FRANKLIN WIRELESS CORP 10-K

ITEM 9A. CONTROLS AND PROCEDURES EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES Our management has evaluated, under the supervision and with the participation of OC Kim, our President, and David Brown, our Acting Chief Financial Officer, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based upon that evaluation, our President and the Acting Chief Financial Officer have concluded that, as of June 30, 2021, our disclosure controls and procedures were effective in ensuring that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is (i) recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the SEC and (ii) accumulated and communicated to our management, including our principal executive and principal accounting officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING There have been no changes in our internal controls over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act or in other factors that materially affected or are reasonably likely to materially affect our internal controls and procedures over financial reporting during the fourth quarter of the fiscal year ended June 30, 2021. MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act). Our internal control over financial reporting is designed 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. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. To evaluate the effectiveness of internal controls over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act, management conducted an assessment, using the criteria in Internal Control-Integrated Framework, (specifically the 2013 framework) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on its assessment, management concluded that we maintained effective internal control over financial reporting as of June 30, 2021. 15 PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE Set forth below are the names, ages, titles and present and past positions of our directors and executive officers as of June 30, 2021. Name Age Position OC Kim 56 President, Secretary and a Director Gary Nelson 80 Chairman of the Board and a Director Johnathan Chee 58 Director Heidy Chow 42 Director Kristina Kim 58 Director Yun J. (David) Lee 59 Chief Operating Officer David Brown 57 Acting Chief Financial Officer OC Kim has been our President, Secretary and a director since September 2003. He also served as our Acting Chief Financial Officer from April 2018 until March 2021. Prior to joining Franklin Wireless, Mr. Kim was the CEO and President of Accetio Inc., a company he founded in April 2001 that developed cell phones and modules for the telecommunications industry. In September 2003, Accetio Inc. merged with Franklin Telecommunications Corp. and was renamed Franklin Wireless Corp. Prior to this, Mr. Kim was the Chief Operating Officer of Axesstel Inc., a pioneering developer of CDMA Wireless Local Loop Products. Before joining Axesstel, he was the president of the U.S. sales office for Kolon Data Communications Co., Ltd., one of Korea's most prominent technology conglomerates. While at Kolon Data Communications, Mr. Kim helped introduce the first generation of CDMA phones to the Korean market through his work with Qualcomm Personal Electronics (QPE), a joint venture between Qualcomm Incorporated and Sony Electronics Inc. Mr. Kim began his career at Lucky Goldstar (LG) Electronics. He has more than 29 years of experience in sales, marketing, and operations management in the telecommunications and information systems industries. He earned a B.A. from Sogang University in Korea. We believe Mr. Kim’s qualifications to serve as a director of the Company include his extensive business, operational and management experience in the wireless industry, including his current position as the Company’s President. In addition, his knowledge of the Company’s business, products, strategic relationships and future opportunities is of great value to the Company. Gary Nelson has been a director since September 2003. Mr. Nelson was an early investor in Franklin Telecommunications Corp. in the 1980’s and served as a director from 2001 up until the Company’s merger with Accetio Inc. in September 2003, at which time the Company was renamed Franklin Wireless Corp. Following the merger, Mr. Nelson became a director and ultimately Chairman of the Board of Franklin Wireless Corp. He was co-founder and President of Churchill Mortgage Corporation, an income property mortgage banking firm based in Los Angeles, California, which was a loan correspondent for major life insurance companies and other financial institutions. In addition, Mr. Nelson was the Chief Operating Officer of Churchill Mortgage Capital, which was the loan origination arm of Churchill Mortgage Corporation. Mr. Nelson’s prior experience includes various marketing positions with Control Data Corporation and design engineering positions with North American Aviation where he worked on the Apollo Project. He holds a B.S. in Mechanical Engineering from Kansas State University and an MBA from the University of Southern California. We believe that Mr. Nelson’s qualifications to serve as a director of the Company include his many years of business, operational and management experience including his previous position as President of Churchill Mortgage Corporation. In addition, Mr. Nelson has served as a director of the Company for 14 years, and brings a valuable historical perspective on the development of the Company’s business and its leadership. Johnathan Chee has been a director since September 2009. He is an attorney and has owned the Law Offices of Johnathan Chee, in Niles, Illinois, since August 2007. Mr. Chee has represented clients in various business dealings and negotiations with Ameritech, SBC, Sprint and several wireless carriers in Latin America. Between 1998 and 2007, he served as an attorney with the C&S Law Group, P.C., in Glenview, Illinois. He holds a B.A. from the University of Illinois-Chicago and a J.D. from IIT Chicago-Kent College of Law. He is a member of the Illinois Bar Association. We believe Mr. Chee’s qualifications to serve as a director of the Company include his experience as a business attorney that allow him to provide the Company’s Board of Directors with valuable knowledge of legal matters that may affect the Company. 16 Heidy Chow is a Certified Public Accountant and an experienced finance and accounting executive whose client base includes several IT companies. Ms. Chow is an Assurance Partner of The Pun Group, LLP and has over fifteen (15) years of combined experience in auditing, consulting and finance. Ms. Chow’s career in public accounting was spent primarily with the National firms of RSM US and Ernst & Young, and regional firms where she has specialized in corporate accounting and auditing services. She supervises engagement teams in areas of designing and planning audits in accordance with the AICPA Generally Accepted Auditing Standards and Public Company Accounting Oversight Board (PCAOB) standards. In addition, she often serves as Contract Chief Financial Officer for privately held small and middle market companies. She holds a B.S. in Accounting from California State Polytechnic University, Pomona. Kristina Kim is a licensed attorney with extensive knowledge of global import/export, international trade, and regulatory issues. Ms. Kim also served as General Counsel and Vice President with Samsung International Inc. for over 14 years. Ms. Kim holds a B.A. in Biochemistry and Molecular Biology from the University of California at Santa Barbara, and a Juris Doctorate from the University of San Diego. Yun J. (David) Lee has served as our Chief Operating Officer since September 2008. Mr. Lee has 23 years of upper level management experience in telecommunications, including experience in the cellular telephone business in the U.S. and South America. Prior to joining the Company, he was President of Ace Electronics, and served as Chief Financial Officer and Director of Sales and Marketing for RMG Wireless. Prior to that, he served as Controller and Director of International Sales for Focus Wireless in Chicago. David Brown has served as our Acting Chief Financial officer since March 2021. With over 25 years of financial experience, David Brown has worked in several industries including manufacturing, aerospace, biotech, and electronics. A graduate in accounting from San Diego State University, David has advanced knowledge of accounting, budgeting, and cash management. He has developed and implemented internal policies and procedures throughout several organizations and has managed all aspects of the finance departments along with outside auditors. CODE OF ETHICS The Board of Directors has adopted a Code of Ethics, which is applicable to all of our employees, including our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. The Code of Ethics covers all areas of professional conduct, including honest and ethical conduct, conflicts of interest, compliance with laws, disclosure obligation, and accountability for adherence to this Code. CORPORATE GOVERNANCE During fiscal 2021, the Board of Directors held five meetings. Each director attended 100% of the meetings of the Board, except for Joon Won Jyoung, who attended none of the meetings and resigned his position on the Board on January 26, 2021. The Board of Directors has an Audit Committee made up of Heidy Chow (committee chair), Gary Nelson, and Kristina Kim, and a Compensation Committee made up of Gary Nelson (committee chair) and Johnathan Chee. The Board of Directors has no other committees. ITEM 11. EXECUTIVE COMPENSATION The following table sets forth all compensation paid or accrued by us for the years ended June 30, 2021, and 2020 to our President, Chief Operating Officer, and Chief Financial Officer (The "Named Executive Officers"). Name and Principal Position Fiscal Year Salary ($) Bonus ($) Option Awards ($) All Other Compensation ($)(1) Total ($) OC Kim, 2020 $ 220,000 $ 25,000 $ – – $ 245,000 President 2021 $ 286,667 $ 58,000 $ – – $ 344,667 Yun J. (David) Lee, 2020 $ 220,000 $ 33,000 $ – – $ 253,000 Chief Operating Officer 2021 $ 286,667 $ 58,000 $ 404,090 – $ 748,757 David Brown, 2020 $ – $ – $ – – $ – Acting Chief Financial Officer 2021 $ 40,032 $ 2,000 $ – – $ 42,032 17 Outstanding Equity Awards at Fiscal Year-End The following table presents the outstanding equity awards held by each of the Named Executive Officer as of June 30, 2021. The only outstanding equity awards are stock options. Options to purchase 100,000 shares were granted to Yun J. (David) Lee during fiscal 2021. The options vest over periods ranging from one to three years and are subject to early termination on the occurrence of certain events related to termination of employment. In addition, the full vesting of options is accelerated if there is a change in control of the Company. Options Awards Name Number of Securities Underlying Unexercised Options (#) Option Exercise Price ($) Option Expiration Date Number of Shares that have not Vested (#) Market Value of Shares that have not Vested ($) Yun J. (David) Lee 100,000 (1) $1.34 06/15/2022 – – 75,000 (2) $0.45 06/15/2022 – – 100,000 (3) $5.40 07/13/2025 66,667 $611,336 (1) The option vests and is exercisable in full on the first anniversary of the date of the grant and has a ten-year term. (2) The option vests and is exercisable over two years as follows: i. 50% of the shares underlying the option vest on the first anniversary of the date of the grant. ii. 25% of the shares underlying the option vest eighteen months following the date of the grant. ii. 25% of the shares underlying the option vest on the second anniversary of the date of the grant. The option originally had a five-year term and an expiration date of June 11, 2014. On June 10, 2014, the option was modified to extend the term an additional five years to June 11, 2019. On June 11, 2019, the option was again modified to extend the term an additional three years to June 15, 2022. (3) The option vests and is exercisable over three years as follows: i. 33.3% of the shares underlying the option vest on the first anniversary of the date of the grant. ii. 33.3% of the shares underlying the option vest on the second anniversary of the date of the grant. ii. 33.3% of the shares underlying the option vest on the third anniversary of the date of the grant. Director Compensation Our directors are reimbursed for reasonable out-of-pocket expenses incurred in attending meetings of the Board of Directors. Employee directors do not receive any cash compensation for service as directors and do not receive any equity compensation designated for such services. Members of the Board of Directors who are not employees may receive stock option grants as consideration for their board service from time to time, although there is no established policy for such stock option grants. Fiscal 2021 Director Compensation Name Fee Earned or Paid in Cash ($)(1) Option Awards ($) All Other Compensation ($) Total ($) Gary Nelson 14,500 – – 14,500 Johnathan Chee 14,500 – – 14,500 Heidy Chow 14,500 – – 14,500 Kristina Kim (2) 7,500 – – 7,500 18 (1) Directors are compensated at a base rate of $10,000 and $15,000 annually for the years ended December 31, 2020, and 2021, respectively, and prorated based upon board meeting attendance. Bonuses may be awarded when the business has performed exceptionally well as determined by the Board of Directors. For the six months ended December 31, 2021, the Board of Directors approved bonuses of $2,000 each to Gary Nelson, Jonathan Chee, and Heidy Chow. For the six months ended June 30, 2021, there has been no approved bonus for the Directors. (2) On January 27, 2021, the Board of Directors appointed Ms. Kristina Kim to the Board of Directors to replace Mr. Joon Won Jyoung, who resigned his position on the Board on January 26, 2021. There were no outstanding equity awards held by any of the non-officer directors as of June 30, 2021. EMPLOYMENT CONTRACTS On September 21, 2009, we entered into Change of Control Agreements with OC Kim, our President, and Yun J. (David) Lee, our Chief Operating Officer. 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, and the agreement with Mr. Lee calls for a payment of $2 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 30, 2023. COMPENSATION DISCUSSION AND ANALYSIS GENERAL PHILOSOPHY - We compensate our executive officers through a mix of base salary, incentive compensation and stock options. Our compensation policies are designed to be competitive with comparable employers and to align management’s incentives with both near-term and long-term interests of our stockholders. We use informal methods of benchmarking our executive compensation, based on the experience of our directors or, in some cases, studies of industry standards. Our compensation is negotiated on a case by case basis, with attention being given to the amount of compensation necessary to make a competitive offer and the relative compensation among our executive officers. BASE SALARIES - We want to provide our senior management with a level of cash compensation in the form of base salary that facilitates an appropriate lifestyle given their professional status and accomplishments. INCENTIVE COMPENSATION - Our practice is to award cash bonuses based upon performance objectives set by the Board of Directors. We maintain a bonus plan which provides our executive officers the ability to earn cash bonuses based on the achievement of performance targets. The performance targets are set by the Board of Directors, and our executive officers are eligible to receive bonuses on a quarterly basis. The actual amount of incentive compensation paid to our executive officers is in the sole discretion of the Board of Directors. SEVERANCE BENEFITS - We are generally an at will employer and have no employment agreements with severance benefits; however, we have entered into Change of Control Agreements with our executive officers, and one other employee that provide them with lump sum payments in the event of a change in control of the Company. RETIREMENT PLANS - We do not maintain any retirement plans. 19 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS The following table sets forth certain information regarding the beneficial ownership of our Common Stock as of September 28, 2021, by each director and executive officer of the Company, each person known to us to be the beneficial owner of more than 5% of the outstanding Common Stock, and all directors and executive officers of the Company as a group. Except as otherwise indicated below, each person has sole voting and investment power with respect to the shares owned, subject to applicable community property laws. Shares Beneficially Owned Name and Address Number Percent Joon Won Jyoung 9707 Waples Street, Suite 150, San Diego, CA 92121 1,004,948 8.7% OC Kim 9707 Waples Street, Suite 150, San Diego, CA 92121 1,096,695 9.5% Gary Nelson 9707 Waples Street, Suite 150, San Diego, CA 92121 314,008 2.7% Yun J. (David) Lee 9707 Waples Street, Suite 150, San Diego, CA 92121 10,000 0.0% Johnathan Chee 9707 Waples Street, Suite 150, San Diego, CA 92121 13,500 0.0% Paul Packer 805 Third Ave., 15 th Floor, New York, NY 10022 848,259 (1) 7.3% - Kennedy Capital Management, Inc. 10829 Olive Blvd., St. Louis, MO 63141 661,185 (2) 5.7% AIGH Investment Partners, L.L.C. 6006 Berkley Avenue, Baltimore, MD21209 780,000 (3) 6.8% All directors and executive officers as a group 3,362,229 28.8% (1) Based solely on a Schedule 13G dated February 12, 2021, which indicates that Mr. Packer may be deemed to beneficially own 849,259 shares. With respect to these shares, Mr. Packer has shared voting power and shared dispositive power with Globis Capital Partners, L.P., Globis Capital Advisors, L.L.C., Globis Overseas Fund, Ltd., Globis Capital Management, L.P. and Globis Capital, L.L.C. (2) Based solely on a Schedule 13G dated July 09, 2021, which indicates that Kennedy Capital Management, Inc. may be deemed to beneficially own 661,185 shares. (3) Based solely on a Schedule 13G dated January 12, 2021, which indicates that AIGH Capital Management, L.L.C. may be deemed to beneficially own 780,000 shares. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE. None. 20 ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES The aggregate fees billed for the most recently completed fiscal period for the audit of our annual financial statements and services normally provided by the independent registered public accounting firm for this fiscal period were as follows: FY 2021 FY 2020 Audit Fees $ 69,125 $ 68,600 Total Fees $ 69,125 $ 68,600 In the above table, "audit fees" are fees billed by our external auditor for services provided in auditing our company's annual financial statements for the subject year. The fees set forth on the foregoing table relate to the audit as of and for the years ended June 30, 2021, and 2020, which was performed by Benjamin & Ko and Haskell & White LLP., respectively. All of the services described above were approved in advance by the Board of Directors or the Company's Audit Committee. 21 PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES (a) Index to financial statements (b) Exhibits The following Exhibits are files as part of, or incorporated by reference into, this Report on Form 10-K: Exhibit No. Description 2.1 Articles of Merger and Agreement and Plan of Reorganization, filed January 2, 2008 with the Nevada Secretary of State (1) 3.1 Articles of Incorporation of Franklin Wireless Corp. (1) 3.2 Amended and Restated Bylaws of Franklin Wireless Corp. (3) 4.1 Description of Securities (7) 10.2 Lease, dated August 12, 2011, between the Company and EJMC, Inc., a California corporation (4) 10.3 Employment Agreement, dated September 21, 2009, between Franklin Wireless Corp. and OC Kim (3) 10.4 Change of Control Agreement, dated September 21, 2009, between Franklin Wireless Corp. and OC Kim (3) 10.5 Change of Control Agreement, dated September 21, 2009, between Franklin Wireless Corp. and David Lee. (3) 10.7 Lease, dated September 9, 2015, between the Company and Hunsaker & Associates San Diego, Inc., a California corporation (5) 10.8 Common Stock Purchase Agreement, dated August 18, 2020, between Franklin Wireless Corp. and Top Intercube Co., Ltd . (6) 10.9 Common Stock Purchase Agreement, dated August 18, 2020, between Franklin Wireless Corp. and Partron Co., Ltd. (6) 14.1 Code of Ethics (2) 31.1 Certificate of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2 Certificate of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 32.1 Certificate of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 32.2 Certificate of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 101.INS XBRL Instance Document 101.SCH XBRL Schema Document 101.CAL XBRL Calculation Linkbase Document 101.DEF XBRL Definition Linkbase Document 101.LAB XBRL Label Linkbase Document 101.PRE XBRL Presentation Linkbase Document (1) Incorporated by reference from Report on Form 10-QSB for the quarterly period ended March 31, 2008, filed on May 14, 2008. (2) Incorporated by reference from Annual Report on Form 10-K for the year ended June 30, 2008, filed on September 26. 2008. (3) Incorporated by reference from Annual Report on Form 10-K for the year ended June 30, 2009, filed on October 13, 2009. (4) Incorporated by reference from Annual Report on Form 10-K for the year ended June 30, 2011, filed on September 28, 2011. (5) Incorporated by reference from Quarterly Report on Form 10-Q for the quarter ended September 30, 2015, filed on November 16, 2015. (6) Incorporated by reference from Annual Report on Form 10-K for the year ended June 30, 2020, filed on September 17, 2020. (7) Incorporated by reference from Report on Form 10-K/A for the year ended June 30, 2020, filed on September 18, 2020. (c) Supplementary Information None. ITEM 16. FORM 10-K SUMMARY . Not applicable. 22 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 Dated: September 28, 2021 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date Principal Executive Officer /s/ OC KIM President and a Director September 28, 2021 Principal Financial Officer /s/ David Brown Acting Chief Financial Officer September 28, 2021 David Brown /s/ GARY NELSON Chairman of the Board of Directors September 28, 2021 Gary Nelson /s/ JOHNATHAN CHEE Director September 28, 2021 Johnathan Chee /s/ HEIDY CHOW Director September 28, 2021 Heidy Chow /s/ KRISTINA KIM Director September 28, 2021 Kristina Kim 23 FRANKLIN WIRELESS CORP. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED JUNE 30, 2021, and 2020 Page No. Index to Consolidated Financial Statements F-1 Reports of Independent Registered Public Accounting Firms F-2 Consolidated Balance Sheets as of June 30, 2021, and June 30, 2020 F-6 Consolidated Statements of Comprehensive Income for the Years ended June 30, 2021, and 2020 F-7 Consolidated Statements of Stockholders' Equity for the Years ended June 30, 2021, and 2020 F-8 Consolidated Statements of Cash Flows for the Years ended June 30, 2021, and 2020 F-9 Notes to Consolidated Financial Statements F-10 F- 1 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Shareholders and Board of Directors of Franklin Wireless Corp. Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheet of Franklin Wireless Corp. (the “Company”) as of June 30, 2021, and the related consolidated statements of income and comprehensive income, shareholders’ equity, and cash flows for the year ended June 30, 2021, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of June 30, 2021, and the results of its operations and its cash flows for the year ended June 30, 2021, in conformity with accounting principles generally accepted in the United States of America. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of June 30, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated, September 28, 2021, expressed an unqualified opinion. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that is material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which it relates. F- 2 Description of the Matter As described in Note 2 to the consolidated financial statements, the Company’s contracts with customers sometimes contain multiple performance obligations, which are accounted for separately if they are distinct. In such cases, the transaction price is then allocated to the distinct performance obligations on a relative standalone selling price basis, and revenue is recognized when control of the distinct performance obligation is transferred. Auditing the Company’s revenue recognition was complex, including the identification and determination of distinct performance obligations and the timing of revenue recognition. For example, there were non-standard terms and conditions that required judgment to determine the distinct performance obligations and the impact on the timing of revenue recognition. How We Addressed the Matter in Our Audit We obtained an understanding, evaluated the design, and tested the operating effectiveness of the Company’s process and controls to identify and determine the distinct performance obligations and the timing of revenue recognition. To test the identification and determination of the distinct performance obligations and the timing of revenue recognition, our audit procedures included, among others, reading the executed contract or purchase order to understand the contract, identifying the performance obligation(s), determining the distinct performance obligations, and evaluating the timing of revenue recognition for a sample of individual sales transactions. We evaluated the accuracy of the Company’s contract summary documentation, specifically related to the identification and determination of distinct performance obligations and the timing of revenue recognition. We further evaluated appropriateness of revenue recognition through year-on-year analytics and reasonableness assessment of gross margin analysis. /s/ Benjamin & Ko Santa Ana, CA September 28, 2021 We have served as the Company’s auditor since 2020. F- 3 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Shareholders and Board of Directors of Franklin Wireless Corp. Opinion on Internal Control over Financial Reporting We have audited the internal control over financial reporting of Franklin Wireless Corp. (the “Company”) as of June 30, 2021, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of June 30, 2021, based on criteria established in Internal Control—Integrated Framework (2013) issued by COSO. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets as of June 30, 2021 and the related consolidated statements of income and comprehensive income, shareholders’ equity, and cash flows of the Company for the year ended June 30, 2021, and our report dated September 28, 2021, expressed an unqualified opinion. Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Report on the audit of the Consolidated Financial Statements. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control over Financial Reporting A company’s internal control over financial reporting is a process designed 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. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ Benjamin & Ko Santa Ana, CA September 28, 2021 We have served as the Company’s auditor since 2020. F- 4 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders Franklin Wireless Corp. Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of Franklin Wireless Corp. (the “Company”) as of June 30, 2020 and 2019, and the related consolidated statements of comprehensive income (loss), stockholders’ equity, and cash flows for each of the two years in the period ended June 30, 2020, and the related notes (collectively, the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company as of June 30, 2020 and 2019, and the consolidated results of its operations and its cash flows for each of the two years in the period ended June 30, 2020, in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. /s/ HASKELL & WHITE LLP We have served as the Company’s auditor since 2013. Irvine, California September 17, 2020 F- 5 FRANKLIN WIRELESS CORP. Consolidated Balance Sheets As of June 30, 2021 2020 ASSETS Current assets: Cash and cash equivalents $ 45,796,006 $ 28,161,644 Certificates of deposit account 5,386,034 5,381,918 Accounts receivable 2,542,429 15,973,537 Other receivables, net 50,040 61,090 Inventories, net 975,519 11,783,403 Prepaid expenses and other current assets 44,984 21,588 Advance payments to vendors 40,630 27,838 Total current assets 54,835,642 61,411,018 Property and equipment, net 151,610 220,889 Intangible assets, net 1,246,750 1,125,152 Deferred tax assets, non-current 387,548 938,188 Goodwill 273,285 273,285 Right of use assets 753,263 1,139,670 Other assets 140,539 283,369 TOTAL ASSETS $ 57,788,637 $ 65,391,571 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 9,718,989 $ 42,083,255 Income tax payable 333,503 34,713 Accrued liabilities 785,525 466,021 Lease liabilities, current 317,519 400,508 Total current liabilities 11,155,536 42,984,497 Lease liabilities, non-current 467,937 784,233 Notes payable, payroll protection plan loan – 487,300 Total liabilities 11,623,473 44,256,030 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 June 30, 2021, and 2020 – – Common stock, par value $0.001 per share, authorized 50,000,000 shares; 11,590,281 and 10,605,912 shares issued and outstanding as of June 30, 2021, and 2020, respectively 14,069 14,007 Additional paid-in capital 12,972,234 7,475,365 Retained earnings 35,727,094 18,028,059 Treasury stock, 2,549,208 and 3,472,286 shares as of June 30, 2021, and 2020, respectively (3,554,893 ) (4,513,479 ) Accumulated other comprehensive loss (472,502 ) (650,426 ) Total Parent Company stockholders’ equity 44,686,002 20,353,526 Non-controlling interests 1,479,162 782,015 Total stockholders’ equity 46,165,164 21,135,541 TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $ 57,788,637 $ 65,391,571 See accompanying notes to consolidated financial statements. F- 6 FRANKLIN WIRELESS CORP. Consolidated Statements of Comprehensive Income Fiscal Years Ended June 30, 2021 2020 Net sales $ 184,115,345 $ 75,072,298 Cost of goods sold 151,651,324 60,547,813 Gross profit 32,464,021 14,524,485 Operating expenses: Selling, general and administrative 5,077,848 3,699,859 Research and development 4,567,863 3,746,502 Total operating expenses 9,645,711 7,446,361 Income from operations 22,818,310 7,078,124 Other income, net: Interest income 8,789 159,749 Income from governmental subsidy 147,166 16,282 Gain from the forgiveness of payroll protection plan loan 487,300 – Other income (expense), net (26,088 ) 44,733 Total other income, net 617,167 220,764 Income before provision for income taxes 23,435,477 7,298,888 Income tax provision 5,039,295 1,380,301 Net income 18,396,182 5,918,587 Less: non-controlling interests in net income of subsidiary at 35.8% – 189,105 Less non-controlling interests in net income of subsidiary at 33.7% 697,147 178,864 Net income attributable to Parent Company $ 17,699,035 $ 5,550,618 Basic earnings per share attributable to Parent Company stockholders $ 1.56 $ 0.52 Diluted earnings per share attributable to Parent Company stockholders $ 1.53 $ 0.52 Weighted average common shares outstanding - basic 11,350,946 10,581,499 Weighted average common shares outstanding - diluted 11,592,901 10,715,979 Comprehensive income Net income $ 18,396,182 $ 5,918,587 Translation adjustments 177,924 (15,624 ) Comprehensive income 18,574,106 5,902,963 Less: comprehensive income attributable to non-controlling interest 697,147 367,969 Comprehensive income attributable to controlling interest $ 17,876,959 $ 5,534,994 See accompanying notes to consolidated financial statements. F- 7 FRANKLIN WIRELESS CORP. Consolidated Statements of Stockholders' Equity Common Stock Additional Paid-in Retained Treasury Accumulated Other Comprehensive Income Non-controlling Total Stockholders Shares Amount Capital Earnings Stock (Loss) Interest Equity Balance - June 30, 2019 10,570,203 $ 13,972 $ 7,442,272 $ 12,477,441 $ (4,513,479 ) $ (634,802 ) $ 489,046 $ 15,274,450 Net income attributable to Parent Company – – – 5,550,618 – – – 5,550,618 Foreign exchange translation – – – – – (15,624 ) – (15,624 ) Issuance of stock related to stock option exercised 35,709 35 33,093 – – – – 33,128 Comprehensive income attributable to non-controlling interest – – – – – – 367,969 367,969 Purchase of shares of a subsidiary – – – – – – (75,000 ) (75,000 ) Balance - June 30, 2020 10,605,912 $ 14,007 $ 7,475,365 $ 18,028,059 $ (4,513,479 ) $ (650,426 ) $ 782,015 $ 21,135,541 Net income attributable to Parent Company – – – 17,699,035 – – – 17,699,035 Foreign exchange translation – – – – – 177,924 – 177,924 Issuance of stock related to stock option exercised 61,291 62 74,689 – – – – 74,751 Comprehensive income attributable to non-controlling interest – – – – – – 697,147 697,147 Sales of treasury stock 923,078 – 5,041,422 – 958,586 – – 6,000,008 Stock based compensation – – 380,758 – – – – 380,758 Balance - June 30, 2021 11,590,281 $ 14,069 $ 12,972,234 $ 35,727,094 $ (3,554,893 ) $ (472,502 ) $ 1,479,162 $ 46,165,164 See accompanying notes to consolidated financial statements. F- 8 FRANKLIN WIRELESS CORP. Consolidated Statements of Cash Flows Fiscal Years Ended June 30, 2021 2020 CASH FLOW FROM OPERATING ACTIVITIES: Net income $ 18,396,182 $ 5,918,587 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 90,322 92,736 Amortization of intangible assets 435,571 482,792 Stock based compensation 380,758 – Bad debt expense 338,185 – Forgiveness of payroll protection plan loan (487,300 ) – Disposal of intangible assets 140,192 38,498 Amortization of right of use assets 386,407 361,533 Deferred tax (benefit) 550,640 1,344,787 Increase (decrease) in cash due to change in: Accounts receivable 13,103,973 (11,855,351 ) Inventories 10,807,884 (10,730,663 ) Prepaid expenses and other current assets (23,396 ) 6,454 Advance payments to vendors (12,792 ) 23,502 Other assets 142,830 (25,272 ) Accounts payable (32,364,266 ) 36,410,741 Income tax payable 298,790 34,059 Lease liabilities (399,285 ) (316,462 ) Accrued liabilities 319,504 218,363 Net cash provided by operating activities 12,104,199 22,004,304 CASH FLOW FROM INVESTING ACTIVITIES: Purchases of short-term investments (4,116 ) (1,692 ) Purchases of shares of a subsidiary – (75,000 ) Purchases of property and equipment (21,043 ) (181,746 ) Payments for capitalized product development costs (694,909 ) (343,360 ) Purchases of intangible assets (2,452 ) (193,171 ) Net cash used in investing activities (722,520 ) (794,969 ) CASH FLOW FROM FINANCING ACTIVITIES: Proceeds of payroll protection plan loan – 487,300 Sales of common stock sold from treasury stock 6,000,008 – Cash received from exercise of stock options 74,751 33,128 Net cash provided by financing activities 6,074,759 520,428 Effect of foreign currency translation 177,924 (15,624 ) Net increase in cash and cash equivalents 17,634,362 21,714,139 Cash and cash equivalents, beginning of year 28,161,644 6,447,505 Cash and cash equivalents, end of year $ 45,796,006 $ 28,161,644 Supplemental disclosure of cash flow information: Cash paid during the periods for: Income taxes $ (4,124,485 ) $ (800 ) Non-cash investing and financing activities: Initial adoption of right to use assets $ – $ 1,501,203 Initial adoption of lease liabilities $ – $ 1,501,203 See accompanying notes to consolidated financial statements. F- 9 FRANKLIN WIRELESS CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - BUSINESS OVERVIEW We are a leading provider of intelligent wireless solutions including mobile hotspots, routers, trackers, and other devices. Our designs integrate innovative hardware and software enabling 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 based on 5G/4G wireless technology. We have a majority ownership position in Franklin Technology Inc. ("FTI"), a research and development company 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 North America, the Caribbean and South America, and Asia. NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The consolidated financial statements include the accounts of the Company and its subsidiary with a majority voting interest of 66.3% (33.7% is owned by non-controlling interests) as of June 30, 2021, and 2020. For the year ended June 30, 2020, the increase in the majority voting interest in percentage from 64.2% to 66.3% was due to the purchase by the Company of 43,333 shares of the subsidiary for $75,000 ($1.73 per share) from three non-controlling shareholders. The purchase decreased the non-controlling interests’ ownership percentage from 35.8% to 33.7%. 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. As consolidated financial statements are based on the assumption that they represent the financial position and operating results of a single economic entity, the retained earnings or deficit of the subsidiary at the date of acquisition, October 1, 2009, by the parent are excluded from consolidated retained earnings. When a subsidiary is consolidated, the consolidated financial statements include the subsidiary’s revenues, expenses, gains, and losses only from the date the subsidiary is initially consolidated, and the non-controlling interest is reported in the consolidated statement of financial position within equity, separately from the parent’s equity. There are no shares of the Company held by any subsidiaries as of June 30, 2021, or June 30, 2020. Non-controlling Interest in a Consolidated Subsidiary As of June 30, 2021, the non-controlling interest was $1,479,162, which represents a $697,147 increase from $782,015 as of June 30, 2020. The increase in the non-controlling interest of $697,147 was from income in the subsidiary of $2,071,302 incurred for the year ended June 30, 2021. 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 our chief operating decision maker internally evaluates separate financial information, business activities and management responsibility. We have one reportable segment, consisting of the sale of wireless access products. F- 10 We generate revenues from three geographic areas, consisting of North America, the Caribbean and South America, 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: Fiscal Year Ended June 30, Net sales: 2021 2020 North America $ 183,771,146 $ 74,839,778 Caribbean and South America 17,500 – Asia 326,699 232,520 Totals $ 184,115,345 $ 75,072,298 Long-lived assets, net (property and equipment and intangible assets): June 30, 2021 June 30, 2020 United States $ 1,349,320 $ 1,302,353 Asia 49,040 43,688 Totals $ 1,398,360 $ 1,346,041 Fair Value of Financial Instruments The carrying amounts of financial instruments such as cash equivalents, short-term investments, 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 are readily convertible into cash, such as money market funds and certificates of deposit (see Note 3). 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. 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 June 30, 2021, and June 30, 2020. Revenue Recognition Contracts with Customers Revenue from sales of products and services is derived from contracts with customers. The products and services covered by contracts primarily consist of hot spot routers. Contracts with each customer generally state the terms of the sale, including the description, quantity and price of each product or service. Payment terms are stated in the contract, primarily in the form of a purchase order. Since the customer typically agrees to a stated rate and price in the purchase order that does not vary over the life of the contract, the majority of our contracts do not contain variable consideration. We establish a provision for estimated warranty and returns. Using historical averages, that provision for the year ended June 30, 2021, was not material. Disaggregation of Revenue In accordance with Topic 606, we disaggregate revenue from contracts with customers into geographical regions and by the timing of when goods and services are transferred. We determined that disaggregating revenue into these categories meets the disclosure objective in Topic 606, which is to depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by regional economic factors. F- 11 Contract Balances We perform our obligations under a contract with a customer by transferring products in exchange for consideration from the customer. We typically invoice our customers as soon as control of an asset is transferred, and a receivable is established. We, however, recognize a contract liability when a customer prepays for goods and/or services, or we have not delivered goods under the contract since we have not yet transferred control of the goods and/or services. The balances of our trade receivables are as follows: June 30, 2021 June 30, 2020 Accounts Receivable $ 2,542,429 $ 15,973,537 The balance of contract assets was immaterial as we did not have a significant amount of un-invoiced receivables in the periods ended June 30, 2021, and June 30, 2020. Our contract liabilities are as follows: June 30, 2021 June 30, 2020 Undelivered products $ 140,000 $ 140,000 Performance Obligations A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of measurement in Topic 606. At contract inception, we assess the products and services promised in our contracts with customers. We then identify performance obligations to transfer distinct products or services to the customer. In order to identify performance obligations, we consider all the products or services promised in the contract regardless of whether they are explicitly stated or are implied by customary business practices. Our performance obligations are satisfied at a point in time. Revenue from products transferred to customers at a single point in time accounted for over 99% of net sales for the year ended June 30, 2021. Revenue for non-recurring engineering projects is based on the percentage completion of a project and accounted for under 1% of net sales for the year ended June 30, 2021. Most of our revenue recognized at a point in time is for the sale of hot-spot router products. Revenue from these contracts is recognized when the customer can direct the use of and obtain substantially all of the benefits from the product, which generally coincides with title transfer at completion of the shipping process. As of June 30, 2021, our contracts do not contain any unsatisfied performance obligations, except for undelivered products. 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 expenses of approximately $360,000 and $405,000 associated with capitalized product development costs associated with complete technology for the years ended June 30, 2021, and 2020, respectively. 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. F- 12 The costs of product development that are capitalized once technological feasibility is determined (noted as technology in progress in the Intangible Assets table in Note 2 to Notes to Consolidated Financial Statements) include related licenses, certification costs, payroll, employee benefits, and other headcount-related expenses associated with product development. 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 June 30, 2021, and June 30, 2020, capitalized product development costs in progress were $602,388 and $140,192, respectively, and these amounts are included in intangible assets in our consolidated balance sheets. During the year ended June 30, 2021, we incurred $694,909 in capitalized product development costs and disposed a technology in progress in the amount of $140,192 as we identified it has the great unlikelihood of economic success based on its performance test results, 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. Research and Development Costs Costs associated with research and development are expensed as incurred. Research and development costs were $4,567,863 and $3,746,502 for the years ended June 30, 2021, and 2020, 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. 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 statements of comprehensive income, were $723,617 and $642,930 for the years ended June 30, 2021, and 2020, 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. We invest our excess cash into financial instruments which management believes are readily convertible into cash, such as money market funds that are readily convertible to cash and have a $1.00 net asset value. Short Term Investments We have invested excess funds in short term liquid assets of certificates of deposit. Inventories Our inventories consist of finished goods and are stated at the lower of cost or net realizable value, 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 our control. We may write down our inventory value for potential obsolescence and excess inventory. As of June 30, 2021, and 2020, we have recorded inventory reserves in the amount of $0 and $399,437, respectively, for inventories that we have identified as obsolete or slow-moving. F- 13 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 improvements 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 were 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 years ended June 30, 2021, and 2020. Intangible Assets The definite lived intangible assets consisted of the following as of June 30, 2021: Definite lived intangible assets: Expected Life Average Remaining life Gross Intangible Assets Less Accumulated Amortization Net Intangible Assets Complete technology 3 years 0.5 years 18,397 15,331 3,066 Technology in progress Not Applicable – 602,388 – 602,388 Software 5 years 3.0 years 399,811 268,495 131,316 Patents 10 years 3.9 years 21,105 12,951 8,154 Certifications & licenses 3 years 1.6 years 1,070,770 568,944 501,826 Total as of June 30, 2021 $ 2,112,471 $ 865,721 $ 1,246,750 The definite lived intangible assets consisted of the following as of June 30, 2020: Definite lived intangible assets: Expected Life Average Remaining life Gross Intangible Assets Less Accumulated Amortization Net Intangible Assets Complete technology 3 years 1.8 years 18,397 7,666 10,731 Technology in progress Not Applicable - 140,192 – 140,192 Software 5 years 2.9 years 525,930 338,593 187,337 Patents 10 years 7.0 years 20,734 10,821 9,913 Certifications & licenses 3 years 1.9 years 4,078,310 3,301,331 776,979 Total as of June 30, 2020 $ 4,783,563 $ 3,658,411 $ 1,125,152 F- 14 Amortization expense recognized during the years ended June 30, 2021, and 2020 was $435,571 and $482,792, respectively. For the year ended June 30, 2021, we disposed the fully amortized intangible assets in the amount of $3,228,261 and a technology in progress in the amount of $140,192 as we identified it has the great unlikelihood of economic success based on its performance test results. The amortization expenses of the definite lived intangible assets for the next five years and thereafter are as follows: FY2022 FY2023 FY2024 FY2025 FY2026 Thereafter Total $ 528,655 $ 341,133 $ 198,944 $ 98,521 $ 25,442 $ 54,055 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 assets; 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. We are not aware of any events or changes in circumstances during the year ended June 31, 2021, 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. F- 15 Earnings per Share Attributable to Common Stockholders Basic earnings per share is calculated by dividing the net income by the weighted-average number of common shares that were outstanding for the period, without consideration for potential common shares. Diluted earnings per share is calculated by dividing the net income 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 of Credit Risk 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 year ended June 30, 2021, net sales to our two largest customers represented 63% and 30% of our consolidated net sales, respectively, and 0% and 84% of our accounts receivable balance as of June 30, 2021. For the year ended June 30, 2020, net sales to our two largest customers represented 46% and 36% of our consolidated net sales, respectively, and 21% and 72% of our accounts receivable balance as of June 30, 2020. No other customer accounted for more than ten percent of total net sales. For the year ended June 30, 2021, we purchased the majority of our wireless data products from two manufacturing companies located in Asia. If they 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 our revenue. For the year ended June 30, 2021, we purchased wireless data products from these suppliers in the amount of $138,516,044, or 99% of total purchases, and had related accounts payable of $9,096,451 as of June 30, 2021. For the year ended June 30, 2020, we purchased wireless data products from these suppliers in the amount of $67,179,379, or 94% of total purchases, and had related accounts payable of $41,181,840, as of June 30, 2020. 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 February 2018, the FASB issued Accounting Standards Update (ASU) 2018-02, Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. Under the amendments in ASU 2018-02, an entity may elect to reclassify the income tax effects of the Tax Cuts and Jobs Act of 2017 on items within accumulated other comprehensive income to retained earnings. We do not expect that the adoption of this update will impact the Company’s consolidated financial statements. NOTE 3 - FAIR VALUE MEASUREMENTS Fair value accounting is applied for all financial assets and liabilities and non-financial assets and liabilities that are recognized or disclosed at fair value in the consolidated financial statements on a recurring basis (at least annually). Assets and liabilities recorded at fair value in the financial statements are categorized based upon the level of judgment associated with the inputs used to measure their fair value. Hierarchical levels, which are directly related to the amount of subjectivity, associated with the inputs to the valuation of these assets or liabilities are as follows: • Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company can access at the measurement date. • Level 2 inputs are observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. • Level 3 inputs are unobservable inputs for the asset or liability. F- 16 The carrying values of the Company’s financial instruments, including cash and cash equivalents, short-term investments, accounts receivable, and accounts payable and debt, are calculated based on their approximate their fair values due to the short period of time to maturity or repayment. 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. NOTE 4 - PROPERTY AND EQUIPMENT Property and equipment consisted of the following as of: June 30, 2021 June 30, 2020 Machinery and Commercial Equipment $ 67,044 $ 364,054 Office equipment 291,191 420,941 Molds 575,552 940,165 933,787 1,725,160 Less accumulated depreciation (782,177 ) (1,504,271 ) Total $ 151,610 $ 220,889 Depreciation expense associated with property and equipment was $90,322 and $92,736 for the fiscal years ended June 30, 2021, and 2020, respectively, and is included in selling, general, and administrative expenses on the consolidated statements of comprehensive income. For the year ended June 30, 2021, we disposed the fully depreciated property ad equipment in the amount of $812,416. NOTE 5 - ACCRUED LIABILITIES Accrued liabilities consisted of the following as of: June 30, 2021 June 30, 2020 Accrued payroll deductions owed to government entities $ 66,307 $ 39,380 Accrued salaries and bonuses – 129,000 Accrued vacation 73,900 58,467 Accrued undelivered inventory 140,000 140,000 Accrued commission for service providers 52,500 98,500 Accrued commission to a customer 451,898 – Other accrued liabilities 920 674 Total $ 785,525 $ 466,021 NOTE 6 - INCOME TAXES Income tax provision for the years ended June 30, 2021, and 2020 consists of the following: Year Ended June 30, 2021 2020 Current income tax expense (benefit): Federal $ 4,217,883 $ 33,039 State (525 ) 2,475 Foreign 256,636 – 4,473,994 35,514 Deferred income tax expense (benefit): Federal 142,242 1,323,265 State 155,410 (293,773 ) Foreign 267,649 315,295 565,301 1,344,787 Provision for income taxes $ 5,039,295 $ 1,380,301 The provisions for income taxes reconciles to the amount computed by applying the effective federal statutory income tax rate to the income before provision for income taxes as follows: F- 17 Year Ended June 30, 2021 2020 Federal income tax, at statutory rate of 21% applied to earnings before income taxes and extraordinary items $ 4,929,611 $ 1,533,352 State tax, net of federal tax benefit 125,237 128,406 ) Nondeductible expenses 22,688 (45,345 ) R&D credits (56,950 ) (36,841 ) Global intangible low-taxed income 95,419 31,060 Foreign rate difference 39,146 74,256 Other (13,523 ) 53,943 Forgiveness of payroll protection plan loan (102,333 ) – Change in valuation allowance – (358,530 ) Provision (benefit) for income taxes $ 5,039,295 $ 1,380,301 Deferred income taxes reflect the net effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of our deferred tax assets are as follows: June 30, 2021 June 30, 2020 Deferred tax asset: Net operating losses $ 170,649 $ 507,402 State tax – 520 Lease accounting 7,035 10,078 Intangibles 84,831 38,154 Tax credits 133,451 346,091 Inventory reserve 30,591 103,450 Other, net 12,693 38,085 Total deferred tax assets 439,250 1,043,780 Deferred tax liabilities: Deferred state taxes (29,056 ) (61,692 ) State tax (110 ) – Fixed asset (22,536 ) (43,900 ) Total deferred tax liabilities (51,702 ) (105,592 ) Less valuation allowance – – Net deferred tax asset $ 387,548 $ 938,188 Deferred income tax assets and liabilities are recorded for differences between the financial statement and tax basis of the assets and liabilities that will result in taxable or deductible amounts in the future based on enacted laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. We have evaluated the available evidence supporting the realization of our gross deferred tax assets, including the amount and timing of forecasted future taxable income. Management determined it is more likely than not that the federal deferred tax assets will be fully realized, and no valuation allowance is necessary as of June 30, 2021 or 2020. As of June 30, 2021, we have federal net operating loss carryforwards of approximately $0.8 million and no state net operating loss carryforwards. Under the Tax Cuts and Jobs Act (the “Act”), which was signed into law on December 22, 2017, the federal net operating loss recognized on or after January 1, 2018 will carry forward indefinitely. The federal net operating loss of $0.8 million, which recognized on or before December 31, 2017, will expire through 2035, and the federal net operating loss recognized on or after January 1, 2018, which will carry forward indefinitely, is 0. The utilization of net operating loss carryforwards may be subject to limitations under provisions of the Internal Revenue Code Section 382 and similar state provisions. We apply the provisions of ASC 740 related to accounting for u F- 18 ncertain tax positions, which prescribes a recognition threshold and measurement process for recording in the financial statements uncertain tax positions taken or expected to be taken in a tax return. Under this provision, the impact of an uncertain income tax position on the income tax return must be recognized at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant taxing authority. Tax benefits of an uncertain tax position will not be recognized if it has less than a 50% likelihood of being sustained based on technical merits. A reconciliation of the beginning and ending balance of unrecognized tax benefits, which have been considered in the Company's computation of its deferred tax assets, is as follows: Balance as of June 30, 2019 $ 275,262 Gross increase 21,570 Balance as of June 30, 2020 296,832 Gross increase 38,427 Balance as of June 30, 2021 $ 335,259 We do not anticipate any material change in the total amount of unrecognized tax benefits to occur within the next twelve months. ASC 740 requires us to accrue interest and penalties where there is an underpayment of taxes based on our best estimate of the amount ultimately to be paid. Our policy is to recognize interest accrued related to unrecognized tax benefits and penalties as income tax expense. We have not recorded any interest or penalties as the liability associated with the unrecognized tax benefits is immaterial. We are subject to taxation in the U.S., and various state and foreign jurisdictions. 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 by using the treasury stock method that the proceeds we receive from an in-the-money option exercise are used towards repurchasing common shares in the market. For the years ended June 30, 2021, and 2020, we have calculated the diluted effect of common stocks arising from 484,000 and 251,291 stock options, respectively. The weighted average number of shares outstanding used to compute earnings per share is as follows: Year Ended June 30, 2021 2020 Net income attributable to Parent Company $ 17,699,035 $ 5,550,618 Weighted-average shares of common stock outstanding: Basic 11,350,946 10,581,499 Dilutive effect of common stock equivalents arising from stock options 241,955 134,480 Diluted Outstanding shares 11,592,901 10,715,979 Basic earnings per share attributable to Parent Company stockholders $ 1.56 $ 0.52 Diluted earnings per share attributable to Parent Company stockholders $ 1.53 $ 0.52 NOTE 8 - COMMITMENTS AND CONTINGENCIES Leases On September 9, 2015, we signed a lease for new office space consisting of approximately 12,775 square feet, located in San Diego, California, at a monthly rent of $25,754, 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 was four years from the lease commencement date and was then extended at a monthly rent of $25,752, by an additional fifty months to December 31, 2023. 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. F- 19 Our Korea-based subsidiary, FTI leases approximately 10,000 square feet of office space, located in Seoul, Korea, at a monthly rent of approximately $8,000 and the additional office space consisting of approximately 2,682 square feet, also located in Seoul, Korea, at a monthly rent of approximately $2,700 that expired on August 31, 2021, and extended by an additional twelve months to August 31, 2022. We lease one corporate housing facility, located in Seoul, Korea, primarily for our employees who travel, under a non-cancelable operating lease that expired on September 4, 2021, and extended by an additional twelve months to September 4, 2022. Rent expense for the years ended June 30, 2021, and 2020 was $446,614 and $435,683, respectively. Future minimum payments under operating leases are as follows: Payments due by June 30, 2022 2023 2024 Total Administrative office, San Diego, CA $ 321,930 $ 321,930 $ 160,965 $ 804,825 Administrative office, Korea 20,849 – – 20,849 Total Obligations $ 342,779 $ 321,930 $ 160,965 $ 825,674 As of June 30, 2021, we used discount rates of 4.0% and 2.8% in determining our operating lease liabilities for the office spaces in San Diego, California, and South Korea, respectively. These rates represented our incremental borrowing rates at that time. Short-term leases with initial terms of twelve months or less are not capitalized. Both our San Diego and Korean office leases were extensions of previous leases and neither contains any further extension provisions. Future minimum payments under operating leases are as follows: Operating Leases Fiscal 2022 $ 342,779 Fiscal 2023 321,930 Fiscal 2024 160,965 Total lease payments 825,674 Less imputed interest (40,218 ) Total $ 785,456 Litigation We are from time to time involved in certain legal proceedings and claims arising in the ordinary course of business. Management does not expect any material adverse outcome. Verizon Jetpack Recall On April 8 th , Verizon issued a press release announcing that it is working with the U.S. Consumer Product Safety Commission (CPSC) to conduct a voluntary recall of certain Verizon Ellipsis Jetpack mobile hotspot devices, indicating that the lithium-ion battery in the devices can overheat, posing a fire and burn hazard. According to the CPSC release, the recall affects approximately 2.5 million devices. We import the devices and supply them to Verizon. Verizon first advised us of one alleged Jetpack device failure at the end of February 2021. We immediately began meeting with Verizon and requested access to the device. We also began internal testing to evaluate device performance. We did not receive any further incident information until the last week of March 2021. On April 1 we issued a press release announcing that we had received reports from Verizon about potential issues with the batteries in the devices. On April 9 we issued a press release announcing the voluntary recall by Verizon. As of the date of this report, we have been unable to recreate any device failures of the type identified by Verizon. All internal testing conducted to date has confirmed that the Jetpack devices are performing within normal parameters. We are not currently aware of any aspect of the Jetpack design that could cause the devices to fail in the way described in Verizon’s recall notice. F- 20 We are continuing to investigate the alleged device failures. At the time of the recall announcement, only two of the devices involved in the 15 alleged incidents had been physically inspected by Verizon. We have not yet had the opportunity to inspect any of these devices, but we have retained an expert to assist in the process. We are actively discussing ways to resolve the consequences of the recall, including the costs to Verizon of conducting the recall, impacts on our manufacturing partners and our future business relationship with Verizon. Our suppliers and component manufactures, as well as relevant insurance carriers have been notified and are also participating. Future Impact on Financial Performance We need to resolve the recall to ensure future sales to Verizon. Discussions are ongoing but no agreement for future products have been reached at this time. We are striving to avoid litigation arising from the recall and have not received court filings from any of the parties involved at this time. We are not currently able to estimate the financial impact of the recall on our future operations. At this time, we do not have information that identifies the cause of the alleged incidents. We also do not have any specific legal claims or theories of causation for device failure incidents that would allow us to estimate the ultimate cost of potential future litigation. Although the recall notice identified 2.5 million devices, we are unable to predict the number of units that may be returned or the costs and damages that may be alleged in the future. Shareholder Litigation We have been made aware of legal actions alleging, among other things, that we had prior knowledge that the recall was likely and did not disclose that information to investors in a timely manner. We believe these allegations are not supported by the facts and we intend to vigorously defend against these claims. Swing Profits Litigation A legal action was filed against Franklin, as a nominal defendant, on or about July 22, 2021, claiming that OC Kim violated rule 16b of the Securities Act for taking swing profits from a sale and purchase of shares in violation of the Act. We believe the allegations are not supported by the facts and we intend to vigorously defend against these claims. Anydata, Inc. We entered into a Professional Services Agreement with Anydata Corp. (“Anydata”) for the product ACT233F Smart Link OBD device on May 5, 2017, for a minimum purchase commitment of 250,000 units. We have delivered approximately 25,000 units and 7,000 units during our second and fourth quarters of fiscal 2018, respectively, and an additional 18,000 units during our first quarter of fiscal 2019. Sales to Anydata were approximately $1.8 million for the year ended June 30, 2019. We have received information that Anydata may not be able to fulfill the entire purchase commitment for which parts have already been ordered with our main vendor, Quanta. We believe that the Company will be able to supply some of the products to another customer and has received personal guarantees from the ownership group of Anydata. As of June 30, 2019, the remaining unfulfilled purchase commitment was approximately $3.1 million. The total product purchase commitment with Quanta was approximately $2.9 million. We have not recorded a receivable from Anydata, nor a liability owed to Quanta. Management believes that, at this time, a loss contingency is reasonably possible but not estimable as to how much ultimately would be paid to Quanta. As of June 30, 2020, we paid $100,000 for the right to call on inventory and recorded an additional $49,580 as a prepaid expense related to pricing adjustments, which has been agreed with Quanta for other products to ensure demand is met, and for the quarter ended December 31, 2020, the prepaid expense of $149,580 has been recorded as a cost of goods sold. As of June 30, 2021, there is a reasonable possibility we may incur a loss; however, the amount is not estimable at this time. On January 25 th , 2021, we commenced legal action against Anydata and its principal officers in San Diego Superior Court, case number 37-2021-00003468-CU-BC-CTL. F- 21 COVID-19 In March 2020, the World Health Organization declared the outbreak of a novel coronavirus (COVID-19) as a pandemic which continues to spread throughout the United States. On March 19, 2020, the Governor of California declared a health emergency and issued an order to close all nonessential businesses until further notice. As a maker of wireless connectivity devices, we are deemed to be an essential business. Nonetheless, out of concern for our workers and pursuant to the government order, we reduced the scope of our operations and, where possible, certain workers began telecommuting from their homes. The continued spread of COVID-19 may result in a period of business disruption, including delays or disruptions in our supply chain. The spread of COVID-19, or another infectious disease, could also negatively affect the operations at our third-party manufacturers, which could result in delays or disruptions in the supply of our products. While we expect this situation may increase demand for its products, the related impact cannot be reasonably estimated at this time. Change of Control Agreements On October 1, 2020, we entered into Change of Control Agreements with OC Kim, our President, and Yun J. (David) Lee, our Chief Operating Officer. Each Change of Control Agreement provides for a lump sum payment to the officer in case we experience a change of control. The term includes the acquisition of our Common Stock 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 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 our outstanding Common Stock, or a liquidation or dissolution or sale of substantially all of our assets. The Change of Control Agreement with Mr. Kim calls for a payment of $5 million upon a change of control, and the agreement with Mr. Lee calls for a payment of $2 million upon a change of control. International Tariffs We believe that our products are currently exempt from international tariffs upon import from our manufacturers to the United States. If this were to change at any point, a tariff of 10%-25% of the purchase price would be imposed. If such tariffs are imposed, they could have a materially adverse effect on sales and operating results. Customer Indemnification Under purchase orders and contracts for the sale of our products we may provide indemnification to our customers for potential intellectual property infringement claims for which we may have no corresponding recourse against our third-party licensors. This potential liability, if realized, could materially adversely affect our business, operating results and financial condition. NOTE 9 - LONG-TERM INCENTIVE PLAN AWARDS We apply the provisions of ASC 718, “Compensation - Stock Compensation,” to all of our stock-based compensation awards, and use the Black-Scholes option pricing model to value stock options. Under this application, we record compensation expense for all awards granted. Compensation costs will be recognized over the period that an employee provides service in exchange for the award, i.e. the vesting period. In 2009, we adopted the Stock Incentive Plan (“2009 Plan”), 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. In July of 2020, the Board of Directors adopted the 2020 Franklin Wireless Corp. Stock Option Plan, which covers 800,000 shares of Common Stock. The Plan provide for the grant of incentive stock options, non-qualified stock options and restricted stock to our employees, directors, and independent contractors. These options will have such vesting or other provisions as may be established by the Board of Directors at the time of each grant. F- 22 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. There were $380,758 and $0 compensation expenses recorded under this method for the years ended June 30, 2021, and 2020, respectively. 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, 2019 299,000 $ 1.04 2.75 $ 241,220 Granted – – – – Exercised (35,709 ) 0.93 – – Cancelled – – – – Forfeited or expired (12,000 ) 1.35 – – Outstanding as of June 30, 2020 251,291 $ 1.05 1.95 $ 1,124,525 Granted 299,000 5.40 – – Exercised (61,291 ) 1.22 – – Cancelled – – – – Forfeited or expired (5,000 ) 5.40 – – Outstanding as of June 30, 2021 484,000 $ 3.67 2.83 $ 2,662,830 Exercisable as of June 30, 2021 190,000 $ 0.99 0.95 $ 1,554,450 The aggregate intrinsic value in the preceding table represents the total pretax intrinsic value, based upon the Company’s closing stock price of $9.17 as of June 30, 2021, 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 June 30, 2021, in the amount of 484,000 shares was $3.02 per share. As of June 30, 2021, there was unrecognized compensation cost of $808,225 related to non-vested stock options granted. F- 23