0001019687-16-006317.txt : 20160516 0001019687-16-006317.hdr.sgml : 20160516 20160516170155 ACCESSION NUMBER: 0001019687-16-006317 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 50 CONFORMED PERIOD OF REPORT: 20160331 FILED AS OF DATE: 20160516 DATE AS OF CHANGE: 20160516 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FRANKLIN WIRELESS CORP CENTRAL INDEX KEY: 0000722572 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE & TELEGRAPH APPARATUS [3661] IRS NUMBER: 953733534 STATE OF INCORPORATION: NV FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-14891 FILM NUMBER: 161654886 BUSINESS ADDRESS: STREET 1: 9707 WAPLES STREET, SUITE 150 CITY: SAN DIEGO STATE: CA ZIP: 92121 BUSINESS PHONE: 858-623-0000 MAIL ADDRESS: STREET 1: 9707 WAPLES STREET, SUITE 150 CITY: SAN DIEGO STATE: CA ZIP: 92121 FORMER COMPANY: FORMER CONFORMED NAME: FRANKLIN TELECOMMUNICATIONS CORP DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: ABM COMPUTER SYSTEMS DATE OF NAME CHANGE: 19870317 FORMER COMPANY: FORMER CONFORMED NAME: AUTOMATED BUSINESS MACHINES INC DATE OF NAME CHANGE: 19830802 10-Q 1 franklin_10q-033116.htm FORM 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q

 

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2016

 

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)

 

 

 

 

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 o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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).  Yes x   No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer o   Accelerated filer o   Non-accelerated filer o   Smaller reporting company x

 

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 Registrant has 10,442,203 shares of common stock outstanding as of May 16, 2016.

 

 

 

   

 

 

FRANKLIN WIRELESS CORP.

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2016

INDEX

 

     Page
PART I – Financial Information
       
Item 1:  Consolidated Financial Statements (unaudited)   
   Consolidated Balance Sheets as of March 31, 2016 (unaudited) and June 30, 2015  4
   Consolidated Statements of Comprehensive Income (unaudited) for the three and nine months ended March 31, 2016 and 2015  5
   Consolidated Statements of Cash Flows (unaudited) for the nine months ended March 31, 2016 and 2015  6
   Notes to Consolidated Financial Statements  7
Item 2:  Management’s Discussion and Analysis of Financial Condition and Results of Operations  18
Item 3:  Quantitative and Qualitative Disclosures About Market Risk  22
Item 4:  Controls and Procedures  22
       
PART II – Other Information
       
Item 1:  Legal Proceedings  23
Item 1A:  Risk Factors  23
Item 2:  Unregistered Sales of Equity Securities and Use of Proceeds  23
Item 3:  Defaults Upon Senior Securities  23
Item 4:  Mine Safety Disclosures  23
Item 5:  Other Information  23
Item 6:  Exhibits  23
       
Signatures     24

 

 

 

 

 2 

 

 

NOTE ON FORWARD LOOKING STATEMENTS

 

You should keep in mind the following points as you read this Report on Form 10-Q:

 

The terms “we,” “us,” “our,” “Franklin,” “Franklin Wireless,” or the “Company” refer to Franklin Wireless Corp.

 

This Report on Form 10-Q 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 caption “Management’s Discussion and Analysis of Financial Condition and Results of Operation,” and elsewhere in this Quarterly Report on Form 10-Q. 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” in Item 1A of our Annual Report on Form 10-K for the year ended June 30, 2015. These forward looking statements are made only as of the date of this Report on Form 10-Q. We do not undertake to update or revise the forward looking statements, whether as a result of new information, future events or otherwise.

 

 

 

 

 

 

 

 

 

 3 

 

 

PART I – FINANCIAL INFORMATION

 

ITEM 1. Financial Statements

 

FRANKLIN WIRELESS CORP.

CONSOLIDATED BALANCE SHEETS

 

  

March 31, 2016

(unaudited)

  

June 30,

2015

 
ASSETS          
Current assets:          
Cash and cash equivalents  $10,182,253   $11,822,620 
Accounts receivable   13,537,786    5,464,182 
Other receivables, net   154,564    143,384 
Inventories, net   2,662,362    2,281,667 
Prepaid expenses and other current assets   11,631    60,339 
Prepaid income taxes       1,055,788 
Deferred tax assets, current   206,902    206,902 
Advance payments to vendors   25,851    62,321 
Total current assets   26,781,349    21,097,203 
Property and equipment, net   258,179    314,492 
Intangible assets, net   1,225,193    1,042,281 
Deferred tax assets, non-current   1,786,450    1,860,347 
Goodwill   273,285    273,285 
Other assets   135,644    129,859 
TOTAL ASSETS  $30,460,100   $24,717,467 
           
LIABILITIES AND STOCKHOLDERS' EQUITY          
Current liabilities:          
Accounts payable  $12,446,590   $7,362,075 
Advance payments from customers   107,854    693,317 
Accrued liabilities   246,421    238,619 
Income tax payable   341,912     
Short-term borrowings       148,295 
Total current liabilities   13,142,777    8,442,306 
Total liabilities   13,142,777    8,442,306 
           
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 March 31, 2016 and June 30, 2015        
Common stock, par value $0.001 per share, authorized 50,000,000 shares; 10,417,203 and 10,533,869 shares issued and outstanding as of March 31, 2016 and June 30, 2015, respectively   13,819    13,806 
Additional paid-in capital   7,286,154    7,305,767 
Retained earnings   14,387,627    13,361,091 
Treasury stock, 3,472,286 and 3,342,286 shares as of March 31, 2016 and June 30, 2015, respectively   (4,513,479)   (4,279,479)
Accumulated other comprehensive loss   (716,327)   (664,722)
Total Parent Company stockholders’ equity   16,457,794    15,736,463 
Non-controlling interests   859,529    538,698 
Total stockholders’ equity   17,317,323    16,275,161 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY  $30,460,100   $24,717,467 

 

See accompanying notes to consolidated financial statements.

 

 

 

 4 

 

 

FRANKLIN WIRELESS CORP.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

 

   Three Months Ended   Nine Months Ended 
   March 31,   March 31, 
   2016   2015   2016   2015 
Net sales  $14,146,310   $10,174,842   $46,258,257   $36,285,606 
Cost of goods sold   11,674,481    8,293,528    38,660,515    29,600,967 
Gross profit   2,471,829    1,881,314    7,597,742    6,684,639 
                     
Operating expenses:                    
Selling, general and administrative   1,332,285    1,145,194    3,743,967    3,777,978 
Research and development   693,540    722,781    2,209,718    2,238,684 
Total operating expenses   2,025,825    1,867,975    5,953,685    6,016,662 
Income from operations   446,004    13,339    1,644,057    667,977 
                     
Other income, net:                    
Interest income   2,407    2,854    8,115    8,509 
Other income, net   120,218    20,203    99,990    398,211 
Total other income, net   122,625    23,057    108,105    406,720 
Income before provision (benefit) for income taxes   568,629    36,396    1,752,162    1,074,697 
Income tax provision (benefit)   254,806    (249,000)   404,795    (39,000)
Net income   313,823    285,396    1,347,367    1,113,697 
Non-controlling interests in net loss (income) of subsidiary at 48.2%   77,547    (267,597)   (320,831)   (388,270)
Net income attributable to Parent Company  $391,370   $17,799   $1,026,536   $725,427 
                     
                     
Basic earnings per share attributable to Parent Company stockholders  $0.04   $0.00   $0.10   $0.07 
Diluted earnings per share attributable to Parent Company stockholders  $0.04   $0.00   $0.10   $0.07 
                     
Weighted average common shares outstanding – basic   10,414,536    10,533,869    10,486,606    10,533,869 
Weighted average common shares outstanding – diluted   10,630,453    10,650,609    10,702,523    10,650,609 
                     
Comprehensive income                    
Net income  $313,823   $285,396   $1,347,367   $1,113,697 
Translation adjustments   (21,057)   (208,407)   (51,605)   (334,551)
Comprehensive income   292,766    76,989    1,295,762    779,146 
Comprehensive loss (income) attributable to non-controlling interest   77,547    (267,597)   (320,831)   (388,270)
Comprehensive income (loss) attributable to controlling interest  $370,313   $(190,608)  $974,931   $390,876 

 

See accompanying notes to consolidated financial statements.

 

 

 

 5 

 

 

FRANKLIN WIRELESS CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

  

Nine Months Ended March 31,

 
   2016   2015 
CASH FLOWS FROM OPERATING ACTIVITIES:          
Net income  $1,347,367   $1,113,697 
Adjustments to reconcile net income to net cash (used in) provided by operating activities:          
Depreciation   138,683    180,203 
Amortization of intangible assets   658,535    970,576 
Deferred tax (benefit)   73,897    (185,999)
Share-based compensation   (37,500)   52,721 
Gain on forgiven debt       (40,125)
Gain on debt extinguishment       (374,608)
Increase (decrease) in cash due to change in:          
Accounts receivable   (8,084,784)   47,227 
Inventories   (380,695)   (140,440)
Prepaid expenses and other current assets   48,708    106,374 
Prepaid income taxes   1,055,788    147,000 
Advance payments to vendors   36,470    15,343 
Other assets   (5,785)   7,629 
Accounts payable   5,084,515    1,450,627 
Advance payments from customers   (585,463)   (205,945)
Accrued liabilities   7,802    (62,186)
Income tax payable   341,912     
Net cash (used in) provided by operating activities   (300,550)   3,082,094 
           
CASH FLOWS FROM INVESTING ACTIVITIES:          
Purchases of property and equipment   (82,370)   (34,232)
Payments for capitalized development costs   (663,800)   (81,591)
Purchases of intangible assets   (177,647)   (47,618)
Receipt of loan repayments from an employee       7,128 
Net cash used in investing activities   (923,817)   (156,313)
           
CASH FLOWS FROM FINANCING ACTIVITIES:          
Repurchase of common stock   (234,000)    
Issuance of stock related to stock options exercised   17,900     
Principal repayment of short-term borrowings   (148,295)    
Net cash used in financing activities   (364,395)    
           
Effect of foreign currency translation   (51,605)   (334,551)
Net decrease in cash and cash equivalents   (1,640,367)   2,591,230 
Cash and cash equivalents, beginning of period   11,822,620    8,240,595 
Cash and cash equivalents, end of period  $10,182,253   $10,831,825 
Supplemental disclosure of cash flow information:          
Cash received during the periods for:          
Interest  $8,114   $3,466 
Income taxes  $1,067,681   $ 

 

See accompanying notes to consolidated financial statements.

 

 

 

 6 

 

 

FRANKLIN WIRELESS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 1 – BASIS OF PRESENTATION

 

The accompanying unaudited consolidated financial statements of Franklin Wireless Corp. (“the Company”) have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and are presented in accordance with the requirements of Form 10-Q. In the opinion of management, the financial statements included herein contain all adjustments, including normal recurring adjustments, considered necessary to present fairly the financial position, the results of operations and comprehensive income (loss) and cash flows of the Company for the periods presented.  These financial statements and notes hereto should be read in conjunction with the financial statements and notes thereto for the fiscal year ended June 30, 2015 included in the Company’s Form 10-K filed on September 28, 2015.  The operating results or cash flows for the interim periods presented herein are not necessarily indicative of the results to be expected for any other interim period or the full year.

 

NOTE 2 - BUSINESS OVERVIEW

 

We are a provider of intelligent wireless solutions including mobile hotspots, routers and modems as well as innovative hardware and software products that support 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 solve 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.

 

We have a majority ownership position in Franklin Technology Inc. ("FTI"), a research and development facility 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 South America, the Caribbean, Europe, the Middle East and Africa ("EMEA") and Asia.

 

NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Principles of Consolidation

 

The consolidated financial statements include the accounts of the Company and a subsidiary with a majority voting interest of 51.8% (48.2% is owned by non-controlling interests) as of March 31, 2016 and June 30, 2015. 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.

 

Non-controlling Interest in a Consolidated Subsidiary

 

As of March 31, 2016, the non-controlling interest was $859,529, which represents a $320,831 increase from $538,698 as of June 30, 2015. The increase was due to the net income of subsidiary of $665,073 for the nine months ended March 31, 2016, of which 48.2% was attributable to the non-controlling interests.

 

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 management internally evaluates separate financial information, business activities and management responsibility. We have one reportable segment, consisting of the sale of wireless access products.

 

 

 

 7 

 

 

We generate revenues from four geographic areas, consisting of the United States, 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:

 

   Three Months Ended   Nine Months Ended 
   March 31,   March 31, 
Net sales:  2016   2015   2016   2015 
United States  $14,145,611   $6,999,431   $39,616,528   $26,725,077 
Caribbean and South America   699        100,699    1,415,052 
Europe, the Middle East and Africa (“EMEA”)       3,154,126    6,485,441    4,517,524 
Asia       21,285    55,589    3,627,953 
Totals  $14,146,310   $10,174,842   $46,258,257   $36,285,606 

 

Long-lived assets, net (property and equipment and intangible assets):  March 31, 2016   June 30, 2015 
United States  $1,089,842   $785,144 
Asia   393,530    571,629 
Totals  $1,483,372   $1,356,773 

 

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.

 

Fair Value of Financial Instruments

 

The carrying amounts of financial instruments such as cash equivalents, 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 management believes are readily convertible into cash, such as money market funds and certificates of deposit.

 

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 March 31, 2016 and June 30, 2015.

 

Revenue Recognition

 

We recognize revenue in accordance with 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 recognize revenues from product sales upon shipment of the products to customers or when the products are received by the customers in accordance with shipping or delivery terms. We provide a warranty for one year from the shipment date, which is covered by our vendors pursuant to purchase agreements. Any net warranty related expenditures made by us have not historically been material. Under our sales return policy, customers may generally return products that are under warranty for repair or replacement.

 

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 expense associated with capitalized product development costs associated with complete technology.

 

 

 

 8 

 

 

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.

 

The costs of product development that are capitalized once technological feasibility is determined (noted as Technology in progress in the Intangible Assets table) include payroll, employee benefits, and other headcount-related expenses associated with product development. Related licenses and certification costs are also capitalized. 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 March 31, 2016 and June 30, 2015, capitalized product development costs in progress were $135,000 and $0, respectively, and these amounts are included in intangible assets in our consolidated balance sheets. During the three months and nine months ended March 31, 2016, we incurred $60,223 and $663,800 in capitalized product development costs, 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 (loss).

 

Research and Development Costs

 

Costs associated with research and development are expensed as incurred. Research and development costs were $693,540 and $722,781 for the three months ended March 31, 2016 and 2015, respectively, and $2,209,718 and $2,238,684 for the nine months ended March 31, 2016 and 2015, 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. In general, our products are shipped directly from our vendors to our customers. 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 consolidated statements of comprehensive income, were $435,500 and $201,249 for the three months ended March 31, 2016 and 2015, respectively, and $1,106,928 and $876,827 for the nine months ended March 31, 2016 and 2015, 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.

 

Inventories

 

Our inventories consist of finished goods and are stated at the lower of cost or market, 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 the control of the Company. We may write down our inventory value for potential obsolescence and excess inventory. As of March 31, 2016 and June 30, 2015, we have recorded an inventory reserve in the amount of $120,867 for inventories that we have identified as obsolete or slow-moving.

 

 

 

 9 

 

 

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 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 are 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 periods ended March 31, 2016 and June 30, 2015.

 

The definite lived intangible assets consisted of the following as of March 31, 2016:

 

Definite lived intangible assets:  Expected Life 

Average

Remaining

life

  

Gross

Intangible

Assets

  

Accumulated

Amortization

  

Net Intangible

Assets

 
Complete technology  3 years      $490,000   $490,000   $ 
Complete technology  3 years       1,517,683    1,517,683     
Complete technology  3 years       281,714    281,714     
Complete technology  3 years       361,249    361,249     
Complete technology  3 years       174,009    174,009     
Complete technology  3 years       909,962    909,962     
Complete technology  3 years   1.0 years    65,000    43,333    21,667 
Complete technology  3 years   1.8 years    2,402    1,001    1,401 
Complete technology  3 years   2.0 years    6,405    2,135    4,270 
Supply and development agreement  8 years   1.6 years    1,121,000    910,813    210,187 
Technology in progress  Not Applicable       135,000        135,000 
Software  5 years   1.5 years    214,332    192,308    22,024 
Patents  10 years   7.3 years    58,390    2,207    56,183 
Certifications and licenses  3 years   2.3 years     2,472,359    1,697,898    774,461 
Total as of March 31, 2016          $7,809,505   $6,584,312   $1,225,193 

 

 

 

 10 

 

 

The definite lived intangible assets consisted of the following as of June 30, 2015:

 

Definite lived intangible assets:  Expected Life 

Average

Remaining

life

  

Gross

Intangible

Assets

  

Accumulated

Amortization

  

Net Intangible

Assets

 
Complete technology  3 years      $490,000   $490,000   $ 
Complete technology  3 years       1,517,683    1,517,683     
Complete technology  3 years       281,714    281,714     
Complete technology  3 years       361,249    361,249     
Complete technology  3 years   0.3 years    174,009    159,508    14,501 
Complete technology  3 years   0.5 years    909,962    733,025    176,937 
Complete technology  3 years   1.8 years    65,000    27,083    37,917 
Complete technology  3 years   2.5 years    2,402    400    2,002 
Complete technology  3 years   2.8 years    6,405    534    5,871 
Supply and development agreement  8 years   2.3 years    1,121,000    805,719    315,281 
Technology in progress  Not Applicable                
Software  5 years   1.1 years    197,418    158,284    39,134 
Patents  10 years   6.8 years    57,655    1,005    56,650 
Certifications and licenses  3 years   0.4 years    1,783,561    1,389,573    393,988 

Total as of June 30, 2015

          $6,968,058   $5,925,777   $1,042,281 

 

Amortization expense recognized during the three months ended March 31, 2016 and 2015 was $174,488 and $317,066, respectively, and during the nine months ended March 31, 2016 and 2015 was $658,535 and $970,576, respectively.

 

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 asset; 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.

 

As of March 31, 2016, we are not aware of any events or changes in circumstances 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.

 

 

 

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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.

 

As of March 31, 2016, we have no material unrecognized tax benefits. We recorded an income tax provision of $254,806 and $404,795 for the three and nine months ended March 31, 2016, respectively, and an increase in income tax payable of $250,168 and $341,912 for the three and nine months ended March 31, 2016, respectively.

 

Net Loss per Share Attributable to Common Stockholders

 

Basic net loss per share is calculated by dividing the net loss by the weighted-average number of common shares that were outstanding for the period, without consideration for potential common shares. Diluted net loss per share is calculated by dividing the net loss 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

 

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 nine months ended March 31, 2016, sales to our three largest customers accounted for 68%, 14%, and 13% of our consolidated net sales and 45%, 46%, and 1% of our accounts receivable balance, as of March 31, 2016. In the same period in 2015, sales to our two largest customers accounted for 63% and 13% of our consolidated net sales and 79% and 11% of our accounts receivable balance as of March 31, 2015. No other customers accounted for more than ten percent of total net sales for the nine months ended March 31, 2016 and 2015 and no other customers accounted for more than ten percent of total accounts receivable for the nine months ended March 31, 2016 and 2015.

 

For the nine months ended March 31, 2016, we purchased the majority of our wireless data products from one manufacturing company located in Asia. If this manufacturing company 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 the Company's revenue.  For the nine months ended March 31, 2016, we purchased wireless data products from this manufacturer in the amount of $38,325,448, or 99% of total purchases, and had related accounts payable of $11,837,603 as of March 31, 2016. For the nine months ended March 31, 2015, we purchased wireless data products from one manufacturing company in the amount of $22,691,229, or 78% of total purchases, and had related accounts payable of $6,392,081 as of March 31, 2015.

 

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.

 

 

 

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Recently Issued Accounting Pronouncements

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers. This amendment addresses revenue from contracts with customers, which clarifies existing accounting literature relating to how and when a company recognizes revenue. Under the update, a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods and services. ASU 2015-14 delayed the effective date of this update to annual reporting periods beginning after December 15, 2017, and the amendment is to be applied retrospectively or the cumulative effect as of the date of adoption. Management is currently evaluating the impact ASU 2014-09 will have on the consolidated financial statements and related disclosures.

 

In August 2014, the FASB issued ASU 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. This ASU introduces an explicit requirement for management to assess if there is substantial doubt about an entity’s ability to continue as a going concern, and to provide related footnote disclosures in certain circumstances. In connection with each annual and interim period, management must assess if there is substantial doubt about an entity’s ability to continue as a going concern within one year after the issuance date. Disclosures are required if conditions give rise to substantial doubt. ASU 2014-15 is effective for all entities in the first annual period ending after December 15, 2016. Management does not believe the potential effects of this ASU on the consolidated financial statements will be material.

 

In April 2015, the FASB issued ASU 2015-03, Interest—Imputation of Interest: Simplifying the Presentation of Debt Issuance Costs. The update requires debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of the related debt liability instead of being presented as an asset. Debt disclosures will include the face amount of the debt liability and the effective interest rate. The update requires retrospective application and represents a change in accounting principle. ASU 2015-15 was issued subsequently to permit costs associated with a line of credit arrangement to be presented as assets and amortized ratably over the term of the arrangement. These updates will be effective for the Company on July 1, 2016. Management does not believe that these updates will materially impact the Company’s consolidated financial statements.

 

In July 2015, the FASB issued ASU 2015-11, Inventory—Simplifying the Measurement of Inventory. ASU 2015-11 requires inventory to be subsequently measured using the lower of cost and net realizable value, thereby eliminating the market value approach. Net realizable value is defined as the “estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation.” ASU 2015-11 is effective for the Company beginning on July 1, 2017 and is applied prospectively. Early adoption is permitted. The Company is currently evaluating the impact that this guidance will have on its consolidated financial statements and disclosure.

 

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”), which modified lease accounting for both lessees and lessors to increase transparency and comparability by recognizing lease assets and lease liabilities by lessees for those leases classified as operating leases under previous accounting standards and disclosing key information about leasing arrangements. ASU 2016-02 will be effective for the Company beginning in the first quarter of fiscal 2020 and early adoption is permitted. The Company is currently evaluating the impact of adopting the new lease standard on its consolidated financial statements.

 

NOTE 4 – PROPERTY AND EQUIPMENT

 

Property and equipment consisted of the following as of:

 

   March 31, 2016   June 30, 2015 
Machinery and facility  $303,520   $300,650 
Office equipment   382,023    373,554 
Molds   848,680    775,499 
Construction-in progress       2,150 
    1,534,223    1,451,853 
Less accumulated depreciation   (1,276,044)   (1,137,361)
Total  $258,179   $314,492 

 

Depreciation expense associated with property and equipment was $39,336 and $58,885 for the three months ended March 31, 2016 and 2015, respectively, and $138,683 and $180,203 for the nine months ended March 31, 2016 and 2015, respectively.

 

 

 

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NOTE 5 – ACCRUED LIABILITIES

 

Accrued liabilities consisted of the following as of:

 

   March 31, 2016   June 30, 2015 
Accrued salaries, severance  $113,313   $140,820 
Accrued salaries, payroll deductions owed to government entities   45,936    8,434 
Accrued vacation   37,930    75,477 
Taxes   5,635    10,823 
Other accrued liabilities   43,607    3,065 
Total  $246,421   $238,619 

 

NOTE 6 – SHORT-TERM BORROWINGS

 

Short-term borrowings consisted of the following as of:

 

   March 31, 2016   June 30, 2015 
Loan dated June 2011, due to a financial institution, with monthly interest payments (interest rate of 8.90% per annum), and the principal balance due March 2016 (interest rate of 5.025% per annum as extended).  The loan was paid off in full during the three months ending March 31, 2016.  $   $148,295 
           

 

The short-term borrowings of $0 and $148,295 as of March 31, 2016 and June 30, 2015, respectively, resulted from the consolidation of FTI’s debt.

 

NOTE 7 – EARNINGS PER SHARE

 

We report earnings per share in accordance with ASC 260, “Earnings Per Share.”  Basic earnings 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. The weighted average number of shares outstanding used to compute earnings per share is as follows:

 

   Three Months ended March 31,   Nine Months Ended March 31, 
   2016   2015   2016   2015 
Net income attributable to Parent Company  $391,370   $17,799   $1,026,536   $725,427 
                     
Weighted-average shares of common stock outstanding:                    
Basic shares outstanding   10,414,536    10,533,869    10,486,606    10,533,869 
Dilutive effect of common stock equivalents arising from stock options   215,917    116,740    215,917    116,740 
Diluted shares outstanding   10,630,453    10,650,609    10,702,523    10,650,609 
Basic earnings per share  $0.04   $0.00   $0.10   $0.07 
Diluted earnings per share  $0.04   $0.00   $0.10   $0.07 

 

 

 

 

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NOTE 8 - COMMITMENTS AND CONTINGENCIES

 

Leases

 

We leased approximately 11,318 square feet of office space located in San Diego, California, at a monthly rent of $16,576; although the lease expired on August 31, 2015, we continued to occupy the premises with the consent of the landlord through October 27, 2015. On September 9, 2015, we signed a lease for new office space consisting of approximately 12,775 square feet, also located in San Diego, California, at a monthly rent of $23,115, 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 is four years 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. Rent expense related to these leases was $69,344 and $49,728 for the three months ended March 31, 2016 and 2015, respectively, and $200,424 and $149,185 for the nine months ended March 31, 2016 and 2015, 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, and the lease expires on September 1, 2017. 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 expires on September 1, 2017. In addition to monthly rent, the lease provides 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 $32,100 and $24,000 for the three months ended March 31, 2016 and 2015, respectively, and $96,300 and $72,000 for the nine months ended March 31, 2016 and 2015, respectively.

 

We lease one corporate housing facility for our vendors and employees who travel, under a non-cancelable operating lease that expired on September 13, 2015 and was extended to September 5, 2016. Rent expense related to this lease was $2,371 and $2,603 for the three months ended March 31, 2016 and 2015, respectively, and $7,267 and $7,983 for the nine months ended March 31, 2016 and 2015, respectively.

 

Litigation

 

We are from time to time involved in certain legal proceedings and claims arising in the ordinary course of business.

 

C-Motech Co., Ltd.

 

On July 27, 2010, we entered into a Common Stock Repurchase Agreement with C-Motech (the “Agreement”), under which we agreed to repurchase 3,370,356 shares of our Common Stock from C-Motech for $3,500,000. A total of 1,803,684 shares were repurchased on the date of the Agreement in exchange for non-cash consideration in the amount of $1,873,065, which represented amounts owed to the Company by C-Motech for certain marketing funds as well as the settlement of a price dispute for products previously purchased by the Company from C-Motech. Under the Agreement, the remaining 1,566,672 shares were to be repurchased by us upon payment of the balance, $1,626,935, on or before December 31, 2010.

 

On January 28, 2011 (the “Amendment Date”) the Agreement was amended to reflect (1) a change in the date the 1,566,672 shares are to be repurchased from C-Motech from December 31, 2010 to March 31, 2011, and (2) a change to the non-cash consideration of $1,873,065. In exchange for the 1,803,684 shares, we were to pay cash to C-Motech (in the same amount) for the shares, by March 31, 2011. In addition, in a separate agreement dated January 28, 2011, C-Motech agreed to pay us $1,873,065, for amounts owed, by March 31, 2011. The purpose of these revisions was to more clearly differentiate each party’s payment obligations to the other with respect to this transaction. Following the Amendment Date, we paid C-Motech $1,873,065 in exchange for the 1,803,684 shares previously transferred to us by C-Motech, and C-Motech paid us $1,873,065 for amounts owed, of which $1,581,457 was booked to other income and $291,608 was booked to cost of goods sold. The repurchase of the remaining 1,566,672 shares from C-Motech was not completed. We have provided formal notification to C-Motech that it is in breach of its obligations and we have also provided a demand to sell the shares back to us. We have attempted to tender payment for the shares without results. We were previously advised that two individuals, Cheng-Ji Zhu and Ok-Nam Yun, claim to have purchased the shares from C-Motech through its former CEO; however, the authority of the former CEO to agree to the sale of the shares was disputed by C-Motech. The ownership of the shares was the subject of litigation involving Cheng-Ji Zhu and Ok-Nam Yun and C-Motech in U.S. and Korean courts. On April 1, 2015 the Circuit Court of Cook County, Illinois County Department, Chancery Division issued an Order with respect to the matter of Cheng-Ji Zhu and Ok-Nam Yun, plaintiffs, v. Integrity Stock Transfer and Registrar, Mountain Share Transfer, Inc. and C-Motech Company Ltd., defendants. The Order recognizes and enforces the plaintiff's Motion to Recognize and Enforce Foreign Judgment in which the plaintiffs previously prevailed over C-Motech with respect to the ownership of the 1,566,672 shares of Franklin Wireless Common Stock in an action that took place in Korea.

 

 

 15 

 

 

On May 7, 2013, we filed a lawsuit against C-Motech in the Superior Court of California for the County of San Diego for breach of the Agreement and breach of other contracts between the parties relating to indemnification and other obligations. On February 25, 2014, C-Motech answered the complaint and on February 26, 2014, C-Motech filed a Notice of Removal from the Superior Court of the State of California for the County of San Diego to the United States District Court for the Southern District of California. On June 19, 2014, C-Motech filed a voluntary petition for relief under Chapter 15 of the U.S. Bankruptcy Code and on June 27, 2014, C-Motech filed a Motion for Recognition of a Foreign Main Proceeding under Chapter 15 of the U.S. Bankruptcy Code and Further Relief. On July 10, 2014, this motion was heard in the U.S. Bankruptcy Court for the Southern District of California during which the Court ordered that C-Motech's bankruptcy proceeding in South Korea was recognized as a foreign main proceeding and that our lawsuit against C-Motech in the U.S. District Court is stayed. The effect of this ruling is that we must participate in C-Motech's bankruptcy proceeding in South Korea if we wish to pursue our various claims against C-Motech.

 

On September 9, 2015, registered ownership of the shares was transferred from C-Motech to Cheng-Ji Zhu (838,350 shares) and Ok-Nam Yun (728,322 shares). Subsequently, on December 30, 2015, the Company repurchased 130,000 of the shares from Ok-Nam Yun.

 

Novatel Wireless, Inc.

 

On December 10, 2010, Novatel Wireless, Inc. and Novatel Wireless Solutions, Inc. ("Novatel") filed a complaint in the United States District Court for the Southern District of California, against us and one other defendant. The complaint alleges that certain products, including, but not limited to, mobile data hot spots and data modems, infringe on U.S. Patent Nos. 5,129,098; 7,318,225; 7,574,737 and 7,319,715. On April 13, 2012, the plaintiff filed a Second Amended Complaint which amended certain claims and added U.S. Patent No. 7,944,901 to the original complaint. On April 27, 2012, we filed a Motion to Dismiss the Second Amended Complaint as to certain of the claims. On July 6, 2012, the Court held oral argument on the Motion to Dismiss and on July 19, 2012, the Court issued an order granting in part and denying in part the Motion to Dismiss. On August 2, 2012, we answered the complaint and an Early Neutral Evaluation Conference took place on October 31, 2012 and a follow-up Settlement Conference was held on June 12, 2013. A claim construction hearing took place on October 9, 2014. On November 25, 2014, the Court granted plaintiff's Joint Motion to Joinder of Required Party, which added Nova Intellectual Solutions, LLC ("NIS") as a plaintiff to this litigation. Novatel had previously assigned the patents-in-suit to Strategic Intellectual Solutions, LLC, which is the parent company of NIS.

 

On April 24, 2015, NIS filed a complaint in the United States District Court for the Southern District of California, against us and FTI. The complaint alleges that one of the Company's products infringes on U.S. Patent No. 7,944,901.

 

On July 20, 2015, a Settlement Conference took place during which we and NIS agreed to settle this matter and an agreement governing the settlement was executed on October 20, 2015.

 

On October 1, 2015, we and Novatel filed a Joint Motion For Dismissal With Prejudice as to the patent infringement claims made by Novatel against us. On October 28, 2015, we and NIS filed a Joint Motion For Dismissal With Prejudice as to the patent infringement claims made by it against the Company and FTI.

 

Adaptix, Inc.

 

In October 2015 we were notified that on June 12, 2015, Adaptix, Inc. filed a complaint in the United States District Court for the Eastern District of Texas, Tyler Division against one of our customers. The complaint alleges that certain wireless devices, including one device provided by the Company, infringe on U.S. Patent No. 8,934,375. As of March 31, 2016, this legal proceeding is pending, but we do not believe that this action will have a material effect on the Company.

 

Change of Control Agreements

 

On September 21, 2009 we entered into Change of Control Agreements with OC Kim, our President, Yun J. (David) Lee, our Chief Operating Officer, and Yong Bae Won, our Vice President, Engineering. 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.

 

 

 

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The Change of Control Agreement with Mr. Kim calls for a payment of $5 million upon a change of control; the agreement with Mr. Lee calls for a payment of $2 million upon a change of control; and the agreement with Mr. Won was for two years and called for a payment of $1 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 21, 2017. The Change of Control Agreement with Mr. Won expired on September 21, 2014 and was not renewed or extended.

 

NOTE 9 – LONG-TERM INCENTIVE PLAN AWARDS

 

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.

 

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. Compensation expense recorded under this method for the three and nine months ended March 31, 2016 was ($12,500) and ($37,500), respectively. The expense credits for the three and nine months ended March 31, 2016 resulted from the reversal of expenses booked in prior periods for stock options for a small number of employees that were cancelled. This amount increased income from operations and income before provision for income taxes by the same amount by decreasing compensation expense recognized in selling, general and administrative expense.

 

A summary of the status of our stock options is presented below:

 

           Weighted-     
           Average     
       Weighted-   Remaining     
       Average   Contractual   Aggregate 
       Exercise   Life   Intrinsic 
Options  Shares   Price   (In Years)   Value 
                     
Outstanding as of June 30, 2015   850,337   $1.24    4.36   $306,583 
Granted                   
Exercised   (13,334)   1.34    5.64    (33,335)
Cancelled                   
Forfeited or Expired                   
                     
Outstanding as of March 31, 2016   837,003   $1.24    3.58   $1,056,450 
                     
Exercisable as of March 31, 2016   837,003   $1.24    3.58   $1,056,450 

 

The aggregate intrinsic value in the preceding table represents the total pretax intrinsic value, based upon the Company’s closing stock price of $2.50 as of March 31, 2016, 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 March 31, 2016, in the amount of 837,003 shares, was $1.15 per share.

 

As of March 31, 2016, there was no unrecognized compensation cost related to non-vested stock options granted.

 

 

 

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 ITEM 2.  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” in the Company’s Form 10-K for the year ended June 30, 2015, filed on September 28, 2015.  In light of these risks, uncertainties and assumptions, the forward-looking events discussed in this report might not occur.

 

BUSINESS OVERVIEW

 

We are a provider of intelligent wireless solutions including mobile hotspots, routers and modems as well as innovative hardware and software products that support 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 solve 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.

 

We have a majority ownership position in FTI, a research and development facility 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 South America, the Caribbean, EMEA 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, 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, 2015, 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 three months ended March 31, 2016.

 

 

 

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RESULTS OF OPERATIONS

 

The following table sets forth, for the three and nine months ended March 31, 2016 and 2015, our statements of comprehensive income including data expressed as a percentage of sales:

 

   Three Months Ended   Nine Months Ended 
   March 31,   March 31, 
   2016   2015   2016   2015 
                 
Net sales   100.0%    100.0%    100.0%    100.0% 
Cost of goods sold   82.5%    81.5%    83.6%    81.6% 
Gross profit   17.5%    18.5%    16.4%    18.4% 
Operating expenses   14.3%    18.3%    12.8%    16.6% 
Income from operations   3.2%    0.2%    3.6%    1.8% 
Other income, net   0.9%    0.2%    0.2%    1.2% 
Net income before income taxes   4.1%    0.4%    3.8%    3.0% 
Income tax provision (benefit)   1.8%    (2.4%)   0.9%    (0.1%)
Net income   2.3%    2.8%    2.9%    3.1% 
Non-controlling interest in net loss (income) of subsidiary   0.5%    (2.6%)   (0.7%)   (1.1%)
Net income attributable to Parent Company stockholders   2.8%    0.2%    2.2%    2.0% 

 

THREE MONTHS ENDED MARCH 31, 2016 COMPARED TO THREE MONTHS ENDED MARCH 31, 2015

 

NET SALES - Net sales increased by $3,971,468, or 39.0%, to $14,146,310 for the three months ended March 31, 2016 from $10,174,842 for the corresponding period of 2015. For the three months ended March 31, 2016, net sales by geographic regions, consisting of the United States, South America and the Caribbean, EMEA and Asia, were $14,145,611 (100.0% of net sales), $699 (0.0% of net sales), $0 (0.0% of net sales) and $0 (0.0% of net sales), respectively. For the three months ended March 31, 2015, net sales by geographic regions, consisting of the United States, South America and the Caribbean, EMEA and Asia, were $6,999,431 (68.8% of net sales), $0 (0.0% of net sales), $3,154,126 (31.0% of net sales) and $21,285 (0.2% of net sales), respectively.

 

Net sales in the United States increased by $7,146,180, or 102.1%, to $14,145,611 for the three months ended March 31, 2016 from $6,999,431 for the corresponding period of 2015. The increase in net sales was primarily due to the launch of a new product with a carrier customer as well as the addition of a new customer. Net sales in the South American and Caribbean regions increased by $699 to $699 for the three months ended March 31, 2016 from $0 for the corresponding period of 2015.   The increase 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 timing of orders placed by a relatively small number of customers. Net sales in EMEA decreased by $3,154,126, or 100.0%, to $0 for the three months ended March 31, 2016 from $3,154,126 for the corresponding period of 2015. The decrease in net sales was due to timing of orders placed by a carrier customer in Africa. Net sales in Asia decreased by $21,285, or 100.0%, to $0 for the three months ended March 31, 2016 from $21,285 for the corresponding period of 2015. The decrease in net sales was primarily due to lower product and component sales generated by FTI, which typically vary from period to period.

 

GROSS PROFIT – Gross profit increased by $590,515, or 31.4%, to $2,471,829 for the three months ended March 31, 2016 from $1,881,314 for the corresponding period of 2015.  The gross profit in terms of net sales percentage was 17.5% for the three months ended March 31, 2016 compared to 18.5% for the corresponding period of 2015. 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.

 

OPERATING EXPENSES - Operating expenses increased by $157,850, or 8.5%, to $2,025,825 for the three months ended March 31, 2016 from $1,867,975 for the corresponding period of 2015.  The increase was primarily due to higher shipping and handling costs resulting from the volume increase in product shipments as well as higher travel related expenses, which were partially offset by lower legal, research and development, amortization and share-based compensation expenses.

 

OTHER INCOME, NET - Other income, net increased by $99,568, or 431.8%, to $122,625 for the three months ended March 31, 2016 from $23,057 for the corresponding period of 2015. The increase was primarily due to favorable changes in foreign currency exchange rates that occurred during the three months ended March 31, 2016.

 

 

 

 19 

 

 

NINE MONTHS ENDED MARCH 31, 2016 COMPARED TO NINE MONTHS ENDED MARCH 31, 2015

 

NET SALES - Net sales increased by $9,972,651, or 27.5%, to $46,258,257 for the nine months ended March 31, 2016 from $36,285,606 for the corresponding period of 2015. For the nine months ended March 31, 2016, net sales by geographic regions, consisting of the United States, South America and the Caribbean, EMEA and Asia, were $39,616,528 (85.7% of net sales), $100,699 (0.2% of net sales), $6,485,441 (14.0% of net sales), and $55,589 (0.1% of net sales), respectively. For the nine months ended March 31, 2015, net sales by geographic regions, consisting of the United States, South America and the Caribbean, EMEA and Asia, were $26,725,077 (73.7% of net sales), $1,415,052 (3.9% of net sales), $4,517,524 (12.4% of net sales) and $3,627,953 (10.0% of net sales), respectively.

 

Net sales in the United States increased by $12,891,451, or 48.2%, to $39,616,528 for the nine months ended March 31, 2016 from $26,725,077 for the corresponding period of 2015. The increase in net sales was primarily due to increased demand for one of the Company's products, the launch of a new product with a carrier customer as well as the addition of a new customer. Net sales in the South American and Caribbean regions decreased by $1,314,353, or 92.9%, to $100,699 for the nine months ended March 31, 2016 from $1,415,052 for the corresponding period of 2015. 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 timing of orders placed by a relatively small number of customers. Net sales in EMEA increased by $1,967,917, or 43.6%, to $6,485,441 for the nine months ended March 31, 2016 from $4,517,524 for the corresponding period of 2015. The increase in net sales was due to timing of orders placed by a carrier customer in Africa. Net sales in Asia decreased by $3,572,364, or 98.5%, to $55,589 for the nine months ended March 31, 2016 from $3,627,953 for the corresponding period of 2015. The decrease in net sales was primarily due to lower product and component sales generated by FTI, which typically vary from period to period.

 

GROSS PROFIT – Gross profit increased by $913,013, or 13.7%, to $7,597,742 for the nine months ended March 31, 2016 from $6,684,639 for the corresponding period of 2015.  The gross profit in terms of net sales percentage was 16.4% for the nine months ended March 31, 2016 compared to 18.4% for the corresponding period of 2015. 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.

 

OPERATING EXPENSES - Operating expenses decreased by $62,977, or 1.0%, to $5,953,685 for the nine months ended March 31, 2016 from $6,016,662 for the corresponding period of 2015.  The decrease was primarily due to lower legal, research and development, amortization, depreciation and share-based compensation expenses, which were partially offset by higher shipping and handling costs resulting from the volume increase in product shipments.

 

OTHER INCOME, NET - Other income, net decreased by $298,615, or 75.0%, to $108,105 for the nine months ended March 31, 2016 from $406,720 for the corresponding period of 2015. The decrease was primarily due to expenses that were reversed associated with certain marketing related expenses accrued in prior periods which expired during the nine months ended March 31, 2015. During the nine months ended March 31, 2016, no expenses were reversed or expired. This decrease was partially offset by an increase in other income, net due to favorable changes in foreign currency exchange rates that occurred during the nine months ended March 31, 2016.

 

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 March 31, 2017.  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 March 31, 2016 consisted of cash and cash equivalents of $10,182,253.  We believe we have sufficient available capital to cover our existing operations and obligations through at least March 31, 2017.  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.

 

 

 

 20 

 

 

OPERATING ACTIVITIES – Net cash used in operating activities for the nine months ended March 31, 2016 was $300,550 and net cash provided by operating activities for the nine months ended March 31, 2015 was $3,082,094.

 

The $300,550 in net cash used in operating activities for the nine months ended March 31, 2016 was primarily due to the increase in accounts receivable of $8,084,784, which was partially offset by the increase in accounts payable of $5,084,515, the decrease in prepaid income taxes of $1,055,788 as well as our operating results (net income adjusted for depreciation, amortization and other non-cash charges). The $3,082,094 in net cash provided by operating activities for the nine months ended March 31, 2015 was primarily due to the increase in accounts payable of $1,450,627 as well as our operating results (net income adjusted for depreciation, amortization and other non-cash charges).

 

INVESTING ACTIVITIES – Net cash used in investing activities for the nine months ended March 31, 2016 and 2015 were $923,817 and $156,313, respectively.

 

The $923,817 in net cash used in investing activities for the nine months ended March 31, 2016 was primarily due to the payments for capitalized product development of $663,800 and purchases of intangible assets and property and equipment of $177,647 and $82,370, respectively. The $156,313 in net cash used in investing activities for the nine months ended March 31, 2015 was primarily due to the payments for capitalized product development of $81,591 and purchases of intangible assets and property and equipment of $47,618 and $34,232, respectively.

 

FINANCING ACTIVITIES – Net cash used in financing activities for the nine months ended March 31, 2016 and 2015 were $364,395 and $0, respectively. The $364,395 in net cash used in financing activities for the nine months ended March 31, 2016 was due to the repurchase of 130,000 shares of our common stock from a shareholder and the principal repayment of short-term borrowings of $148,295, which were partially offset by the cash received from the issuance of stock related to stock options exercised of $17,900.

 

CONTRACTUAL OBLIGATIONS AND OTHER COMMITMENTS

 

Leases

 

We leased approximately 11,318 square feet of office space located in San Diego, California, at a monthly rent of $16,576; although the lease expired on August 31, 2015, we continued to occupy the premises with the consent of the landlord through October 27, 2015. On September 9, 2015, we signed a lease for new office space consisting of approximately 12,775 square feet, also located in San Diego, California, at a monthly rent of $23,115, 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 is four years 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. Rent expense related to these leases was $69,344 and $49,728 for the three months ended March 31, 2016 and 2015, respectively, and $200,424 and $149,185 for the nine months ended March 31, 2016 and 2015, 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, and the lease expires on September 1, 2017. 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 expires on September 1, 2017. In addition to monthly rent, the lease provides 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 $32,100 and $24,000 for the three months ended March 31, 2016 and 2015, respectively, and $96,300 and $72,000 for the nine months ended March 31, 2016 and 2015, respectively.

 

We lease one corporate housing facility for our vendors and employees who travel, under a non-cancelable operating lease that expired on September 13, 2015 and was extended to September 5, 2016. Rent expense related to this lease was $2,371 and $2,603 for the three months ended March 31, 2016 and 2015, respectively, and $7,267 and $7,983 for the nine months ended March 31, 2016 and 2015, respectively.

 

 

 21 

 

 

Recently Issued Accounting Pronouncements

 

Refer to NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES in the Consolidated Financial Statements.

 

OFF-BALANCE SHEET ARRANGEMENTS

 

None.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

As a “smaller reporting company,” the Company is not required to respond to this item.

 

ITEM 4. CONTROLS AND PROCEDURES

 

 

Disclosure Controls and Procedures

 

The Company’s President and Chief Financial Officer have concluded, based on an evaluation of the Company’s disclosure controls and procedures (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) and 15(d)-15(e)), that such disclosure controls and procedures were effective as of the end of the period covered by this report.

 

Changes in Internal Control Over Financial Reporting

 

There has been no change in the Company’s internal control over financial reporting during the three months ended March 31, 2016 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

 

 

 22 

 

 

PART II – OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

We have provided information about legal proceedings in which we are involved in Note 8 of the notes to consolidated financial statements for the nine months ended March 31, 2016, contained within this Quarterly Report on Form 10-Q.

 

ITEM 1A. RISK FACTORS

 

Our Annual Report on Form 10-K for the fiscal year ended June 30, 2015, filed with the SEC on September 28, 2015 (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.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

None.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

None.

 

ITEM 5. OTHER INFORMATION

 

None.

 

ITEM 6. EXHIBITS

 

31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS XBRL Instance document
101.SCH XBRL Schema
101.CAL XBRL Calculation Linkbase
101.DEF XBRL Definition Linkbase
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 23 

 

 

SIGNATURES

 

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

(Principal Executive Officer)

     
  By:

/s/ Richard T. Walker

 
   

Richard T. Walker

Chief Financial Officer

(Principal Financial Officer)

Dated: May 16, 2016    

 

 

 

 

 24 

EX-31.1 2 franklin_10q-ex3101.htm CERTIFICATION

Exhibit 31.1

 

CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

 

I, OC Kim, President of Franklin Wireless Corp., certify that:

 

1)I have reviewed this quarterly report on Form 10-Q of Franklin Wireless Corp.;
    
2)Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
    
3)Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
    
4)I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

 

 a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant is made known to us by others within those entities, particularly during the period in which this report is being prepared;
     
 b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;
     
 c)Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report my conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
     
 d)Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

 

5)I have disclosed, based on my most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

 a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

/s/ OC KIM                 

OC Kim

President

May 16, 2016

 

 

 

   

 

EX-31.1 3 franklin_10q-ex3102.htm CERTIFICATION

Exhibit 31.2

 

CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

 

I, Richard T. Walker, Chief Financial Officer of Franklin Wireless Corp., certify that:

 

1)I have reviewed this quarterly report on Form 10-Q of Franklin Wireless Corp.;
    
2)Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
    
3)Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
    
4)I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

 

 a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant is made known to us by others within those entities, particularly during the period in which this report is being prepared;
     
 b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;
     
 c)Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report my conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
     
 d)Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

 

5)I have disclosed, based on my most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

 a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

/s/ RICHARD T. WALKER                

Richard T. Walker

Chief Financial Officer

May 16, 2016

 

 

   

 

EX-32.1 4 franklin_10q-ex3201.htm CERTIFICATION

Exhibit 32.1

 

CERTIFICATION PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

 

In connection with the Quarterly Report of Franklin Wireless Corp. (the "Company") on Form 10-Q for the three and nine months ended March 31, 2016 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, OC Kim, President of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:

 

(1)

The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

  
(2)The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

 

/s/ OC KIM                   

OC Kim

President

May 16, 2016

 

A signed copy of this written statement required by section 906 of the Sarbanes-Oxley Act of 2002 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

 

 

 

   

 

EX-32.2 5 franklin_10q-ex3202.htm CERTIFICATION

Exhibit 32.2

 

CERTIFICATION PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

 

In connection with the Quarterly Report of Franklin Wireless Corp. (the "Company") on Form 10-Q for the three and nine months ended March 31, 2016 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Richard T. Walker, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:

 

(1)

The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

  
(2)The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

 

/s/ RICHARD T. WALKER           

Richard T. Walker

May 16, 2016

 

A signed copy of this written statement required by section 906 of the Sarbanes-Oxley Act of 2002 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

 

 

 

   

 

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Document and Entity Information - shares
9 Months Ended
Mar. 31, 2016
May. 16, 2016
Document And Entity Information    
Entity Registrant Name FRANKLIN WIRELESS CORP  
Entity Central Index Key 0000722572  
Document Type 10-Q  
Document Period End Date Mar. 31, 2016  
Amendment Flag false  
Current Fiscal Year End Date --06-30  
Is Entity a Well-known Seasoned Issuer? No  
Is Entity a Voluntary Filer? No  
Is Entity's Reporting Status Current? Yes  
Entity Filer Category Smaller Reporting Company  
Entity Common Stock, Shares Outstanding   10,442,203
Document Fiscal Period Focus Q3  
Document Fiscal Year Focus 2016  
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Consolidated Balance Sheets (Unaudited) - USD ($)
Mar. 31, 2016
Jun. 30, 2015
Current assets:    
Cash and cash equivalents $ 10,182,253 $ 11,822,620
Accounts receivable 13,537,786 5,464,182
Other receivables, net 154,564 143,384
Inventories, net 2,662,362 2,281,667
Prepaid expenses and other current assets 11,631 60,339
Prepaid income taxes 0 1,055,788
Deferred tax assets, current 206,902 206,902
Advance payments to vendors 25,851 62,321
Total current assets 26,781,349 21,097,203
Property and equipment, net 258,179 314,492
Intangible assets, net 1,225,193 1,042,281
Deferred tax assets, non-current 1,786,450 1,860,347
Goodwill 273,285 273,285
Other assets 135,644 129,859
TOTAL ASSETS 30,460,100 24,717,467
Current liabilities    
Accounts payable 12,446,590 7,362,075
Advance payments from customers 107,854 693,317
Accrued liabilities 246,421 238,619
Income tax payable 341,912 0
Short-term borrowings 0 148,295
Total current liabilities 13,142,777 8,442,306
Total liabilities $ 13,142,777 $ 8,442,306
Commitments and contingencies (Note 8)
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 March 31, 2016 and June 30, 2015 $ 0 $ 0
Common stock, par value $0.001 per share, authorized 50,000,000 shares; 10,417,203 and 10,533,869 shares issued and outstanding as of March 31, 2016 and June 30, 2015, respectively 13,819 13,806
Additional paid-in capital 7,286,154 7,305,767
Retained earnings 14,387,627 13,361,091
Treasury stock, 3,472,286 and 3,342,286 shares as of March 31, 2016 and June 30, 2015, respectively (4,513,479) (4,279,479)
Accumulated other comprehensive loss (716,327) (664,722)
Total Parent Company stockholders' equity 16,457,794 15,736,463
Non-controlling interests 859,529 538,698
Total Stockholders' Equity 17,317,323 16,275,161
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 30,460,100 $ 24,717,467
XML 14 R3.htm IDEA: XBRL DOCUMENT v3.4.0.3
Consolidated Balance Sheets (Parenthetical) - $ / shares
Mar. 31, 2016
Jun. 30, 2015
Statement of Financial Position [Abstract]    
Preferred stock par value (in Dollars per share) $ .001 $ 0.001
Preferred stock Authorized 10,000,000 10,000,000
Preferred stock Issued 0 0
Preferred stock Outstanding 0 0
Common stock par value (in Dollars per share) $ .001 $ 0.001
Common stock Authorized 50,000,000 50,000,000
Common stock Issued 10,417,203 10,533,869
Common stock Outstanding 10,417,203 10,533,869
Treasury stock shares 3,472,286 3,342,286
XML 15 R4.htm IDEA: XBRL DOCUMENT v3.4.0.3
Consolidated Statements of Comprehensive Income (Unaudited) - USD ($)
3 Months Ended 9 Months Ended
Mar. 31, 2016
Mar. 31, 2015
Mar. 31, 2016
Mar. 31, 2015
Income Statement [Abstract]        
Net sales $ 14,146,310 $ 10,174,842 $ 46,258,257 $ 36,285,606
Cost of goods sold 11,674,481 8,293,528 38,660,515 29,600,967
Gross profit 2,471,829 1,881,314 7,597,742 6,684,639
Operating expenses:        
Selling, general, and administrative 1,332,285 1,145,194 3,743,967 3,777,978
Research and development 693,540 722,781 2,209,718 2,238,684
Total operating expenses 2,025,825 1,867,975 5,953,685 6,016,662
Income from operations 446,004 13,339 1,644,057 667,977
Other income, net:        
Interest income 2,407 2,854 8,115 8,509
Other income, net 120,218 20,203 99,990 398,211
Total other income, net 122,625 23,057 108,105 406,720
Income before provision (benefit) for income taxes 568,629 36,396 1,752,162 1,074,697
Income tax provision (benefit) 254,806 (249,000) 404,795 (39,000)
Net income 313,823 285,396 1,347,367 1,113,697
Non-controlling interests in net loss (income) of subsidiary at 48.2% 77,547 (267,597) (320,831) (388,270)
Net income attributable to Parent Company $ 391,370 $ 17,799 $ 1,026,536 $ 725,427
Basic earnings per share attributable to Parent Company stockholders $ .04 $ 0.00 $ .10 $ .07
Diluted earnings per share attributable to Parent Company stockholders $ 0.04 $ 0.00 $ 0.10 $ 0.07
Weighted average common shares outstanding - basic 10,414,536 10,533,869 10,486,606 10,533,869
Weighted average common shares outstanding - diluted 10,630,453 10,650,609 10,702,523 10,650,609
Comprehensive income        
Net income $ 313,823 $ 285,396 $ 1,347,367 $ 1,113,697
Translation adjustments (21,057) (208,407) (51,605) (334,551)
Comprehensive income 292,766 76,989 1,295,762 779,146
Comprehensive loss (income) attributable to non-controlling interest 77,547 (267,597) (320,831) (388,270)
Comprehensive income (loss) attributable to controlling interest $ 370,313 $ (190,608) $ 974,931 $ 390,876
XML 16 R5.htm IDEA: XBRL DOCUMENT v3.4.0.3
Consolidated Statements of Comprehensive Income (Parenthetical)
Mar. 31, 2016
Jun. 30, 2015
Income Statement [Abstract]    
Noncontrolling interest percentage 48.20% 48.20%
XML 17 R6.htm IDEA: XBRL DOCUMENT v3.4.0.3
Consolidated Statements of Cash Flows (Unaudited) - USD ($)
9 Months Ended
Mar. 31, 2016
Mar. 31, 2015
CASH FLOWS FROM OPERATING ACTIVITIES:    
Net income $ 1,347,367 $ 1,113,697
Adjustments to reconcile net income to net cash (used in) provided by operating activities:    
Depreciation 138,683 180,203
Amortization of intangible assets 658,535 970,576
Deferred tax (benefit) 73,897 (185,999)
Share-based compensation (37,500) 52,721
Gain on forgiven debt 0 (40,125)
Gain from debt extinguishment 0 (374,608)
Increase (decrease) in cash due to change in:    
Accounts receivable (8,084,784) 47,227
Inventories (380,695) (140,440)
Prepaid expenses and other current assets 48,708 106,374
Prepaid income taxes 1,055,788 147,000
Advance payments to vendors 36,470 15,343
Other assets (5,785) 7,629
Accounts payable 5,084,515 1,450,627
Advance payments from customers (585,463) (205,945)
Accrued liabilities 7,802 (62,186)
Income tax payable 341,912 0
Net cash (used in) provided by operating activities (300,550) 3,082,094
CASH FLOWS FROM INVESTING ACTIVITIES:    
Purchases of property and equipment (82,370) (34,232)
Payments for capitalized development costs (663,800) (81,591)
Purchases of intangible assets (177,647) (47,618)
Receipt of loan repayments from an employee 0 7,128
Net cash used in investing activities (923,817) (156,313)
CASH FLOWS FROM FINANCING ACTIVITIES:    
Repurchase of common stock (234,000) 0
Issuance of stock related to stock options exercised 17,900 0
Principal repayment of short-term borrowings (148,295) 0
Net cash used in financing activities (364,395) 0
Effect of foreign currency translation (51,605) (334,551)
Net decrease in cash and cash equivalents (1,640,367) 2,591,230
Cash and cash equivalents, beginning of period 11,822,620 8,240,595
Cash and cash equivalents, end of period 10,182,253 10,831,825
Cash received during the periods for:    
Interest 8,114 3,466
Income taxes $ 1,067,681 $ 0
XML 18 R7.htm IDEA: XBRL DOCUMENT v3.4.0.3
1. BASIS OF PRESENTATION
9 Months Ended
Mar. 31, 2016
Organization, Consolidation and Presentation of Financial Statements [Abstract]  
BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements of Franklin Wireless Corp. (“the Company”) have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and are presented in accordance with the requirements of Form 10-Q. In the opinion of management, the financial statements included herein contain all adjustments, including normal recurring adjustments, considered necessary to present fairly the financial position, the results of operations and comprehensive income (loss) and cash flows of the Company for the periods presented.  These financial statements and notes hereto should be read in conjunction with the financial statements and notes thereto for the fiscal year ended June 30, 2015 included in the Company’s Form 10-K filed on September 28, 2015. The operating results or cash flows for the interim periods presented herein are not necessarily indicative of the results to be expected for any other interim period or the full year.

XML 19 R8.htm IDEA: XBRL DOCUMENT v3.4.0.3
2. BUSINESS OVERVIEW
9 Months Ended
Mar. 31, 2016
Organization, Consolidation and Presentation of Financial Statements [Abstract]  
BUSINESS OVERVIEW

We are a provider of intelligent wireless solutions including mobile hotspots, routers and modems as well as innovative hardware and software products that support 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 solve 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.

 

We have a majority ownership position in Franklin Technology Inc. ("FTI"), a research and development facility 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 South America, the Caribbean, Europe, the Middle East and Africa ("EMEA") and Asia.

XML 20 R9.htm IDEA: XBRL DOCUMENT v3.4.0.3
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
9 Months Ended
Mar. 31, 2016
Accounting Policies [Abstract]  
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

 

The consolidated financial statements include the accounts of the Company and a subsidiary with a majority voting interest of 51.8% (48.2% is owned by non-controlling interests) as of March 31, 2016 and June 30, 2015. 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.

 

Non-controlling Interest in a Consolidated Subsidiary

 

As of March 31, 2016, the non-controlling interest was $859,529, which represents a $320,831 increase from $538,698 as of June 30, 2015. The increase was due to the net income of subsidiary of $665,073 for the nine months ended March 31, 2016, of which 48.2% was attributable to the non-controlling interests.

 

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 management 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 four geographic areas, consisting of the United States, 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:

 

   Three Months Ended   Nine Months Ended 
   March 31,   March 31, 
Net sales:  2016   2015   2016   2015 
United States  $14,145,611   $6,999,431   $39,616,528   $26,725,077 
Caribbean and South America   699        100,699    1,415,052 
Europe, the Middle East and Africa (“EMEA”)       3,154,126    6,485,441    4,517,524 
Asia       21,285    55,589    3,627,953 
Totals  $14,146,310   $10,174,842   $46,258,257   $36,285,606 

 

Long-lived assets, net (property and equipment and intangible assets):  March 31, 2016   June 30, 2015 
United States  $1,089,842   $785,144 
Asia   393,530    571,629 
Totals  $1,483,372   $1,356,773 

 

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.

 

Fair Value of Financial Instruments

 

The carrying amounts of financial instruments such as cash equivalents, 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 management believes are readily convertible into cash, such as money market funds and certificates of deposit.

 

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 March 31, 2016 and June 30, 2015.

 

Revenue Recognition

 

We recognize revenue in accordance with 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 recognize revenues from product sales upon shipment of the products to customers or when the products are received by the customers in accordance with shipping or delivery terms. We provide a warranty for one year from the shipment date, which is covered by our vendors pursuant to purchase agreements. Any net warranty related expenditures made by us have not historically been material. Under our sales return policy, customers may generally return products that are under warranty for repair or replacement.

 

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 expense associated with capitalized product development costs associated with complete technology.

 

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.

 

The costs of product development that are capitalized once technological feasibility is determined (noted as Technology in progress in the Intangible Assets table) include payroll, employee benefits, and other headcount-related expenses associated with product development. Related licenses and certification costs are also capitalized. 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 March 31, 2016 and June 30, 2015, capitalized product development costs in progress were $135,000 and $0, respectively, and these amounts are included in intangible assets in our consolidated balance sheets. During the three months and nine months ended March 31, 2016, we incurred $60,223 and $663,800 in capitalized product development costs, 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 (loss).

 

Research and Development Costs

 

Costs associated with research and development are expensed as incurred. Research and development costs were $693,540 and $722,781 for the three months ended March 31, 2016 and 2015, respectively, and $2,209,718 and $2,238,684 for the nine months ended March 31, 2016 and 2015, 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. In general, our products are shipped directly from our vendors to our customers. 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 consolidated statements of comprehensive income, were $435,500 and $201,249 for the three months ended March 31, 2016 and 2015, respectively, and $1,106,928 and $876,827 for the nine months ended March 31, 2016 and 2015, 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.

 

Inventories

 

Our inventories consist of finished goods and are stated at the lower of cost or market, 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 the control of the Company. We may write down our inventory value for potential obsolescence and excess inventory.  As of March 31, 2016 and June 30, 2015, we have recorded an inventory reserve in the amount of $120,867 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 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 are 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 periods ended March 31, 2016 and June 30, 2015.

 

The definite lived intangible assets consisted of the following as of March 31, 2016:

 

Definite lived intangible assets:  Expected Life 

Average

Remaining

life

  

Gross

Intangible

Assets

  

Accumulated

Amortization

  

Net Intangible

Assets

 
Complete technology  3 years      $490,000   $490,000   $ 
Complete technology  3 years       1,517,683    1,517,683     
Complete technology  3 years       281,714    281,714     
Complete technology  3 years       361,249    361,249     
Complete technology  3 years       174,009    174,009     
Complete technology  3 years       909,962    909,962     
Complete technology  3 years   1.0 years    65,000    43,333    21,667 
Complete technology  3 years   1.8 years    2,402    1,001    1,401 
Complete technology  3 years   2.0 years    6,405    2,135    4,270 
Supply and development agreement  8 years   1.6 years    1,121,000    910,813    210,187 
Technology in progress  Not Applicable       135,000        135,000 
Software  5 years   1.5 years    214,332    192,308    22,024 
Patents  10 years   7.3 years    58,390    2,207    56,183 
Certifications and licenses  3 years   2.3 years    2,472,359    1,697,898    774,461 
Total as of March 31, 2016          $7,809,505   $6,584,312   $1,225,193 

 

The definite lived intangible assets consisted of the following as of June 30, 2015:

 

Definite lived intangible assets:  Expected Life 

Average

Remaining

life

  

Gross

Intangible

Assets

  

Accumulated

Amortization

  

Net Intangible

Assets

 
Complete technology  3 years      $490,000   $490,000   $ 
Complete technology  3 years       1,517,683    1,517,683     
Complete technology  3 years       281,714    281,714     
Complete technology  3 years       361,249    361,249     
Complete technology  3 years   0.3 years    174,009    159,508    14,501 
Complete technology  3 years   0.5 years    909,962    733,025    176,937 
Complete technology  3 years   1.8 years    65,000    27,083    37,917 
Complete technology  3 years   2.5 years    2,402    400    2,002 
Complete technology  3 years   2.8 years    6,405    534    5,871 
Supply and development agreement  8 years   2.3 years    1,121,000    805,719    315,281 
Technology in progress  Not Applicable                
Software  5 years   1.1 years    197,418    158,284    39,134 
Patents  10 years   6.8 years    57,655    1,005    56,650 
Certifications and licenses  3 years   0.4 years    1,783,561    1,389,573    393,988 

Total as of June 30, 2015

          $6,968,058   $5,925,777   $1,042,281 

 

Amortization expense recognized during the three months ended March 31, 2016 and 2015 was $174,488 and $317,066, respectively, and during the nine months ended March 31, 2016 and 2015 was $658,535 and $970,576, respectively.

 

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 asset; 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.

 

As of March 31, 2016, we are not aware of any events or changes in circumstances 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.

 

As of March 31, 2016, we have no material unrecognized tax benefits. We recorded an income tax provision of $254,806 and $404,795 for the three and nine months ended March 31, 2016, respectively, and an increase in income tax payable of $250,168 and $341,912 for the three and nine months ended March 31, 2016, respectively.

 

Net Loss per Share Attributable to Common Stockholders

 

Basic net loss per share is calculated by dividing the net loss by the weighted-average number of common shares that were outstanding for the period, without consideration for potential common shares. Diluted net loss per share is calculated by dividing the net loss 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

 

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 nine months ended March 31, 2016, sales to our three largest customers accounted for 68%, 14%, and 13% of our consolidated net sales and 45%, 46%, and 1% of our accounts receivable balance, as of March 31, 2016. In the same period in 2015, sales to our two largest customers accounted for 63% and 13% of our consolidated net sales and 79% and 11% of our accounts receivable balance as of March 31, 2015. No other customers accounted for more than ten percent of total net sales for the nine months ended March 31, 2016 and 2015 and no other customers accounted for more than ten percent of total accounts receivable for the nine months ended March 31, 2016 and 2015.

 

For the nine months ended March 31, 2016, we purchased the majority of our wireless data products from one manufacturing company located in Asia. If this manufacturing company 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 the Company's revenue.  For the nine months ended March 31, 2016, we purchased wireless data products from this manufacturer in the amount of $38,325,448, or 99% of total purchases, and had related accounts payable of $11,837,603 as of March 31, 2016. For the nine months ended March 31, 2015, we purchased wireless data products from one manufacturing company in the amount of $22,691,229, or 78% of total purchases, and had related accounts payable of $6,392,081 as of March 31, 2015.

 

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 May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers. This amendment addresses revenue from contracts with customers, which clarifies existing accounting literature relating to how and when a company recognizes revenue. Under the update, a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods and services. ASU 2015-14 delayed the effective date of this update to annual reporting periods beginning after December 15, 2017, and the amendment is to be applied retrospectively or the cumulative effect as of the date of adoption. Management is currently evaluating the impact ASU 2014-09 will have on the consolidated financial statements and related disclosures.

 

In August 2014, the FASB issued ASU 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. This ASU introduces an explicit requirement for management to assess if there is substantial doubt about an entity’s ability to continue as a going concern, and to provide related footnote disclosures in certain circumstances. In connection with each annual and interim period, management must assess if there is substantial doubt about an entity’s ability to continue as a going concern within one year after the issuance date. Disclosures are required if conditions give rise to substantial doubt. ASU 2014-15 is effective for all entities in the first annual period ending after December 15, 2016. Management does not believe the potential effects of this ASU on the consolidated financial statements will be material.

 

In April 2015, the FASB issued ASU 2015-03, Interest—Imputation of Interest: Simplifying the Presentation of Debt Issuance Costs. The update requires debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of the related debt liability instead of being presented as an asset. Debt disclosures will include the face amount of the debt liability and the effective interest rate. The update requires retrospective application and represents a change in accounting principle. ASU 2015-15 was issued subsequently to permit costs associated with a line of credit arrangement to be presented as assets and amortized ratably over the term of the arrangement. These updates will be effective for the Company on July 1, 2016. Management does not believe that these updates will materially impact the Company’s consolidated financial statements.

 

In July 2015, the FASB issued ASU 2015-11, Inventory—Simplifying the Measurement of Inventory. ASU 2015-11 requires inventory to be subsequently measured using the lower of cost and net realizable value, thereby eliminating the market value approach. Net realizable value is defined as the “estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation.” ASU 2015-11 is effective for the Company beginning on July 1, 2017 and is applied prospectively. Early adoption is permitted. The Company is currently evaluating the impact that this guidance will have on its consolidated financial statements and disclosure.

 

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”), which modified lease accounting for both lessees and lessors to increase transparency and comparability by recognizing lease assets and lease liabilities by lessees for those leases classified as operating leases under previous accounting standards and disclosing key information about leasing arrangements. ASU 2016-02 will be effective for the Company beginning in the first quarter of fiscal 2020 and early adoption is permitted. The Company is currently evaluating the impact of adopting the new lease standard on its consolidated financial statements.

XML 21 R10.htm IDEA: XBRL DOCUMENT v3.4.0.3
4. PROPERTY AND EQUIPMENT
9 Months Ended
Mar. 31, 2016
Property, Plant and Equipment [Abstract]  
PROPERTY AND EQUIPMENT

Property and equipment consisted of the following as of:

 

   March 31, 2016   June 30, 2015 
Machinery and facility  $303,520   $300,650 
Office equipment   382,023    373,554 
Molds   848,680    775,499 
Construction-in progress       2,150 
    1,534,223    1,451,853 
Less accumulated depreciation   (1,276,044)   (1,137,361)
Total  $258,179   $314,492 

 

Depreciation expense associated with property and equipment was $39,336 and $58,885 for the three months ended March 31, 2016 and 2015, respectively, and $138,683 and $180,203 for the nine months ended March 31, 2016 and 2015, respectively.

 

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5. ACCRUED LIABILITIES
9 Months Ended
Mar. 31, 2016
Payables and Accruals [Abstract]  
ACCRUED LIABILITIES

NOTE 5 – ACCRUED LIABILITIES

 

Accrued liabilities consisted of the following as of:

 

   March 31, 2016   June 30, 2015 
Accrued salaries, severance  $113,313   $140,820 
Accrued salaries, payroll deductions owed to government entities   45,936    8,434 
Accrued vacation   37,930    75,477 
Taxes   5,635    10,823 
Other accrued liabilities   43,607    3,065 
Total  $246,421   $238,619 

 

XML 23 R12.htm IDEA: XBRL DOCUMENT v3.4.0.3
6. SHORT-TERM BORROWINGS
9 Months Ended
Mar. 31, 2016
Debt Disclosure [Abstract]  
SHORT-TERM BORROWINGS

Short-term borrowings consisted of the following as of:

 

   March 31, 2016   June 30, 2015 
Loan dated June 2011, due to a financial institution, with monthly interest payments (interest rate of 8.90% per annum), and the principal balance due March 2016 (interest rate of 5.025% per annum as extended).  The loan was paid off in full during the three months ending March 31, 2016.  $   $148,295 
           

 

The short-term borrowings of $0 and $148,295 as of March 31, 2016 and June 30, 2015, respectively, resulted from the consolidation of FTI’s debt.

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7. EARNINGS PER SHARE
9 Months Ended
Mar. 31, 2016
Earnings Per Share [Abstract]  
EARNINGS PER SHARE

We report earnings per share in accordance with ASC 260, “Earnings Per Share.”  Basic earnings 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. The weighted average number of shares outstanding used to compute earnings per share is as follows:

 

   Three Months ended March 31,   Nine Months Ended March 31, 
   2016   2015   2016   2015 
Net income attributable to Parent Company  $391,370   $17,799   $1,026,536   $725,427 
                     
Weighted-average shares of common stock outstanding:                    
Basic shares outstanding   10,414,536    10,533,869    10,486,606    10,533,869 
Dilutive effect of common stock equivalents arising from stock options   215,917    116,740    215,917    116,740 
Diluted shares outstanding   10,630,453    10,650,609    10,702,523    10,650,609 
Basic earnings per share  $0.04   $0.00   $0.10   $0.07 
Diluted earnings per share  $0.04   $0.00   $0.10   $0.07 

 

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8. COMMITMENTS AND CONTINGENCIES
9 Months Ended
Mar. 31, 2016
Commitments and Contingencies Disclosure [Abstract]  
COMMITMENTS AND CONTINGENCIES

Leases

 

We leased approximately 11,318 square feet of office space located in San Diego, California, at a monthly rent of $16,576; although the lease expired on August 31, 2015, we continued to occupy the premises with the consent of the landlord through October 27, 2015. On September 9, 2015, we signed a lease for new office space consisting of approximately 12,775 square feet, also located in San Diego, California, at a monthly rent of $23,115, 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 is four years 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. Rent expense related to these leases was $69,344 and $49,728 for the three months ended March 31, 2016 and 2015, respectively, and $200,424 and $149,185 for the nine months ended March 31, 2016 and 2015, 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, and the lease expires on September 1, 2017. 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 expires on September 1, 2017. In addition to monthly rent, the lease provides 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 $32,100 and $24,000 for the three months ended March 31, 2016 and 2015, respectively, and $96,300 and $72,000 for the nine months ended March 31, 2016 and 2015, respectively.

 

We lease one corporate housing facility for our vendors and employees who travel, under a non-cancelable operating lease that expired on September 13, 2015 and was extended to September 5, 2016. Rent expense related to this lease was $2,371 and $2,603 for the three months ended March 31, 2016 and 2015, respectively, and $7,267 and $7,983 for the nine months ended March 31, 2016 and 2015, respectively.

 

Litigation

 

We are from time to time involved in certain legal proceedings and claims arising in the ordinary course of business.

 

C-Motech Co., Ltd.

 

On July 27, 2010, we entered into a Common Stock Repurchase Agreement with C-Motech (the “Agreement”), under which we agreed to repurchase 3,370,356 shares of our Common Stock from C-Motech for $3,500,000. A total of 1,803,684 shares were repurchased on the date of the Agreement in exchange for non-cash consideration in the amount of $1,873,065, which represented amounts owed to the Company by C-Motech for certain marketing funds as well as the settlement of a price dispute for products previously purchased by the Company from C-Motech. Under the Agreement, the remaining 1,566,672 shares were to be repurchased by us upon payment of the balance, $1,626,935, on or before December 31, 2010.

 

On January 28, 2011 (the “Amendment Date”) the Agreement was amended to reflect (1) a change in the date the 1,566,672 shares are to be repurchased from C-Motech from December 31, 2010 to March 31, 2011, and (2) a change to the non-cash consideration of $1,873,065. In exchange for the 1,803,684 shares, we were to pay cash to C-Motech (in the same amount) for the shares, by March 31, 2011. In addition, in a separate agreement dated January 28, 2011, C-Motech agreed to pay us $1,873,065, for amounts owed, by March 31, 2011. The purpose of these revisions was to more clearly differentiate each party’s payment obligations to the other with respect to this transaction. Following the Amendment Date, we paid C-Motech $1,873,065 in exchange for the 1,803,684 shares previously transferred to us by C-Motech, and C-Motech paid us $1,873,065 for amounts owed, of which $1,581,457 was booked to other income and $291,608 was booked to cost of goods sold. The repurchase of the remaining 1,566,672 shares from C-Motech was not completed. We have provided formal notification to C-Motech that it is in breach of its obligations and we have also provided a demand to sell the shares back to us. We have attempted to tender payment for the shares without results. We were previously advised that two individuals, Cheng-Ji Zhu and Ok-Nam Yun, claim to have purchased the shares from C-Motech through its former CEO; however, the authority of the former CEO to agree to the sale of the shares was disputed by C-Motech. The ownership of the shares was the subject of litigation involving Cheng-Ji Zhu and Ok-Nam Yun and C-Motech in U.S. and Korean courts. On April 1, 2015 the Circuit Court of Cook County, Illinois County Department, Chancery Division issued an Order with respect to the matter of Cheng-Ji Zhu and Ok-Nam Yun, plaintiffs, v. Integrity Stock Transfer and Registrar, Mountain Share Transfer, Inc. and C-Motech Company Ltd., defendants. The Order recognizes and enforces the plaintiff's Motion to Recognize and Enforce Foreign Judgment in which the plaintiffs previously prevailed over C-Motech with respect to the ownership of the 1,566,672 shares of Franklin Wireless Common Stock in an action that took place in Korea.

 

On May 7, 2013, we filed a lawsuit against C-Motech in the Superior Court of California for the County of San Diego for breach of the Agreement and breach of other contracts between the parties relating to indemnification and other obligations. On February 25, 2014, C-Motech answered the complaint and on February 26, 2014, C-Motech filed a Notice of Removal from the Superior Court of the State of California for the County of San Diego to the United States District Court for the Southern District of California. On June 19, 2014, C-Motech filed a voluntary petition for relief under Chapter 15 of the U.S. Bankruptcy Code and on June 27, 2014, C-Motech filed a Motion for Recognition of a Foreign Main Proceeding under Chapter 15 of the U.S. Bankruptcy Code and Further Relief. On July 10, 2014, this motion was heard in the U.S. Bankruptcy Court for the Southern District of California during which the Court ordered that C-Motech's bankruptcy proceeding in South Korea was recognized as a foreign main proceeding and that our lawsuit against C-Motech in the U.S. District Court is stayed. The effect of this ruling is that we must participate in C-Motech's bankruptcy proceeding in South Korea if we wish to pursue our various claims against C-Motech.

 

On September 9, 2015, registered ownership of the shares was transferred from C-Motech to Cheng-Ji Zhu (838,350 shares) and Ok-Nam Yun (728,322 shares). Subsequently, on December 30, 2015, the Company repurchased 130,000 of the shares from Ok-Nam Yun.

 

Novatel Wireless, Inc.

 

On December 10, 2010, Novatel Wireless, Inc. and Novatel Wireless Solutions, Inc. ("Novatel") filed a complaint in the United States District Court for the Southern District of California, against us and one other defendant. The complaint alleges that certain products, including, but not limited to, mobile data hot spots and data modems, infringe on U.S. Patent Nos. 5,129,098; 7,318,225; 7,574,737 and 7,319,715. On April 13, 2012, the plaintiff filed a Second Amended Complaint which amended certain claims and added U.S. Patent No. 7,944,901 to the original complaint. On April 27, 2012, we filed a Motion to Dismiss the Second Amended Complaint as to certain of the claims. On July 6, 2012, the Court held oral argument on the Motion to Dismiss and on July 19, 2012, the Court issued an order granting in part and denying in part the Motion to Dismiss. On August 2, 2012, we answered the complaint and an Early Neutral Evaluation Conference took place on October 31, 2012 and a follow-up Settlement Conference was held on June 12, 2013. A claim construction hearing took place on October 9, 2014. On November 25, 2014, the Court granted plaintiff's Joint Motion to Joinder of Required Party, which added Nova Intellectual Solutions, LLC ("NIS") as a plaintiff to this litigation. Novatel had previously assigned the patents-in-suit to Strategic Intellectual Solutions, LLC, which is the parent company of NIS.

 

On April 24, 2015, NIS filed a complaint in the United States District Court for the Southern District of California, against us and FTI. The complaint alleges that one of the Company's products infringes on U.S. Patent No. 7,944,901.

 

On July 20, 2015, a Settlement Conference took place during which we and NIS agreed to settle this matter and an agreement governing the settlement was executed on October 20, 2015.

 

On October 1, 2015, we and Novatel filed a Joint Motion For Dismissal With Prejudice as to the patent infringement claims made by Novatel against us. On October 28, 2015, we and NIS filed a Joint Motion For Dismissal With Prejudice as to the patent infringement claims made by it against the Company and FTI.

 

Adaptix, Inc.

 

In October 2015 we were notified that on June 12, 2015, Adaptix, Inc. filed a complaint in the United States District Court for the Eastern District of Texas, Tyler Division against one of our customers. The complaint alleges that certain wireless devices, including one device provided by the Company, infringe on U.S. Patent No. 8,934,375. As of March 31, 2016, this legal proceeding is pending, but we do not believe that this action will have a material effect on the Company.

 

Change of Control Agreements

 

On September 21, 2009 we entered into Change of Control Agreements with OC Kim, our President, Yun J. (David) Lee, our Chief Operating Officer, and Yong Bae Won, our Vice President, Engineering. 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; the agreement with Mr. Lee calls for a payment of $2 million upon a change of control; and the agreement with Mr. Won was for two years and called for a payment of $1 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 21, 2017. The Change of Control Agreement with Mr. Won expired on September 21, 2014 and was not renewed or extended.

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9. LONG-TERM INCENTIVE PLAN AWARDS
9 Months Ended
Mar. 31, 2016
Disclosure of Compensation Related Costs, Share-based Payments [Abstract]  
LONG-TERM INCENTIVE PLAN AWARDS

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.

 

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. Compensation expense recorded under this method for the three and nine months ended March 31, 2016 was ($12,500) and ($37,500), respectively. The expense credits for the three and nine months ended March 31, 2016 resulted from the reversal of expenses booked in prior periods for stock options for a small number of employees that were cancelled. This amount increased income from operations and income before provision for income taxes by the same amount by decreasing compensation expense recognized in selling, general and administrative expense.

 

A summary of the status of our stock options is presented below:

 

           Weighted-     
           Average     
       Weighted-   Remaining     
       Average   Contractual   Aggregate 
       Exercise   Life   Intrinsic 
Options  Shares   Price   (In Years)   Value 
                     
Outstanding as of June 30, 2015   850,337   $1.24    4.36   $306,583 
Granted                   
Exercised   (13,334)   1.34    5.64    (33,335)
Cancelled                   
Forfeited or Expired                   
                     
Outstanding as of March 31, 2016   837,003   $1.24    3.58   $1,056,450 
                     
Exercisable as of March 31, 2016   837,003   $1.24    3.58   $1,056,450 

 

The aggregate intrinsic value in the preceding table represents the total pretax intrinsic value, based upon the Company’s closing stock price of $2.50 as of March 31, 2016, 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 March 31, 2016, in the amount of 837,003 shares, was $1.15 per share.

 

As of March 31, 2016, there was no unrecognized compensation cost related to non-vested stock options granted.

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3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Policies)
9 Months Ended
Mar. 31, 2016
Organization, Consolidation and Presentation of Financial Statements [Abstract]  
Principles of Consolidation

Principles of Consolidation

 

The consolidated financial statements include the accounts of the Company and a subsidiary with a majority voting interest of 51.8% (48.2% is owned by non-controlling interests) as of March 31, 2016 and June 30, 2015. 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.

Non-controlling Interest in a Consolidated Subsidiary

Non-controlling Interest in a Consolidated Subsidiary

 

As of March 31, 2016, the non-controlling interest was $859,529, which represents a $320,831 increase from $538,698 as of June 30, 2015. The increase was due to the net income of subsidiary of $665,073 for the nine months ended March 31, 2016, of which 48.2% was attributable to the non-controlling interests.

Segment Reporting

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 management 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 four geographic areas, consisting of the United States, 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:

 

   Three Months Ended   Nine Months Ended 
   March 31,   March 31, 
Net sales:  2016   2015   2016   2015 
United States  $14,145,611   $6,999,431   $39,616,528   $26,725,077 
Caribbean and South America   699        100,699    1,415,052 
Europe, the Middle East and Africa (“EMEA”)       3,154,126    6,485,441    4,517,524 
Asia       21,285    55,589    3,627,953 
Totals  $14,146,310   $10,174,842   $46,258,257   $36,285,606 

 

Long-lived assets, net (property and equipment and intangible assets):  March 31, 2016   June 30, 2015 
United States  $1,089,842   $785,144 
Asia   393,530    571,629 
Totals  $1,483,372   $1,356,773 

 

Estimates

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.

Fair Value of Financial Instruments

Fair Value of Financial Instruments

 

The carrying amounts of financial instruments such as cash equivalents, 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 management believes are readily convertible into cash, such as money market funds and certificates of deposit.

Allowance for Doubtful Accounts

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 March 31, 2016 and June 30, 2015.

Revenue Recognition

Revenue Recognition

 

We recognize revenue in accordance with 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 recognize revenues from product sales upon shipment of the products to customers or when the products are received by the customers in accordance with shipping or delivery terms. We provide a warranty for one year from the shipment date, which is covered by our vendors pursuant to purchase agreements. Any net warranty related expenditures made by us have not historically been material. Under our sales return policy, customers may generally return products that are under warranty for repair or replacement.

Cost of Goods Sold

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 expense associated with capitalized product development costs associated with complete technology.

Capitalized Product Development Costs

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.

 

The costs of product development that are capitalized once technological feasibility is determined (noted as Technology in progress in the Intangible Assets table) include payroll, employee benefits, and other headcount-related expenses associated with product development. Related licenses and certification costs are also capitalized. 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 March 31, 2016 and June 30, 2015, capitalized product development costs in progress were $135,000 and $0, respectively, and these amounts are included in intangible assets in our consolidated balance sheets. During the three months and nine months ended March 31, 2016, we incurred $60,223 and $663,800 in capitalized product development costs, 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 (loss).

Research and Development Costs

Research and Development Costs

 

Costs associated with research and development are expensed as incurred. Research and development costs were $693,540 and $722,781 for the three months ended March 31, 2016 and 2015, respectively, and $2,209,718 and $2,238,684 for the nine months ended March 31, 2016 and 2015, respectively.

Warranties

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. In general, our products are shipped directly from our vendors to our customers. 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

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 consolidated statements of comprehensive income, were $435,500 and $201,249 for the three months ended March 31, 2016 and 2015, respectively, and $1,106,928 and $876,827 for the nine months ended March 31, 2016 and 2015, respectively.

Cash and Cash Equivalents

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.

Inventories

Inventories

 

Our inventories consist of finished goods and are stated at the lower of cost or market, 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 the control of the Company. We may write down our inventory value for potential obsolescence and excess inventory.  As of March 31, 2016 and June 30, 2015, we have recorded an inventory reserve in the amount of $120,867 for inventories that we have identified as obsolete or slow-moving.

Property and Equipment

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 5 years or life of the lease, whichever is shorter
Goodwill and Intangible Assets

Goodwill and Intangible Assets

 

Goodwill and certain intangible assets were recorded in connection with the FTI acquisition in October 2009, and are 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 periods ended March 31, 2016 and June 30, 2015.

 

The definite lived intangible assets consisted of the following as of March 31, 2016:

 

Definite lived intangible assets:  Expected Life 

Average

Remaining

life

  

Gross

Intangible

Assets

  

Accumulated

Amortization

  

Net Intangible

Assets

 
Complete technology  3 years      $490,000   $490,000   $ 
Complete technology  3 years       1,517,683    1,517,683     
Complete technology  3 years       281,714    281,714     
Complete technology  3 years       361,249    361,249     
Complete technology  3 years       174,009    174,009     
Complete technology  3 years       909,962    909,962     
Complete technology  3 years   1.0 years    65,000    43,333    21,667 
Complete technology  3 years   1.8 years    2,402    1,001    1,401 
Complete technology  3 years   2.0 years    6,405    2,135    4,270 
Supply and development agreement  8 years   1.6 years    1,121,000    910,813    210,187 
Technology in progress  Not Applicable       135,000        135,000 
Software  5 years   1.5 years    214,332    192,308    22,024 
Patents  10 years   7.3 years    58,390    2,207    56,183 
Certifications and licenses  3 years   2.3 years    2,472,359    1,697,898    774,461 
Total as of March 31, 2016          $7,809,505   $6,584,312   $1,225,193 

 

The definite lived intangible assets consisted of the following as of June 30, 2015:

 

Definite lived intangible assets:  Expected Life 

Average

Remaining

life

  

Gross

Intangible

Assets

  

Accumulated

Amortization

  

Net Intangible

Assets

 
Complete technology  3 years      $490,000   $490,000   $ 
Complete technology  3 years       1,517,683    1,517,683     
Complete technology  3 years       281,714    281,714     
Complete technology  3 years       361,249    361,249     
Complete technology  3 years   0.3 years    174,009    159,508    14,501 
Complete technology  3 years   0.5 years    909,962    733,025    176,937 
Complete technology  3 years   1.8 years    65,000    27,083    37,917 
Complete technology  3 years   2.5 years    2,402    400    2,002 
Complete technology  3 years   2.8 years    6,405    534    5,871 
Supply and development agreement  8 years   2.3 years    1,121,000    805,719    315,281 
Technology in progress  Not Applicable                
Software  5 years   1.1 years    197,418    158,284    39,134 
Patents  10 years   6.8 years    57,655    1,005    56,650 
Certifications and licenses  3 years   0.4 years    1,783,561    1,389,573    393,988 

Total as of June 30, 2015

          $6,968,058   $5,925,777   $1,042,281 

 

Amortization expense recognized during the three months ended March 31, 2016 and 2015 was $174,488 and $317,066, respectively, and during the nine months ended March 31, 2016 and 2015 was $658,535 and $970,576, respectively.

Long-lived Assets

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 asset; 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.

 

As of March 31, 2016, we are not aware of any events or changes in circumstances that would indicate that the long-lived assets are impaired.

Stock-based compensation

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

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.

 

As of March 31, 2016, we have no material unrecognized tax benefits. We recorded an income tax provision of $254,806 and $404,795 for the three and nine months ended March 31, 2016, respectively, and an increase in income tax payable of $250,168 and $341,912 for the three and nine months ended March 31, 2016, respectively.

Net Loss per Share Attributable to Common Stockholders

Net Loss per Share Attributable to Common Stockholders

 

Basic net loss per share is calculated by dividing the net loss by the weighted-average number of common shares that were outstanding for the period, without consideration for potential common shares. Diluted net loss per share is calculated by dividing the net loss 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

Concentrations

 

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 nine months ended March 31, 2016, sales to our three largest customers accounted for 68%, 14%, and 13% of our consolidated net sales and 45%, 46%, and 1% of our accounts receivable balance, as of March 31, 2016. In the same period in 2015, sales to our two largest customers accounted for 63% and 13% of our consolidated net sales and 79% and 11% of our accounts receivable balance as of March 31, 2015. No other customers accounted for more than ten percent of total net sales for the nine months ended March 31, 2016 and 2015 and no other customers accounted for more than ten percent of total accounts receivable for the nine months ended March 31, 2016 and 2015.

 

For the nine months ended March 31, 2016, we purchased the majority of our wireless data products from one manufacturing company located in Asia. If this manufacturing company 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 the Company's revenue.  For the nine months ended March 31, 2016, we purchased wireless data products from this manufacturer in the amount of $38,325,448, or 99% of total purchases, and had related accounts payable of $11,837,603 as of March 31, 2016. For the nine months ended March 31, 2015, we purchased wireless data products from one manufacturing company in the amount of $22,691,229, or 78% of total purchases, and had related accounts payable of $6,392,081 as of March 31, 2015.

 

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

Recently Issued Accounting Pronouncements

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers. This amendment addresses revenue from contracts with customers, which clarifies existing accounting literature relating to how and when a company recognizes revenue. Under the update, a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods and services. ASU 2015-14 delayed the effective date of this update to annual reporting periods beginning after December 15, 2017, and the amendment is to be applied retrospectively or the cumulative effect as of the date of adoption. Management is currently evaluating the impact ASU 2014-09 will have on the consolidated financial statements and related disclosures.

 

In August 2014, the FASB issued ASU 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. This ASU introduces an explicit requirement for management to assess if there is substantial doubt about an entity’s ability to continue as a going concern, and to provide related footnote disclosures in certain circumstances. In connection with each annual and interim period, management must assess if there is substantial doubt about an entity’s ability to continue as a going concern within one year after the issuance date. Disclosures are required if conditions give rise to substantial doubt. ASU 2014-15 is effective for all entities in the first annual period ending after December 15, 2016. Management does not believe the potential effects of this ASU on the consolidated financial statements will be material.

 

In April 2015, the FASB issued ASU 2015-03, Interest—Imputation of Interest: Simplifying the Presentation of Debt Issuance Costs. The update requires debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of the related debt liability instead of being presented as an asset. Debt disclosures will include the face amount of the debt liability and the effective interest rate. The update requires retrospective application and represents a change in accounting principle. ASU 2015-15 was issued subsequently to permit costs associated with a line of credit arrangement to be presented as assets and amortized ratably over the term of the arrangement. These updates will be effective for the Company on July 1, 2016. Management does not believe that these updates will materially impact the Company’s consolidated financial statements.

 

In July 2015, the FASB issued ASU 2015-11, Inventory—Simplifying the Measurement of Inventory. ASU 2015-11 requires inventory to be subsequently measured using the lower of cost and net realizable value, thereby eliminating the market value approach. Net realizable value is defined as the “estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation.” ASU 2015-11 is effective for the Company beginning on July 1, 2017 and is applied prospectively. Early adoption is permitted. The Company is currently evaluating the impact that this guidance will have on its consolidated financial statements and disclosure.

 

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”), which modified lease accounting for both lessees and lessors to increase transparency and comparability by recognizing lease assets and lease liabilities by lessees for those leases classified as operating leases under previous accounting standards and disclosing key information about leasing arrangements. ASU 2016-02 will be effective for the Company beginning in the first quarter of fiscal 2020 and early adoption is permitted. The Company is currently evaluating the impact of adopting the new lease standard on its consolidated financial statements.

XML 28 R17.htm IDEA: XBRL DOCUMENT v3.4.0.3
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Tables)
9 Months Ended
Mar. 31, 2016
Accounting Policies [Abstract]  
Segment information by geographic areas

   Three Months Ended   Nine Months Ended 
   March 31,   March 31, 
Net sales:  2016   2015   2016   2015 
United States  $14,145,611   $6,999,431   $39,616,528   $26,725,077 
Caribbean and South America   699        100,699    1,415,052 
Europe, the Middle East and Africa (“EMEA”)       3,154,126    6,485,441    4,517,524 
Asia       21,285    55,589    3,627,953 
Totals  $14,146,310   $10,174,842   $46,258,257   $36,285,606 

 

Long-lived assets, net (property and equipment and intangible assets):  March 31, 2016   June 30, 2015 
United States  $1,089,842   $785,144 
Asia   393,530    571,629 
Totals  $1,483,372   $1,356,773 

 

Useful lives of property and equipment
Machinery 6 years
Office equipment 5 years
Molds 3 years
Vehicles 5 years
Computers and software 5 years
Furniture and fixtures 7 years
Facilities 5 years or life of the lease, whichever is shorter
Intangible Assets

The definite lived intangible assets consisted of the following as of March 31, 2016:

 

Definite lived intangible assets:  Expected Life 

Average

Remaining

life

  

Gross

Intangible

Assets

  

Accumulated

Amortization

  

Net Intangible

Assets

 
Complete technology  3 years      $490,000   $490,000   $ 
Complete technology  3 years       1,517,683    1,517,683     
Complete technology  3 years       281,714    281,714     
Complete technology  3 years       361,249    361,249     
Complete technology  3 years       174,009    174,009     
Complete technology  3 years       909,962    909,962     
Complete technology  3 years   1.0 years    65,000    43,333    21,667 
Complete technology  3 years   1.8 years    2,402    1,001    1,401 
Complete technology  3 years   2.0 years    6,405    2,135    4,270 
Supply and development agreement  8 years   1.6 years    1,121,000    910,813    210,187 
Technology in progress  Not Applicable       135,000        135,000 
Software  5 years   1.5 years    214,332    192,308    22,024 
Patents  10 years   7.3 years    58,390    2,207    56,183 
Certifications and licenses  3 years   2.3 years    2,472,359    1,697,898    774,461 
Total as of March 31, 2016          $7,809,505   $6,584,312   $1,225,193 

 

The definite lived intangible assets consisted of the following as of June 30, 2015:

 

Definite lived intangible assets:  Expected Life 

Average

Remaining

life

  

Gross

Intangible

Assets

  

Accumulated

Amortization

  

Net Intangible

Assets

 
Complete technology  3 years      $490,000   $490,000   $ 
Complete technology  3 years       1,517,683    1,517,683     
Complete technology  3 years       281,714    281,714     
Complete technology  3 years       361,249    361,249     
Complete technology  3 years   0.3 years    174,009    159,508    14,501 
Complete technology  3 years   0.5 years    909,962    733,025    176,937 
Complete technology  3 years   1.8 years    65,000    27,083    37,917 
Complete technology  3 years   2.5 years    2,402    400    2,002 
Complete technology  3 years   2.8 years    6,405    534    5,871 
Supply and development agreement  8 years   2.3 years    1,121,000    805,719    315,281 
Technology in progress  Not Applicable                
Software  5 years   1.1 years    197,418    158,284    39,134 
Patents  10 years   6.8 years    57,655    1,005    56,650 
Certifications and licenses  3 years   0.4 years    1,783,561    1,389,573    393,988 

Total as of June 30, 2015

          $6,968,058   $5,925,777   $1,042,281 

 

XML 29 R18.htm IDEA: XBRL DOCUMENT v3.4.0.3
4. PROPERTY AND EQUIPMENT (Tables)
9 Months Ended
Mar. 31, 2016
Property, Plant and Equipment [Abstract]  
PROPERTY AND EQUIPMENT
   March 31, 2016   June 30, 2015 
Machinery and facility  $303,520   $300,650 
Office equipment   382,023    373,554 
Molds   848,680    775,499 
Construction-in progress       2,150 
    1,534,223    1,451,853 
Less accumulated depreciation   (1,276,044)   (1,137,361)
Total  $258,179   $314,492 
XML 30 R19.htm IDEA: XBRL DOCUMENT v3.4.0.3
5. ACCRUED LIABILITIES (Tables)
9 Months Ended
Mar. 31, 2016
Payables and Accruals [Abstract]  
ACCRUED LIABILITIES
   March 31, 2016   June 30, 2015 
Accrued salaries, severance  $113,313   $140,820 
Accrued salaries, payroll deductions owed to government entities   45,936    8,434 
Accrued vacation   37,930    75,477 
Taxes   5,635    10,823 
Other accrued liabilities   43,607    3,065 
Total  $246,421   $238,619 
XML 31 R20.htm IDEA: XBRL DOCUMENT v3.4.0.3
6. SHORT-TERM BORROWINGS (Tables)
9 Months Ended
Mar. 31, 2016
Debt Disclosure [Abstract]  
SHORT-TERM BORROWINGS
   March 31, 2016   June 30, 2015 
Loan dated June 2011, due to a financial institution, with monthly interest payments (interest rate of 8.90% per annum), and the principal balance due March 2016 (interest rate of 5.025% per annum as extended).  The loan was paid off in full during the three months ending March 31, 2016.  $   $148,295 
           
XML 32 R21.htm IDEA: XBRL DOCUMENT v3.4.0.3
7. EARNINGS PER SHARE (Tables)
9 Months Ended
Mar. 31, 2016
Earnings Per Share [Abstract]  
EARNINGS PER SHARE
   Three Months ended March 31,   Nine Months Ended March 31, 
   2016   2015   2016   2015 
Net income attributable to Parent Company  $391,370   $17,799   $1,026,536   $725,427 
                     
Weighted-average shares of common stock outstanding:                    
Basic shares outstanding   10,414,536    10,533,869    10,486,606    10,533,869 
Dilutive effect of common stock equivalents arising from stock options   215,917    116,740    215,917    116,740 
Diluted shares outstanding   10,630,453    10,650,609    10,702,523    10,650,609 
Basic earnings per share  $0.04   $0.00   $0.10   $0.07 
Diluted earnings per share  $0.04   $0.00   $0.10   $0.07 
XML 33 R22.htm IDEA: XBRL DOCUMENT v3.4.0.3
9. LONG-TERM INCENTIVE PLAN AWARDS (Tables)
9 Months Ended
Mar. 31, 2016
Disclosure of Compensation Related Costs, Share-based Payments [Abstract]  
Schedule of Stock Option Activity
           Weighted-     
           Average     
       Weighted-   Remaining     
       Average   Contractual   Aggregate 
       Exercise   Life   Intrinsic 
Options  Shares   Price   (In Years)   Value 
                     
Outstanding as of June 30, 2015   850,337   $1.24    4.36   $306,583 
Granted                   
Exercised   (13,334)   1.34    5.64    (33,335)
Cancelled                   
Forfeited or Expired                   
                     
Outstanding as of March 31, 2016   837,003   $1.24    3.58   $1,056,450 
                     
Exercisable as of March 31, 2016   837,003   $1.24    3.58   $1,056,450 
XML 34 R23.htm IDEA: XBRL DOCUMENT v3.4.0.3
3. Summary of Significant Accounting Policies (Details - Segments) - USD ($)
3 Months Ended 9 Months Ended
Mar. 31, 2016
Mar. 31, 2015
Mar. 31, 2016
Mar. 31, 2015
Jun. 30, 2015
Net sales $ 14,146,310 $ 10,174,842 $ 46,258,257 $ 36,285,606  
Long-lived assets, net: 1,483,372   1,483,372   $ 1,356,773
US [Member]          
Net sales 14,145,611 6,999,431 39,616,528 26,725,077  
Long-lived assets, net: 1,089,842   1,089,842   785,144
Asia [Member]          
Net sales 0 21,285 55,589 3,627,953  
Long-lived assets, net: 393,530   393,530   $ 571,629
Caribbean and South America [Member]          
Net sales 699 0 100,699 1,415,052  
EMEA [Member]          
Net sales $ 0 $ 3,154,126 $ 6,485,441 $ 4,517,524  
XML 35 R24.htm IDEA: XBRL DOCUMENT v3.4.0.3
3. Summary of Significant Accounting Policies (Details - Useful lives)
9 Months Ended
Mar. 31, 2016
Machinery  
Estimated useful lives 6 years
Office Equipment [Member]  
Estimated useful lives 5 years
Molds [Member]  
Estimated useful lives 3 years
Vehicles [Member]  
Estimated useful lives 5 years
Computers and software [Member]  
Estimated useful lives 5 years
Furniture and fixtures [Member]  
Estimated useful lives 7 years
Facilities [Member]  
Estimated useful lives 5 years
XML 36 R25.htm IDEA: XBRL DOCUMENT v3.4.0.3
3. Summary of Significant Accounting Policies (Details - Intangibles) - USD ($)
9 Months Ended 12 Months Ended
Mar. 31, 2016
Jun. 30, 2015
Intangible Assets, Gross $ 7,809,505 $ 6,968,058
Accumulated Amortization 6,584,312 5,925,777
Intangible Assets, Net $ 1,225,193 $ 1,042,281
Complete Technology 1 [Member]    
Expected Life 3 years 3 years
Intangible Assets, Gross $ 490,000 $ 490,000
Accumulated Amortization 490,000 490,000
Intangible Assets, Net $ 0 $ 0
Complete Technology 2 [Member]    
Expected Life 3 years 3 years
Intangible Assets, Gross $ 1,517,683 $ 1,517,683
Accumulated Amortization 1,517,683 1,517,683
Intangible Assets, Net $ 0 $ 0
Complete Technology 3 [Member]    
Expected Life 3 years 3 years
Intangible Assets, Gross $ 281,714 $ 281,714
Accumulated Amortization 281,714 281,714
Intangible Assets, Net $ 0 $ 0
Complete Technology 4 [Member]    
Expected Life 3 years 3 years
Intangible Assets, Gross $ 361,249 $ 361,249
Accumulated Amortization 361,249 361,249
Intangible Assets, Net $ 0 $ 0
Complete Technology 5 [Member]    
Expected Life 3 years 3 years
Average Remaining Life   3 months 18 days
Intangible Assets, Gross $ 174,009 $ 174,009
Accumulated Amortization 174,009 159,508
Intangible Assets, Net $ 0 $ 14,501
Complete Technology 6 [Member]    
Expected Life 3 years 3 years
Average Remaining Life   6 months
Intangible Assets, Gross $ 909,962 $ 909,962
Accumulated Amortization 909,962 733,025
Intangible Assets, Net $ 0 $ 176,937
Complete Technology 7 [Member]    
Expected Life 3 years 3 years
Average Remaining Life 1 year 1 year 9 months 18 days
Intangible Assets, Gross $ 65,000 $ 65,000
Accumulated Amortization 43,333 27,083
Intangible Assets, Net $ 21,667 $ 37,917
Complete Technology 8 [Member]    
Expected Life 3 years 3 years
Average Remaining Life 1 year 9 months 18 days 2 years 6 months
Intangible Assets, Gross $ 2,402 $ 2,402
Accumulated Amortization 1,001 400
Intangible Assets, Net $ 1,401 $ 2,002
Complete Technology 9 [Member]    
Expected Life 3 years 3 years
Average Remaining Life 2 years 2 years 9 months 18 days
Intangible Assets, Gross $ 6,405 $ 6,405
Accumulated Amortization 2,135 534
Intangible Assets, Net $ 4,270 $ 5,871
Supply And Development Agreement [Member]    
Expected Life 8 years 8 years
Average Remaining Life 1 year 7 months 6 days 3 years 3 months 18 days
Intangible Assets, Gross $ 1,121,000 $ 1,121,000
Accumulated Amortization 910,813 805,719
Intangible Assets, Net $ 210,187 $ 315,281
Software [Member]    
Expected Life 5 years 5 years
Average Remaining Life 1 year 6 months 1 year 1 month 6 days
Intangible Assets, Gross $ 214,332 $ 197,418
Accumulated Amortization 192,308 158,284
Intangible Assets, Net $ 22,024 $ 39,134
Patents [Member]    
Expected Life 10 years 10 years
Average Remaining Life 7 years 3 months 18 days 6 years 9 months 18 days
Intangible Assets, Gross $ 58,390 $ 57,655
Accumulated Amortization 2,207 1,005
Intangible Assets, Net $ 56,183 $ 56,650
Certifications And Licenses [Member]    
Expected Life 3 years 3 years
Average Remaining Life 2 years 3 months 18 days 4 months 24 days
Intangible Assets, Gross $ 2,472,359 $ 1,783,561
Accumulated Amortization 1,697,898 1,389,573
Intangible Assets, Net 774,461 $ 393,988
Technology In Progress    
Intangible Assets, Gross 135,000  
Accumulated Amortization 0  
Intangible Assets, Net $ 135,000  
XML 37 R26.htm IDEA: XBRL DOCUMENT v3.4.0.3
3. Summary of Significant Accounting Policies (Details Narrative) - USD ($)
3 Months Ended 9 Months Ended
Mar. 31, 2016
Mar. 31, 2015
Mar. 31, 2016
Mar. 31, 2015
Jun. 30, 2015
Noncontrolling interest percentage 48.20%   48.20%   48.20%
Noncontrolling interest $ 859,529   $ 859,529   $ 538,698
Subsidiary income     665,073    
Increase in noncontrolling interest     $ 320,831    
Increase in noncontrolling interest explanation     The increase was due to the net income of subsidiary of $665,073 for the nine months ended March 31, 2016, of which 48.2% was attributable to the non-controlling interests.    
Capitalized product development costs 135,000   $ 135,000   0
Product development costs incurred 60,223   663,800    
Research and development costs 693,540 $ 722,781 2,209,718 $ 2,238,684  
Shipping and handling expense 435,500 1,106,928 201,249 876,827  
Inventory reserve 120,867   120,867   120,867
Impairment of intangible assets 0 0 0 0  
Amortization expense 174,488 317,066 658,535 970,576  
Unrecognized tax benefits 0   0   0
Income tax provision 254,806 (249,000) 404,795 (39,000)  
Increase in income tax payable 250,168   341,912 0  
Products purchased 11,674,481 8,293,528 38,660,515 29,600,967  
Accounts payable 12,446,590 4,162,219 $ 12,446,590 $ 4,162,219 $ 7,362,075
Sales [Member] | Customer 1 [Member]          
Concentration of credit risk     68.00% 63.00%  
Sales [Member] | Customer 2 [Member]          
Concentration of credit risk     14.00% 13.00%  
Sales [Member] | Customer 3 [Member]          
Concentration of credit risk     13.00%    
Accounts Receivable [Member] | Customer 1 [Member]          
Concentration of credit risk     45.00% 79.00%  
Accounts Receivable [Member] | Customer 2 [Member]          
Concentration of credit risk     46.00% 11.00%  
Accounts Receivable [Member] | Customer 3 [Member]          
Concentration of credit risk     1.00%    
Purchases [Member] | Supplier Concentration Risk [Member]          
Concentration of credit risk     99.00% 78.00%  
Products purchased     $ 38,325,448 $ 22,691,229  
Accounts Payable [Member] | Supplier Concentration Risk [Member]          
Accounts payable $ 11,837,603 $ 6,392,081 $ 11,837,603 $ 6,392,081  
XML 38 R27.htm IDEA: XBRL DOCUMENT v3.4.0.3
4. Property and Equipment (Details) - USD ($)
Mar. 31, 2016
Jun. 30, 2015
Property and equipment, gross $ 1,534,223 $ 1,451,853
Less accumulated depreciation (1,276,044) (1,137,361)
Total 258,179 314,492
Machinery and Facility [Member]    
Property and equipment, gross 303,520 300,650
Office Equipment [Member]    
Property and equipment, gross 382,023 373,554
Molds [Member]    
Property and equipment, gross 848,680 775,499
Construction in Progress [Member]    
Property and equipment, gross $ 0 $ 2,150
XML 39 R28.htm IDEA: XBRL DOCUMENT v3.4.0.3
4. Property and Equipment (Details Narrative) - USD ($)
3 Months Ended 9 Months Ended
Mar. 31, 2016
Mar. 31, 2015
Mar. 31, 2016
Mar. 31, 2015
Property, Plant and Equipment [Abstract]        
Depreciation expense $ 39,336 $ 58,885 $ 138,683 $ 180,203
XML 40 R29.htm IDEA: XBRL DOCUMENT v3.4.0.3
5. Accrued Liabilities (Details) - USD ($)
Mar. 31, 2016
Jun. 30, 2015
Payables and Accruals [Abstract]    
Accrued salaries, severance $ 113,313 $ 140,820
Accrued salaries, payroll deductions owed to government entities 45,936 8,434
Accrued vacation 37,930 75,477
Payroll taxes 5,635 10,823
Other accrued liabilities 43,607 3,065
Total accrued liabilities $ 246,421 $ 238,619
XML 41 R30.htm IDEA: XBRL DOCUMENT v3.4.0.3
6. Short-Term Borrowings (Details) - USD ($)
Mar. 31, 2016
Jun. 30, 2015
Debt Disclosure [Abstract]    
Short term borrowings $ 0 $ 148,295
Total short-term borrowings $ 0 $ 148,295
XML 42 R31.htm IDEA: XBRL DOCUMENT v3.4.0.3
7. Earnings Per Share (Details) - USD ($)
3 Months Ended 9 Months Ended
Mar. 31, 2016
Mar. 31, 2015
Mar. 31, 2016
Mar. 31, 2015
Earnings Per Share [Abstract]        
Net income attributable to parent company $ 391,370 $ 17,799 $ 1,026,536 $ 725,427
Weighted-average shares of common stock outstanding:        
Basic shares outstanding 10,414,536 10,533,869 10,486,606 10,533,869
Dilutive effect of common stock equivalents arising from stock options 215,917 116,740 215,917 116,740
Diluted Outstanding shares 10,630,453 10,650,609 10,702,523 10,650,609
Basic earnings per share $ .04 $ 0.00 $ .10 $ .07
Diluted earnings per share $ 0.04 $ 0.00 $ 0.10 $ 0.07
XML 43 R32.htm IDEA: XBRL DOCUMENT v3.4.0.3
8. Commitments and Contingencies (Details Narrative) - USD ($)
3 Months Ended 9 Months Ended
Mar. 31, 2016
Mar. 31, 2015
Mar. 31, 2016
Mar. 31, 2015
San Diego, CA [Member]        
Rent Expense $ 69,344 $ 49,728 $ 200,424 $ 149,185
Seoul, Korean [Member]        
Rent Expense 32,100 24,000 96,300 72,000
Corporate housing facility [Member]        
Rent Expense $ 2,371 $ 2,603 $ 7,267 $ 7,983
XML 44 R33.htm IDEA: XBRL DOCUMENT v3.4.0.3
9. Long-Term Incentive Plan Awards (Details - Option Activity)
9 Months Ended
Mar. 31, 2016
USD ($)
$ / shares
shares
custom:AggregateIntrinsicValueAbstract  
Aggregate Intrinsic Value Exercisable | $ $ 1,056,450
Options [Member]  
Shares  
Number of Options Outstanding, Beginning 850,337
Number of Options Granted
Number of Options Exercised (13,334)
Number of Options Cancelled
Number of Options Forfeited or Expired
Number of Options Outstanding, Ending 837,003
Number of Options Exercisable 837,003
Weighted-Average Exercise Price  
Weighted Average Exercise Price Outstanding, Beginning | $ / shares $ 1.24
Weighted Average Exercise Price Exercised | $ / shares 1.34
Weighted Average Exercise Price Outstanding, Ending | $ / shares 1.24
Weighted Average Exercise Price Exercisable | $ / shares $ 1.24
Weighted-Average Remaining Contractual Life (In Years)  
Weighted Average Remaining Contractual Life (in years) Outstanding 4 years 4 months 10 days
Weighted Average Remaining Contractual Life (in years) Exercised 5 years 7 months 21 days
Weighted Average Remaining Contractual Life (in years) Outstanding 3 years 6 months 29 days
Weighted Average Remaining Contractual Life (in years) Exercisable 3 years 6 months 29 days
custom:AggregateIntrinsicValueAbstract  
Aggregate Intrinsic Value Outstanding, Beginning | $ $ 306,583
Aggregate Intrinsic Value Exercised | $ (33,335)
Aggregate Intrinsic Value Outstanding, Ending | $ $ 1,056,450
XML 45 R34.htm IDEA: XBRL DOCUMENT v3.4.0.3
9. Long-Term Incentive Plan Awards (Details Narrative) - USD ($)
3 Months Ended 9 Months Ended
Mar. 31, 2016
Mar. 31, 2016
Mar. 31, 2015
Disclosure of Compensation Related Costs, Share-based Payments [Abstract]      
Share based compensation expense $ (12,500) $ (37,500) $ 52,721
Weighted average grant-date fair value of stock options 837,003 837,003  
Weighted average grant-date fair value of stock options, per share price   $ 1.15  
Unrecognized compensation cost related to non-vested options $ 0 $ 0  
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