UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended: December 31, 2007
[_] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from ____________ to _____________
Commission file number 0-11616
FRANKLIN WIRELESS CORP.
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(Exact name of small business issuer in its charter)
Nevada 95-3733534
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9823 PACIFIC HEIGHTS BLVD., SUITE J, SAN DIEGO, CALIFORNIA 92121
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(Address of Principal Executive Offices) (Zip Code)
Issuer's Telephone Number, Including Area Code: (858) 623-0000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
par value $.001 per share
---------------
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). YES [ ] NO [X]
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
TITLE OF EACH CLASS OF COMMON STOCK OUTSTANDING AT FEBRUARY 7, 2008
----------------------------------- -------------------------------
Common Stock, par value $.001 per share 13,230,684
Transitional Small Business Disclosure format (Check one): YES [ ] NO [X]
FRANKLIN WIRELESS CORP.
INDEX
PAGE NO.
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PART I - FINANCIAL INFORMATION
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Item 1: Financial Statements
Unaudited Statements of Operations for the Three Months and
Six Months Ended December 31, 2007 and 2006 ......................... 3
Balance Sheets at December 31, 2007 (unaudited) and
June 30, 2007 (audited).............................................. 4
Unaudited Statements of Cash Flows for the Six Months Ended
December 31, 2007 and 2006........................................... 5
Notes to Unaudited Financial Statements................................ 6
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................... 15
Item 3: Controls and Procedures............................................. 24
PART II - OTHER INFORMATION
Item 1: Legal Proceedings................................................... 25
Item 2: Unregistered Sales of Equity Securities and Use of Proceeds......... 25
Item 3: Defaults Upon Senior Securities..................................... 25
Item 4: Submission of Matters to a Vote of Security Holders................. 25
Item 5: Other Information................................................... 26
Item 6: Exhibits............................................................ 26
Signatures.................................................................. 27
Certifications.............................................................. 28
-2-
FRANKLIN WIRELESS CORP.
STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
--------------------------- ---------------------------
2007 2006 2007 2006
------------ ------------ ------------ ------------
Net sales $ 7,858,549 $ 1,800,622 $ 16,503,242 $ 2,770,150
Cost of goods sold 5,940,668 1,318,750 12,628,539 1,994,600
------------ ------------ ------------ ------------
Gross profit 1,917,881 481,872 3,874,703 775,550
------------ ------------ ------------ ------------
Operating expenses:
Selling, general, and administrative 874,736 275,450 1,459,370 474,714
------------ ------------ ------------ ------------
Total operating expenses 874,736 275,450 1,459,370 474,714
------------ ------------ ------------ ------------
Income from operations 1,043,145 206,422 2,415,333 300,836
Other income:
Interest income 38,675 6,944 74,718 12,229
Other income 18,495 293 18,679 318
------------ ------------ ------------ ------------
Total other income 57,170 7,237 93,397 12,547
------------ ------------ ------------ ------------
Net income before income taxes 1,100,315 213,659 2,508,730 313,383
Provision for income taxes 30,891 -- 56,204 800
------------ ------------ ------------ ------------
Net income $ 1,069,424 $ 213,659 $ 2,452,526 $ 312,583
============ ============ ============ ============
Basic earnings per share $ 0.00 $ 0.00 $ 0.00 $ 0.00
Diluted earnings per share $ 0.00 $ 0.00 $ 0.00 $ 0.00
Weighted average common shares
outstanding - basic 926,040,050 894,237,852 926,040,050 888,105,624
Weighted average common shares
outstanding - diluted 926,040,050 894,237,852 926,040,050 888,105,624
See accompanying notes to unaudited financial statements.
-3-
FRANKLIN WIRELESS CORP.
BALANCE SHEETS
--------------------------
(UNAUDITED)
DECEMBER 31, JUNE 30,
2007 2007
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 4,412,158 $ 2,477,593
Account receivables 574,694 44,915
Inventories 20,253 10,830
Prepaid expenses -- 6,649
----------- -----------
Total current assets 5,007,105 2,539,987
Property and equipment, net 27,335 26,218
Intangible assets, net 101,718 130,264
Other assets 5,161 5,161
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TOTAL ASSETS $ 5,141,319 $ 2,701,630
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 451,722 $ 68,064
Advance payment from customers -- 354,500
Accrued liabilities 125,635 179,025
Note payable 434,000 434,000
----------- -----------
Total current liabilities 1,011,357 1,035,589
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STOCKHOLDERS' EQUITY
Common stock, no par value, authorized 1,200,000,000 shares and -- --
Preferred stock, no par value, authorized 10,000,000 shares;
Common stock issued and outstanding -926,040,050 as of December
31, 2007 and June 30, 2007, and no Preferred stock issued and
outstanding
Additional paid-in capital 5,029,393 5,029,393
Stock subscription receivable -- (11,395)
Accumulated deficit (899,431) (3,351,957)
----------- -----------
Total stockholders' equity 4,129,962 1,666,041
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 5,141,319 $ 2,701,630
=========== ===========
See accompanying notes to unaudited financial statements.
-4-
FRANKLIN WIRELESS CORP.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
--------------------------
SIX MONTHS ENDED
DECEMBER 31,
--------------------------
2007 2006
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 2,452,526 $ 312,583
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 4,288 2,844
Amortization of intangible assets 28,546 39,358
Bad debt 2,200 --
Increase (decrease) in cash due to change in:
Accounts receivable (531,979) (112,385)
Inventory (9,423) (307,670)
Prepaid expenses 6,649 --
Accounts payable 383,658 212,654
Advance payment from customers (354,500) --
Accrued liabilities (53,390) (44,729)
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Net cash provided by operating activities 1,928,575 102,655
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (5,405) (2,573)
Purchases of intangible assets -- (53,780)
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Net cash used in investing activities (5,405) (56,353)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Payment received for future stock issuance -- 263,636
Proceeds from issuance of common stock -- 136,364
Receipt of stock subscription receivable 11,395 --
----------- -----------
Net cash provided by financing activities 11,395 400,000
----------- -----------
Net increase in cash and cash equivalents 1,934,565 446,302
Cash and cash equivalents, beginning of period 2,477,593 568,387
----------- -----------
Cash and cash equivalents, end of period $ 4,412,158 $ 1,014,689
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ -- $ --
Income taxes $ 56,204 $ 800
See accompanying notes to unaudited financial statements.
-5-
FRANKLIN WIRELESS CORP.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
NOTE 1 - NATURE OF BUSINESS
Franklin Wireless Corp. designs and sells broadband high speed wireless data
communication products such as 3G wireless modules and modems. The Company
focuses on wireless broadband USB modems, which provides a flexible way for
wireless subscribers to connect to the wireless broadband network with any
laptop, table PC or desktop USB port without a PC card slot. The broadband
wireless data communication products are positioned at the convergence of
wireless communications, mobile computing and the Internet, each of which the
Company believes represents a growing market.
The Company's wireless products are based on Evolution Data Optimized technology
("EV-DO technology") of Code Division Multiple Access ("CDMA") and High-Speed
Packet Access technology ("HSPA technology") of Wideband Code Division Multiple
Access ("WCDMA), which are wireless radio broadband data standards adopted by
many CDMA and WCDMA mobile service providers, and enable end users to send and
receive email with large file attachments, play interactive games, receive, send
and download high resolution picture, video, and music contents.
The Company's wireless products are marketed through Original Equipment
Manufacturers ("OEMs") and distributors, as well as directly to operators and
end users. The Company's customer base extends from the United States,
Caribbean, and South American Countries to African countries; these customers
consist of major carriers / operators, distributors and end users. The Company's
USB modems are certified by Sprint, Alltel, Cellular South, NTELOS, and ACS in
the United States, by IUSACELL in Mexico, by Telefonica and Movilnet in
Venezuela and by TSTT in Trinidad and Tobago.
In the middle of 2007, the Company launched three new products, CDMA Revision A
USB modem CDU-680, CDMA Revision 0 CDU-650 USB modem, and CDMA Revision 0
CDX-650 Express card modem, to North and South American countries. The Company
also unveiled its CGU-628 Mobile Broadband USB modem, which provides a flexible
way for users to connect to high-speed downlink packet access ("HSDPA") network.
The Company anticipates that the sales of these new products will be a key to
the Company's future growth through its brand recognition and an increase in
marketing effort, leveraging sales to its existing customers.
The Company believes that the demand for wireless broadband data products will
continue to grow and expand worldwide. However, to be successful in this market,
the Company will need to continue to keep up with technology changes and
continue to invest and launch new products on a timely basis.
NOTE 2 - DISCONTINUED OPERATIONS
On October 30, 2007, the Board of Directors approved the dissolution of its only
subsidiary, ARG, which has been inactive since August 2003. As a part of the
dissolution, the parent Company assumed the liability of ARG of $434,000, a note
payable. The subsidiary did not have revenue, expense, asset or component of
stockholders' equity as of December 31, 2007 and June 30, 2007, and for the six
months ended December 31, 2007 and 2006.
-6-
NOTE 3 - BASIS OF PRESENTATION
The accompanying unaudited financial statements of the Company have been
prepared in accordance with accounting principles generally accepted in the
United States ("GAAP") for interim financial information and are presented in
accordance with the requirements of Form 10-QSB. The balance sheet is unaudited
as of December 31, 2007 and audited as of June 30, 2007. The statements of
operations are unaudited for the three months and six months ended December 31,
2007 and 2006, and the statements of cash flows are unaudited for the six months
ended December 31, 2007 and 2006. In the opinion of management, the unaudited
financial statements included herein contain all adjustments, including normal
recurring adjustments, considered necessary to present fairly the financial
position, the results of operations and cash flows of the Company for the
periods presented. These unaudited financial statements should be read in
conjunction with the consolidated financial statements and notes thereto for the
fiscal year ended June 30, 2007 included in the Company's Form 10-KSB, filed on
September 19, 2007.
The operating results or cash flows of the interim periods presented herein are
not necessarily indicative of the results to be expected for any other interim
period or the full year.
NOTE 4 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
SEGMENT REPORTING
SFAS No. 131, "Disclosures About Segments of an Enterprise and Related
Information," requires public companies to report financial and descriptive
information about their reportable operating segments. The Company identifies
its operating segments based on how management internally evaluates separate
financial information, business activities and management responsibility. The
Company operates in a single business segment consisting of the sale of wireless
access products.
USE OF ESTIMATES
The preparation of financial statements 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 revenue and expenses during the reporting
periods. Actual results could differ from those estimates. Significant estimates
include useful lives of intangible and long-lived assets.
CASH AND CASH EQUIVALENTS
For purposes of the statements of cash flow, the Company considers all highly
liquid investments purchased with original maturities of six months or less to
be cash equivalents.
REVENUE RECOGNITION
The Company recognizes revenue when persuasive evidence of an arrangement
exists, the price is fixed or determinable, collection is reasonably assured and
delivery of products has occurred or services have been rendered. Accordingly,
the Company recognizes revenues from product sales upon shipment of the product
to the customers. The Company does not allow the right of return on product
sales but warrant the products over one year from the shipment. Allowance for
doubtful accounts is estimated based on estimates of losses related to customer
receivable balances. Estimates are developed by using standard quantitative
measures based on historical losses, adjusting for current economic conditions
and, in some cases, evaluating specific customer accounts for risk of loss. The
establishment of reserves requires the use of judgment and assumptions regarding
the potential for losses on receivable balances. Though the Company considers
these balances adequate and proper, changes in economic conditions in specific
markets in which the Company operates could have a material effect on reserve
balances required.
-7-
SHIPPING AND HANDLING COST
All shipping and handling costs are paid by the customers directly to the
shipping companies. As a result, the Company does not collect and incur any
shipping and handling costs.
INVENTORIES
The Company's inventories are made up of finished goods and are stated at the
lower of cost or market, cost being determined on a first-in, first-out basis.
The Company assesses the inventory carrying value and reduces 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. The Company's customer demand is highly unpredictable, and can
fluctuate significantly caused by factors beyond the control of the Company. The
Company may maintain an allowance for inventories for potentially excess and
obsolete inventories and inventories that are carried at costs that are higher
than their estimated net realizable values.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. The Company provides for depreciation
using the straight-line method over the estimated useful lives as follows:
Computers and software 5 years
Machinery and equipment 5 years
Furniture and fixtures 7 years
Expenditures for maintenance and repairs are charged to operations as incurred
while renewals and betterments are capitalized. Gains or losses on the sale of
property and equipment are reflected in the statements of operations.
INTANGIBLE ASSETS - LICENSES
Licenses are stated at cost and are amortized using the straight-line method
over the license periods of five years or life of the license. Certifications
are stated at cost and are amortized using the straight-line method over the
certification periods of three years or life of the certifications.
IMPAIRMENT OF LONG-LIVED ASSETS
In accordance with Statement of Financial Accounting Standards No. 144,
"Accounting for Impairment on Disposal of Long-lived Assets", the Company
reviews 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. The Company considers the carrying value of assets may not
be recoverable based upon its 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 the Company's 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 is less than its
carrying amount.
-8-
As of December 31, 2007, the Company is not aware of any events or changes in
circumstances that would indicate that the long-lived assets are impaired.
WARRANTIES
The Company does not allow the right of return on product sales but provides a
factory warranty for one year from the shipment, which is covered by its vendor.
These products are shipped directly from its vendor to customers. As a result,
the Company does not accrue any warranty expenses.
INCOME TAXES
The Company accounts for income taxes under the asset and liability method of
accounting. Under this method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date. A valuation
allowance is required when it is less likely than not that the Company will be
able to realize all or a portion of its deferred tax assets. The Company
incurred significant losses in the previous years. These losses have been
carried over to off-set any future taxable income.
Provision for income taxes for the six months ended December 31, 2007 and 2006
consists of alternative minimum taxes and minimum state taxes. Since the Company
recorded a valuation allowance to fully offset the amount of net deferred tax
assets, no deferred tax expenses or benefits were recorded. The components of
the income tax provision are as follows:
(UNAUDITED) (UNAUDITED)
------------ -------------
DECEMBER 31, DECEMBER 31,
2007 2006
------------ ------------
Current income taxes expense:
Federal $ 42,256 $ --
State 13,948 800
------------ ------------
Deferred income taxes expense (benefits): 56,204 800
-- --
------------ ------------
PROVISION FOR INCOME TAXES $ 56,204 $ 800
============ ============
The significant component of the deferred tax asset at December 31, 2007 and
June 30, 2007 was the federal net operating loss carry-forwards. At December 31,
2007 and June 30, 2007, the effect on the deferred tax asset from the federal
net operating loss carry-forwards amounted to approximately $2,201,000 and
$2,935,000, respectively, based on a federal tax rate of 34%.
SFAS No. 109 requires a valuation allowance to be recorded when it is more
likely than not that some or all of the deferred tax assets will not be
realized. At December 31, 2007 and June 30, 2007, valuation allowances for the
full amount of the net deferred tax asset were established due to the
uncertainties as to the amount of the taxable income that would be generated in
future years. There are no other temporary differences or carry-forward tax
effects that would significantly affect the Company's deferred tax asset or
liability.
-9-
EARNING PER SHARE
The Company reports earnings per share in accordance with Statement of Financial
Accounting Standards No. 128, "Earnings Per Share". Basic earnings per share are
computed using the weighted average number of shares outstanding during the
year. Diluted earnings per share include the potentially dilutive effect of
outstanding common stock options and warrants which are convertible to common
shares.
CONCENTRATION OF RISK
The Company extends credit to its customers and performs ongoing credit
evaluations of such customers. The Company evaluates its accounts receivable on
a regular basis for collectability and provides for an allowance for potential
credit losses as deemed necessary.
Substantially all of the Company's revenues are derived from sales of wireless
data products. Any significant decline in market acceptance of its products or
in the financial condition of its existing customers could impair the Company's
ability to operate effectively. A significant portion of the Company's revenue
is derived from a small number of customers. Three customers accounted for
17.6%, 28.0%, and 43.1% of revenues for the six months ended December 31, 2007,
and had related accounts receivable in the total amount of $42,950, or 7.5% of
total accounts receivables at December 31, 2007.
The Company purchases its wireless products from C-Motech Co. Ltd., a design and
manufacturing company located in South Korea. If the design and manufacturing
company were to experience delays, capacity constraints or quality control
problems, product shipments to the Company's customers could be delayed, or its
customers could consequently elect to cancel the underlying product purchase
order, which would negatively impact the Company's revenue. However, there were
no significant delays, capacity constraints, or quality control problems that
negatively impacted the Company's revenue for the six months ended December 31,
2007 and 2006. For those periods, the Company purchased approximately
$12,638,000 and $2,300,000, respectively, and had related accounts payable of
$38,475 and $210,000 at December 31, 2007 and 2006, respectively.
The Company maintains its cash accounts with established commercial banks. Such
cash deposits periodically exceed the Federal Deposit Insurance Corporation
insured limit of $100,000 for each account. However, the Company does not
anticipate any loss on excess deposits.
NOTE 5 - BALANCE SHEET DETAILS
ACCOUNT RECEIVABLES
Accounts receivable at December 31, 2007 and June 30, 2007, consisted of
receivables from customers in the amounts of $574,694 and $44,915, respectively.
-10-
PREPAID EXPENSES
Prepaid expenses at December 31, 2007 and June 30, 2007 consisted of the
following:
(UNAUDITED)
------------ ------------
DECEMBER 31, JUNE 30,
2007 2007
------------ ------------
Prepaid liability insurance $ -- $ 243
Prepaid rent, corporate housing -- 4,989
Prepaid rent, administrative office -- 1,417
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TOTAL $ -- $ 6,649
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PROPERTY AND EQUIPMENT
Property and equipment at December 31, 2007 and June 30, 2007 consisted of the
following:
(UNAUDITED)
------------ ------------
DECEMBER 31, JUNE 30,
2007 2007
------------ ------------
Computers and software $ 43,489 $ 38,084
Furniture and fixtures 11,325 11,325
------------ ------------
54,814 49,409
Less accumulated depreciation (27,479) (23,191)
------------ ------------
TOTAL $ 27,335 $ 26,218
============ ============
Depreciation expense associated with property and equipment was $4,288 and
$2,844 for the six months ended December 31, 2007 and 2006, respectively.
INTANGIBLE ASSETS
Intangible assets at December 31, 2007 and June 30, 2007 consisted of the
following:
(UNAUDITED)
------------ ------------
DECEMBER 31, JUNE 30,
2007 2007
------------ ------------
Certifications: CDG test licenses $ 171,280 $ 171,280
Less accumulated amortization (69,562) (41,016)
------------ ------------
TOTAL $ 101,718 $ 130,264
============ ============
Certifications have life of 3 years or the life of the CDG test based on the
life of the CDMA wireless data product. CDG test certifications are required to
launch and market new CDMA wireless data products with carriers in North,
Caribbean and South American countries. Certifications are issued as being a
qualifier of CDG1 (CDMA Development Group Stage 1), CDG 2 and CDG 3.
Amortization expense associated with intangible assets was $28,546 and $39,358
for the six months ended December 31, 2007 and 2006, respectively.
-11-
OTHER ASSETS
Other assets at December 31, 2007 and June 30, 2007 consisted of the following:
(UNAUDITED)
------------ ------------
DECEMBER 31, JUNE 30,
2007 2007
------------ ------------
Lease deposit, corporate housing $ 709 $ 709
Lease deposit, administrative office 4,170 4,170
Utility deposit 282 282
------------ ------------
TOTAL $ 5,161 $ 5,161
============ ============
ACCRUED LIABILITIES
Accrued liabilities at December 31, 2007, and June 30, 2007 consisted of the
following:
(UNAUDITED)
------------ ------------
DECEMBER 31, JUNE 30,
2007 2007
------------ ------------
Salaries payable $ 85,418 $ 94,418
Accrued professional fees payable 40,217 50,217
Tax payable -- 34,390
------------ ------------
TOTAL $ 125,635 $ 179,025
============ ============
NOTE PAYABLE
On August 20, 2002, the Company's wholly owned subsidiary, ARG, issued a
promissory note to a stockholder of the Company in the amount of $550,000,
including 10% interest due on March 20, 2004. The Company and the stockholder
agreed to change the promissory note to a convertible promissory note in the
amount of $550,000, including 10% interest for the year ended June 30, 2004. The
Company paid off $10,000 and $100,000 during the 2006 and 2007 fiscal years
respectively, and an additional $6,000 was offset by the stock subscription
receivable from the stockholder during the 2007 fiscal year. This note of
$434,000 was not converted to our Common Stock as of December 31, 2007 and June
30, 2007.
NOTE 6 - COMMITMENTS AND CONTINGENCIES
The Company had the following off-balance sheet obligations and other
commitments at December 31, 2007
OPERATING LEASES
The Company leases its administrative facilities under a non-cancelable
operating lease that expires on June 30, 2008, and its principal future
obligations and commitments as of the expiration date is $31,068. In
addition to the minimum annual rental commitments, the lease provides
for periodic cost of living increases in the base rent and payment of
common area costs. Rent expense related to the operating lease was
$31,129 and $29,403 for the six months ended December 31, 2007 and
2006, respectively.
The Company leases its corporate housing facility under a
non-cancelable operating lease that expires on March 31, 2008 for its
vendors, and its principal future obligations and commitments as of the
expiration date is $4,476. Rent expense related to the operating lease
was $8,727 and $0 for the six months ended December 31, 2007 and 2006,
respectively.
The Company leases one automobile under an operating lease that expires
on July 22, 2009. Lease expense was $3,226 and $3,569 for the six
months ended December 31, 2007 and 2006, respectively.
-12-
LITIGATION
The Company is involved in certain legal proceedings and claims which
arise in the normal course of business. Management does not believe
that the outcome of these matters will have any material adverse effect
on its financial condition.
CO-DEVELOPMENT, CO-OWNERSHIP AND SUPPLY AGREEMENT
In January 2005, the Company entered into a co-development,
co-ownership, and supply agreement (the "Agreement") with C-Motech Co.
Ltd., located in South Korea. The Agreement provides exclusive rights
to market and sale its CDMA wireless data products in North, Central
and South American countries. Furthermore, the Agreement includes that
the Company is responsible for marketing, sales, field testing, and
certifications of these products to wireless service operators and
other commercial buyers within a designated territory and C-Motech Co.
Ltd. is responsible for design, development, testing, certification,
and completion of these products. Under the Agreement, products include
all access devices designed with Qualcomm's MSM 5100, 5500 and 6500
chipset solutions provided or designed by C-Motech Co. Ltd. or both
companies. Both companies own the rights to the products: USB modems,
Card Bus, PCI Bus and Module designed with MSM 5500 dual band products.
The term of the Agreement is for two years commencing on January 5,
2005 with automatic renewable of additional one year. The Agreement may
be terminated by either party by providing a written notice to
terminate at least sixty days prior to the end of the term.
NOTE 7 - EARNINGS PER SHARE
Basic earnings per share ("EPS") excludes dilution and is computed by dividing
net income attributable to common shareholders by the weighted-average number of
common shares outstanding for the period. As of December 31, 2007, the Company
did not have any dilutive common stock shares.
NOTE 8 - RECENT ACCOUNTING PRONOUNCEMENTS
In December 2007, the FASB issued Statement No. 141 (revised), Business
Combinations (SFAS No. 141(R)). The standard changes the accounting for business
combinations including the measurement of acquirer shares issued in
consideration for a business combination, the recognition of contingent
consideration, the accounting for pre-acquisition gain and loss contingencies,
the recognition of capitalized in-process research and development, the
accounting for acquisition-related restructuring cost accruals, the treatment of
acquisition related transaction costs and the recognition of changes in the
acquirer's income tax valuation allowance. SFAS No. 141(R) is effective for
fiscal years beginning after December 15, 2008, with early adoption prohibited.
The Company does not expect this to have a material impact on the Company's
financial statements.
In December 2007, the FASB issued Statement No. 160, Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB No. 51 (SFAS No. 160).
The standard changes the accounting for noncontrolling (minority) interests in
consolidated financial statements including the requirements to classify
noncontrolling interests as a component of consolidated stockholders' equity,
and the elimination of "minority interest" accounting in results of operations
with earnings attributable to noncontrolling interests reported as part of
consolidated earnings. Additionally, SFAS No. 160 revises the accounting for
both increases and decreases in a parent's controlling ownership interest. SFAS
No. 160 is effective for fiscal years beginning after December 15, 2008, with
early adoption prohibited. The Company does not expect this to have a material
impact on the Company's financial statements.
-13-
In June 2007, the FASB ratified Emerging Issues Task Force (EITF) 07-3,
Accounting for Nonrefundable Advance Payments for Goods or Services Received for
Use in Future Research and Development Activities (EITF 07-3). EITF 07-3
requires that nonrefundable advance payments for goods or services that will be
used or rendered for future research and development activities be deferred and
capitalized and recognized as an expense as the goods are delivered or the
related services are performed. EITF 07-3 is effective, on a prospective basis,
for fiscal years beginning after December 15, 2007. The Company does not expect
this to have a material impact on the Company's financial statements.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities (SFAS No. 159). SFAS No. 159 permits
companies to choose to measure certain financial instruments and other items at
fair value. The standard requires that unrealized gains and losses are reported
in earnings for items measured using the fair value option. SFAS No. 159 is
effective for the Company beginning in the first quarter of fiscal year 2009.
The Company does not expect this to have a material impact on the Company's
financial statements.
In July 2006, the FASB issued FASB interpretation (FIN) No. 48, "Accounting for
Uncertainty in Income Taxes -- an interpretation of FASB statement No. 109,"
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. In addition, FIN 48 provides guidance on the
derecognizing, classification, accounting in interim periods and disclosure
requirements for uncertain tax positions. The Company is currently adopting and
evaluating the impact, if any, that FIN 48 will have on its financial
statements, and FIN 48 is not expected to have a material impact on the
Company's financial statements.
There are no other accounting standards issued as of December 31, 2007 that are
expected to have a material impact on the Company's financial statements.
NOTE 9 - RELATED PARTY TRANSACTIONS
The Company purchased CDMA wireless data products in the amount of $12,638,000
or 100% of total inventory purchases, from C-Motech Co. Ltd., for the six months
ended December 31, 2007 and had related accounts payable of $38,475 at December
31, 2007. C-Motech Co. Ltd owns 133,684,402 shares of the Company's Common
Stocks, or 14.4% of outstanding, and Jaeman Lee, Chief Executive Officer of
C-Motech Co. Ltd., has served as a director of the Company since September 2006.
NOTE 10 - SUBSEQUENT EVENTS
Following approval by the Company's Board of Directors and shareholders, the
Company completed the following transactions in January of 2008:
1. Reincorporated from California to Nevada.
2. Effected a 1 for 70 reverse stock split of the Common Stock and a
change in the authorized shares of Common Stock to 50,000,000. As a
result, at January 31, 2008, the Company had 50,000,000 shares of
Common Stock authorized and 13,230,684 shares of Common Stock
outstanding.
-14-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the financial
statements and notes thereto included in Item 1 of this Report and the financial
statements and notes thereto and Management's Discussion and Analysis or Results
of Operations contained in the Company's Form 10-KSB filed on September 19, 2007
for the year ended June 30, 2007.
BUSINESS OVERVIEW
Franklin Wireless Corp. designs and sells broadband high speed wireless data
communication products such as 3G wireless modules and modems. The Company
focuses on wireless broadband USB modems, which provides a flexible way for
wireless subscribers to connect to the wireless broadband network with any
laptop, table PC or desktop USB port without a PC card slot. The broadband
wireless data communication products are positioned at the convergence of
wireless communications, mobile computing and the Internet, each of which the
Company believes represents a growing market.
The Company's wireless products are based on Evolution Data Optimized technology
("EV-DO technology") of Code Division Multiple Access ("CDMA") and High-Speed
Packet Access technology ("HSPA technology") of Wideband Code Division Multiple
Access ("WCDMA), which are wireless radio broadband data standards adopted by
many CDMA and WCDMA mobile service providers, and enable end users to send and
receive email with large file attachments, play interactive games, receive, send
and download high resolution picture, video, and music contents.
The Company's wireless products are marketed through Original Equipment
Manufacturers ("OEMs") and distributors, as well as directly to operators and
end users. The Company's customer base extends from the United States,
Caribbean, and South American Countries to African countries; these customers
consist of major carriers / operators, distributors and end users. The Company's
USB modems are certified by Sprint, Alltel, Cellular South, NTELOS, and ACS in
the United States, by IUSACELL in Mexico, by Telefonica and Movilnet in
Venezuela and by TSTT in Trinidad and Tobago.
In the middle of 2007, the Company launched three new products, CDMA Revision A
USB modem CDU-680, CDMA Revision 0 CDU-650 USB modem, and CDMA Revision 0
CDX-650 Express card modem, to North and South American countries. The Company
also unveiled its CGU-628 Mobile Broadband USB modem, which provides a flexible
way for users to connect to high-speed downlink packet access ("HSDPA") network.
The Company anticipates that the sales of these new products will be a key to
the Company's future growth through its brand recognition and an increase in
marketing effort, leveraging sales to its existing customers.
The Company believes that the demand for wireless broadband data products will
continue to grow and expand worldwide. However, to be successful in this market,
the Company will need to continue to keep up with technology changes and
continue to invest and launch new products on a timely basis.
-15-
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company believes the following critical accounting policies affect the
Company's more significant judgments and estimates used in the preparation of
the financial statements.
SEGMENT REPORTING
SFAS No. 131, "Disclosures About Segments of an Enterprise and Related
Information," requires public companies to report financial and descriptive
information about their reportable operating segments. The Company identifies
its operating segments based on how management internally evaluates separate
financial information, business activities and management responsibility. The
Company operates in a single business segment consisting of the sale of wireless
access products.
USE OF ESTIMATES
The preparation of financial statements 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 revenue and expenses during the reporting
periods. Actual results could differ from those estimates. Significant estimates
include useful lives of intangible and long-lived assets.
REVENUE RECOGNITION
The Company recognizes revenue when persuasive evidence of an arrangement
exists, the price is fixed or determinable, collection is reasonably assured and
delivery of products has occurred or services have been rendered. Accordingly,
the Company recognizes revenues from product sales upon shipment of the product
to the customers. The Company does not allow the right of return on product
sales but warrant the products over one year from the shipment. Allowance for
doubtful accounts is estimated based on estimates of losses related to customer
receivable balances. Estimates are developed by using standard quantitative
measures based on historical losses, adjusting for current economic conditions
and, in some cases, evaluating specific customer accounts for risk of loss. The
establishment of reserves requires the use of judgment and assumptions regarding
the potential for losses on receivable balances. Though the Company considers
these balances adequate and proper, changes in economic conditions in specific
markets in which the Company operates could have a material effect on reserve
balances required.
IMPAIRMENT OF LONG-LIVED ASSETS
In accordance with Statement of Financial Accounting Standards No. 144,
"Accounting for Impairment on Disposal of Long-lived Assets", the Company
reviews 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. The Company considers the carrying value of assets may not
be recoverable based upon its 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 the Company's 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 is less than its
carrying amount.
As of December 31, 2007, the Company is not aware of any events or changes in
circumstances that would indicate that the long-lived assets are impaired.
-16-
INCOME TAXES
The Company accounts for income taxes under the asset and liability method of
accounting. Under this method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date. A valuation
allowance is required when it is less likely than not that the Company will be
able to realize all or a portion of its deferred tax assets. The Company
incurred significant losses in the previous years. These losses have been
carried over to off-set any future taxable income.
Provision for income taxes for the six months ended December 31, 2007 and 2006
consists of alternative minimum taxes and minimum state taxes. Since the Company
recorded a valuation allowance to fully offset the amount of net deferred tax
assets, no deferred tax expenses or benefits were recorded. The components of
the income tax provision are as follows:
(UNAUDITED) (UNAUDITED)
------------ ------------
DECEMBER 31, DECEMBER 31,
2007 2006
------------ ------------
Current income taxes expense:
Federal $ 42,256 $ --
State 13,948 800
------------ ------------
Deferred income taxes expense (benefits): 56,204 800
-- --
------------ ------------
PROVISION FOR INCOME TAXES $ 56,204 $ 800
============ ============
The significant component of the deferred tax asset at December 31, 2007 and
June 30, 2007 was the federal net operating loss carry-forwards. At December 31,
2007 and June 30, 2007, the effect on the deferred tax asset from the federal
net operating loss carry-forwards amounted to approximately $2,201,000 and
$2,935,000, respectively, based on federal tax rate of 34%.
SFAS No. 109 requires a valuation allowance to be recorded when it is more
likely than not that some or all of the deferred tax assets will not be
realized. At December 31, 2007 and June 30 2007, valuation allowances for the
full amount of the net deferred tax asset were established due to the
uncertainties as to the amount of the taxable income that would be generated in
future years. There are no other temporary differences or carry-forward tax
effects that would significantly affect the Company's deferred tax asset or
liability.
-17-
RESULTS OF OPERATIONS
The following table sets forth, for the three and six months ended December 31,
2007 and 2006, selected statements of operations data expressed as a percentage
of sales:
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
--------------------------- ---------------------------
2007 2006 2007 2006
------------ ------------ ------------ ------------
Net Sales 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 75.6% 73.2% 76.5% 72.0%
------------ ------------ ------------ ------------
Gross profit 24.4% 26.8% 23.5% 28.0%
------------ ------------ ------------ ------------
Operating expenses:
Selling, general and administrative expenses 11.1% 15.3% 8.9% 17.1%
------------ ------------ ------------ ------------
Total operating expenses 11.1% 15.3% 8.9% 17.1%
------------ ------------ ------------ ------------
Income from operations 13.3% 11.5% 14.6% 10.9%
Other income 0.7% 0.4% 0.6% 0.4%
------------ ------------ ------------ ------------
Net income before income taxes 14.0% 11.9% 15.2% 11.3%
Provision for income taxes 0.4% - 0.3% -
------------ ------------ ------------ ------------
Net income 13.6% 11.9% 14.9% 11.3%
============ ============ ============ ============
The results of the interim periods are not necessarily indicative of results for
the entire fiscal year.
-18-
THREE MONTHS ENDED DECEMBER 31, 2007
COMPARED TO THREE MONTHS ENDED DECEMBER 31, 2006
NET SALES
Net sales increased by $6,057,927, or 336.4%, to $7,858,549 for the three months
ended December 31, 2007 from $1,800,622 for the corresponding period of 2006.
The overall increase in sales was primarily due to strong demand for the
Company's new data products of CDU-680, CDU-650, and CDX-650, which were
introduced in the middle of 2007. The overall increase was also due to the
increase in sales volume in the United States as well as in Caribbean and South
American countries, in the amount of $1,159,819 and 6,698,650 respectively, for
the three months ended December 31, 2007, compared to $56,798 and $1,744,929 for
the corresponding period of 2006, an increase of 1,942.0% and 283.9%,
respectively.
GROSS PROFIT
Gross profit increased by $1,436,009, or 298.0% to $1,917,881 for the three
months ended December 31, 2007 from $481,872 for the corresponding period of
2006. The increase was primarily due to the increase in sales volume in the
United States as well as in Caribbean and South American countries. The gross
profit in terms of net sales percentage was 24.4% for the three months ended
December 31, 2007 compared to 26.8% for the corresponding period of 2006. The
overall decrease in gross profit as a percentage of net sales was primarily due
to the negative impact of competitive pricing pressures on the Company's sales
prices in the United States. Net sales recognized for CDMA data products in the
United States was $1,159,819, or 14.8% of total sales, for the three months
ended December 31, 2007, compared to $56,798, or 3.2% of total sales, for the
corresponding period of 2006, an increase of $1,103,021, or 1,942.0%.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES
Selling, general, and administrative expenses increased by $599,285, or 217.6%,
to $874,736 for the three months ended December 31, 2007 from $275,450 for the
corresponding period of 2006. The increase was primarily due to an increase in
sales and marketing efforts, which included hiring new personnel to expand our
marketing and customer support functions, which increased salary and related
expenses. For the three months ended December 31, 2007, the Company had an
increase in sales commission expense of $412,080, a decrease in marketing
expense of $10,171, an increase in travel expense of $11,071, an increase in
professional fees of $21,781, and an increase in payroll expense of $144,565,
compared to the corresponding period of 2006. Payroll expenses were increased
due to not only the hiring new personnel but also the bonus payment of $56,500
to share profits with the management and employees for the three months ended
December 31, 2007.
OTHER INCOME (EXPENSE), NET
Other income increased by $49,932, or 690.9%, to $57,170 for the three months
ended December 31, 2007 from $7,237 for the corresponding period of 2006. The
overall increase is primarily due to the interest income of $38,675 and the
legal settlement income of $16,304 for the three months ended December 31, 2007.
-19-
SIX MONTHS ENDED DECEMBER 31, 2007
COMPARED TO SIX MONTHS ENDED DECEMBER 31, 2006
NET SALES
Net sales increased by $13,733,092, or 495.8%, to $16,503,242 for the six months
ended December 31, 2007 from $2,770,150 for the corresponding period of 2006.
The overall increase in sales was primarily due to strong demand for the
Company's new data products of CDU-680, CDU-650, and CDX-650, which were
introduced in the middle of 2007. The overall increase was also due to the
increase in sales volume in the United States as well as in Caribbean and South
American countries, in the amount of $6,166,292 and 10,333,980 respectively, for
the six months ended December 31, 2007, compared to $172,000 and $2,598,150 for
the corresponding period of 2006, an increase of 3,485.1% and 297.7%
respectively.
GROSS PROFIT
Gross profit increased by $3,099,153, or 399.6% to $3,874,703 for the six months
ended December 31, 2007 from $775,550 for the corresponding period of 2006. The
increase was primarily due to the increase in sales volume of the Company's data
products in the United States as well as in Caribbean and South American
countries. The gross profit in terms of net sales percentage was 23.5% for the
six months ended December 31, 2007 compared to 28.0% for the corresponding
period of 2006. The overall decrease in gross profit as a percentage of net
sales was primarily due to the negative impact of competitive pricing pressures
on the Company's sales prices in the United States. Net sales recognized for
CDMA data products in the United States was $6,166,292, or 37.4% of total sales,
for the six months ended December 31, 2007, compared to $172,000, or 6.2% of
total sales, for the corresponding period of 2006, an increase of $5,994,292, or
3,485.1%.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSE
Selling, general, and administrative expenses increased by $984,656, or 207.4%,
to $1,459,370 for the six months ended December 31, 2007 from $474,714 for the
corresponding period of 2006. The increase was primarily due to an increase in
sales and marketing efforts, which included hiring new personnel to expand our
marketing and customer support functions, which increased salary and related
expenses. For the six months ended December 31, 2007, the Company had an
increase in sales commission expense of $615,480, a decrease in marketing
expense of $4,779, an increase in travel expense of $14,522, an increase in
professional fees of $33,883, and an increase in payroll expense of $296,268,
compared to the corresponding period of 2006. Payroll expenses were increased
due to not only the hiring new personnel but also the bonus payment of $120,000
to share profits with the management and employees for the six months ended
December 31, 2007.
OTHER INCOME (EXPENSE), NET
Other income increased by $80,850, or 644.4%, to $93,397 for the six months
ended December 31, 2007 from $12,547 for the corresponding period of 2006. The
overall increase is due to the interest income of $74,718 and the legal
settlement income of $16,304 for the six months ended December 31, 2007.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents increased by $1,934,565 to $4,412,158 at December 31,
2007, compared to $2,477,593 at June 30, 2007. The increase was primarily from
the net income of $2,452,526.
-20-
OPERATING ACTIVITIES
Net cash provided by operating activities was $1,928,575 and $102,655 for the
six months ended December 31, 2007, and 2006, respectively. The increase from
the prior period is primarily due to the increase in net income.
INVESTING ACTIVITIES
Net cash used in investing activities was $5,405 and $56,353 the six months
ended December 31, 2007 and 2006, respectively, consisting of capital
expenditures.
FINANCING ACTIVITIES
Net cash provided by financing activities was $11,395 and $400,000 for the six
months ended December 31, 2007 and 2006, respectively, consisting of receipt of
stock subscription receivable and proceeds from a future common stock issuance.
CONTRACTUAL OBLIGATIONS AND OTHER COMMITMENTS
The Company had the following off-balance sheet obligations and other
commitments at December 31, 2007:
OPERATING LEASES
The Company leases its administrative facilities under a non-cancelable
operating lease that expires on June 30, 2008, and its principal future
obligations and commitments as of the expiration date is $31,068. In
addition to the minimum annual rental commitments, the lease provides
for periodic cost of living increases in the base rent and payment of
common area costs. Rent expense related to the operating lease was
$31,129 and $29,403 for the six months ended December 31, 2007 and
2006, respectively.
The Company leases its corporate housing facility under a
non-cancelable operating lease that expires on March 31, 2008 for its
vendors, and its principal future obligations and commitments as of the
expiration date is $4,476. Rent expense related to the operating lease
was $8,727 and $0 for the six months ended December 31, 2007 and 2006,
respectively.
The Company leases one automobile under an operating lease that expires
on July 22, 2009. Lease expense was $3,226 and $3,569 for the six
months ended December 31, 2007 and 2006, respectively.
LITIGATION
The Company is involved in certain legal proceedings and claims which
arise in the normal course of business. Management does not believe
that the outcome of these matters will have any material adverse effect
on its financial condition.
-21-
CO-DEVELOPMENT, CO-OWNERSHIP AND SUPPLY AGREEMENT
In January 2005, the Company entered into a co-development,
co-ownership, and supply agreement (the "Agreement") with C-Motech Co.
Ltd., located in South Korea. The Agreement provides exclusive rights
to market and sale its CDMA wireless data products in North, Central
and South American countries. Furthermore, the Agreement includes that
the Company is responsible for marketing, sales, field testing, and
certifications of these products to wireless service operators and
other commercial buyers within a designated territory and C-Motech Co.
Ltd. is responsible for design, development, testing, certification,
and completion of these products. Under the Agreement, products include
all access devices designed with Qualcomm's MSM 5100, 5500 and 6500
chipset solutions provided or designed by C-Motech Co. Ltd. or both
companies. Both companies own the rights to the products: USB modems,
Card Bus, PCI Bus and Module designed with MSM 5500 dual band products.
The term of the Agreement is for two years commencing on January 5,
2005 with automatic renewable of additional one year. The Agreement may
be terminated by either party by providing a written notice to
terminate at least sixty days prior to the end of the term.
RISK FACTORS RELATED TO OUR BUSINESS
An investment in the Company's shares is highly speculative and involves a
significant degree of risk. Prospective investors should carefully consider the
following risk factors, in addition to the other information set forth herein or
in the material accompanying this report, prior to purchasing any of the
Company's shares. The following risk factors do not purport to be a complete
explanation of the risks involved in its business.
THE COMPANY HAS HAD A HISTORY OF LOSSES
The Company had experienced significant operating losses and negative cash flows
from operating activities for the 2005 and 2006 fiscal years. If the Company's
sales do not continue to improve and operating expenses are not reduced and
monitored, it may incur additional significant net losses and negative cash
flows from operations.
THE COMPANY OPERATES IN AN INTENSIVELY COMPETITIVE MARKET
The wireless broadband data access market is highly competitive, and the Company
may be unable to compete effectively. The Company's primary competitors are
Sierra Wireless, Novatel Wireless, and Option International. Many of the
Company's competitors or potential competitors have significantly greater
financial, technical and marketing resources than the Company does. To survive
and be competitive, the Company will need to continuously invest in research and
development, sales and marketing, and customer support. Increased competition
could result in price reduction and smaller customer orders. The Company's
failure to compete effectively could seriously impair its business.
THE COMPANY OPERATES IN THE HIGH-RISK TELECOM SECTOR
The Company is in a volatile industry. In addition, its revenue model is
evolving and relies substantially on the assumption that the Company will be
able to successfully complete the development and sales of its products and
services in the marketplace. The Company's prospects must be considered in the
light of the risk, uncertainties, expenses and difficulties frequently
encountered by companies in the early stages of development and marketing. In
order to be successful in the market the Company must, among other things:
o Complete development and introduction of functional and attractive
products and services;
o Attract and maintain customer loyalty;
o Establish and increase awareness of its brand and develop customer
loyalty;
o Provide desirable products and services to customers at attractive
prices;
o Establish and maintain strategic relationships with strategic
partners and affiliates;
o Rapidly respond to competitive and technological developments;
o Build operations and customer service infrastructure to support
its business; and
o Attract, retain, and motivate qualified personnel.
-22-
The Company cannot guarantee that it will be able to achieve the above goals,
and its failure to achieve them could adversely affect its business, results of
operations, and financial condition. Moreover, there can be no assurance that
the Company will be able to obtain additional funding once its financial
resources are depleted. The Company expects that revenues and operating results
will fluctuate in the future. There is no assurance that any or all of its
efforts will produce a successful outcome. If its efforts are unsuccessful or
other unexpected events occur, purchasers of our shares could lose their entire
investment.
THE COMPANY OPERATES IN A FIELD WITH RAPIDLY CHANGING TECHNOLOGY
Since the Company's products and services are new, it cannot be certain that
these products and services will function as anticipated or be desirable to its
intended markets. The Company's current or future products and services may fail
to function properly, and if its products and services do not achieve and
sustain market acceptance, its business, results of operations and profitability
may suffer. If the Company are unable to predict and comply with evolving
wireless standards, its ability to introduce and sell new products will be
adversely affected. If the Company fails to develop and introduce products on
time, it may lose customers and potential product orders.
THE COMPANY DEPENDS ON THE DEMAND FOR WIRELESS NETWORK CAPACITY
The demand for the Company's products is completely dependent on the demand for
broadband wireless access to networks. If wireless operators do not deliver
acceptable wireless service, its product sales may dramatically decline. Thus,
if wireless operators experience financial or network difficulties, it will
likely reduce demand for the Company's products.
THE COMPANY DEPENDS ON COLLABORATIVE ARRANGEMENTS
The development and commercialization of the Company's products and services
depend in large part upon its ability to selectively enter into and maintain
collaborative arrangements with developers, distributors, service providers,
network systems providers, core wireless communications technology providers and
manufacturers, among others.
THE COMPANY RELIES ON A SINGLE SOURCE FOR THE MANUFACTURE OF OUR PRODUCTS
The Company relies on a single source to design, manufacture and supply its
products, which exposes the Company to a number of risks and uncertainties
outside its control. Due to its lack of working capital, the Company relies on
C-Motech Co. Ltd to manufacture and deliver all its products. Any significant
changes in C-Motech Co. Ltd., such as a change in ownership, operations or
financial status may cause difficulties in its ability to deliver products to
customers on a timely basis.
THE LOSS OF ANY OF THE COMPANY'S MATERIAL CUSTOMERS COULD ADVERSELY AFFECT ITS
REVENUES AND PROFITABILITY, AND THEREFORE SHAREHOLDER VALUE.
The Company depends on a small number of customers for a significant portion of
its revenues. During the six months ended December 31, 2007, three customers
accounted for 17.6%, 27.9%, and 43.1% of revenues. If either of these customers
reduce their business with the Company or suffer from business failure, the
Company's revenues and profitability could decline, perhaps materially.
-23-
THE COMPANY'S PRODUCT DELIVERIES ARE SUBJECT TO LONG LEAD TIMES
Due to its limited capital resources, the Company is experiencing long-lead
times to ship products to its customers, often in excess of 45 days. This could
cause the Company to lose customers, who may be able to secure faster delivery
times from its competitors, and require the Company to maintain higher levels of
working capital.
AS THE COMPANY'S BUSINESS EXPANDS INTERNATIONALLY, IT WILL BE EXPOSED TO
ADDITIONAL RISKS RELATING TO INTERNATIONAL OPERATIONS
The Company's expansion into international operations exposes the Company to
additional risks unique to such international markets, including the following:
o Increased credit management risks and greater difficulties in
collecting accounts receivable;
o Unexpected changes in regulatory requirements, wireless
communications standards, exchange rates, trading policies,
tariffs and other barriers;
o Uncertainties of laws and enforcement relating to the protection
of intellectual property;
o Language barriers; and
o Potential adverse tax consequences.
Furthermore, if the Company is unable to further develop distribution channels
in countries in North and South America and Africa, it may not be able to grow
its international operations and its ability to increase the Company's revenue
will be negatively impacted.
THE COMPANY MAY INFRINGE THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS
The industry in which the Company operates has many participants that own, or
claim to own, proprietary intellectual property. In the past the Company has
received, and in the future may receive, claims from third parties alleging that
it, and possibly its customers, violate their intellectual property rights.
Rights to intellectual property can be difficult to verify and litigation may be
necessary to establish whether or not the Company has infringed the intellectual
property rights of others. In many cases, these third parties are companies with
substantially greater resources than the Company, and they may be able to, and
may choose to, pursue complex litigation to a greater degree than the Company
could. Regardless of whether these infringement claims have merit or not, the
Company may be subject to the following:
o The Company may be liable for potentially substantial damages,
liabilities and litigation costs, including attorneys' fees;
o The Company may be prohibited from further use of the intellectual
property and may be required to cease selling its products that
are subject to the claim;
o The Company may have to license the third party intellectual
property, incurring royalty fees that may or may not be on
commercially reasonable terms. In addition, there is no assurance
that it will be able to successfully negotiate and obtain such a
license from the third party;
o The Company may have to develop a non-infringing alternative,
which could be costly and delay or result in the loss of sales. In
addition, there is no assurance that it will be able to develop
such a non-infringing alternative;
o The diversion of management's attention and resources;
o The Company's relationships with customers may be adversely
affected; and
o The Company may be required to indemnify its customers for certain
costs and damages they incur in such a claim.
-24-
In the event of an unfavorable outcome in such a claim and the Company's
inability to either obtain a license from the third party or develop a
non-infringing alternative, then its business, operating results and financial
condition may be materially adversely affected, and the Company may have to
restructure its business. Absent a specific claim for infringement of
intellectual property, from time to time, the Company has and expects to
continue to license technology, intellectual property and software from third
parties. There is no assurance that the Company will be able to maintain its
third party licenses or obtain new licenses when required and this inability
could materially adversely affect its business and operating results and the
quality and functionality of its products. In addition, there is no assurance
that third party licenses the Company executes will be on commercially
reasonable terms. Under purchase orders and contracts for the sale of its
products, the Company may provide indemnification to its customers for potential
intellectual property infringement claims for which the Company may have no
corresponding recourse against its third party licensors. This potential
liability, if realized, could materially adversely affect its business,
operating results and financial condition.
GOVERNMENT REGULATION COULD RESULT IN INCREASED COSTS AND INABILITY TO SELL THE
COMPANY'S PRODUCTS
The Company's products are subject to certain mandatory regulatory approvals in
the United States and other regions in which it operates. In the United States,
the Federal Communications Commission regulates many aspects of communications
devices. Although the Company has obtained all the necessary Federal
Communications Commission and other required approvals for the products it
currently sells, the Company may not obtain approvals for future products on a
timely basis, or at all. In addition, regulatory requirements may change or the
Company may not be able to obtain regulatory approvals from countries other than
the United States in which it may desire to sell products in the future.
THE COMPANY MAY NEED ADDITIONAL FINANCING DUE TO LIMITED RESOURCES
The Company's financial resources are limited, and the amount of funding that is
required to develop and commercialize its products and technologies is highly
uncertain. Adequate funds may not be available when needed or on terms
satisfactory to the Company. Lack of funds may cause the Company to delay,
reduce and/or abandon certain or all aspects of its development and
commercialization programs. The Company may seek additional financing through
the issuance of equity or convertible debt securities. The percentage ownership
of its stockholders would be reduced, stockholders could experience additional
dilution, and such securities may have rights, preferences and privileges senior
to those of the Company's Common Stock. There can be no assurance that
additional financing will be available on terms favorable to the Company or at
all. If adequate funds are not available or are not available on acceptable
terms, the Company may not be able to fund its expansion, take advantage of
desirable acquisition opportunities, develop or enhance services or products or
respond to competitive pressures. Such inability could have a materially adverse
effect on its business, results of operations and financial conditions.
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ITEM 3. CONTROLS AND PROCEDURES
The Company did not carry out a full evaluation of the effectiveness of the
design and operation of its disclosure controls and procedures at the end of the
period covered by this Form 10-QSB pursuant to Rule 13a-15 of the Exchange Act.
However, the Company's Chief Executive Officer ("CEO") and Chief Financial
Officer ("CFO") concluded that its disclosure controls and procedures related to
internal control over financial reporting were effective.
LIMITATIONS ON THE EFFECTIVENESS OF CONTROLS
The Company's management, including our CEO and CFO, does not expect that its
disclosure controls and internal controls will prevent all errors and all fraud.
A control system, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the control system
are met. Further, the design of a control system must reflect the fact that
there are resource constraints, and the benefits of controls must be considered
relative to their costs. Because of the inherent limitations in all control
systems, no controls can provide absolute assurance that all control issues and
instances of fraud, if any, within the Company have been detected. These
inherent limitations include the realities that judgments in decision-making can
be faulty, and that breakdowns can occur because of a simple error or mistake.
Additionally, controls can be circumvented by the individual acts of some
persons, by collusion of two or more people, or by management or board override
of the control.
The design of any system of controls also is based in part upon certain
assumptions about the likelihood of future events, and there can be no assurance
that any design will succeed in achieving its stated goals under all potential
future conditions; over time, controls may become inadequate because of changes
in conditions, or the degree of compliance with the policies or procedures may
deteriorate. Because of the inherent limitations in a cost-effective control
system, misstatements due to error or fraud may occur and not be detected.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the period covered by this report the Company solicited consents
from shareholders for the following actions:
1. Reincorporation from California to Nevada.
2. Effecting a 1 for 70 reverse stock split of the Common Stock and a
change in the authorized shares of Common Stock to 50,000,000.
Consents from shareholders holding over 50% of the outstanding shares of
Common Stock were received, and the reincorporation and reverse stock split
were consummated in January 2008.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
31.1 Certificate of Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certificate of Acting Chief Financial Officer pursuant to Section 302 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 Acting Chief Financial Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
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SIGNATURES
Pursuant to the requirements of Section 13 of 15(d) of the Securities
Exchange Act of 1934, the registrant has duly 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 and Acting Chief Financial Officer
Dated: February 11, 2008
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