Franklin Wireless Corp: Form 10-Q for the period ended Dec 31, 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 hold a 66.3% ownership in 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. We hold a 60% ownership interest in Sigbeat Inc., based in San Diego, California (“Sigbeat”), which will engage in worldwide sales, marketing, customer support and operations for telecommunications modules. 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 and six months ended December 31, 2024.

RESULTS OF OPERATIONS

The following table sets forth, for the three and six months ended December 31, 2024 and 2023, our statements of comprehensive income (loss) (unaudited) including data expressed as a percentage of sales:

THREE MONTHS ENDED DECEMBER 31, 2024 COMPARED TO THREE MONTHS ENDED DECEMBER 31, 2023

NET SALES - Net sales increased by $8,979,319, or 101.5%, to $17,827,098 for the three months ended December 31, 2024 from $8,847,779 for the corresponding period of 2023. For the three months ended December 31, 2024, net sales by geographic regions, consisting of North America and Asia, were $17,827,098 (100% of net sales) and $0 (0% of net sales), respectively. For the three months ended December 31, 2023, net sales by geographic regions, consisting of North America and Asia, were $8,753,451 (98.9% of net sales) and $94,328 (1.1% of net sales), respectively.

Net sales in North America increased by $9,073,647, or 103.7%, to $17,827,098 for the three months ended December 31, 2024 from $8,753,451 for the corresponding period of 2023. The increase in net sales was primarily due to increased demand from our major carrier customers. Net sales in Asia decreased by $94,328, or 100%, to $0 for the three months ended December 31, 2023 from $94,328 for the corresponding period of 2023. The decrease in net sales was primarily due to the absence of revenue generated from Wi-Fi router sales by FTI, which typically vary from period to period.

GROSS PROFIT - Gross profit increased by $2,404,987, or 287.3%, to $3,242,062 for the three months ended December 31, 2024 from $837,075 for the corresponding period of 2023. The gross profit in terms of net sales percentage was 18.2% for the three months ended December 31, 2024, compared to 9.5% for the corresponding period of 2023. The increase in gross profit and gross profit in terms of net sales percentage for the three months ended December 31, 2024, was primarily due to the increase in net sales as described above and the fact that the increased sales were of higher margin products. .

OPERATING EXPENSES - Operating expenses increased by $53,815, or 2.2%, to $2,446,831 for the three months ended December 31, 2024 from $2,393,016 for the corresponding period of 2023.

Selling, general, and administrative expenses decreased by $20,569, or 1.3%, to $1,519,593 for the three months ended December 31, 2024, from $1,540,162 for the corresponding period of 2023. Research and development expense increased by $74,384, or 8.7%, to $927,238 for the three months ended December 31, 2024, from $852,854 for the corresponding period of 2023. The increase in research and development expense was primarily due to the increased research and development costs and the related payroll expense of approximately $64,000 and $10,000, respectively, which is the mixed result of the timing of research and development activities and the number of active projects and typically vary from period to period.

OTHER (EXPENSE) INCOME, NET - Other (expense) income, net decreased by $1,402,074, or 202.9%, to ($710,949) for the three months ended December 31, 2024 from $691,125 for the corresponding period of 2023. The decrease was primarily due to the increased loss of $1,355,984 from the unfavorable changes in foreign currency exchange rates in FTI.

SIX MONTHS ENDED DECEMBER 31, 2024 COMPARED TO SIX MONTHS ENDED DECEMBER 31, 2023

NET SALES - Net sales increased by $12,646,685, or 68.3%, to $31,150,010 for the six months ended December 31, 2024 from $18,503,325 for the corresponding period of 2023. For the six months ended December 31, 2024, net sales by geographic regions, consisting of North America and Asia, were $31,149,546 (100% of net sales) and $464 (0.0% of net sales), respectively. For the six months ended December 31, 2023, net sales by geographic regions, consisting of North America and Asia, were $18,408,997 (99.5% of net sales) and $94,328 (0.5% of net sales), respectively.

Net sales in North America increased by $12,740,549, or 69.2%, to $31,149,546 for the six months ended December 31, 2024 from $18,408,997 for the corresponding period of 2023. The increase in net sales was primarily due to increased demand from our major carrier customers. Net sales in Asia decreased by $93,864, or 99.5%, to $464 for the six months ended December 31, 2024 from $94,328 for the corresponding period of 2023. The decrease in net sales was primarily due to the absence of revenue generated from Wi-Fi router sales by FTI, which typically vary from period to period.

GROSS PROFIT – Gross profit increased by $2,963,329, or 126.1%, to $5,313,564 for the six months ended December 31, 2024 from $2,350,235 for the corresponding period of 2023. The gross profit in terms of net sales percentage was 17.1% for the six months ended December 31, 2023 compared to 12.7% for the corresponding period of 2023. The increase in gross profit and gross profit in terms of net sales percentage for the six months ended December 31, 2024, was primarily due to the change in net sales as described above. The amortization expenses associated with the completed capitalized product development costs that are included in the cost of goods sold declined the gross profits and gross profits in terms of net sales percentages in both periods.

OPERATING EXPENSES – Operating expenses increased by $400,423, or 8.9%, to $4,891,116 for the six months ended December 31, 2024 from $4,490,693 for the corresponding period of 2023.

Selling, general, and administrative expenses increased by $168,682, or 6.1%, to $2,939,566 for the six months ended December 31, 2024, from $2,770,884 for the corresponding period of 2023. The increase in selling, general, and administrative expenses was primarily due to the increased payroll expenses, legal fees, and compensation expenses related to stock options of approximately $150,000, $85,000, and $66,000, respectively, which was offset by the decreased rent expense of the operating leases by approximately $130,000.

Research and development expense increased by $231,741, or 13.5%, to $1,951,550 for the six months ended December 31, 2024, from $1,719,809 for the corresponding period of 2023. The increase in research and development expense was primarily due to the increased research and development costs and the related payroll expense of approximately $216,000 and $16,000, respectively, which is the mixed result of the timing of research and development activities and the number of active projects and typically vary from period to period.

OTHER INCOME, NET – Other income, net decreased by $530,011, or 59.7%, to $358,370 for the six months ended December 31, 2024 from $888,381 for the corresponding period of 2023. The decrease was primarily due to the increased loss of $705,063 from the unfavorable changes in foreign currency exchange rates in FTI and the decreased interest income of approximately $50,000 from deposits, which was partially offset by the increased forgiven liabilities 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 December 31, 2024 consisted of cash and cash equivalents, as well as short-term investments, of $42,160,072. 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 six months ended December 31, 2024 was $5,412,542, and net cash used in operating activities for the six months ended December 31, 2023 was $6,193,534.

The $5,412,542 in net cash provided by operating activities for the six months ended December 31, 2024 was primarily due to the increase in accounts payable and accrued liabilities of $6,501,820 and $838,564 as well as our operating results (net income adjusted for depreciation, amortization, and other non-cash charges), which was partially offset by the increase in inventories of $2,751,477.

The $6,193,534 in net cash used in operating activities for the six months ended December 31, 2023 was primarily due to the increase in accounts receivable of $4,495,638 and the decrease in accounts payable of $3,869,191 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 inventories of $2,581,682.

INVESTING ACTIVITIES – Net cash provided by investing activities for the six months ended December 31, 2024 was $2,631,817, and net cash used in investing activities for the six months ended December 31, 2023 was $869,481.

The $2,631,817 in net cash provided by investing activities for the six months ended December 31, 2024 was primarily due to the sales of short-term investments of $2,685,688, which were offset by the payments for capitalized product development and property and equipment of $31,981 and $24,784, respectively.

The $869,481 in net cash used in investing activities for the six months ended December 31, 2023 was primarily due to the purchase of short-term investments of $779,571 and the payments for capitalized product development of $68,733.

FINANCING ACTIVITIES - Net cash used in financing activities for the six months ended December 31, 2024, and 2023 was $0 and $2,046, respectively. The $2,046 in net cash used in financial activities for the six months ended December 31, 2023 was from the increased loan interest to an employee.

CONTRACTUAL OBLIGATIONS AND OTHER COMMITMENTS

Leases

We leased approximately 12,775 square feet of office space in San Diego, California, at a monthly rent of $25,754, pursuant to a lease that expired in December 2023. On October 19, 2023, we signed a lease for office space consisting of approximately 11,400 square feet, located in San Diego, California, at a monthly rent of $27,789, which commenced on January 1, 2024. In addition to monthly rent, the lease includes payment for certain common area costs. The term of the lease for the office space is 65 months from the lease commencement date. 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.

On or about December 7, 2023, we received an invoice from our prior landlord, Hunsaker & Associates, requesting payment of additional rent on our completed and expired lease of office space located at 9707 Waples Street, San Diego, CA as of December 31, 2023. This invoice of $142,978 purports to represent charges for variable cost increases during the prior 7 years of the lease, which was discounted by $46,274 and adjusted down to $96,704 for the three months ended June 30, 2024. We are currently reviewing these charges and will be requesting further validation of these charges, in accordance with our rights granted under the lease. For the year ended June 30, 2024, we recorded an additional rent expense of $96,704 and an accrued liability of $72,048 reflecting this pending invoice and a credit of $24,656 for our deposit on the leasehold property.

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. We lease one corporate vehicle on December 1, 2024, in San Diego, California, for our employees, under a non-cancelable lease that expires on November 30, 2027.

Rent expenses for the three months ended December 31, 2024 and 2023 were $112,352 and $254,402, respectively. Rent expenses for the six months ended December 31, 2024 and 2023 were $225,109 and $365,829, 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 December 31, 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) during the six months ended December 31, 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. We are planning to replace one model this year and one model next year that are reaching end of life with new models. Any of the risks discussed in our Annual Report, including risks related to developing new models, 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.