# Franklin Wireless Corp: Form 10-Q for the period ended Mar 31, 2023

- Company: [Franklin Wireless Corp](/companies/fkwl.md) (CIK 722572)
- Form: 10-Q
- Filed: 2023-05-15
- Accepted by EDGAR: May 15, 2023, 19:13 ET
- Period: 2023-03-31
- Accession: 0001683168-23-003382
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/722572/000168316823003382/franklin_i10q-033123.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/722572/000168316823003382/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2023-03-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2023-01-01 to 2023-03-31 | $11.9m | us-gaap:Revenues |
| Revenue | 9 months, 2022-07-01 to 2023-03-31 | $28.9m | us-gaap:Revenues |
| Cost of revenue | 3 months, 2023-01-01 to 2023-03-31 | $9.8m | us-gaap:CostOfRevenue |
| Cost of revenue | 9 months, 2022-07-01 to 2023-03-31 | $24.4m | us-gaap:CostOfRevenue |
| Gross profit | 3 months, 2023-01-01 to 2023-03-31 | $2.0m | us-gaap:GrossProfit |
| Gross profit | 9 months, 2022-07-01 to 2023-03-31 | $4.6m | us-gaap:GrossProfit |
| Research and development | 3 months, 2023-01-01 to 2023-03-31 | $1.1m | us-gaap:ResearchAndDevelopmentExpense |
| Research and development | 9 months, 2022-07-01 to 2023-03-31 | $3.0m | us-gaap:ResearchAndDevelopmentExpense |
| Selling, general and administrative | 3 months, 2023-01-01 to 2023-03-31 | $1.5m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 9 months, 2022-07-01 to 2023-03-31 | $4.0m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2023-01-01 to 2023-03-31 | −$470.6k | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2022-07-01 to 2023-03-31 | −$2.5m | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2023-01-01 to 2023-03-31 | −$578.7k | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2022-07-01 to 2023-03-31 | −$563.2k | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2023-01-01 to 2023-03-31 | $247.6k | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2022-07-01 to 2023-03-31 | −$1.3m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2023-01-01 to 2023-03-31 | $0.02 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2022-07-01 to 2023-03-31 | −$0.11 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2023-01-01 to 2023-03-31 | $0.02 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2022-07-01 to 2023-03-31 | −$0.11 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2023-01-01 to 2023-03-31 | 11,784,280 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2022-07-01 to 2023-03-31 | 11,720,776 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2022-07-01 to 2023-03-31 | −$7.0m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2022-07-01 to 2023-03-31 | $45.2k | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2023-03-31 | $17.6m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2023-03-31 | $47.3m | us-gaap:AssetsCurrent |
| Total assets | at 2023-03-31 | $52.4m | us-gaap:Assets |
| Current liabilities | at 2023-03-31 | $10.4m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2023-03-31 | $10.4m | us-gaap:Liabilities |
| Shareholders' equity | at 2023-03-31 | $40.4m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 18,319 characters.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our financial statements and related notes included elsewhere in this report. This report contains certain forward-looking statements relating to future events or our future financial performance. These statements are subject to risks and uncertainties which could cause actual results to differ materially from those discussed in this report. You are cautioned not to place undue reliance on this information, which speaks only as of the date of this report. We are not obligated to publicly update this information, whether as a result of new information, future events or otherwise, except to the extent we are required to do so in connection with our obligation to file reports with the SEC. For a discussion of the important risks to our business and future operating performance, see the discussion under the caption “Item 1A. Risk Factors” and under the caption “Factors That May Influence Future Results of Operations” in the Company’s Form 10-K for the year ended June 30, 2022, filed on September 13, 2022. In light of these risks, uncertainties and assumptions, the forward-looking events discussed in this report might not occur.

### BUSINESS OVERVIEW

We are a leading provider of integrated wireless solutions utilizing the latest in 4G LTE (fourth generation long-term evolution) and 5G (fifth generation) technologies including mobile hotspots, routers, CPEs (Customer Premise Equipment), and various trackers. Our integrated software subscription services provide users remote capabilities including mobile device management (MDM) and software defined wide area networking (SD-WAN).

We have majority ownership of Franklin Technology Inc. (FTI), a research and development company based in Seoul, South Korea. FTI primarily provides design and development services for our wireless products.

Our products are generally marketed and sold directly to wireless operators and indirectly through strategic partners and distributors. Our global customer base primarily extends from North America to Asia.

### FACTORS THAT MAY INFLUENCE FUTURE RESULTS OF OPERATIONS

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

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

### CRITICAL ACCOUNTING POLICIES

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

We have several critical accounting policies, which were described in our Annual Report on Form 10-K for the year ended June 30, 2022, that are both important to the portrayal of our financial condition and results of operations and require management’s most difficult, subjective, and complex judgments. Typically, the circumstances that make these judgments difficult, subjective, and complex have to do with making estimates about the effect of matters that are inherently uncertain. There were no material changes to our critical accounting policies during the nine months ended March 31, 2023.

### RESULTS OF OPERATIONS

The following table sets forth, for the three and nine months ended March 31, 2023 and 2022, our statements of comprehensive income including data expressed as a percentage of sales:

|  | Three Months Ended March 31, 2023 | 2022 | Nine Months Ended March 31, 2023 | 2022 |
| --- | ---: | ---: | ---: | ---: |
| Net sales | 100.0% | 100.0% | 100.0% | 100.0% |
| Cost of goods sold | 82.7% | 79.7% | 84.2% | 81.3% |
| Gross profit | 17.3% | 20.3% | 15.8% | 18.7% |
| Operating expenses | 21.3% | 36.5% | 24.3% | 56.3% |
| Loss from operations | (4.0%) | (16.2%) | (8.5%) | (37.6%) |
| Other income, net | 0.9% | 0.9% | 2.0% | 2.7% |
| Net loss before income taxes | (3.1%) | (15.3%) | (6.5%) | (34.9%) |
| Income tax (benefit) provision | (4.9%) | (3.6%) | (2.0%) | (9.5%) |
| Net income (loss) | 1.8% | (11.7%) | (4.5%) | (25.4%) |
| Less: non-controlling interest in net (loss) income of subsidiary | (0.3%) | (0.2%) | (0.1%) | 0.4% |
| Net income (loss) attributable to Parent Company stockholders | 2.1% | (11.5%) | (4.4%) | (25.8%) |

### THREE MONTHS ENDED MARCH 31, 2023 COMPARED TO THREE MONTHS ENDED MARCH 31, 2022

**NET SALES** - Net sales increased by $5,164,684, or 77.2%, to $11,851,971 for the three months ended March 31, 2023 from $6,687,287 for the corresponding period of 2022. For the three months ended March 31, 2023, net sales by geographic regions, consisting of North America and Asia, were $11,720,894 (98.9% of net sales) and $131,077 (1.1%), respectively. For the three months ended March 31, 2022, net sales by geographic regions, consisting of North America and Asia, were $6,687,287 (100.0% of net sales) and $0 (0.0%), respectively.

Net sales in North America increased by $5,033,607, or 75.3%, to $11,720,894 for the three months ended March 31, 2023 from $6,687,287 for the corresponding period of 2022. The increase in net sales in North America was primarily due to the demand for one newly launched wireless product from a major carrier customer (approximately 51.8% of net sales), which did not purchase our products during the corresponding period of 2022. Net sales in Asia increased by $131,077, or 100.0%, to $131,077 for the three months ended March 31, 2023 from $0 for the corresponding period of 2022. The increase in net sales was primarily due to the demand for one newly launched wireless product from a customer (approximately $160,000).

**GROSS PROFIT -** Gross profit increased by $686,180, or 50.5%, to $2,045,510 for the three months ended March 31, 2023 from $1,359,330 for the corresponding period of 2022. The gross profit in terms of net sales percentage was 17.3% for the three months ended March 31, 2023 compared to 20.3% for the corresponding period of 2022. 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 the mixed results of competitive selling prices and the increase in production costs of the launched products.

**OPERATING EXPENSES** - Operating expenses increased by $75,206, or 3.1%, to $2,516,105 for the three months ended March 31, 2023 from $2,440,899 for the corresponding period of 2022. Selling, general, and administrative expenses increased by $72,714 to $1,463,433 for the three months ended March 31, 2023, from $1,390,719 for the corresponding period of 2022. The increase in operating expenses was primarily due to the increased payroll expenses. Research and development expense increased by $2,492 to $1,052,672 for the three months ended March 31, 2023, from $1,050,180 for the corresponding period of 2022.

**OTHER INCOME, NET** - Other income, net increased by $47,449, or 84.5%, to $103,570 for the three months ended March 31, 2023 from $56,121 for the corresponding period of 2022. The increase was primarily due to the increased interest income of approximately $160,000, the increased unrealized gain from an investment account of approximately $111,000, and the increased gain from the forgiven liability of approximately $25,000, which was offset by the increased loss from the unfavorable changes in foreign currency exchange rates of approximately $250,000 in FTI.

### NINE MONTHS ENDED MARCH 31, 2023 COMPARED TO NINE MONTHS ENDED MARCH 31, 2022

**NET SALES** - Net sales increased by $17,091,618, or 144.2%, to $28,944,554 for the nine months ended March 31, 2023 from $11,852,936 for the corresponding period of 2022. For the nine months ended March 31, 2023, net sales by geographic regions, consisting of North America, the countries in the Caribbean and South America, and Asia, were $28,778,479 (99.4% of net sales), $0 (0.0% of net sales), and $166,075 (0.6% of net sales), respectively. For the nine months ended March 31, 2022, net sales by geographic regions, consisting of North America, the countries in the Caribbean and South America, and Asia, were $11,143,335 (94.0% of net sales), $2,375 (0.0% of net sales), and $707,226 (6.0% of net sales), respectively.

Net sales in North America increased by $17,635,144, or 158.3%, to $28,778,479 for the nine months ended March 31, 2023 from $11,143,335 for the corresponding period of 2022. The increase in net sales in North America was the mixed result of the new demand for two newly launched wireless products from a major carrier customer (approximately $7.8M newly generated revenue), which did not purchase our products during the corresponding period of 2022, and the increased demand of approximately $12.6M for our wireless products from the existing major carrier customer compared to the corresponding period of 2022, which were offset by the decreased demands from other customers.

Net sales in the Caribbean and South America decreased by 2,375, or 100.0%, to $0 for the nine months ended March 31, 2023 from $2,375 for the corresponding period of 2022. The decrease in net sales was primarily due to the general nature of sales in these regions, which often fluctuate significantly from period to period due to the timing of orders placed by a relatively small number of customers.

Net sales in Asia decreased by $541,151, or 76.5%, to $166,075 for the nine months ended March 31, 2023 from $707,226 for the corresponding period of 2022. The decrease in net sales was primarily due to the one-time revenue generated from the material sales by FTI for the prior period, which was partially offset by the revenue generated from the demand for one newly launched wireless product by FTI (approximately $160,000) for the nine months ended March 31, 2023.

**GROSS PROFIT -** Gross profit increased by $2,369,140, or 106.9%, to $4,585,414 for the nine months ended March 31, 2023 from $2,216,274 for the corresponding period of 2022. The gross profit in terms of net sales percentage was 15.8% for the nine months ended March 31, 2023 compared to 18.7% for the corresponding period of 2022. 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 the mixed results of competitive selling prices and the increase in production costs of the launched products.

**OPERATING EXPENSES** - Operating expenses increased by $365,693, or 5.5%, to $7,038,242 for the nine months ended March 31, 2023 from $6,672,549 for the corresponding period of 2022.

Selling, general, and administrative expenses increased by $545,707 to $4,039,035 for the nine months ended March 31, 2023, from $3,493,328 for the corresponding period of 2022. The increase in selling, general, and administrative expenses was primarily due to the increased payroll expenses and compensation expenses related to stock options granted for employees of approximately $446,000 and $163,000, respectively. Research and development expense decreased by $180,014 to $2,999,207 for the nine months ended March 31, 2023, from $3,179,221 for the corresponding period of 2022. The decrease in research and development expense was primarily due to the mix of the timing of research and development activities and the number of active projects, which typically vary from period to period.

**OTHER INCOME, NET** - Other income, net increased by $267,447, or 82.7%, to $590,925 for the nine months ended March 31, 2023 from $323,478 for the corresponding period of 2022. The increase was primarily due to the increased interest income of approximately $276,000, the increased unrealized gain from an investment account of approximately $163,000, and the increased gain from the forgiven liability of approximately $190,000, which was offset by the increased loss from the unfavorable changes in foreign currency exchange rates of approximately $299,000 in FTI and the decreased product development funding received by FTI from a government entity of approximately $52,000.

### LIQUIDITY AND CAPITAL RESOURCES

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

Our principal source of liquidity as of March 31, 2023 consisted of cash and cash equivalents as well as short-term investments of $33,978,340. We believe we have sufficient available capital to cover our existing operations and obligations through at least one year from the date of the filing of this Form 10-Q. Our long-term future cash requirements will depend on numerous factors, including our revenue base, profit margins, product development activities, market acceptance of our products, future expansion plans and ability to control costs. If we are unable to achieve our current business plan or secure additional funding that may be required, we would need to curtail our operations or take other similar actions outside the ordinary course of business in order to continue to operate as a going concern.

**OPERATING ACTIVITIES** - Net cash used in operating activities for the nine months ended March 31, 2023 and 2022 was $7,044,244 and $7,296,402, respectively.

The $7,044,244 in net cash used in operating activities for the nine months ended March 31, 2023 was primarily due to the increase in accounts receivable of $5,886,082 and inventories of $1,713,431 as well as our operating results (net loss of $1,298,722 adjusted for depreciation, amortization, and other non-cash charges), which was partially offset by an increase in accounts payable of $1,214,246. The $7,296,402 in net cash used in operating activities for the nine months ended March 31, 2022 was primarily due to the increase in inventories of $6,676,070 as well as our operating results (net loss of $3,005,937 adjusted for depreciation, amortization, and other non-cash charges), which was partially offset by an increase in accounts payable of $2,533,695.

**INVESTING ACTIVITIES** - Net cash used in investing activities for the nine months ended March 31, 2023 and 2022 was $1,731,707 and $1,780,484, respectively.

The $1,731,707 in net cash used in investing activities for nine months ended March 31, 2023 was primarily due to the payments for purchase of capitalized product development of $1,601,998 and purchase of short-term investments of $71,927. The $1,780,484 in net cash used in investing activities for the nine months ended March 31, 2022 was primarily due to the purchases of short-term investments of $1,240,376 and the payments for capitalized product development of $475,366.

**FINANCING ACTIVITIES** - Net cash provided by financing activities for the nine months ended March 31, 2023 and 2022 was $134,000 and $21,595, respectively.

The $134,000 and $21,595 in net cash provided by financing activities for the nine months ended March 31, 2023 and 2022 was from cash received from exercise of stock options.

### CONTRACTUAL OBLIGATIONS AND OTHER COMMITMENTS

### Leases

We lease approximately 12,775 square feet of office space in San Diego, California, at a monthly rent of $25,754, pursuant to a lease expiring in December 2023. In addition to monthly rent, the lease includes payment for certain common area costs. Our facility is covered by an appropriate level of insurance, and we believe it to be suitable for our use and adequate for our present needs. Our Korea-based subsidiary, FTI, leases approximately 10,000 square feet of office space, at a monthly rent of approximately $8,000, and additional office space consisting of approximately 2,682 square feet at a monthly rent of approximately $2,700, both located in Seoul, Korea. These leases will expire on August 31, 2023. In addition to monthly rent, the leases provide for periodic cost of living increases in the base rent and payment for certain common area costs. These facilities are covered by an appropriate level of insurance, and we believe them to be suitable for our use and adequate for our present needs. We lease one corporate housing facility, located in Seoul, Korea, primarily for our employees who travel, under a non-cancelable operating lease that will expire on September 4, 2023.

Rent expense for the three months ended March 31, 2023 and 2022 was $111,469 and $111,513, respectively. Rent expense for the nine months ended March 31, 2023 and 2022 was $334,146 and $334,651, respectively.

### Recently Issued Accounting Pronouncements

Refer to NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES in the Consolidated Financial Statements.

### OFF-BALANCE SHEET ARRANGEMENTS

None.

## Controls and procedures

As filed, 1,490 characters.

### Evaluation of Disclosure Controls and Procedures

Our management has evaluated, under the supervision and with the participation of our President and Acting Chief Financial Officer, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based upon that evaluation, our President and our Acting Chief Financial Officer have concluded that, as of March 31, 2023, our disclosure controls and procedures were effective in ensuring that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is (i) recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the SEC and (ii) accumulated and communicated to our management, including our principal executive and principal accounting officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

### Changes in Internal Control Over Financial Reporting

There have been no changes in our internal controls over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934 and as a result of adopting Topic 842) during the nine months ended March 31, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

## Risk factors

As filed, 584 characters.

Our Annual Report on Form 10-K for the fiscal year ended June 30, 2022, filed with the SEC on September 13, 2022 (the “Annual Report”), includes a detailed discussion of our risk factors under the heading “PART I, ITEM 1A – RISK FACTORS.” You should carefully consider the risk factors discussed in our Annual Report, as well as other information in this quarterly report. Any of these risks could cause our business, financial condition, results of operations and future growth prospects to suffer. We are not aware of any material changes from the risk factors previously disclosed.

Filed May 15, 2023.
Source: SEC EDGAR, the filing index for accession 0001683168-23-003382. Last ingested by Listed: Oct 24, 2026, 14:55 ET. No prices; not investment advice.