Franklin Wireless Corp: Form 10-Q for the period ended Sep 30, 2024

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, 2024, filed on September 30, 2024. In light of these risks, uncertainties and assumptions, the forward-looking events discussed in this report might not occur.

BUSINESS OVERVIEW

Doing business as “FranklinAccess”, we are a leading global provider of integrated wireless solutions utilizing the latest 5G (fifth generation) and 4G LTE (fourth generation long-term evolution) technologies including mobile hotspots, fixed wireless routers, and mobile device management (MDM) solutions. We are a leading enabler of the Digital Divide initiative, and our expertise extends to innovation in Internet of Things (IOT) and machine-to-machine (M2M) applications, driving forward seamless communication and connectivity for both individuals and enterprises.

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 primary markets are in North 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 of our new products, (4) new customer relationships and contracts, (5) our ability to meet customers’ demands, (6) our ability to maintain good relationships with our manufacturing partners and suppliers, and (7) the defect rates experienced by end users of our hardware and software products.

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.

We continuously evaluate the performance of our hardware and software products to discover defects that can adversely affect our revenue, income, and the price of our stock. If defects occur that customers believe are either severe in nature or excessively frequent in occurrence, customers could stop buying our products and services and the value of our stock may decrease.

We are also seeing that demand from end-users has been shifting in the post-pandemic economy as remote education and work from home trends are declining. Current demand for mobile device management (MDM) services has been declining. We are working to improve and further enhance our software service offerings to address this change in the market.

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, 2024, that are both important to the portrayal of our financial condition and results of operations and require management’s most difficult, subjective, and complex judgments. Typically, the circumstances that make these judgments difficult, subjective, and complex have to do with making estimates about the effect of matters that are inherently uncertain. There were no material changes to our critical accounting policies for the three months ended September 30, 2024.

RESULTS OF OPERATIONS

The following table sets forth, for the three months ended September 30, 2024 and 2023, our statements of comprehensive income (loss) including data expressed as a percentage of sales:

THREE MONTHS ENDED SEPTEMBER 30, 2024 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2023

NET SALES - Net sales increased by $3,667,366, or 38.0%, to $13,322,912 for the three months ended September 30, 2024 from $9,655,546 for the corresponding period of 2023. For the three months ended September 30, 2024, net sales by geographic regions, consisting of North America and Asia, were $13,322,448 (100.0% of net sales) and $464 (0.0% of net sales), respectively. For the three months ended September 30, 2023, net sales by geographic regions, consisting of North America and Asia, were $9,655,546 (100.0% of net sales) and $0 (0.0% of net sales), respectively.

Net sales in North America increased by $3,666,902, or 38.0%, to $13,322,448 for the three months ended September 30, 2024 from $9,655,546 for the corresponding period of 2023. The increase in net sales in North America was primarily due to the increased sales of approximately $6.4M for our two wireless products from two major carrier customers for the three months ended September 30, 2024, which was partially offset by the decreased sales of one wireless product by approximately $2.7M, compared to the corresponding period of 2023. Net sales in Asia increased by $464, or 100%, to $464 for the three months ended September 30, 2024 from $0 for the corresponding period of 2023.

GROSS PROFIT - Gross profit increased by $558,342, or 36.9%, to $2,071,502 for the three months ended September 30, 2024 from $1,513,160 for the corresponding period of 2023. The gross profit in terms of net sales percentage was 15.5% for the three months ended September 30, 2024 compared to 15.7% for the corresponding period of 2023.

The increase in gross profit was primarily due to the change in net sales as described above. The decrease in gross profit margin in terms of net sales was primarily driven by a decline in the proportion of high-margin sales while overall sales increased for the three months ended September 30, 2024 compared to the corresponding period of 2023.

OPERATING EXPENSES - Operating expenses increased by $346,608, or 16.5%, to $2,444,285 for the three months ended September 30, 2024 from $2,097,677 for the corresponding period of 2023.

Selling, general, and administrative expenses increased by $189,251, or 15.4%, to $1,419,973 for the three months ended September 30, 2024, from $1,230,722 for the corresponding period of 2023. The increase in selling, general, and administrative expenses was primarily due to the increased legal expenses and payroll expenses of approximately $74,000 and $70,000, respectively.

Research and development expense increased by $157,357, or 18.2%, to $1,024,312 for the three months ended September 30, 2024, from $866,955 for the corresponding period of 2023. The increase in research and development expense was primarily due to the increased sample generations to test new products of approximately $150,000, which typically vary from period to period.

TOTAL OTHER INCOME, NET - Other income, net increased by $872,063, or 442.1%, to $1,069,319 for the three months ended September 30, 2024 from $197,256 for the corresponding period of 2023. The increase was primarily due to the favorable changes in foreign currency and the gain from the appreciation on the currency exchange rates in FTI of approximately $650,000 and the forgiven accrued commission from a customer of approximately $250,000.

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 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 September 30, 2024 consisted of cash and cash equivalents, as well as short-term investments, of $40,678,153. We believe we have sufficient available capital to cover our existing operations and obligations through at least one year from the date of the filing of this Form 10-Q. Our long-term future cash requirements will depend on numerous factors, including our revenue base, profit margins, product development activities, market acceptance of our products, future expansion plans and ability to control costs. If we are unable to achieve our current business plan or secure additional funding that may be required, we would need to curtail our operations or take other similar actions outside the ordinary course of business in order to continue to operate as a going concern.

OPERATING ACTIVITIES - Net cash provided by operating activities for the three months ended September 30, 2024 was $2,670,900, and net cash used in operating activities for the three months ended September 30, 2023 was $5,223,316.

The $2,670,900 in net cash provided by operating activities for the three months ended September 30, 2024 was primarily due to the increase in accounts payable of $3,550,907 as well as our operating results (net income adjusted for depreciation, amortization, and other non-cash charges), which was partially offset by the increase of inventories of $1,127,477

The $5,223,316 in net cash used in operating activities for the three months ended September 30, 2023 was primarily due to the decrease in accounts payable of $5,800,795 and the increase of accounts receivable of $978,093 of as well as our operating results (net loss adjusted for depreciation, amortization, and other non-cash charges), which was partially offset by the decrease in inventory of $1,479,279.

INVESTING ACTIVITIES – Net cash used in investing activities for the three months ended September 30, 2024, and 2023 was $334,785 and $98,759, respectively.

The $334,785 in net cash used in financial activities for the three months ended September 30, 2024 was from the purchased short-term investments of $291,869 and the payments for property and equipment of $21,544, respectively.

The $98,759 in net cash used in investing activities for the three months ended September 30, 2023 was primarily due to the increased short-term investments of $73,832 and the payments for capitalized product development of $22,500.

FINANCING ACTIVITIES - Net cash used in financing activities for the three months ended September 30, 2024, and 2023 was $0 and $1,023, respectively. The $1,023 in net cash used in financial activities for the three months ended September 30, 2023 was from the increased loan interest to an employee.

CONTRACTUAL OBLIGATIONS AND OTHER COMMITMENTS

Leases

We lease approximately 11,400 square feet of office space in San Diego, California, at a monthly rent of $27,789, which commenced on January 1, 2024. This lease will expire on May 31, 2029. 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, South Korea. These leases expired on August 31, 2024, and were extended for an additional 24 months to August 31, 2026. 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, South Korea, primarily for our employees who travel, under a non-cancelable operating lease that expires on September 4, 2025.

Rent expenses for the three months ended September 30, 2024, and 2023 were $112,757 and $111,417, respectively.

Recently Issued Accounting Pronouncements

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

OFF-BALANCE SHEET ARRANGEMENTS

None.

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 September 30, 2024, 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) for the three months ended September 30, 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Our Annual Report on Form 10-K for the fiscal year ended June 30, 2024, filed with the SEC on September 30, 2024 (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.