||||||||
LEASES
Refer to ITEM 2. PROPERTIES.
FUTURE LIQUIDITY AND CAPITAL REQUIREMENTS
For the next twelve months, we may require in excess of $5.0$5 million for capital expenditures, software licenses and for testing and certifying new products.
We believe we will be able to fund our future cash requirements for operations from our cash available, operating cash flows, bank lines of credit and issuance of equity securities. We believe these sources of funds will be sufficient to continue our operations and planned capital expenditures. However, we will be required to raise additional debt or equity capital if we are unable to generate sufficient cash flow from operations to fund the expansion of our sales and to satisfy the related working capital requirements for the next twelve months. Our ability to satisfy such obligations also depends upon our future performance, which in turn is subject to general economic conditions and regional risks, and to financial, business and other factors affecting our operations, including factors beyond our control. See Item 1A, “Risk Factors” included in this report.
If we are unable to generate sufficient cash flow from operations to meet our obligations and commitments, we will be required to raise additional debt or equity capital. Additionally, we may be required to sell material assets or operations or delay or forego expansion opportunities. We might not be able to effect these alternative strategies to raise funds including credit lines and loans, on satisfactory terms, if at all.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and the supplementary financial information required by this Item and included in this report are listed in the Index to Financial Statements beginning on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
EVALUATIONEVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Our management has evaluated, under the supervision and with the participation of OC Kim, our President, and David Brown, our 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 the Acting Chief Financial Officer have concluded that, as of June 30, 2019,2021, 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 Exchange Act or in other factors that materially affected or are reasonably likely to materially affect our internal controls and procedures over financial reporting during the fourth quarter of the fiscal year ended June 30, 2019.2021.
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act). Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
To evaluate the effectiveness of internal controls over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act, management conducted an assessment, using the criteria in Internal Control-Integrated Framework, (specifically the 2013 framework) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on its assessment, management concluded that we maintained effective internal control over financial reporting as of June 30, 2019.
This annual report does not include an attestation report from our independent registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by our registered public accounting firm pursuant to the rules adopted under Section 404(c) of the Sarbanes-Oxley Act.
None.
2021.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Set forth below are the names, ages, titles and present and past positions of our directors and executive officers as of June 30, 2019.2021.
| Name | Age | Position | ||
| OC Kim | President, Secretary and a Director | |||
| Gary Nelson | Chairman of the Board and a Director | |||
| Director | ||||
| Director | ||||
| Director | ||||
| Yun J. (David) Lee | Chief Operating Officer | |||
| David Brown | 57 | Acting Chief Financial Officer |
OC Kim has been our President, Secretary and a director since September 2003 and2003. He also served as our Acting Chief Financial Officer from April 2018 until March 2014 and reassumed the role in April 2018.2021. Prior to joining Franklin Wireless, Mr. Kim was the CEO and President of Accetio Inc., a company he founded in April 2001 that developed cell phones and modules for the telecommunications industry. In September 2003, Accetio Inc. merged with Franklin Telecommunications Corp. and was renamed Franklin Wireless Corp. Prior to this, Mr. Kim was the Chief Operating Officer of Axesstel Inc., a pioneering developer of CDMA Wireless Local Loop Products. Before joining Axesstel, he was the president of the U.S. sales office for Kolon Data Communications Co., Ltd., one of Korea's most prominent technology conglomerates. While at Kolon Data Communications, Mr. Kim helped introduce the first generation of CDMA phones to the Korean market through his work with Qualcomm Personal Electronics (QPE), a joint venture between Qualcomm Incorporated and Sony Electronics Inc. Mr. Kim began his career at Lucky Goldstar (LG) Electronics. He has more than 29 years of experience in sales, marketing, and operations management in the telecommunications and information systems industries. He earned a B.A. from Sogang University in Korea. We believe Mr. Kim’s qualifications to serve as a director of the Company include his extensive business, operational and management experience in the wireless industry, including his current position as the Company’s President. In addition, his knowledge of the Company’s business, products, strategic relationships and future opportunities is of great value to the Company.
Gary Nelson has been a director since September 2003. Mr. Nelson was an early investor in Franklin Telecommunications Corp. in the 1980’s and served as a director from 2001 up until the Company’s merger with Accetio Inc. in September 2003, at which time the Company was renamed Franklin Wireless Corp. Following the merger, Mr. Nelson became a director and ultimately Chairman of the Board of Franklin Wireless Corp. He was co-founder and President of Churchill Mortgage Corporation, an income property mortgage banking firm based in Los Angeles, California, which was a loan correspondent for major life insurance companies and other financial institutions. In addition, Mr. Nelson was the Chief Operating Officer of Churchill Mortgage Capital, which was the loan origination arm of Churchill Mortgage Corporation. Mr. Nelson’s prior experience includes various marketing positions with Control Data Corporation and design engineering positions with North American Aviation where he worked on the Apollo Project. He holds a B.S. in Mechanical Engineering from Kansas State University and an MBA from the University of Southern California. We believe that Mr. Nelson’s qualifications to serve as a director of the Company include his many years of business, operational and management experience including his previous position as President of Churchill Mortgage Corporation. In addition, Mr. Nelson has served as a director of the Company for 14 years, and brings a valuable historical perspective on the development of the Company’s business and its leadership.
Joon Won Jyoung has been a director since September 2009. He has been an active investor since 1997 and made early investments in Sewon Telecom, Telson Electronics and Pantech, three leading telecommunications companies based in Korea. From 2001 to 2007, Mr. Jyoung served as a director and Treasurer for Sewon Telecom. From 1992 to 1996, he served as President of Sneakers Classic Ltd., and from 1987 to 1991, he was Chairman of Empire State Bank in New York. From 1972 to 1982, he was Chairman of Downtown Mart, a distribution company in New York and Virginia. He holds a B.S. in Mathematics from Seoul National University and an M.S. in Statistics from the University of Connecticut. We believe Mr. Jyoung’s qualifications to serve as a director of the Company include his extensive management experience in a diverse range of industries as well as his broad experience in international business matters.
Johnathan Chee has been a director since September 2009. He is an attorney and has owned the Law Offices of Johnathan Chee, in Niles, Illinois, since August 2007. Mr. Chee has represented clients in various business dealings and negotiations with Ameritech, SBC, Sprint and several wireless carriers in Latin America. Between 1998 and 2007, he served as an attorney with the C&S Law Group, P.C., in Glenview, Illinois. He holds a B.A. from the University of Illinois-Chicago and a J.D. from IIT Chicago-Kent College of Law. He is a member of the Illinois Bar Association. We believe Mr. Chee’s qualifications to serve as a director of the Company include his experience as a business attorney that allow him to provide the Company’s Board of Directors with valuable knowledge of legal matters that may affect the Company.
Benjamin Chung has been a director since November 2011. He
| 16 |
Heidy Chow is a Certified Public Accountant and an experienced finance and accounting executive whose client base includes several telecommunicationsIT companies. HeMs. Chow is currently aan Assurance Partner of The Pun Group, LLP and has over fifteen (15) years of combined experience in auditing, consulting and finance. Ms. Chow’s career in public accounting was spent primarily with the accounting firmNational firms of BenjaminRSM US and Ernst & Young, LLP. Between September 2010 and July 2011 he servedregional firms where she has specialized in corporate accounting and auditing services. She supervises engagement teams in areas of designing and planning audits in accordance with the AICPA Generally Accepted Auditing Standards and Public Company Accounting Oversight Board (PCAOB) standards. In addition, she often serves as International ControllerContract Chief Financial Officer for American Apparel, Inc., a publicly traded company. He served as an Audit Senior Manager in the accounting firm of BDO USA, LLP from October 2007 to August 2010privately held small and completed an 18 month international rotation at BDO Daejoo Korea where he was promoted to an Audit Partner. Prior to BDO, he was the Director of Internal Audit for Big 5 Sporting Goods Corporation, a publicly traded company, from January 2006 to October 2007. Hemiddle market companies. She holds a B.S. in Business AdministrationAccounting from California State Polytechnic University, Pomona. We believe Mr. Chung’s qualifications to serve as
Kristina Kim is a director of the Company include his experience as a certified public accountant and as controller for public companies, which will allow him to provide the Company’s Board of Directorslicensed attorney with valuableextensive knowledge of financialglobal import/export, international trade, and accounting matters that may affectregulatory issues. Ms. Kim also served as General Counsel and Vice President with Samsung International Inc. for over 14 years. Ms. Kim holds a B.A. in Biochemistry and Molecular Biology from the Company.University of California at Santa Barbara, and a Juris Doctorate from the University of San Diego.
Yun J. (David) Lee has beenserved as our Chief Operating Officer since September 2008. Mr. Lee has 23 years of upper level management experience in telecommunications, including experience in the cellular telephone business in the U.S. and South America. Prior to joining the Company, he was President of Ace Electronics, and served as Chief Financial Officer and Director of Sales and Marketing for RMG Wireless. Prior to that, he served as Controller and Director of International Sales for Focus Wireless in Chicago.
COMPLIANCE WITH SECTION 16(A) OF EXCHANGE ACT
Section 16(a)David Brown has served as our Acting Chief Financial officer since March 2021. With over 25 years of financial experience, David Brown has worked in several industries including manufacturing, aerospace, biotech, and electronics. A graduate in accounting from San Diego State University, David has advanced knowledge of accounting, budgeting, and cash management. He has developed and implemented internal policies and procedures throughout several organizations and has managed all aspects of the Securities Exchange Act of 1934 requires officers and directors, and persons who own more than ten percent of our equity securities, to file reports of ownership and changes in ownershipfinance departments along with the Securities and Exchange Commission (the "Commission"). Officers, directors and greater than regulations to furnish us with copies of all forms they file pursuant to Section 16(a). Based solely on our review of the copies of such forms it received and written representations from reporting persons required to file reports under Section 16(a), to our knowledge all of the Section 16(a) filing requirements applicable to such persons with respect to fiscal 2019 were complied with.outside auditors.
CODE OF ETHICS
The Board of Directors has adopted a Code of Ethics, which is applicable to all of our employees, including our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. The Code of Ethics covers all areas of professional conduct, including honest and ethical conduct, conflicts of interest, compliance with laws, disclosure obligation, and accountability for adherence to this Code.
CORPORATE GOVERNANCE
During fiscal 2019,2021, the Board of Directors held sixfive meetings. Each director attended 100% of the meetings of the Board, except for Joon Won Jyoung, who attended none of the meetings.meetings and resigned his position on the Board on January 26, 2021. The Board of Directors has an Audit Committee made up of Messrs. ChungHeidy Chow (committee chair), Gary Nelson, and NelsonKristina Kim, and a Compensation Committee made up of Messrs.Gary Nelson (committee chair) and Johnathan Chee. The Board of Directors has no other committees.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth all compensation paid or accrued by us for the years ended June 30, 20192021, and 20182020 to our President, Chief Operating Officer, and Chief Financial Officer (The "Named Executive Officers").
| Name and Principal Position | Fiscal Year | Salary ($) | Bonus ($) | Option Awards ($) | All Other Compensation ($)(1) | Total ($) | ||||||||||||||||
| OC Kim, President | 2018 | $ | 220,000 | $ | – | $ | – | – | $ | 220,000 | ||||||||||||
| 2019 | $ | 220,000 | $ | – | $ | – | – | $ | 220,000 | |||||||||||||
| Yun J. (David) Lee, Chief Operating Officer | 2018 | $ | 220,000 | $ | – | $ | – | – | $ | 220,000 | ||||||||||||
| 2019 | $ | 220,000 | $ | – | $ | – | – | $ | 220,000 | |||||||||||||
| Richard Walker, Chief Financial Officer (1) | 2018 | $ | 100,141 | $ | – | $ | – | $ | – | $ | 100,141 | |||||||||||
| 2019 | $ | – | $ | – | $ | – | $ | – | $ | – | ||||||||||||
| Name and Principal Position | Fiscal Year | Salary ($) | Bonus ($) | Option Awards ($) | All Other Compensation ($)(1) | Total ($) | ||||||||||||||||||
| OC Kim, | 2020 | $ | 220,000 | $ | 25,000 | $ | – | – | $ | 245,000 | ||||||||||||||
| President | 2021 | $ | 286,667 | $ | 58,000 | $ | – | – | $ | 344,667 | ||||||||||||||
| Yun J. (David) Lee, | 2020 | $ | 220,000 | $ | 33,000 | $ | – | – | $ | 253,000 | ||||||||||||||
| Chief Operating Officer | 2021 | $ | 286,667 | $ | 58,000 | $ | 404,090 | – | $ | 748,757 | ||||||||||||||
| David Brown, | 2020 | $ | – | $ | – | $ | – | – | $ | – | ||||||||||||||
| Acting Chief Financial Officer | 2021 | $ | 40,032 | $ | 2,000 | $ | – | – | $ | 42,032 | ||||||||||||||
(1) On April 6, 2018 Richard Walker resigned as Chief Financial Officer of the Company. Mr. Walker's resignation was not the result of any disagreement with respect to the Company's operations, policies or practices.
| 17 |
Outstanding Equity Awards at Fiscal Year-End
The following table presents the outstanding equity awards held by each of the Named Executive OfficersOfficer as of June 30, 2019.2021. The only outstanding equity awards are stock options. No optionsOptions to purchase 100,000 shares were granted to the Named Executive OfficersYun J. (David) Lee during the 2018 fiscal year.2021. The options previously granted to our Named Executive Officers vest over periods ranging from one to three years and are subject to early termination on the occurrence of certain events related to termination of employment. In addition, the full vesting of options is accelerated if there is a change in control of the Company.
Options Awards
| Name | Number of Securities Underlying Unexercised Options (#) | Option Exercise Price ($) | Option Expiration Date | Number of Shares that have not Vested (#) | Market Value of Shares that have not Vested ($) | |||||||||||
| OC Kim | – | – | – | – | – | |||||||||||
| Yun J. (David) Lee | 100,000 (1) | $1.34 | 06/15/2022 | – | – | |||||||||||
| 100,000 (2) | $0.45 | 06/15/2022 | – | – | ||||||||||||
________________________
| Name | Number of Securities Underlying Unexercised Options (#) | Option Exercise Price ($) | Option Expiration Date | Number of Shares that have not Vested (#) | Market Value of Shares that have not Vested ($) | |||||||||||
| Yun J. (David) Lee | 100,000 (1) | $1.34 | 06/15/2022 | – | – | |||||||||||
| 75,000 (2) | $0.45 | 06/15/2022 | – | – | ||||||||||||
| 100,000 (3) | $5.40 | 07/13/2025 | 66,667 | $611,336 | ||||||||||||
| (1) | The option vests and is exercisable in full on the first anniversary of the date of the grant and has a ten-year term. |
| (2) | The option vests and is exercisable over two years as follows: |
| i. | 50% of the shares underlying the option vest on the first anniversary of the date of the grant. | |
| ii. | 25% of the shares underlying the option vest eighteen months following the date of the grant.
| |
| ii. | 25% of the shares underlying the option vest on the second anniversary of the date of the grant. |
The option originally had a five-year term and an expiration date of June 11, 2014. On June 10, 2014, the option was modified to extend the term an additional five years to June 11, 2019. On June 11, 2019, the option was again modified to extend the term an additional three years to June 15, 2022.
| (3) | The option |
| i. | 33.3% of the shares underlying the option vest on the first anniversary of the date of | |
| ii. | 33.3% of the shares underlying the option vest on the second anniversary of the date of the grant. |
| 33.3% of the shares underlying the option vest on the third anniversary of the date of the grant. |
Director Compensation
Our directors are reimbursed for reasonable out-of-pocket expenses incurred in attending meetings of the Board of Directors. Employee directors do not receive any cash compensation for servicesservice as directors and havedo not receivedreceive any equity compensation designated for such services. Members of the Board of Directors who are not employees may receive stock option grants as consideration for their board service from time to time, although there is no established policy for such stock option grants.
Fiscal 20192021 Director Compensation
| Name | Fee Earned or Paid in Cash ($)(1) | Option Awards ($) | All Other Compensation ($) | Total ($) | Fee Earned or Paid in Cash ($)(1) | Option Awards ($) | All Other Compensation ($) | Total ($) | |||||||
| Gary Nelson | 10,000 | - | - | 10,000 | 14,500 | – | – | 14,500 | |||||||
| Joon Won Jyoung | - | - | |||||||||||||
| Johnathan Chee | 10,000 | - | - | 10,000 | 14,500 | – | – | 14,500 | |||||||
| Benjamin Chung | 10,000 | - | - | 10,000 | |||||||||||
| Heidy Chow | 14,500 | – | – | 14,500 | |||||||||||
| Kristina Kim (2) | 7,500 | – | – | 7,500 | |||||||||||
_________________________
| 18 |
| (1) | Directors are compensated at a |
| (2) | On January There were no outstanding equity awards held by any of the non-officer directors as of June 30, 2021. |
There were no outstanding equity awards held by any of the non-officer directors as of June 30, 2019.
EMPLOYMENT CONTRACTS
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, 2021.2023.
COMPENSATION DISCUSSION AND ANALYSIS
GENERAL PHILOSOPHY- We compensate our executive officers through a mix of base salary, incentive compensation and stock options. Our compensation policies are designed to be competitive with comparable employers and to align management’s incentives with both near-term and long-term interests of our stockholders. We use informal methods of benchmarking our executive compensation, based on the experience of our directors or, in some cases, studies of industry standards. Our compensation is negotiated on a case by case basis, with attention being given to the amount of compensation necessary to make a competitive offer and the relative compensation among our executive officers.
BASE SALARIES - We want to provide our senior management with a level of cash compensation in the form of base salary that facilitates an appropriate lifestyle given their professional status and accomplishments.
INCENTIVE COMPENSATION - Our practice is to award cash bonuses based upon performance objectives set by the Board of Directors. We maintain a bonus plan which provides our executive officers the ability to earn cash bonuses based on the achievement of performance targets. The performance targets are set by the Board of Directors, and our executive officers are eligible to receive bonuses on a quarterly basis. The actual amount of incentive compensation paid to our executive officers is in the sole discretion of the Board of Directors.
SEVERANCE BENEFITS - We are generally an at will employer and have no employment agreements with severance benefits; however, we have entered into Change of Control Agreements with our executive officers, and one other employee that provide them with lump sum payments in the event of a change in control of the Company.
RETIREMENT PLANS - We do not maintain any retirement plans.
| 19 |
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table sets forth certain information regarding the beneficial ownership of our Common Stock as of September 30, 201928, 2021, by each director and executive officer of the Company, each person known to us to be the beneficial owner of more than 5% of the outstanding Common Stock, and all directors and executive officers of the Company as a group. Except as otherwise indicated below, each person has sole voting and investment power with respect to the shares owned, subject to applicable community property laws.
| Shares Beneficially Owned | Shares Beneficially Owned | Shares Beneficially Owned | ||||||||||||||
| Name and Address | Number | Percent | Number | Percent | ||||||||||||
| Joon Won Jyoung 9707 Waples Street, Suite 150, San Diego, CA 92121 | 1,869,012 | 17.7% | 1,004,948 | 8.7% | ||||||||||||
| OC Kim 9707 Waples Street, Suite 150, San Diego, CA 92121 | 1,596,695 | 15.1% | 1,096,695 | 9.5% | ||||||||||||
| Gary Nelson 9707 Waples Street, Suite 150, San Diego, CA 92121 | 391,825 | 3.7% | 314,008 | 2.7% | ||||||||||||
| Yun J. (David) Lee 9707 Waples Street, Suite 150, San Diego, CA 92121 | 25,000 | 0.2% | 10,000 | 0.0% | ||||||||||||
| Johnathan Chee 9707 Waples Street, Suite 150, San Diego, CA 92121 | 13,500 | 0.1% |
| 13,500 | 0.0% |
| ||||||||||
Paul Packer | 1,041,642 | (1) | 9.9% |
| 848,259 | (1) | 7.3% |
| ||||||||
| - | ||||||||||||||||
Kennedy Capital Management, Inc. 10829 Olive Blvd., St. Louis, MO 63141 | 661,185 | (2) | 5.7% |
| ||||||||||||
Kennedy Capital Management, Inc. 10829 Olive Blvd., St. Louis, MO 63141 | 1,047,449 | (2) | 9.9% |
| ||||||||||||
AIGH Investment Partners, L.L.C. 6006 Berkley Avenue, Baltimore, MD21209 | 780,000 | (3) | 6.8% | |||||||||||||
| All directors and executive officers as a group | 3,896,032 | 36.9% | 3,362,229 | 28.8% | ||||||||||||
| (1) | Based solely on a Schedule 13G dated February |
| (2) | Based solely on a Schedule 13G dated |
(3) | Based solely on a Schedule 13G dated January 12, 2021, which indicates that AIGH Capital Management, L.L.C. may be deemed to beneficially own 780,000 shares. |
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
None.
| 20 |
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The aggregate fees billed for the most recently completed fiscal period for the audit of our annual financial statements and services normally provided by the independent registered public accounting firm for this fiscal period were as follows:
| FY 2019 | FY 2018 | FY 2021 | FY 2020 | |||||||||||||
| Audit Fees | $ | 68,845 | $ | 65,675 | $ | 69,125 | $ | 68,600 | ||||||||
| Total Fees | $ | 68,845 | $ | 65,675 | $ | 69,125 | $ | 68,600 | ||||||||
In the above table, "audit fees" are fees billed by our external auditor for services provided in auditing our company's annual financial statements for the subject year. The fees set forth on the foregoing table relate to the audit as of and for the years ended June 30, 20192021, and 2018,2020, which was performed by Benjamin & Ko and Haskell & White LLP., respectively. All of the services described above were approved in advance by the Board of Directors or the Company's Audit Committee.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
| (a) | Index to financial statements | ||
| (b) | Exhibits | ||
The following Exhibits are files as part of, or incorporated by reference into, this Report on Form 10-K:
| 101.INS | XBRL Instance Document | |
| 101.SCH | XBRL Schema Document | |
| 101.CAL | XBRL Calculation Linkbase Document | |
| 101.DEF | XBRL Definition Linkbase Document | |
| 101.LAB | XBRL Label Linkbase Document | |
| 101.PRE | XBRL Presentation Linkbase Document |
____________________________
(1) Incorporated by reference from Report on Form 10-QSB for the quarterly period ended March 31, 2008, filed on May 14, 2008.
(2) Incorporated by reference from Annual Report on Form 10-KSB10-K for the year ended June 30, 2008, filed on September 26,26. 2008.
(3) Incorporated by reference from Annual Report on Form 10-K for the year ended June 30, 2009, filed on October 13, 2009.
(4) Incorporated by reference from Annual Report on Form 10-K for the year ended June 30, 2011, filed on September 28, 2011.
(5) Incorporated by reference from Quarterly Report on Form 10-Q for the quarter ended September 30, 2015, filed on November 16, 2015.
(6) Incorporated by reference from Annual Report on Form 10-K for the year ended June 30, 2020, filed on September 17, 2020.
(7) Incorporated by reference from Report on Form 10-K/A for the year ended June 30, 2020, filed on September 18, 2020.
(c) Supplementary Information
None.
Not applicable.
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 | |||
| Dated: September | |||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| Signature | Title | Date | ||
| Principal Executive Officer | ||||
| /s/ OC KIM | President and a Director | September | ||
| Principal Financial Officer | ||||
| /s/ | Acting Chief Financial Officer | September | ||
| /s/ GARY NELSON | Chairman of the Board of Directors | September | ||
| 28, 2021 | ||||
| /s/ JOHNATHAN CHEE | Director | September | ||
| Johnathan Chee | ||||
| /s/ | Director | September | ||
| Heidy Chow | ||||
| /s/ KRISTINA KIM | Director | September 28, 2021 | ||
| Kristina Kim |
FRANKLIN WIRELESS CORP.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 20192021, and 20182020
| F-1 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of Franklin Wireless Corp.
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheet of Franklin Wireless Corp. (the “Company”) as of June 30, 2021, and the related consolidated statements of income and comprehensive income, shareholders’ equity, and cash flows for the year ended June 30, 2021, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of June 30, 2021, and the results of its operations and its cash flows for the year ended June 30, 2021, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of June 30, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated, September 28, 2021, expressed an unqualified opinion.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that is material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which it relates.
| F-2 |
| Description of the Matter | As described in Note 2 to the consolidated financial statements, the Company’s contracts with customers sometimes contain multiple performance obligations, which are accounted for separately if they are distinct. In such cases, the transaction price is then allocated to the distinct performance obligations on a relative standalone selling price basis, and revenue is recognized when control of the distinct performance obligation is transferred. Auditing the Company’s revenue recognition was complex, including the identification and determination of distinct performance obligations and the timing of revenue recognition. For example, there were non-standard terms and conditions that required judgment to determine the distinct performance obligations and the impact on the timing of revenue recognition. | |
| How We Addressed the Matter in Our Audit | We obtained an understanding, evaluated the design, and tested the operating effectiveness of the Company’s process and controls to identify and determine the distinct performance obligations and the timing of revenue recognition. To test the identification and determination of the distinct performance obligations and the timing of revenue recognition, our audit procedures included, among others, reading the executed contract or purchase order to understand the contract, identifying the performance obligation(s), determining the distinct performance obligations, and evaluating the timing of revenue recognition for a sample of individual sales transactions. We evaluated the accuracy of the Company’s contract summary documentation, specifically related to the identification and determination of distinct performance obligations and the timing of revenue recognition. We further evaluated appropriateness of revenue recognition through year-on-year analytics and reasonableness assessment of gross margin analysis. |
/s/ Benjamin & Ko
Santa Ana, CA
September 28, 2021
We have served as the Company’s auditor since 2020.
| F-3 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of Franklin Wireless Corp.
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Franklin Wireless Corp. (the “Company”) as of June 30, 2021, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of June 30, 2021, based on criteria established in Internal Control—Integrated Framework (2013) issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets as of June 30, 2021 and the related consolidated statements of income and comprehensive income, shareholders’ equity, and cash flows of the Company for the year ended June 30, 2021, and our report dated September 28, 2021, expressed an unqualified opinion.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Report on the audit of the Consolidated Financial Statements. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Benjamin & Ko
Santa Ana, CA
September 28, 2021
We have served as the Company’s auditor since 2020.
| F-4 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Franklin Wireless Corp.
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Franklin Wireless Corp. (the “Company”) as of June 30, 20192020 and 2018,2019, and the related consolidated statements of comprehensive income (loss), stockholders’ equity, and cash flows for each of the two years thenin the period ended June 30, 2020, and the related notes (collectively, the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company as of June 30, 20192020 and 2018,2019, and the consolidated results of its operations and its cash flows for each of the two years thenin the period ended June 30, 2020, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ HASKELL & WHITE LLP
We have served as the Company’s auditor since 2013.
Irvine, California
September 30, 201917, 2020
FRANKLIN WIRELESS CORP.
| As of June 30, | As of June 30, | |||||||||||||||
| 2019 | 2018 | 2021 | 2020 | |||||||||||||
| ASSETS | ||||||||||||||||
| Current assets: | ||||||||||||||||
| Cash and cash equivalents | $ | 6,447,505 | $ | 11,975,944 | $ | 45,796,006 | $ | 28,161,644 | ||||||||
| Certificates of deposit account | 5,380,226 | – | 5,386,034 | 5,381,918 | ||||||||||||
| Accounts receivable | 4,138,469 | 7,907,117 | 2,542,429 | 15,973,537 | ||||||||||||
| Other receivables, net | 40,807 | 125,144 | 50,040 | 61,090 | ||||||||||||
| Inventories, net | 1,052,740 | 1,615,332 | 975,519 | 11,783,403 | ||||||||||||
| Prepaid expenses and other current assets | 28,042 | 19,034 | 44,984 | 21,588 | ||||||||||||
| Prepaid income taxes | – | 28,240 | ||||||||||||||
| Advance payments to vendors | 51,340 | 78,696 | 40,630 | 27,838 | ||||||||||||
| Total current assets | 17,139,129 | 21,749,507 | 54,835,642 | 61,411,018 | ||||||||||||
| Property and equipment, net | 131,879 | 124,072 | 151,610 | 220,889 | ||||||||||||
| Intangible assets, net | 1,109,911 | 996,708 | 1,246,750 | 1,125,152 | ||||||||||||
| Deferred tax assets, non-current | 2,282,975 | 1,853,429 | 387,548 | 938,188 | ||||||||||||
| Goodwill | 273,285 | 273,285 | 273,285 | 273,285 | ||||||||||||
| Right of use assets | 753,263 | 1,139,670 | ||||||||||||||
| Other assets | 258,097 | 139,637 | 140,539 | 283,369 | ||||||||||||
| TOTAL ASSETS | $ | 21,195,276 | $ | 25,136,638 | $ | 57,788,637 | $ | 65,391,571 | ||||||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||||||||||
| Current liabilities: | ||||||||||||||||
| Accounts payable | $ | 5,672,514 | $ | 7,609,585 | $ | 9,718,989 | $ | 42,083,255 | ||||||||
| Income tax payable | 654 | 3,750 | 333,503 | 34,713 | ||||||||||||
| Advance payments from customers | – | 228,598 | ||||||||||||||
| Accrued liabilities | 247,658 | 259,348 | 785,525 | 466,021 | ||||||||||||
| Lease liabilities, current | 317,519 | 400,508 | ||||||||||||||
| Total current liabilities | 5,920,826 | 8,101,281 | 11,155,536 | 42,984,497 | ||||||||||||
| Lease liabilities, non-current | 467,937 | 784,233 | ||||||||||||||
| Notes payable, payroll protection plan loan | – | 487,300 | ||||||||||||||
| Total liabilities | 5,920,826 | 8,101,281 | 11,623,473 | 44,256,030 | ||||||||||||
| Commitments and contingencies (Note 8) | ||||||||||||||||
| 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 June 30, 2019 and 2018 | – | – | ||||||||||||||
| Common stock, par value $0.001 per share, authorized 50,000,000 shares; 10,570,203 shares issued and outstanding as of June 30, 2019 and 2018, respectively | 13,972 | 13,972 | ||||||||||||||
| Preferred stock, par value $0.001 per share, authorized 10,000,000 shares; No preferred stock issued and outstanding as of June 30, 2021, and 2020 | – | – | ||||||||||||||
| Common stock, par value $0.001 per share, authorized 50,000,000 shares; 11,590,281 and 10,605,912 shares issued and outstanding as of June 30, 2021, and 2020, respectively | 14,069 | 14,007 | ||||||||||||||
| Additional paid-in capital | 7,442,272 | 7,442,272 | 12,972,234 | 7,475,365 | ||||||||||||
| Retained earnings | 12,477,441 | 13,753,565 | 35,727,094 | 18,028,059 | ||||||||||||
| Treasury stock, 3,472,286 shares as of June 30, 2019 and 2018 | (4,513,479 | ) | (4,513,479 | ) | ||||||||||||
| Treasury stock, 2,549,208 and 3,472,286 shares as of June 30, 2021, and 2020, respectively | (3,554,893 | ) | (4,513,479 | ) | ||||||||||||
| Accumulated other comprehensive loss | (634,802 | ) | (581,983 | ) | (472,502 | ) | (650,426 | ) | ||||||||
| Total Parent Company stockholders’ equity | 14,785,404 | 16,114,347 | 44,686,002 | 20,353,526 | ||||||||||||
| Non-controlling interests | 489,046 | 921,010 | 1,479,162 | 782,015 | ||||||||||||
| Total stockholders’ equity | 15,274,450 | 17,035,357 | 46,165,164 | 21,135,541 | ||||||||||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 21,195,276 | $ | 25,136,638 | $ | 57,788,637 | $ | 65,391,571 | ||||||||
See accompanying notes to consolidated financial statements.
FRANKLIN WIRELESS CORP.
Consolidated Statements of Comprehensive Income
| Fiscal Years Ended June 30, | ||||||||
| 2019 | 2018 | |||||||
| Net sales | $ | 36,468,900 | $ | 30,065,833 | ||||
| Cost of goods sold | 30,729,411 | 24,874,119 | ||||||
| Gross profit | 5,739,489 | 5,191,714 | ||||||
| Operating expenses: | ||||||||
| Selling, general and administrative | 4,891,365 | 4,511,568 | ||||||
| Research and development | 2,955,581 | 3,372,016 | ||||||
| Total operating expenses | 7,846,946 | 7,883,584 | ||||||
| Loss from operations | (2,107,457 | ) | (2,691,870 | ) | ||||
| Other income, net: | ||||||||
| Interest income | 138,462 | 10,007 | ||||||
| Income from governmental subsidy | 64,201 | 330,856 | ||||||
| Other income, net | 2,291 | (8,541 | ) | |||||
| Total other income, net | 204,954 | 332,322 | ||||||
| Loss before provision (benefit) for income taxes | (1,902,503 | ) | (2,359,548 | ) | ||||
| Income tax benefit | (428,745 | ) | (186,973 | ) | ||||
| Net loss | (1,473,758 | ) | (2,172,575 | ) | ||||
| Non-controlling interests in net loss of subsidiary at 48.2% | 55,564 | 80,118 | ||||||
| Non-controlling interests in net loss of subsidiary at 35.8% | 142,070 | – | ||||||
| Net loss attributable to Parent Company | $ | (1,276,124 | ) | $ | (2,092,457 | ) | ||
| Basic earnings (loss) per share attributable to Parent Company stockholders | $ | (0.12 | ) | $ | (0.20 | ) | ||
| Diluted earnings (loss) per share attributable to Parent Company stockholders | $ | (0.12 | ) | $ | (0.20 | ) | ||
| Weighted average common shares outstanding - basic | 10,570,203 | 10,538,610 | ||||||
| Weighted average common shares outstanding - diluted | 10,570,203 | 10,538,610 | ||||||
| Comprehensive loss | ||||||||
| Net loss | $ | (1,473,758 | ) | $ | (2,172,575 | ) | ||
| Translation adjustments | (52,819 | ) | 31,822 | |||||
| Comprehensive loss | (1,526,577 | ) | (2,140,753 | ) | ||||
| Comprehensive loss attributable to non-controlling interest | 197,634 | 80,118 | ||||||
| Comprehensive loss attributable to controlling interest | $ | (1,328,943 | ) | $ | (2,060,635 | ) | ||
| Fiscal Years Ended June 30, | ||||||||
| 2021 | 2020 | |||||||
| Net sales | $ | 184,115,345 | $ | 75,072,298 | ||||
| Cost of goods sold | 151,651,324 | 60,547,813 | ||||||
| Gross profit | 32,464,021 | 14,524,485 | ||||||
| Operating expenses: | ||||||||
| Selling, general and administrative | 5,077,848 | 3,699,859 | ||||||
| Research and development | 4,567,863 | 3,746,502 | ||||||
| Total operating expenses | 9,645,711 | 7,446,361 | ||||||
| Income from operations | 22,818,310 | 7,078,124 | ||||||
| Other income, net: | ||||||||
| Interest income | 8,789 | 159,749 | ||||||
| Income from governmental subsidy | 147,166 | 16,282 | ||||||
| Gain from the forgiveness of payroll protection plan loan | 487,300 | – | ||||||
| Other income (expense), net | (26,088 | ) | 44,733 | |||||
| Total other income, net | 617,167 | 220,764 | ||||||
| Income before provision for income taxes | 23,435,477 | 7,298,888 | ||||||
| Income tax provision | 5,039,295 | 1,380,301 | ||||||
| Net income | 18,396,182 | 5,918,587 | ||||||
| Less: non-controlling interests in net income of subsidiary at 35.8% | – | 189,105 | ||||||
| Less non-controlling interests in net income of subsidiary at 33.7% | 697,147 | 178,864 | ||||||
| Net income attributable to Parent Company | $ | 17,699,035 | $ | 5,550,618 | ||||
| Basic earnings per share attributable to Parent Company stockholders | $ | 1.56 | $ | 0.52 | ||||
| Diluted earnings per share attributable to Parent Company stockholders | $ | 1.53 | $ | 0.52 | ||||
| Weighted average common shares outstanding - basic | 11,350,946 | 10,581,499 | ||||||
| Weighted average common shares outstanding - diluted | 11,592,901 | 10,715,979 | ||||||
| Comprehensive income | ||||||||
| Net income | $ | 18,396,182 | $ | 5,918,587 | ||||
| Translation adjustments | 177,924 | (15,624 | ) | |||||
| Comprehensive income | 18,574,106 | 5,902,963 | ||||||
| Less: comprehensive income attributable to non-controlling interest | 697,147 | 367,969 | ||||||
| Comprehensive income attributable to controlling interest | $ | 17,876,959 | $ | 5,534,994 | ||||
See accompanying notes to consolidated financial statements.
FRANKLIN WIRELESS CORP.
Consolidated Statements of Stockholders' Equity
| Common Stock | Additional Paid-in | Retained | Treasury | Accumulated Other Comprehensive Income | Non-controlling | Total Stockholders | ||||||||||||||||||||||||||
| Shares | Amount | Capital | Earnings | Stock | (Loss) | Interest | Equity | |||||||||||||||||||||||||
| Balance - June 30, 2017 | 10,520,203 | $ | 13,922 | $ | 7,375,322 | $ | 15,846,022 | $ | (4,513,479 | ) | $ | (613,805 | ) | $ | 1,001,128 | $ | 19,109,110 | |||||||||||||||
| Net loss attributable to Parent Company | – | – | – | (2,092,457 | ) | – | – | – | (2,092,457 | ) | ||||||||||||||||||||||
| Foreign exchange translation | – | – | – | – | – | 31,822 | – | 31,822 | ||||||||||||||||||||||||
| Comprehensive income attributable to non-controlling interest | – | – | – | – | – | – | (80,118 | ) | (80,118 | ) | ||||||||||||||||||||||
| Issuance of stock related to stock options exercised | 50,000 | 50 | 66,950 | – | – | – | – | 67,000 | ||||||||||||||||||||||||
| 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 | – | – | – | (1,276,124 | ) | – | – | – | (1,276,124 | ) | ||||||||||||||||||||||
| Foreign exchange translation | – | – | – | – | – | (52,819 | ) | – | (52,819 | ) | ||||||||||||||||||||||
| Comprehensive loss attributable to non-controlling interest | – | – | – | – | – | – | (197,634 | ) | (197,634 | ) | ||||||||||||||||||||||
| Purchase of shares of a subsidiary | – | – | – | – | – | – | (234,330 | ) | (234,330 | ) | ||||||||||||||||||||||
| 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 | |||||||||||||||
| Common Stock | Additional Paid-in | Retained | Treasury | Accumulated Other Comprehensive Income | Non-controlling | Total Stockholders | ||||||||||||||||||||||||||
| Shares | Amount | Capital | Earnings | Stock | (Loss) | Interest | Equity | |||||||||||||||||||||||||
| Balance - June 30, 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 | – | – | – | 5,550,618 | – | – | – | 5,550,618 | ||||||||||||||||||||||||
| Foreign exchange translation | – | – | – | – | – | (15,624 | ) | – | (15,624 | ) | ||||||||||||||||||||||
| Issuance of stock related to stock option exercised | 35,709 | 35 | 33,093 | – | – | – | – | 33,128 | ||||||||||||||||||||||||
| Comprehensive income attributable to non-controlling interest | – | – | – | – | – | – | 367,969 | 367,969 | ||||||||||||||||||||||||
| Purchase of shares of a subsidiary | – | – | – | – | – | – | (75,000 | ) | (75,000 | ) | ||||||||||||||||||||||
| Balance - June 30, 2020 | 10,605,912 | $ | 14,007 | $ | 7,475,365 | $ | 18,028,059 | $ | (4,513,479 | ) | $ | (650,426 | ) | $ | 782,015 | $ | 21,135,541 | |||||||||||||||
| Net income attributable to Parent Company | – | – | – | 17,699,035 | – | – | – | 17,699,035 | ||||||||||||||||||||||||
| Foreign exchange translation | – | – | – | – | – | 177,924 | – | 177,924 | ||||||||||||||||||||||||
| Issuance of stock related to stock option exercised | 61,291 | 62 | 74,689 | – | – | – | – | 74,751 | ||||||||||||||||||||||||
| Comprehensive income attributable to non-controlling interest | – | – | – | – | – | – | 697,147 | 697,147 | ||||||||||||||||||||||||
| Sales of treasury stock | 923,078 | – | 5,041,422 | – | 958,586 | – | – | 6,000,008 | ||||||||||||||||||||||||
| Stock based compensation | – | – | 380,758 | – | – | – | – | 380,758 | ||||||||||||||||||||||||
| Balance - June 30, 2021 | 11,590,281 | $ | 14,069 | $ | 12,972,234 | $ | 35,727,094 | $ | (3,554,893 | ) | $ | (472,502 | ) | $ | 1,479,162 | $ | 46,165,164 | |||||||||||||||
See accompanying notes to consolidated financial statements.
FRANKLIN WIRELESS CORP.
Consolidated Statements of Cash Flows
| Fiscal Years Ended June 30, | Fiscal Years Ended June 30, | |||||||||||||||
| 2019 | 2018 | 2021 | 2020 | |||||||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||||||||||
| Net loss | $ | (1,473,758 | ) | $ | (2,172,575 | ) | ||||||||||
| Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | ||||||||||||||||
| CASH FLOW FROM OPERATING ACTIVITIES: | ||||||||||||||||
| Net income | $ | 18,396,182 | $ | 5,918,587 | ||||||||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||||||
| Depreciation | 92,961 | 119,773 | 90,322 | 92,736 | ||||||||||||
| Amortization of intangible assets | 422,183 | 488,049 | 435,571 | 482,792 | ||||||||||||
| Reserve for obsolete inventory | 257,779 | 150,000 | ||||||||||||||
| Deferred tax | (429,546 | ) | (191,523 | ) | ||||||||||||
| Forgiveness of accounts payable | – | (2,382 | ) | |||||||||||||
| Stock based compensation | 380,758 | – | ||||||||||||||
| Bad debt expense | 338,185 | – | ||||||||||||||
| Forgiveness of payroll protection plan loan | (487,300 | ) | – | |||||||||||||
| Disposal of intangible assets | 140,192 | 38,498 | ||||||||||||||
| Amortization of right of use assets | 386,407 | 361,533 | ||||||||||||||
| Deferred tax (benefit) | 550,640 | 1,344,787 | ||||||||||||||
| Increase (decrease) in cash due to change in: | ||||||||||||||||
| Accounts receivable | 3,852,985 | 3,039,951 | 13,103,973 | (11,855,351 | ) | |||||||||||
| Inventories | 304,813 | 1,613,733 | 10,807,884 | (10,730,663 | ) | |||||||||||
| Prepaid expenses and other current assets | (9,008 | ) | 101 | (23,396 | ) | 6,454 | ||||||||||
| Prepaid income taxes | 28,240 | – | ||||||||||||||
| Advance payments to vendors | 27,356 | 48,404 | (12,792 | ) | 23,502 | |||||||||||
| Other assets | (118,460 | ) | (2,985 | ) | 142,830 | (25,272 | ) | |||||||||
| Accounts payable | (1,937,071 | ) | (5,250,597 | ) | (32,364,266 | ) | 36,410,741 | |||||||||
| Income tax payable | (3,096 | ) | 3,750 | 298,790 | 34,059 | |||||||||||
| Advance payments from customers | (228,598 | ) | 176,601 | |||||||||||||
| Lease liabilities | (399,285 | ) | (316,462 | ) | ||||||||||||
| Accrued liabilities | (11,690 | ) | (28,994 | ) | 319,504 | 218,363 | ||||||||||
| Net cash provided by (used in) operating activities | 775,090 | (2,008,694 | ) | |||||||||||||
| Net cash provided by operating activities | 12,104,199 | 22,004,304 | ||||||||||||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||||||||||
| CASH FLOW FROM INVESTING ACTIVITIES: | ||||||||||||||||
| Purchases of short-term investments | (5,380,226 | ) | – | (4,116 | ) | (1,692 | ) | |||||||||
| Purchases of shares of a subsidiary | (234,330 | ) | – | – | (75,000 | ) | ||||||||||
| Purchases of property and equipment | (100,768 | ) | (23,903 | ) | (21,043 | ) | (181,746 | ) | ||||||||
| Payments for capitalized development costs | (465,352 | ) | (291,386 | ) | ||||||||||||
| Payments for capitalized product development costs | (694,909 | ) | (343,360 | ) | ||||||||||||
| Purchases of intangible assets | (70,034 | ) | (83,896 | ) | (2,452 | ) | (193,171 | ) | ||||||||
| Net cash used in investing activities | (6,250,710 | ) | (399,185 | ) | (722,520 | ) | (794,969 | ) | ||||||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||||||||||
| CASH FLOW FROM FINANCING ACTIVITIES: | ||||||||||||||||
| Proceeds of payroll protection plan loan | – | 487,300 | ||||||||||||||
| Sales of common stock sold from treasury stock | 6,000,008 | – | ||||||||||||||
| Cash received from exercise of stock options | – | 67,000 | 74,751 | 33,128 | ||||||||||||
| Net cash provided by financing activities | – | 67,000 | 6,074,759 | 520,428 | ||||||||||||
| Effect of foreign currency translation | (52,819 | ) | 31,822 | 177,924 | (15,624 | ) | ||||||||||
| Net decrease in cash and cash equivalents | (5,528,439 | ) | (2,309,057 | ) | ||||||||||||
| Net increase in cash and cash equivalents | 17,634,362 | 21,714,139 | ||||||||||||||
| Cash and cash equivalents, beginning of year | 11,975,944 | 14,285,001 | 28,161,644 | 6,447,505 | ||||||||||||
| Cash and cash equivalents, end of year | $ | 6,447,505 | $ | 11,975,944 | $ | 45,796,006 | $ | 28,161,644 | ||||||||
Supplemental disclosure of cash flow information: | ||||||||||||||||
| Cash paid during the periods for: | ||||||||||||||||
| Income taxes | $ | (801 | ) | $ | (800 | ) | $ | (4,124,485 | ) | $ | (800 | ) | ||||
| Non-cash investing and financing activities: | ||||||||||||||||
| Initial adoption of right to use assets | $ | – | $ | 1,501,203 | ||||||||||||
| Initial adoption of lease liabilities | $ | – | $ | 1,501,203 | ||||||||||||
See accompanying notes to consolidated financial statements.
FRANKLIN WIRELESS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BUSINESS OVERVIEW
We are a leading provider of intelligent wireless solutions including mobile hotspots, routers, trackers, and modems as well asother devices. Our designs integrate innovative hardware and software products that supportenabling 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 solveapplications based on 5G/4G 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.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 the United States to countries in SouthNorth America, the Caribbean Europe, the Middle East and Africa ("EMEA")South America, and Asia.
NOTE 2 - 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 64.2% (35.8%66.3% (33.7% is owned by non-controlling interests) as of June 30, 20192021, and 51.8% (48.2% is owned by non-controlling interests) as of2020. For the year ended June 30, 2018.2020, the increase in the majority voting interest in percentage from 64.2% to 66.3% was 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%. 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. The increase in the majority voting interest in percentage from 51.8% to 64.2% for the year ended June 30, 2019 was due to the purchase of an additional 246,663 shares of the subsidiary, at $0.95 per share, by the parent company from three shareholders of the subsidiary.
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 June 30, 20192021, or June 30, 2018.2020.
Non-controlling Interest in a Consolidated Subsidiary
As of June 30, 2019,2021, the non-controlling interest was $489,046,$1,479,162, which represents a $431,964 decrease$697,147 increase from $921,010$782,015 as of June 30, 2018.
2020. The decreaseincrease in the non-controlling interest of $431,964$697,147 was comprised of two components: (1) lossesfrom income in the subsidiary of $511,622$2,071,302 incurred for the year ended June 30, 2019 and (2) a reduction in the ownership percentage of the non-controlling interests due to the repurchase by the Company of 246,663 shares of the subsidiary for $234,330 ($0.95 per share) from three non-controlling shareholders. This decreased the non-controlling interests’ ownership percentage from 48.2% to 35.8%.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.
| F-10 |
We generate revenues from fourthree geographic areas, consisting of the United States,North America, the Caribbean and South America, 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:
| Fiscal Year Ended June 30, | Fiscal Year Ended June 30, | |||||||||||||||
| Net sales: | 2019 | 2018 | 2021 | 2020 | ||||||||||||
| United States | $ | 36,217,387 | $ | 29,235,011 | ||||||||||||
| North America | $ | 183,771,146 | $ | 74,839,778 | ||||||||||||
| Caribbean and South America | – | 238,970 | 17,500 | – | ||||||||||||
| Europe, the Middle East and Africa (“EMEA”) | 224,427 | 335,845 | ||||||||||||||
| Asia | 27,086 | 256,007 | 326,699 | 232,520 | ||||||||||||
| Totals | $ | 36,468,900 | $ | 30,065,833 | $ | 184,115,345 | $ | 75,072,298 | ||||||||
| Long-lived assets, net (property and equipment and intangible assets): | June 30, 2019 | June 30, 2018 | June 30, 2021 | June 30, 2020 | ||||||||||||
| United States | $ | 1,209,159 | $ | 1,073,640 | $ | 1,349,320 | $ | 1,302,353 | ||||||||
| Asia | 32,631 | 47,140 | 49,040 | 43,688 | ||||||||||||
| Totals | $ | 1,241,790 | $ | 1,120,780 | $ | 1,398,360 | $ | 1,346,041 | ||||||||
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 (see Note 3).
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.
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 June 30, 20192021, and June 30, 2018.2020.
Revenue Recognition
Through June 30, 2018, we recognized revenue in accordance with Accounting Standards Codification ("ASC") 605, “Revenue Recognition,” when persuasive evidence of an arrangement exists, the price is fixed or determinable, collection is reasonably assured, and delivery of products has occurred or services have been rendered. Accordingly, we recognized revenues from product sales upon shipment of the products to the customers or when the products are received by the customers in accordance with shipping or delivery terms. We provided a warranty for one year from the shipment or delivery date, which was covered by our vendors pursuant to purchase agreements. Any net warranty related expenditures made by us have historically not been material. Under our sales return policy, customers may generally return products that are under warranty for repair or replacement. 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, while prior period amounts have not been adjusted and continue to be reported in accordance with our historic accounting under Topic 605. 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 forfrom sales of products and services is derived from contracts with customers. The products and services promised incovered by 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 year ended June 30, 20192021, 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.
| F-11 |
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:
| June 30, 2019 | June 30, 2018 | |||||||
| Accounts Receivable | $ | 4,138,470 | $ | 7,907,117 | ||||
| June 30, 2021 | June 30, 2020 | |||||||
| Accounts Receivable | $ | 2,542,429 | $ | 15,973,537 | ||||
The balance of contract assets was immaterial as we did not have a significant amount of un-invoiced receivables in the periods ended June 30, 20192021, and June 30, 2018.2020.
Our contract liabilities are as follows:
| June 30, 2019 | June 30, 2018 | |||||||
| Advance payments from customers | $ | – | $ | 228,598 | ||||
| Undelivered products | 140,000 | 140,000 | ||||||
| Totals | $ | 140,000 | $ | 368,598 | ||||
| June 30, 2021 | June 30, 2020 | |||||||
| Undelivered products | $ | 140,000 | $ | 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 satisfied at a point in time. Revenue from products transferred to customers at a single point in time accounted for over 99% of net sales for the year ended June 30, 2019.2021. Revenue for non-recurring engineering projects is based on the percent completepercentage completion of a project and accounted for 1.0%under 1% of net sales for the year ended June 30, 2019. The majority2021. Most 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 tocan 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 June 30, 2019,2021, 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 expenseexpenses of approximately $360,000 and $405,000 associated with capitalized product development costs associated with complete technology.technology for the years ended June 30, 2021, and 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 shall be 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.
| F-12 |
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 2 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 June 30, 2019,2021, and June 30, 2018,2020, capitalized product development costs in progress were $465,352$602,388 and $100,000,$140,192, respectively, and these amounts are included in intangible assets in our consolidated balance sheets. During the year ended June 30, 2019,2021, we incurred $465,352$694,909 in capitalized product development costs and disposed a technology in progress in the amount of $140,192 as we identified it has the great unlikelihood of economic success based on its performance test results, 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 $2,955,581$4,567,863 and $3,372,016$3,746,502 for the years ended June 30, 20192021, and 2018, respectively.
Advertising and Promotion Costs
Costs associated with advertising and promotions are expensed as incurred. Advertising and promotion costs were $6,105 and $16,488 for the years ended June 30, 2019 and 2018,2020, 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 statementstatements of comprehensive income, were $1,140,229$723,617 and $814,926$642,930 for the years ended June 30, 20192021, and 2018,2020, 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 and short-term government bonds mutual 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 of certificates of deposit.
Inventories
Our inventories consist of finished goods and are stated at the lower of cost or market,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 our control. We may write down our inventory value for potential obsolescence and excess inventory. As of June 30, 2019,2021, and 2018,2020, we have recorded inventory reserves in the amount of $553,281$0 and $295,502,$399,437, respectively, 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:
| 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 arewere 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 during the years ended June 30, 20192021, and 2018.2020.
Intangible Assets
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 | ||||||||||
The definite lived intangible assets consisted of the following as of June 30, 2018:2021:
| Definite lived intangible assets: | Expected Life | Average Remaining life | Gross Intangible Assets | Accumulated Amortization | Net Intangible Assets | Expected Life | Average Remaining life | Gross Intangible Assets | Less Accumulated Amortization | Net Intangible Assets | ||||||||||||||||||||||
| Complete technology | 3 years | 3.0 years | 18,397 | – | 18,397 | 3 years | 0.5 years | 18,397 | 15,331 | 3,066 | ||||||||||||||||||||||
| Technology in progress | Not Applicable | – | 100,000 | – | 100,000 | Not Applicable | – | 602,388 | – | 602,388 | ||||||||||||||||||||||
| Software | 5 years | 2.7 years | 323,295 | 238,487 | 84,808 | 5 years | 3.0 years | 399,811 | 268,495 | 131,316 | ||||||||||||||||||||||
| Patents | 10 years | 7.0 years | 58,391 | 6,683 | 51,708 | 10 years | 3.9 years | 21,105 | 12,951 | 8,154 | ||||||||||||||||||||||
| Certifications & licenses | 3 years | 1.9 years | 3,250,061 | 2,508,266 | 741,795 | 3 years | 1.6 years | 1,070,770 | 568,944 | 501,826 | ||||||||||||||||||||||
| Total as of June 30, 2018 | $ | 3,750,144 | $ | 2,753,436 | $ | 996,708 | ||||||||||||||||||||||||||
| Total as of June 30, 2021 | $ | 2,112,471 | $ | 865,721 | $ | 1,246,750 | ||||||||||||||||||||||||||
The definite lived intangible assets consisted of the following as of June 30, 2020:
| Definite lived intangible assets: | Expected Life | Average Remaining life | Gross Intangible Assets | Less Accumulated Amortization | Net Intangible Assets | |||||||||||
| Complete technology | 3 years | 1.8 years | 18,397 | 7,666 | 10,731 | |||||||||||
| Technology in progress | Not Applicable | - | 140,192 | – | 140,192 | |||||||||||
| Software | 5 years | 2.9 years | 525,930 | 338,593 | 187,337 | |||||||||||
| Patents | 10 years | 7.0 years | 20,734 | 10,821 | 9,913 | |||||||||||
| Certifications & licenses | 3 years | 1.9 years | 4,078,310 | 3,301,331 | 776,979 | |||||||||||
| Total as of June 30, 2020 | $ | 4,783,563 | $ | 3,658,411 | $ | 1,125,152 | ||||||||||
Amortization expense recognized during the years ended June 30, 20192021, and 20182020 was $422,183$435,571 and $488,049,$482,792, respectively. For the year ended June 30, 2021, we disposed the fully amortized intangible assets in the amount of $3,228,261 and a technology in progress in the amount of $140,192 as we identified it has the great unlikelihood of economic success based on its performance test results. The amortization expenses of the definite lived intangible assets for the next five years and thereafter are as follows:
| FY2020 | FY2021 | FY2022 | FY2023 | FY2024 | Thereafter | |||||||||||||||||||
| Total | $ | 303,890 | $ | 114,452 | $ | 47,465 | $ | 26,827 | $ | 16,745 | $ | 20,786 | ||||||||||||
| FY2022 | FY2023 | FY2024 | FY2025 | FY2026 | Thereafter | |||||||||||||||||||
| Total | $ | 528,655 | $ | 341,133 | $ | 198,944 | $ | 98,521 | $ | 25,442 | $ | 54,055 | ||||||||||||
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.
We are not aware of any events or changes in circumstances during the year ended June 30, 201931, 2021, 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 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.
| F-15 |
Earnings per Share Attributable to Common Stockholders
Basic 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 of Credit Risk
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 year ended June 30, 2019,2021, net sales to our two largest customers represented 57%63% and 24%30% of our consolidated net sales, respectively, and 56%0% and 26%84% of our accounts receivable balance as of June 30, 2019.2021. For the year ended June 30, 2018,2020, net sales to our threetwo largest customers represented 54%, 21%,46% and 11%36% of our consolidated net sales, respectively, and 48%, 36%,21% and 9%72% of our accounts receivable balance as of June 30, 2018.2020. No other customer accounted for more than ten percent of total net sales for the years ended June 30, 2019 and 2018. For the year ended June 30, 2019, sales to Verizon and Sprint each comprised more the 10% of our net sales. For the year ended June 30, 2018, sales to Verizon, Sprint, and Anydata Corp. each comprised more the 10% of our net sales.
For the year ended June 30, 2019,2021, we purchased the majority of our wireless data products from two manufacturing companies located in Asia. If this manufacturing companythey 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 our revenue. For the year ended June 30, 2019,2021, we purchased wireless data products from these suppliers in the amount of $28,858,171,$138,516,044, or 97%99% of total purchases, and had related accounts payable of $4,401,501$9,096,451 as of June 30, 2019.2021. For the year ended June 30, 2018,2020, we purchased wireless data products from this supplierthese suppliers in the amount of $19,507,215,$67,179,379, or 87%94% of total purchases, and had related accounts payable of $5,834,383$41,181,840, as of June 30, 2018.2020.
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.
Recently Issued Accounting Pronouncements
In March 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases (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. ASU 2016-02 will be effective for us beginning in our first quarter of fiscal 2020, and early adoption is permitted. We are currently evaluating the impact of adopting the new standard on our consolidated financial statements and the timing and presentation of our adoption. However, we do not expect that the adoption of this update will materially impact the Company’s consolidated financial statements.
In February 2018, the FASB issued Accounting Standards Update (ASU) 2018-02, Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. Under the amendments in ASU 2018-02, an entity may elect to reclassify the income tax effects of the TCJATax Cuts and Jobs Act of 2017 on items within AOCIaccumulated other comprehensive income to retained earnings. We do not expect that the adoption of this update will impact the Company’s consolidated financial statements.
NOTE 3 - FAIR VALUE MEASUREMENTS
Fair value accounting is applied for all financial assets and liabilities and non-financial assets and liabilities that are recognized or disclosed at fair value in the consolidated financial statements on a recurring basis (at least annually). Assets and liabilities recorded at fair value in the financial statements are categorized based upon the level of judgment associated with the inputs used to measure their fair value. Hierarchical levels, which are directly related to the amount of subjectivity, associated with the inputs to the valuation of these assets or liabilities are as follows:
| Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company can access at the measurement date. |
| Level 2 inputs are observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. |
| • |
| F-16 |
The carrying values of the Company’s financial instruments, including cash and cash equivalents, short-term investments, accounts receivable, and accounts payable and debt, are calculated based on their approximate their fair values due to the short period of time to maturity or repayment. We invest our excess cash into financial instruments which management believes are readily convertible into cash, such as money market funds and certificates of deposit.
NOTE 4 - PROPERTY AND EQUIPMENT
Property and equipment consisted of the following as of:
| June 30, 2019 | June 30, 2018 | June 30, 2021 | June 30, 2020 | |||||||||||||
| Machinery and facility | $ | 363,022 | $ | 306,335 | ||||||||||||
| Machinery and Commercial Equipment | $ | 67,044 | $ | 364,054 | ||||||||||||
| Office equipment | 396,222 | 385,913 | 291,191 | 420,941 | ||||||||||||
| Molds | 784,170 | 984,720 | 575,552 | 940,165 | ||||||||||||
| 1,543,414 | 1,676,968 | 933,787 | 1,725,160 | |||||||||||||
| Less accumulated depreciation | (1,411,535 | ) | (1,552,896 | ) | (782,177 | ) | (1,504,271 | ) | ||||||||
| Total | $ | 131,879 | $ | 124,072 | $ | 151,610 | $ | 220,889 | ||||||||
Depreciation expense associated with property and equipment was $92,961$90,322 and $119,773$92,736 for the fiscal years ended June 30, 20192021, and 2018,2020, respectively, and is included in selling, general, and administrative expenses on the consolidated statements of comprehensive income. Due to the disposal of molds in the amount of $234,321 with no remaining net value, the associated accumulated depreciation was decreased by the same amount forFor the year ended June 30, 2019.2021, we disposed the fully depreciated property ad equipment in the amount of $812,416.
NOTE 5 - ACCRUED LIABILITIES
Accrued liabilities consisted of the following as of:
| June 30, 2019 | June 30, 2018 | |||||||
| Accrued salaries, payroll deductions owed to government entities | $ | 44,752 | $ | 38,855 | ||||
| Accrued vacation | 56,335 | 54,506 | ||||||
| Accrued undelivered inventory | 140,000 | 140,000 | ||||||
| Taxes | 408 | 1,332 | ||||||
| Other accrued liabilities | 6,163 | 24,655 | ||||||
| Total | $ | 247,658 | $ | 259,348 | ||||
| June 30, 2021 | June 30, 2020 | |||||||
| Accrued payroll deductions owed to government entities | $ | 66,307 | $ | 39,380 | ||||
| Accrued salaries and bonuses | – | 129,000 | ||||||
| Accrued vacation | 73,900 | 58,467 | ||||||
| Accrued undelivered inventory | 140,000 | 140,000 | ||||||
| Accrued commission for service providers | 52,500 | 98,500 | ||||||
| Accrued commission to a customer | 451,898 | – | ||||||
| Other accrued liabilities | 920 | 674 | ||||||
| Total | $ | 785,525 | $ | 466,021 | ||||
NOTE 6 - INCOME TAXES
Income tax provision for the years ended June 30, 20192021, and 20182020 consists of the following:
| Year Ended June 30, | Year Ended June 30, | |||||||||||||||
| 2019 | 2018 | 2021 | 2020 | |||||||||||||
| Current income tax expense (benefit): | ||||||||||||||||
| Federal | $ | – | $ | 3,750 | $ | 4,217,883 | $ | 33,039 | ||||||||
| State | 801 | 800 | (525 | ) | 2,475 | |||||||||||
| Foreign | 256,636 | – | ||||||||||||||
| 801 | 4,550 | 4,473,994 | 35,514 | |||||||||||||
| Deferred income tax expense (benefit): | ||||||||||||||||
| Federal | (345,083 | ) | (27,460 | ) | 142,242 | 1,323,265 | ||||||||||
| State | – | – | 155,410 | (293,773 | ) | |||||||||||
| Foreign | (84,463 | ) | (164,063 | ) | 267,649 | 315,295 | ||||||||||
| (429,546 | ) | (191,523 | ) | 565,301 | 1,344,787 | |||||||||||
| Benefit for income taxes | $ | (428,745 | ) | $ | (186,973 | ) | ||||||||||
| Provision for income taxes | $ | 5,039,295 | $ | 1,380,301 | ||||||||||||
The provision (benefit)provisions for income taxes reconciles to the amount computed by applying the effective federal statutory income tax rate to the income before provision for income taxes as follows:
| Year Ended June 30, | ||||||||
| 2019 | 2018 | |||||||
| Federal tax benefit, at statutory rate of 21% for the year ended June 30, 2019 and 34% for the year ended June 30, 2018 | $ | (438,706 | ) | $ | (799,696 | ) | ||
| State tax, net of federal tax benefit | (50,881 | ) | (54,642 | ) | ||||
| Nondeductible expenses | 4,129 | 6,753 | ||||||
| R&D credits | (36,127 | ) | (36,733 | ) | ||||
| Foreign rate difference | 40,660 | (54,332 | ) | |||||
| Other | 666 | 34,878 | ||||||
| Rate reduction | 51,514 | 661,629 | ||||||
| Change in valuation allowance | – | 55,170 | ||||||
| Benefit for income taxes | $ | (428,745 | ) | $ | (186,973 | ) | ||
| F-17 |
| Year Ended June 30, | ||||||||
| 2021 | 2020 | |||||||
| Federal income tax, at statutory rate of 21% applied to earnings before income taxes and extraordinary items | $ | 4,929,611 | $ | 1,533,352 | ||||
| State tax, net of federal tax benefit | 125,237 | 128,406 | ) | |||||
| Nondeductible expenses | 22,688 | (45,345 | ) | |||||
| R&D credits | (56,950 | ) | (36,841 | ) | ||||
| Global intangible low-taxed income | 95,419 | 31,060 | ||||||
| Foreign rate difference | 39,146 | 74,256 | ||||||
| Other | (13,523 | ) | 53,943 | |||||
| Forgiveness of payroll protection plan loan | (102,333 | ) | – | |||||
| Change in valuation allowance | – | (358,530 | ) | |||||
| Provision (benefit) for income taxes | $ | 5,039,295 | $ | 1,380,301 | ||||
Deferred income taxes reflect the net effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of our deferred tax assets are as follows:
| June 30, 2019 | June 30, 2018 | |||||||
| Deferred tax asset: | ||||||||
| Net operating losses | $ | 1,767,365 | $ | 1,417,549 | ||||
| State tax | 169 | 169 | ||||||
| Intangibles | 22,678 | 44,200 | ||||||
| Tax credits | 666,380 | 589,206 | ||||||
| Inventory reserve | 165,160 | 76,663 | ||||||
| Other, net | 44,853 | 48,687 | ||||||
| Total deferred tax assets | 2,666,605 | 2,176,474 | ||||||
| Deferred tax liabilities: | ||||||||
| Fixed asset | (25,100 | ) | (17,123 | ) | ||||
| Total deferred tax liabilities | (25,100 | ) | (17,123 | ) | ||||
| Less valuation allowance | (358,530 | ) | (305,922 | ) | ||||
| Net deferred tax asset | $ | 2,282,975 | $ | 1,853,429 | ||||
| June 30, 2021 | June 30, 2020 | |||||||
| Deferred tax asset: | ||||||||
| Net operating losses | $ | 170,649 | $ | 507,402 | ||||
| State tax | – | 520 | ||||||
| Lease accounting | 7,035 | 10,078 | ||||||
| Intangibles | 84,831 | 38,154 | ||||||
| Tax credits | 133,451 | 346,091 | ||||||
| Inventory reserve | 30,591 | 103,450 | ||||||
| Other, net | 12,693 | 38,085 | ||||||
| Total deferred tax assets | 439,250 | 1,043,780 | ||||||
| Deferred tax liabilities: | ||||||||
| Deferred state taxes | (29,056 | ) | (61,692 | ) | ||||
| State tax | (110 | ) | – | |||||
| Fixed asset | (22,536 | ) | (43,900 | ) | ||||
| Total deferred tax liabilities | (51,702 | ) | (105,592 | ) | ||||
| Less valuation allowance | – | – | ||||||
| Net deferred tax asset | $ | 387,548 | $ | 938,188 | ||||
Deferred income tax assets and liabilities are recorded for differences between the financial statement and tax basis of the assets and liabilities that will result in taxable or deductible amounts in the future based on enacted laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. We have evaluated the available evidence supporting the realization of our gross deferred tax assets, including the amount and timing of forecasted future taxable income. Management determined it is more likely than not that the federal deferred tax assets will be fully realized, and no valuation allowance is necessary as of June 30, 2019. Management also determined that certain state deferred tax assets required a partial valuation allowance as of June 30, 2019.2021 or 2020.
As of June 30, 2019,2021, we have federal net operating loss carryforwards of approximately $5.6$0.8 million and no state net operating loss carryforwards. Under the Tax Cuts and Jobs Act (the “Act”), which was signed into law on December 22, 2017, the federal net operating loss recognized on or after January 1, 2018 will carry forward indefinitely. The federal net operating loss of $2.5$0.8 million, which recognized on or before December 31, 2017, will expire through 2035, and the federal net operating loss of $3.1 million recognized on or after January 1, 2018, which will carry forward indefinitely.indefinitely, is 0. The utilization of net operating loss carryforwards may be subject to limitations under provisions of the Internal Revenue Code Section 382 and similar state provisions.
We apply the provisions of ASC 740 related to accounting for uncertainu
| F-18 |
ncertain tax positions, which prescribes a recognition threshold and measurement process for recording in the financial statements uncertain tax positions taken or expected to be taken in a tax return. Under this provision, the impact of an uncertain income tax position on the income tax return must be recognized at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant taxing authority. Tax benefits of an uncertain tax position will not be recognized if it has less than a 50% likelihood of being sustained based on technical merits.
A reconciliation of the beginning and ending balance of unrecognized tax benefits, which have been considered in the Company's computation of its deferred tax assets, is as follows:
| Balance as of June 30, 2017 | $ | 221,145 | ||||||
| Balance as of June 30, 2019 | $ | 275,262 | ||||||
| Gross increase | 35,894 | 21,570 | ||||||
| Relief of ASC 740 reserve/adjustment | (14,852 | ) | ||||||
| Balance as of June 30, 2018 | 242,187 | |||||||
| Balance as of June 30, 2020 | 296,832 | |||||||
| Gross increase | 33,075 | 38,427 | ||||||
| Balance as of June 30, 2019 | $ | 275,262 | ||||||
| Balance as of June 30, 2021 | $ | 335,259 | ||||||
We do not anticipate any material change in the total amount of unrecognized tax benefits to occur within the next twelve months. ASC 740 requires us to accrue interest and penalties where there is an underpayment of taxes based on our best estimate of the amount ultimately to be paid. Our policy is to recognize interest accrued related to unrecognized tax benefits and penalties as income tax expense. We have not recorded any interest or penalties as the liability associated with the unrecognized tax benefits is immaterial. We are subject to taxation in the U.S., and various state and foreign jurisdictions.
The Tax Cuts and Jobs Act (the “Act”) was signed into law on December 22, 2017. The Act includes a provision to reduce federal corporate income tax rate to a flat 21% effective for a taxable year beginning on or after January 1, 2018. ASC 740 provides that deferred tax assets and liabilities be measured at the enacted tax rate expected to apply when the related temporary differences are to be realized or settled, and the related tax impact is recognized through continuing operation in the period in which tax legislation is enacted. Accordingly, the Company remeasures its deferred tax assets and liabilities as of June 30, 2018 and provides income tax provision of $661,629 through continuing operation section of the income statement.
The SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”), which provides guidance on accounting for the tax effects of the Tax Act. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Tax Act for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete but it is able to determine a reasonable estimate, it must record and provisional estimate in the financial statements. The Company has recognized the provisional tax impacts related to the Tax Act in its financial statements for the year ended June 30, 2018.
NOTE 7 - EARNINGS PER SHARE
We report earnings per share in accordance with ASC 260, “Earnings 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.options by using the treasury stock method that the proceeds we receive from an in-the-money option exercise are used towards repurchasing common shares in the market. For the yearyears ended June 30, 2019,2021, and 2020, we were in a net loss positionhave calculated the diluted effect of common stocks arising from 484,000 and have excluded 299,000251,291 stock options, from the calculation of diluted net loss per share because these securities are anti-dilutive.respectively.
The weighted average number of shares outstanding used to compute lossearnings per share is as follows:
| Year Ended June 30, | Year Ended June 30, | |||||||||||||||
| 2019 | 2018 | 2021 | 2020 | |||||||||||||
| Net loss attributable to Parent Company | $ | (1,276,124 | ) | $ | (2,092,457 | ) | ||||||||||
| Net income attributable to Parent Company | $ | 17,699,035 | $ | 5,550,618 | ||||||||||||
| Weighted-average shares of common stock outstanding: | ||||||||||||||||
| Basic | 10,570,203 | 10,538,610 | 11,350,946 | 10,581,499 | ||||||||||||
| Dilutive effect of common stock equivalents arising from stock options | – | – | 241,955 | 134,480 | ||||||||||||
| Diluted Outstanding shares | 10,570,203 | 10,538,610 | 11,592,901 | 10,715,979 | ||||||||||||
| Basic loss per share | $ | (0.12 | ) | $ | (0.20 | ) | ||||||||||
| Diluted loss per share | $ | (0.12 | ) | $ | (0.20 | ) | ||||||||||
| Basic earnings per share attributable to Parent Company stockholders | $ | 1.56 | $ | 0.52 | ||||||||||||
| Diluted earnings per share attributable to Parent Company stockholders | $ | 1.53 | $ | 0.52 | ||||||||||||
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,$25,754, 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 at a monthly rent of $25,752, 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.
| F-19 |
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 that expires on August 31, 2021. Beginning on June 12, 2015, FTI leasedand 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 expiresexpired on August 31, 2021.2021, and extended by an additional twelve months to August 31, 2022. We lease one corporate housing facility, located in Seoul, Korea, primarily for our employees who travel, under a non-cancelable operating lease that expiresexpired on September 4, 2020.2021, and extended by an additional twelve months to September 4, 2022.
Rent expense for the years ended June 30, 20192021, and 20182020 was $415,443$446,614 and $414,252,$435,683, respectively. Future minimum payments under operating leases are as follows:
| Payments Due by June 30, | Payments due by June 30, | |||||||||||||||||||||||||||||||||||||||
| 2020 | 2021 | 2022 | 2023 | 2024 | Total | 2022 | 2023 | 2024 | Total | |||||||||||||||||||||||||||||||
| Administrative office, San Diego, CA | $ | 313,243 | $ | 321,930 | $ | 321,930 | $ | 321,930 | $ | 160,965 | $ | 1,439,998 | $ | 321,930 | $ | 321,930 | $ | 160,965 | $ | 804,825 | ||||||||||||||||||||
| Administrative office, Korea | 128,400 | 128,400 | 21,400 | – | – | 278,200 | 20,849 | – | – | 20,849 | ||||||||||||||||||||||||||||||
| Corporate housing facility | 9,913 | 2,478 | – | – | – | 12,391 | ||||||||||||||||||||||||||||||||||
| Total Obligations | $ | 451,556 | $ | 452,808 | $ | 343,330 | $ | 321,930 | $ | 160,965 | $ | 1,730,589 | $ | 342,779 | $ | 321,930 | $ | 160,965 | $ | 825,674 | ||||||||||||||||||||
As of June 30, 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:
| Operating Leases | ||||
| Fiscal 2022 | $ | 342,779 | ||
| Fiscal 2023 | 321,930 | |||
| Fiscal 2024 | 160,965 | |||
| Total lease payments | 825,674 | |||
| Less imputed interest | (40,218 | ) | ||
| Total | $ | 785,456 |
Litigation
We are from time to time involved in certain legal proceedings and claims arising in the ordinary course of business. Management does not expect any material adverse outcome.
Verizon Jetpack Recall
On April 8th, 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.
| F-20 |
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.
We are actively discussing ways to resolve the consequences of the recall, including the costs to Verizon of conducting the recall, impacts on our manufacturing partners and our future business relationship with Verizon. Our suppliers and component manufactures, as well as relevant insurance carriers have been notified and are also participating.
Future Impact on Financial Performance
We need to resolve the recall to ensure future sales to Verizon. Discussions are ongoing but no agreement for future products have been reached at this time. We are striving to avoid litigation arising from the recall and have not received court filings from any of the parties involved at this time.
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 allow us to estimate the ultimate cost of potential future litigation. Although the recall notice identified 2.5 million devices, we are unable to predict the number of units that may be returned or the costs and damages that may be alleged in the future.
Shareholder Litigation
We have been made aware of legal actions alleging, among other things, that we had prior knowledge that the recall was likely and did not disclose that information to investors in a timely manner. We believe these allegations are not supported by the facts and we intend to vigorously defend against these claims.
Swing Profits Litigation
A legal action was filed against Franklin, as a nominal defendant, on or about July 22, 2021, claiming that OC Kim violated rule 16b of the Securities Act for taking swing profits from a sale and purchase of shares in violation of the Act. We believe the allegations are not supported by the facts and we intend to vigorously defend against these claims.
Anydata, Inc.
We entered into a Professional Services Agreement with Anydata Corp. (“Anydata”) for the productACT233Fproduct ACT233F Smart Link OBD device on May 5, 2017, for a minimum purchase commitment of 250,000 units, which is associated with Anydata’s irrevocable purchase orders received from its customer.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. Management believesWe 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 unfulfilled by Anydata to the Company was approximately $3.1 million. The total preliminary product purchase commitment with Quanta was approximately $1.9$2.9 million. This amount is subject to further changes depending on the ability of Quanta to repurpose some of the component parts to its other customers. 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. For the year endedAs of June 30, 2019,2020, we paid $100,000 for the right to call on inventory and has recorded this amountan additional $49,580 as a prepaid. Additionally, we have agreedprepaid expense related to pricing adjustments, which has been agreed with Quanta for other products to ensure demand is met, and havefor the quarter ended December 31, 2020, the prepaid expense of $149,580 has been recorded an additional $22,000 as a prepaid related to pricing adjustments.cost of goods sold. As of June 30, 2019,2021, there is a reasonable possibility we may incur a loss,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.
| F-21 |
COVID-19
In March 2020, the World Health Organization declared the outbreak of a novel coronavirus (COVID-19) as a pandemic which continues to spread throughout the United States. On March 19, 2020, the Governor of California declared a health emergency and issued an order to close all nonessential businesses until further notice. As a maker of wireless connectivity devices, we are deemed to be an essential business. Nonetheless, out of concern for our workers and pursuant to the government order, we reduced the scope of our operations and, where possible, certain workers began telecommuting from their homes. The continued spread of COVID-19 may result in a period of business disruption, including delays or disruptions in our supply chain. The spread of COVID-19, or another infectious disease, could also negatively affect the operations at our third-party manufacturers, which could result in delays or disruptions in the supply of our products. While we expect this situation may increase demand for its products, the related impact cannot be reasonably estimated at this time.
Change of Control Agreements
On September 21, 2009,October 1, 2020, we entered into Change of Control Agreements with OC Kim, our President, and Yun J. (David) Lee, our Chief Operating Officer. Each Change of Control Agreement provides for a lump sum payment to the officer in case ofwe experience a change of control of the Company.control. The term includes the acquisition of our 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'sour outstanding Common Stock, or a liquidation or dissolution of the Company or sale of substantially all of the Company'sour 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.
ChineseInternational Tariffs
We believe that our products are currently exempt from Chinese tariffs.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 resultsresults.
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,” using a modified prospective application,to all of our stock-based compensation awards, and use the Black-Scholes model.option pricing model to value stock options. Under this application, we are required to record compensation expense for all awards granted after the date of adoption and for the unvested portion of previously granted awards that remain outstanding at the date of adoption.granted. Compensation costs will be recognized over the period that an employee provides service in exchange for the award.award, i.e. the vesting period.
WeIn 2009, 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.
In July of 2020, the Board of Directors adopted the 2020 Franklin Wireless Corp. Stock Option Plan, which covers 800,000 shares of Common Stock. The 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.
| F-22 |
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 nowere $380,758 and $0 compensation expenseexpenses recorded under this method for the yearyears ended June 30, 2019.2021, and 2020, respectively.
A summary of the status of our stock options is presented below:
| Weighted- | Weighted- | |||||||||||||||||||||||||||||||
| Average | Average | |||||||||||||||||||||||||||||||
| Weighted- | Remaining | Weighted- | Remaining | |||||||||||||||||||||||||||||
| Average | Contractual | Aggregate | Average | Contractual | Aggregate | |||||||||||||||||||||||||||
| Exercise | Life | Intrinsic | Exercise | Life | Intrinsic | |||||||||||||||||||||||||||
| Options | Shares | Price | (In Years) | Value | Shares | Price | (In Years) | Value | ||||||||||||||||||||||||
| Outstanding as of June 30, 2017 | 399,000 | $ | 1.12 | 4.05 | $ | 451,820 | ||||||||||||||||||||||||||
| Outstanding as of June 30, 2019 | 299,000 | $ | 1.04 | 2.75 | $ | 241,220 | ||||||||||||||||||||||||||
| Granted | – | – | – | – | – | – | – | – | ||||||||||||||||||||||||
| Exercised | (50,000 | ) | (1.34 | ) | (3.95 | ) | (92,500 | ) | (35,709 | ) | 0.93 | – | – | |||||||||||||||||||
| Cancelled | – | – | – | – | – | – | – | – | ||||||||||||||||||||||||
| Forfeited or Expired | (50,000 | ) | (1.34 | ) | (3.96 | ) | (92,500 | ) | ||||||||||||||||||||||||
| Outstanding as of June 30, 2018 | 299,000 | $ | 1.04 | 2.75 | $ | 241,220 | ||||||||||||||||||||||||||
| Forfeited or expired | (12,000 | ) | 1.35 | – | – | |||||||||||||||||||||||||||
| Outstanding as of June 30, 2020 | 251,291 | $ | 1.05 | 1.95 | $ | 1,124,525 | ||||||||||||||||||||||||||
| Granted | – | – | – | – | 299,000 | 5.40 | – | – | ||||||||||||||||||||||||
| Exercised | – | – | – | – | (61,291 | ) | 1.22 | – | – | |||||||||||||||||||||||
| Cancelled | – | – | – | – | – | – | – | – | ||||||||||||||||||||||||
| Forfeited or Expired | – | – | – | – | ||||||||||||||||||||||||||||
| Outstanding as of June 30, 2019 | 299,000 | $ | 1.04 | 2.75 | $ | 420,620 | ||||||||||||||||||||||||||
| Forfeited or expired | (5,000 | ) | 5.40 | – | – | |||||||||||||||||||||||||||
| Outstanding as of June 30, 2021 | 484,000 | $ | 3.67 | 2.83 | $ | 2,662,830 | ||||||||||||||||||||||||||
| Exercisable as of June 30, 2019 | 299,000 | $ | 1.04 | 2.75 | $ | 420,620 | ||||||||||||||||||||||||||
| Exercisable as of June 30, 2021 | 190,000 | $ | 0.99 | 0.95 | $ | 1,554,450 | ||||||||||||||||||||||||||
The aggregate intrinsic value in the preceding table represents the total pretax intrinsic value, based upon the Company’s closing stock price of 2.45$9.17 as of June 30, 2019,2021, 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 June 30, 20192021, in the amount of 299,000484,000 shares was $0.92$3.02 per share.
As of June 30, 2019,2021, there was no unrecognized compensation cost of $808,225 related to non-vested stock options granted.
NOTE 11 - SUBSEQUENT EVENTS
Management considered subsequent events in the preparation of the Company's financial statements through the date this Form 10-K was filed.