FRANKLIN WIRELESS CORP

Previous wording

We have several critical accounting policies, which were described in our Annual Report on Form 10-K for the year ended June 30, 2023, 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, 2023.

Current wording

We have several critical accounting policies, which were described in our Annual Report on Form 10-K for the year ended June 30, 2023, 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 nine months ended March 31, 2024.

Previous wording

The following table sets forth, for the three and six months ended December 31, 2023 and 2022, our statements of comprehensive (loss) income (unaudited) including data expressed as a percentage of sales:

Current wording

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

Previous wording

NET SALES - Net sales increased by $1,410,742, or 8.3%, to $18,503,325 for the six months ended December 31, 2023 from $17,092,583 for the corresponding period of 2022. 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. For the six months ended December 31, 2022, net sales by geographic regions, consisting of North America and Asia, were $17,057,585 (99.8% of net sales) and $34,998 (0.2% of net sales), respectively.

Current wording

NET SALES - Net sales decreased by $5,675,472, or 47.9%, to $6,176,499 for the three months ended March 31, 2024 from $11,851,971 for the corresponding period of 2023. For the three months ended March 31, 2024, net sales by geographic regions, consisting of North America and Asia, were $6,174,327 (100.0% of net sales) and $2,172 (0.0%), respectively. 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.

Previous wording

Net sales in North America decreased by $196,683, or 2.2%, to $8,753,451 for the three months ended December 31, 2023 from $8,950,134 for the corresponding period of 2022. For the three months ended December 31 ,2023, the decrease in net sales in North America was primarily due to the lack of sales to one major carrier (which was the second largest customer for the six months ended December 31, 2023, but its purchase was concentrated in the period of the three months ended September 30, 2023), which was offset by the increased sales from several customers. Net sales in Asia increased by $60,819, or 181.5%, to $94,328 for the three months ended December 31, 2023 from $33,509 for the corresponding period of 2022. The increase in net sales was primarily due to the increased revenue generated from Wi-Fi routers sales by FTI, which typically vary from period to period.

Current wording

Net sales in North America decreased by $5,546,567, or 47.3%, to $6,174,327 for the three months ended March 31, 2024 from $11,720,894 for the corresponding period of 2023. The decrease in net sales in North America was primarily due to the lack of sales to one major carrier (which was the largest customer, approximately 52% of the total sales for the three months ended March 31, 2023), which was offset by the increased sales of approximately $1.7M to another major carrier customer. Net sales in Asia decreased by $128,905, or 98.3%, to $2,172 for the three months ended March 31, 2024 from $131,077 for the corresponding period of 2023. The decrease in net sales was primarily due to the lack of the demand for one newly launched wireless product from a customer (approximately $160,000) from FTI.

Previous wording

**GROSS PROFIT –**Gross profit decreased by $189,669, or 7.5%, to $2,350,235 for the six months ended December 31, 2023 from $2,539,904 for the corresponding period of 2022. The gross profit in terms of net sales percentage was 12.7% for the six months ended December 31, 2023 compared to 14.9% for the corresponding period of 2022. The decrease in gross profit was primarily due to the lower gross profit in terms of net sales percentage. The decrease in gross profit in terms of net sales percentage for the six months ended December 31, 2023, was primarily due to the mixed results of competitive selling prices and the increase in production costs as well as the increased amortization expenses associated with the completed capitalized product development costs that are included in the cost of goods sold compared to the corresponding period of 2022.

Current wording

**GROSS PROFIT -**Gross profit decreased by $1,528,061, or 74.7%, to $517,449 for the three months ended March 31, 2024 from $2,045,510 for the corresponding period of 2023. The gross profit in terms of net sales percentage was 8.4% for the three months ended March 31, 2024 compared to 17.3% for the corresponding period of 2023. The decrease in gross profit in terms of net sales percentage for the three months ended March 31, 2024, was primarily due to that a significant portion of the total sales, approximately 96%, was derived from a major carrier customer with a competitive selling price and production costs (approximately gross profit in terms of net sales in percentage of 10%), and the amortization expenses associated with the completed capitalized product development costs that are included in the cost of goods sold.

Previous wording

OPERATING EXPENSES - Operating expenses increased by $80,634, or 3.5%, to $2,393,016 for the three months ended December 31, 2023 from $2,312,382 for the corresponding period of 2022.

Current wording

OPERATING EXPENSES - Operating expenses decreased by $443,488, or 17.6%, to $2,072,617 for the three months ended March 31, 2024 from $2,516,105 for the corresponding period of 2023.

Previous wording

Research and development expense decreased by $123,561 to $852,854 for the three months ended December 31, 2023, from $976,415 for the corresponding period of 2022. The decrease in research and development expense was primarily due to the decreased research and development costs and the related payroll expense of approximately $92,000 and $32,000, 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.

Current wording

Selling, general, and administrative expenses decreased by $202,286 to $1,261,147 for the three months ended March 31, 2024, from $1,463,433 for the corresponding period of 2023. The decrease in operating expenses was primarily due to the decreased compensation expenses related to stock options granted to employees. Research and development expense decreased by $241,202 to $811,470 for the three months ended March 31, 2024, from $1,052,672 for the corresponding period of 2023. The decrease in research and development expense was primarily due to the decreased research and development costs and the related payroll expense of approximately $125,000 and $116,000, 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.

Previous wording

OTHER INCOME, NET - Other income, net decreased by $710,290, or 50.7%, to $691,125 for the three months ended December 31, 2023 from $1,401,415 for the corresponding period of 2022. The decrease was primarily due to the decreased gain from the favorable changes in foreign currency exchange rates in FTI and the decreased forgiven liabilities of approximately $726,000 and $165,000, respectively, which were partially offset by the increased unrealized gain and interest income from the money market accounts and certificates of deposits of approximately $103,000 and $89,000.

Current wording

OTHER INCOME (LOSS), NET - Other income (loss), net decreased by $171,486, or 165.6%, to $67,916 for the three months ended March 31, 2024 from $103,570 for the corresponding period of 2023. The decrease was primarily due to the decreased gain from the forgiven liability of approximately $190,000 and the increased loss from the unfavorable changes in foreign currency exchange rates of approximately $167,000, which was partially offset by the increased unrealized gain from an investment account of approximately $196,000.

Previous wording

NET SALES- Net sales decreased by $135,864, or 1.5%, to $8,847,779 for the three months ended December 31, 2023 from $8,983,643 for the corresponding period of 2022. 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. For the three months ended December 31, 2022, net sales by geographic regions, consisting of North America and Asia, were $8,950,134 (99.6% of net sales) and $33,509 (0.4% of net sales), respectively.

Current wording

NET SALES - Net sales decreased by $4,264,730, or 14.7%, to $24,679,824 for the nine months ended March 31, 2024 from $28,944,554 for the corresponding period of 2023. For the nine months ended March 31, 2024, net sales by geographic regions, consisting of North America and Asia, were $24,583,324 (99.6% of net sales) and $96,500 (0.4% of net sales), respectively. For the nine months ended March 31, 2023, net sales by geographic regions, consisting of North America and Asia, were $28,778,479 (99.4% of net sales) and $166,075 (0.6% of net sales), respectively.

Previous wording

**GROSS PROFIT -**Gross profit decreased by $108,967, or 11.5%, to $837,075 for the three months ended December 31, 2023 from $946,042 for the corresponding period of 2022. The gross profit in terms of net sales percentage was 9.5% for the three months ended December 31, 2023 compared to 10.5% for the corresponding period of 2022. The decrease 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 for the three months ended December 31, 2023, was primarily due to the mixed results of competitive selling prices and the increase in production costs as well as the increased amortization expenses associated with the completed capitalized product development costs that are included in the cost of goods sold compared to the corresponding period of 2022.

Current wording

**GROSS PROFIT -**Gross profit decreased by $1,717,730, or 37.5%, to $2,867,684 for the nine months ended March 31, 2024 from $4,585,414 for the corresponding period of 2023. The gross profit in terms of net sales percentage was 11.6% for the nine months ended March 31, 2024 compared to 15.8% for the corresponding period of 2023. The decrease 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 for the nine months ended March 31, 2024, was primarily due to the mixed results of competitive selling prices and the increase in production costs as well as the increased amortization expenses associated with the completed capitalized product development costs that are included in the cost of goods sold compared to the corresponding period of 2023.

Previous wording

OPERATING EXPENSES – Operating expenses decreased by $31,444, or 0.7%, to $4,490,693 for the six months ended December 31, 2023 from $4,522,137 for the corresponding period of 2022.

Current wording

OPERATING EXPENSES - Operating expenses decreased by $474,932, or 6.7%, to $6,563,310 for the nine months ended March 31, 2024 from $7,038,242 for the corresponding period of 2023.

Previous wording

Research and development expense decreased by $226,726 to $1,719,809 for the six months ended December 31, 2023, from $1,946,535 for the corresponding period of 2022. The decrease in research and development expense was primarily due to the decreased research and development costs and the related payroll expense of approximately $154,000 and $72,000, 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.

Current wording

Selling, general, and administrative expenses decreased by $7,004 to $4,032,031 for the nine months ended March 31, 2024, from $4,039,035 for the corresponding period of 2023. The decrease in selling, general, and administrative expenses was primarily due to the decreased compensation expenses related to stock options granted to employees of approximately $320,000, which was offset by the increased operating lease expense and legal fees of approximately $150,000 and 135,000, respectively. Research and development expense decreased by $467,928 to $2,531,279 for the nine months ended March 31, 2024, from $2,999,207 for the corresponding period of 2023. The decrease in research and development expense was primarily due to the decreased research and development costs and the related payroll expense of approximately $280,000 and $188,000, 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.

Previous wording

OTHER INCOME, NET – Other income, net increased by $401,026, or 82.3%, to $888,381 for the six months ended December 31, 2023 from $487,355 for the corresponding period of 2022. The increase was primarily due to the increased unrealized gain from the money market accounts of approximately $276,000 and the increased interest income from certificates of deposits of approximately $283,000, which was partially offset by the decreased forgiven liabilities of $165,000.

Current wording

OTHER INCOME, NET - Other income, net increased by $229,540, or 38.8%, to $820,465 for the nine months ended March 31, 2024 from $590,925 for the corresponding period of 2023. The increase was primarily due to the increased interest income of approximately $280,000 and the increased unrealized gain from an investment account of approximately $261,000, which was offset by the decreased gain from the forgiven liability of approximately $190,000 and the loss from the unfavorable changes in foreign currency exchange rates of approximately $143,000.

Previous wording

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.

Current wording

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.

Previous wording

Our principal source of liquidity as of December 31, 2023 consisted of cash and cash equivalents as well as short-term investments of $32,749,752. 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.

Current wording

Our principal source of liquidity as of March 31, 2024 consisted of cash and cash equivalents as well as short-term investments of $31,737,201. 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.

Previous wording

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.

Current wording

The $6,972,515 in net cash used in operating activities for the nine months ended March 31, 2024 was primarily due to the decrease in accounts payable of $6,668,572 as well as our operating results (net loss of $2,297,180 adjusted for depreciation, amortization, and other non-cash charges), which was partially offset by a decrease in inventories of $2,605,602. The $6,954,199 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 $5,895,731 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.

Previous wording

INVESTING ACTIVITIES – Net cash used in investing activities for the six months ended December 31, 2023 and 2022 was $869,481 and $1,393,764, respectively.

Current wording

INVESTING ACTIVITIES - Net cash provided by investing activities for the nine months ended March 31, 2024 was $1,815,796, and net cash used in investing activities for the nine months ended March 31, 2023 was $1,731,707.

Previous wording

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. The $1,393,764 in net cash used in investing activities for the six months ended December 31, 2022 was primarily due to the payments for capitalized product development of $1,046,980 and purchase of short-term investments of $293,545.

Current wording

The $1,815,796 in net cash provided by investing activities for nine months ended March 31, 2024 was primarily due to the sales of short-term investments of $1,995,606, which was partially offset by payments for purchase of capitalized product development of $121,708 and purchase of property and equipment of $53,017. 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.

Previous wording

FINANCING ACTIVITIES – Net cash used in financing activities for six months ended December 31, 2023 was $2,046, and net cash provided by financing activities for the six months ended December 31, 2022 was $45,000.

Current wording

FINANCING ACTIVITIES - Net cash provided by financing activities for the nine months ended March 31, 2024 and 2023 was $1,045 and $43,955, respectively.

Previous wording

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. The $45,000 in net cash provided by financing activities for the six months ended December 31, 2022 were from cash received from exercise of stock options of $134,000, which was partially offset by the loan to an employee of $89,000.

Current wording

The $1,045 in net cash provided by financing activities for the nine months ended March 31, 2024 was due to the increase in loan to an employee of $1,045. The $43,955 in net cash provided by financing activities for the nine months ended March 31, 2023 was from cash received from exercise of stock options of $134,000, which was partially offset by the increase in loan to an employee of $90,045.

Previous wording

Rent expense for the three months ended December 31, 2023 and 2022 were $254,402 and $111,384, respectively. Rent expense for the six months ended December 31, 2022 and 2021 were $365,819 and $222,677, respectively.

Current wording

Rent expense for the three months ended March 31, 2024 and 2023 was $117,486 and $111,469, respectively. Rent expense for the nine months ended March 31, 2024 and 2023 was $483,305 and $334,146, respectively.