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: March 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)
California 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, without par value
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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 May 14, 2007
----------------------------------- ---------------------------
Common Stock, no par value 926,040,050
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
Consolidated Statements of Operations for the Three Months
and Nine Months Ended March 31, 2007 and 2006 (Unaudited).... 3
Consolidated Balance Sheets at March 31, 2007 (Unaudited)
and June 30, 2006............................................ 4
Consolidated Statements of Cash Flows for the Nine Months
Ended March 31, 2007 and 2006 (Unaudited).................... 5
Notes to Unaudited Consolidated Financial Statements......... 6
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations....................................... 12
Item 3: Controls and Procedures......................................... 19
PART II - OTHER INFORMATION
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Item 1: Legal Proceedings............................................... 19
Item 2: Unregistered Sales of Equity Securities and Use of Proceeds..... 20
Item 3: Defaults Upon Senior Securities................................. 20
Item 4: Submission of Matters to a Vote of Security Holders............. 20
Item 5: Other Information ............................................. 20
Item 6: Exhibits........................................................ 20
Signatures...................................................... 21
Certifications.................................................. 22
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FRANKLIN WIRELESS CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
-------------------------------- --------------------------------
2007 2006 2007 2006
------------- ------------- ------------- -------------
Net sales $ 3,226,915 $ 162,698 $ 5,997,065 $ 323,088
Cost of goods sold 2,253,540 142,448 4,248,140 202,648
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Gross profits 973,375 20,250 1,748,925 120,440
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Operating expenses:
Selling, general, and administrative 582,595 131,503 1,057,309 416,875
Research and development -- -- -- 36,300
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Total operating expenses 582,595 131,503 1,057,309 453,175
------------- ------------- ------------- -------------
Income (Loss) from operations 390,780 (111,253) 691,616 (332,735)
Other income (expense):
Interest income 10,760 517 22,989 792
Other income 846 117 1,164 15,059
Other expenses (5) (1,346) (5) (2,051)
Loss on impairment of intangible assets (19,167) -- (19,167) --
------------- ------------- ------------- -------------
Total other income (expense), net (7,566) (712) 4,981 13,800
------------- ------------- ------------- -------------
Income (loss) before income taxes 383,214 (111,965) 696,597 (318,935)
Provision for income taxes -- -- 800 800
------------- ------------- ------------- -------------
Net income (loss) $ 383,214 $ (111,965) $ 695,797 $ (319,735)
============= ============= ============= =============
Basic earnings (loss) per share $ 0.00 $ (0.00) $ 0.00 $ (0.00)
Diluted earnings (loss) per share $ 0.00 $ (0.00) $ 0.00 $ (0.00)
Weighted average common shares
outstanding - basic 897,040,050 835,040,050 891,072,897 814,653,189
Weighted average common shares
outstanding - diluted 897,040,050 835,040,050 891,072,897 814,653,189
See accompanying notes to unaudited consolidated financial statements.
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FRANKLIN WIRELESS CORP.
CONSOLIDATED BALANCE SHEETS
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(UNAUDITED)
MARCH 31, JUNE 30,
2007 2006
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ASSETS
Current assets:
Cash and cash equivalents $ 1,465,487 $ 568,387
Inventories 13,370 --
Accounts receivable 41,409 1,750
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Total current assets 1,520,266 570,137
Property and equipment, net 27,333 12,715
Intangible assets, net 79,094 104,195
Other assets 4,452 4,452
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TOTAL ASSETS $ 1,631,145 $ 691,499
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable $ 2,269 $ 585
Accrued liabilities 133,135 190,968
Other current liability 263,636 --
Liability from discontinued operations 434,000 540,000
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TOTAL CURRENT LIABILITIES 833,040 731,553
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STOCKHOLDERS' EQUITY (DEFICIT)
Common stock, no par value, authorized 1,200,000,000 shares
of Common Stock and 10,000,000 shares of Preferred Stock at
March 31, 2007, and 900,000,000 shares of Common Stock and
10,000,000 shares of Preferred Stock at June 30, 2006;
issued and outstanding - 897,040,050 and 882,040,050 as of
March 31, 2007 and June 30, 2006, respectively -- --
Additional paid-in capital 4,765,756 4,629,393
Stock subscription receivable (11,394) (17,395)
Accumulated deficit (3,956,257) (4,652,052)
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TOTAL STOCKHOLDERS' EQUITY (DEFICIT) 798,105 (40,054)
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,631,145 $ 691,499
============ ============
See accompanying notes to unaudited consolidated financial statements.
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FRANKLIN WIRELESS CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
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NINE MONTHS ENDED
MARCH 31,
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2007 2006
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (loss) $ 695,797 $ (319,735)
Adjustments to reconcile net income (loss) to net cash (used in)
provided by operating activities:
Depreciation 4,800 4,650
Amortization of intangible assets 59,714 33,750
Loss on impairment of intangible assets 19,167 --
Increase (decrease) in cash due to change in:
Accounts receivable (39,659) (950)
Inventories (13,370) --
Accounts payable 1,683 (17,367)
Accrued liabilities (57,834) 47,772
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Net cash (used in) provided by operating activities 670,298 (251,880)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (19,418) (2,837)
Purchases of intangible assets (53,780) (3,000)
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Net cash used in investing activities (73,198) (5,837)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on notes payable to stockholders (100,000) (39,975)
Additional borrowings from stockholders 400,000 335,000
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Net cash provided by financing activities 300,000 295,025
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Net increase in cash and cash equivalents 897,100 37,308
Cash and cash equivalents, beginning of period 568,387 39,542
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Cash and cash equivalents, end of period $ 1,465,487 $ 76,850
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the nine months for:
Interest $ -- $ --
Income taxes $ 800 $ 800
See accompanying notes to unaudited consolidated financial statements.
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FRANKLIN WIRELESS CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - NATURE OF BUSINESS
Franklin Wireless Corp. ("Franklin" or the "Company") designs and markets
broadband high speed data communication products such as 3rd generation ("3G")
wireless broadband modules and modems to end users and wireless companies in
North and South American countries. Franklin 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 Company's wireless products are based on Evolution Data
Optimized technology ("EV-DO technology") of Code Division Multiple Access
("CDMA"), which is a wireless radio broadband data standard adopted by many CDMA
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.
NOTE 2 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of the Company and
its wholly-owned subsidiary 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 consolidated balance sheet is unaudited as of March 31, 2007
and audited as of June 30, 2006. The consolidated statements of income are
unaudited for the three months and nine months ended March 31, 2007 and 2006,
and the consolidated statements of cash flows are unaudited for the nine months
ended March 31, 2007 and 2006. In the opinion of management, the unaudited
consolidated financial statements included herein contain all adjustments,
including normal recurring adjustments, considered necessary to present fairly
the Company's financial position, the results of operations and cash flows for
the periods presented. These unaudited consolidated financial statements should
be read in conjunction with the consolidated financial statements and notes
thereto for the fiscal year ended June 30, 2006 included in the Company's
Amended Report on Form 10-KSB, filed on April 2, 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 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
Franklin and ARG. ARG is a wholly owned subsidiary located in South Korea used
to design wireless data products. All inter-company balances and transactions
have been eliminated in consolidation.
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SEGMENT REPORTING
The Company has two reportable segments as defined by SFAS No. 131, Disclosure
About Segments of an Enterprise and Related Information. Since August 2003, the
Company's subsidiary located in South Korea, ARG, has not been in operation and
all of its subsidiary's assets were written off during the fiscal year 2004. As
a result, the Company's consolidated financial statements include $550,000 of
debt from ARG financial statements.
USE OF ESTIMATES
The preparation of 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 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 flows, the Company considers all highly
liquid investments purchased with original maturities of three 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.
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.
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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 recorded at cost and are amortized on a straight-line basis over
the license or benefit periods as follows:
GSM/GPRS license 5 years
GSM text license 5 years
USB Modem certifications 3 years
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. 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 is less than its carrying amount.
On March 31, 2007, the Company wrote off two intangible assets (GSM/SPRS license
and GSM text license) in the amount of $19,167, as these GSM licenses were
deemed impaired due to their inability to continue to generate income from
operations and positive cash flow in future periods.
WARRANTIES
The Company does not provide any warranties on its products. However, the
manufacturer provides limited warranties up to one year from the date of the
sale to the Company's customers. These products are shipped directly from the
manufacturer to the customers. As a result, the Company was not required to and
does not accrue any warranty expenses during the three months and nine months
ended March 31, 2007 and 2006.
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
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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. As a result, no provision for
income taxes for the nine months ended March 31, 2007 was necessary, except for
minimum state taxes.
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
Substantially all of the Company's revenues are derived from the sales of
wireless data products. Any significant decline in market acceptance of the
Company's products or in the financial condition of the Company's 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. Two customers accounted for 81.60% and 17.53% of revenues for three
months ended March 31, 2007, and had no related account receivables at March 31,
2007. Two customers accounted for 65.82% and 10.88% of revenues for the nine
months ended March 31, 2007, and had related accounts receivables in the total
amount of $30,375 or 73.35% of total accounts receivables at March 31, 2007.
The Company purchases its wireless products from one design and manufacturing
company located in South Korea. If this 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. The Company purchased approximately $1,959,240 and
$4,259,840 for the three months and nine months ended March 31, 2007,
respectively, and had related accounts payable of $2,269 at March 31, 2007.
However, there were no significant delays, capacity constraints, or quality
control problems during the nine months ended March 31, 2007.
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.
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NOTE 4 - BALANCE SHEET DETAILS
PROPERTY AND EQUIPMENT
Property and equipment at March 31, 2007 and June 30, 2006 consisted of the
following:
(UNAUDITED)
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MARCH 31, JUNE 30,
2007 2006
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Computers and software $ 48,295 $ 30,640
Furniture and fixtures 10,476 8,713
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58,771 39,353
Less accumulated depreciation (31,438) (26,638)
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TOTAL $ 27,333 $ 12,715
========== ==========
Depreciation expense associated with property and equipment was $1,956 and
$1,550 for the three months ended March 31, 2007 and 2006, respectively, and
$4,800 and $4,650 for the nine months ended March 31, 2007 and 2006,
respectively.
INTANGIBLE ASSETS
Intangible assets at March 31, 2007 and June 30, 2006 consisted of the
following:
(UNAUDITED)
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MARCH 31, JUNE 30,
2007 2006
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GSM software license $ -- $ 200,000
Text input methods license -- 25,000
Certifications: CDG test licenses 109,280 55,500
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109,280 280,500
Less accumulated amortization (30,186) (176,305)
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TOTAL $ 79,094 $ 104,195
========== ==========
Amortization expense associated with intangible assets was $20,357 and $11,250
for the three months ended March 31, 2007 and 2006, respectively, and $59,714
and $33,750 for the nine months ended March 31, 2007 and 2006, respectively.
On March 31, 2007, the Company wrote off two intangible assets (GSM/SPRS license
and GSM text license) in the amount of $19,167 as these GSM licenses were deemed
impaired due to their inability to continue to generate income from operations
and positive cash flow in future periods.
OTHER ASSETS
Other assets as of March 31, 2007 and June 30, 2006 consisted of facility lease
of $4,170 and utility deposits of $282.
OTHER CURRENT LIABILITY
During the period of nine months ended March 31, 2007, the Company received
$400,000 in advance from an unaffiliated company for a future issuance of Common
Stock. On October 18, 2006, the Company issued 15,000,000 shares of Common
Stock, valued at $0.0091 per share, or a total value of $136,364. The Company
planned to issue an additional 29,000,000 shares of its common stock, valued at
$0.0091 per share, or a total value of $263,636, during the three months ended
March 31, 2007.
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On September 11, 2006, the Company's Board of Directors approved an increase in
the authorized Common Stock to 1,200,000,000 from 900,000,000. In March of 2007,
the stockholders approved an amendment of the Articles of Incorporation to
increase the authorized shares, which would permit the issuance of the
additional shares. The Articles of Incorporation were amended on March 31, 2007,
and the Company plans to issue the additional 29,000,000 shares of Common Stock
during the three months ended June 30, 2007.
LIABILITY FROM DISCONTINUED OPERATIONS
On August 20, 2002, the Company's wholly owned subsidiary, ARG, issued a
promissory note to a Company stockholder in the amount of $550,000 (which
includes $50,000 of 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 during the year ended June 30, 2004. The note is
convertible to the Company's Common Stock, at the option of the holder, at a
conversion price equal to the fair value of the Company's common stock on the
date of issuance, or $0.005. As of June 30, 2006 and March 31, 2007, this note
had not been converted into Common Stock, and $10,000 was paid during the year
ended June 30, 2006. During the three months ended March 31, 2007, the Company
paid $100,000, and an additional $6,000 was offset by the stock subscription
receivable. The total liability from discontinued operations is $434,000 at
March 31, 2007.
ACCRUED LIABILITIES
Accrued liabilities at March 31, 2007 and June 30, 2006 consisted of the
following:
(UNAUDITED)
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MARCH 31, JUNE 30,
2007 2006
---------- ----------
Accrued salaries $ 99,418 $ 131,750
Accrued professional fees 31,217 52,840
Other accrued liabilities 2,500 6,378
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TOTAL $ 133,135 $ 190,968
========== ==========
NOTE 5 - COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company leases its administrative facilities under a non-cancelable
operating lease that expire on June 30, 2008. In addition to the minimum annual
rental commitments, the leases provide for periodic cost of living increases in
the base rent and payment by the Company of common area costs.
LITIGATION
During June 2005, the Company's landlord filed a suit against the Company
alleging that the Company defaulted under the terms and conditions of the
Company's lease agreement when the Company failed to pay for its facility lease
valued at $18,221. The parties have settled at $9,308, to be paid in twelve
equal monthly installments commencing on December 6, 2005. The Company has paid
$9,308, and the entire legal action of all parties was dismissed because all
causes of legal action was dismissed on December 19, 2006
In addition, 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 the
Company's consolidated financial condition.
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NOTE 6 - EARNINGS PER SHARE
Basic earnings per share ("EPS") excludes dilution and is computed by dividing
net income or loss attributable to common shareholders by the weighted-average
number of common shares outstanding for the period. As of March 31, 2007, the
Company did not have any dilutive common stock shares.
NOTE 7 - RECENT ACCOUNTING PRONOUNCEMENTS
In September 2006, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 157, FAIR VALUE MEASUREMENTS. This standard provides guidance for
using fair value to measure assets and liabilities. The standard also responds
to investors' requests for expanded information about the extent to which
companies measure assets and liabilities at fair value, the information used to
measure fair value, and the effect of fair value measurements on earnings. The
standard applies whenever other standards require (or permit) assets or
liabilities to be measured at fair value, but does not expand the use of fair
value in any new circumstances. SFAS No. 157 is effective for financial
statements issued for fiscal years beginning after November 15, 2007, and
interim periods within those fiscal years. There are numerous previously issued
statements dealing with fair values that are amended by SFAS No. 157. The
Company is in the process of evaluating the impact, if any, that the adoption of
SFAS No. 157 will have on the Company's consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159, THE FAIR VALUE OPTION FOR
FINANCIAL ASSETS AND FINANCIAL LIABILITIES. SFAS No. 159 provides companies with
an option to report many financial instruments and certain other items at fair
value that are not currently required to be measured at fair value. The
objective of SFAS No. 159 is to reduce both complexity in accounting for
financial instruments and the volatility in earnings caused by measuring related
assets and liabilities differently. The FASB believes that SFAS No. 159 helps to
mitigate accounting-induced volatility by enabling companies to report related
assets and liabilities at fair value, which would likely reduce the need for
companies to comply with detailed rules for hedge accounting. SFAS No. 159 also
establishes presentation and disclosure requirements designed to facilitate
comparisons between companies that choose different measurement attributes for
similar types of assets and liabilities, and would require entities to display
the fair value of those assets and liabilities for which the company has chosen
to use fair value on the face of the balance sheet. The new statement does not
eliminate disclosure requirements included in other accounting standards,
including requirements for disclosures about fair value measurements included in
SFAS No. 157, FAIR VALUE MEASUREMENTS. This statement is effective as of the
beginning of an entity's first fiscal year beginning after November 15, 2007.
The Company is in the process of evaluating the impact, if any, that the
adoption of SFAS No. 159 will have on the Company's consolidated financial
statements.
There are no other accounting standards issued as of April 27, 2007 that are
expected to have a material impact on the Company's consolidated financial
statements.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
The following discussion should be read in conjunction with the consolidated
financial statements and notes thereto included in Item 1 of this filing and the
financial statements and notes thereto and Management's Discussion and Analysis
of Financial Condition or Plan of Operation contained in the Company's Amended
Report on Form 10-KSB filed on April 2, 2007 for the year ended June 30, 2006.
- 12 -
BUSINESS OVERVIEW
The Company designs and sells broadband high speed wireless data communication
products such as 3G wireless modules and modems. Our products are used, with
broadband high speed data service, to access wireless data communications
networks using laptops, handheld and desktop computers and enable our customers
to send and receive email with large file attachments, play interactive games,
and receive, send, and download high resolution picture, video and music
contents.
The broadband wireless data communication products are positioned at the
convergence of wireless communications, mobile computing and the Internet, each
of which we believe represents a growing market. Our products are based on
widely deployed cellular technologies and operate on the networks of major
wireless network operators around the world.
In 2005, we designed and marketed Global System for Mobile telecommunication or
GSM cellular phones to North and South American countries and experienced
significant financial difficulties due to increased competition, fast technology
changes, limited resources, low brand recognitions, and high cost to design
cellular phones. In order to overcome these difficulties in our business, we
restructured our operations at the end of 2005 by shifting our focus on
designing and marketing of wireless broadband modules and modems on Code
Division Multiple Access ("CDMA") technology and focusing on highly demanded
market of these products, North and South American countries. Teaming up with
Cmotech Co. Ltd, a designer and original equipment manufacturer ("OEMs") of our
wireless broadband modems and modules, we successfully launched our first
wireless broadband USB modems in the U.S. in early 2006. Our sales of the CDMA
based modems to our customers in South American countries have been successful
since May 2006, and have been a key factor to our increase in revenue. In 2007,
we 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. We anticipate that our sales of these new products
through our brand recognition, leveraging sales to our existing customers, and
increase in marketing effort, will be successful to our future growth.
We believe that the demand for wireless broadband data products will continue to
grow and expand worldwide. However, to be successful in this market, we will
need to continue to keep up with technology changes and continue to invest and
launch new products on a timely basis.
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.
USE OF ESTIMATES
The preparation of 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 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.
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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. 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 is less than its carrying amount.
On March 31, 2007, the Company wrote off two intangible assets (GSM/SPRS license
and GSM text license) in the amount of $19,167 as these GSM licenses were deemed
impaired due to their disability to continue to generate income from operations
and positive cash flow in future periods.
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. As a result, no provision for
income taxes for the nine months ended March 31, 2007 was necessary, except for
minimum state taxes.
RESULTS OF OPERATIONS
The following table sets forth, for the three months and nine months ended March
31, 2007 and 2006, selected consolidated statements of operations data expressed
as a percentage of sales:
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
--------------------- --------------------
2007 2006 2007 2006
-------- -------- -------- --------
Net Sales 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 69.8% 87.6% 70.8% 62.7%
-------- -------- -------- --------
Gross profit 30.2% 12.4% 29.2% 37.3%
-------- -------- -------- --------
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Operating expenses:
Selling, general and
administrative expenses 18.1% 80.8% 17.7% 129.0%
Research and development -- -- -- 11.3%
-------- -------- -------- --------
Total operating expenses 18.1% 80.8% 17.7% 140.3%
-------- -------- -------- --------
Income (loss) from operations 12.1% (68.4%) 11.5% (103.0%)
Other income (expense), net (0.2)% (0.4)% 0.1% 4.3%
-------- -------- -------- --------
Income (loss) before income taxes 11.9% (68.8%) 11.6% (98.7%)
Provision for income taxes -- -- -- (0.3%)
-------- -------- -------- --------
Net income (loss) 11.9% (68.8%) 11.6% (99.0%)
======== ======== ======== ========
The results of the interim periods are not necessarily indicative of results for
the entire fiscal year
THREE MONTHS ENDED MARCH 31, 2007
COMPARED TO THREE MONTHS ENDED MARCH 31, 2006
NET SALES
Net sales increased by $3,064,217, or 1,883.4%, to $3,226,915 for the three
months ended March 31, 2007 from $162,698 for the corresponding period of 2006.
The increase was primarily attributable to an increase in sales of CDMA EV-DO
data products, due to a substantial increase in demand in the South America
market. Sales for these data products totaled $3,224,339 and $5,900 for the
three months ended March 31, 2007 and 2006, respectively, an increase of
$3,218,439.
GROSS PROFIT
Gross profit increased by $953,125, or 4,706.8%, to $973,375 for the three
months ended March 31, 2007 from $20,250 for the corresponding period of 2006.
Our gross profit was 30.2% for the three months ended March 31, 2007, compared
to 12.4% in the corresponding period of 2006. The overall increase was primarily
due to the improved structure of gaining a higher gross profit of CDMA EV-DO
data products as compared to sales of our lower margin GSM products for the
corresponding period in 2006. The higher gross profit of CDMA EV-DO data product
was particularly higher due to two particular demands to a customer, which
generated 6.3% more profit, to 31%, compared to its usual 24.7% profit, and
those demands accounted for 81.6% of net sales for the three months ended March
31, 2007.
SELLING, GENERAL, AND ADMINISTRATIVE
Selling, general, and administrative expenses increased by $451,092, or 343.0%,
to $582,595 for the three months ended March 31, 2007 from $131,503 for the
corresponding period of 2006. The increase was primarily due to increases in
sales commission expense of $239,410, marketing expense of $24,345, travel
expense of $54,385, and payroll of $147,084.
OTHER INCOME (EXPENSE), NET
Other expense increased by $6,854, or 962.64%, to $7,566 for the three months
ended March 31, 2007 from $712 for the corresponding period of 2006. The overall
increase is due to $19,167 of impairment charges of intangible assets, offset by
an increase in interest income of approximately $10,500.
- 15 -
NINE MONTHS ENDED MARCH 31, 2007
COMPARED TO NINE MONTHS ENDED MARCH 31, 2006
NET SALES
Net sales increased by $5,673,977, or 1,756.2%, to $5,997,065 for the nine
months ended March 31, 2007 from $323,088 for the corresponding period of 2006.
The increase was primarily attributable to an increase in sales of CDMA EV-DO
data products due to increase in demand in the South America market. Sales for
these data products totaled $5,994,489 and $79,300 for the nine months ended
March 31, 2007 and 2006, respectively, an increase of $5,915,189.
GROSS PROFIT
Gross profit margin increased by $1,628,485, or 1,352.1% to $1,748,925 for the
nine months ended March 31, 2007 from $120,440 for the corresponding period of
2006. Our gross profit percentage was 29.2% for the nine months ended March 31,
2007 compared to 37.3% in the corresponding period of 2006. The gross profit
percentage decrease was primarily due to a one time commission revenue,
recognized as a non-refundable brokerage fee in the amount of $57,280, during
the nine months ended March 31, 2006. This was offset by the higher gross profit
of CDMA EV-DO data product, which was particularly high due to two particular
demands to a customer, which generated 6.3% more profit to 31% compared to its
usual 24.7% profit and those demands accounted for 43.9% of net sales for the
nine months ended March 31, 2007.
SELLING, GENERAL, AND ADMINISTRATIVE
Selling, general, and administrative expenses increased by $604,134, or 133.3%,
to $1,057,309 for the nine months ended March 31, 2007 from $453,175 for the
corresponding period of 2006. The increase was primarily due to increases in
sales commission expense of $239,410, marketing expense of $55,354, travel
expense of $100,570, and payroll of $361,931.
OTHER INCOME (EXPENSE), NET
Other income decreased by $8,819, or 63.91%, to $4,981 for the nine months ended
March 31, 2007 from $13,800 for the corresponding period of 2006. The overall
decrease was due to the loss expense of 19,167 on impairment of intangible
assets, which was partially offset by the interest income of $22,989.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents increased by $897,100, to $1,465,487 as of March 31,
2007 compared to $568,387 as of June 30, 2006. The increase was primarily from
the net profit of $695,797 and the advance payment of future stock purchases of
$400,000 from a private investor. The Company believes that anticipated working
capital to be generated by future operations will be sufficient to support the
Company's working capital requirements.
OPERATING ACTIVITIES - Net cash provided by operating activities amounted to
$670,298 for the nine months ended March 31, 2007. Net cash used by operating
activities amounted to $251,880 for the corresponding period of 2006. The
increase from the prior period is mainly due to increase in net income.
INVESTING ACTIVITIES - Net cash used in investing activities totaled $73,198 and
$5,837 for the nine months ended March 31, 2007 and 2006, respectively,
consisting of capital expenditures.
FINANCING ACTIVITIES - Net cash provided by financing activities for the nine
months ended March 31, 2007 and 2006 totaled $300,000 and $295,025,
respectively, which consisted of proceeds from its future common stock issuance.
- 16 -
CONTRACTUAL OBLIGATIONS AND OTHER COMMITMENTS
The Company's material off-balance sheet contractual commitment is operating
lease obligation. We excluded this item from the balance sheet in accordance
with GAAP. We do not maintain any other off-balance sheet arrangements,
transactions, obligations or other relationships with unconsolidated entities
that would be expected to have a material current or future effect upon our
financial condition or results of operations.
The Company's principal future obligations and commitments as of March 31, 2007,
include the following:
LEASES
The Company leases its administrative facilities under a non-cancelable
operating lease that expires on June 30, 2008. In addition to the minimum annual
rental commitments, the lease provides for periodic cost of living increases in
the base rent and payment by the Company of common area costs.
LITIGATION
During June 2005, the Company's landlord filed a suit against the Company
alleging that the Company defaulted under the terms and conditions of the
Company's lease agreement when the Company failed to pay for its facility lease
valued at $18,221. The parties have settled at $9,308, to be paid in twelve
equal monthly installments commencing on December 6, 2005. The Company has paid
$9,308, and the entire legal action of all parties was dismissed because all
causes of legal action was dismissed on December 19, 2006
In addition, 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 a material adverse effect on the
Company's consolidated financial condition.
RISK FACTORS
An investment in our 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 Shares.
The following risk factors do not purport to be a complete or exhaustive
explanation of the risks involved in our business.
HIGH-RISK COMPANY IN TELECOM SECTOR
The Company is in a volatile industry. In addition, the Company's 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 earliest 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 royalty;
o Establish and increase awareness of the Company's brand and develop
customer royalty;
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 the
Company's business; and
o Attract, retain, and motivate qualified personnel.
- 17 -
The Company cannot guarantee that it will be able to achieve the above goals,
and its failure to achieve them could adversely affect the Company's business,
results of operations, and financial condition. Moreover, there can be no
assurance that the Company will be able to obtain additional funding once the
Company's financial resources are depleted. The Company expects that its
revenues and operating results will fluctuate in the future. There is no
assurance that any or all of the Company's efforts will produce a successful
outcome. If the Company's efforts are unsuccessful or other unexpected events
occur, purchasers of the shares could lose their entire investment.
DEPENDENCE ON COLLABORATIVE ARRANGEMENTS
The development and commercialization of the Company's products and services
depend in large part upon the Company's 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.
RAPID TECHNOLOGICAL CHANGES CREATE UNCERTAINTIES
Since the Company's products and services are new, the Company 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 the Company's products and services do not
achieve and sustain market acceptance, the Company's business, results of
operations and profitability may suffer.
NEED OF ADDITIONAL FINANCING; 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 plans to seek additional financing
through the issuance of equity or convertible debt securities. The percentage
ownership of the stockholders of the Company will be reduced, stockholders may
experience additional dilution, and such securities may have rights, preferences
and privileges senior to those of the Company's Common and Preferred 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 the Company's business, results of
operations and financial conditions.
PRODUCT-TO-MARKET CHALLENGE IS CRITICAL
The success of the Company depends on its ability to quickly enter the market
and establish an early mover advantage. The Company must implement an aggressive
sales and marketing campaign to solicit customers and strategic partners. Any
delay could seriously affect its ability to establish and exploit effectively
its early-to-market-strategy.
- 18 -
CONCENTRATION RISK - SUPPLIER
Cmotech is our only product vendor to design and manufacture our products. If we
are not unable to successfully manage our relationship with Cmotech, our
products may not be readily available to our customers. Furthermore, if Cmotech
was to experience delays, capacity constraints or quality control problems in
its designing and manufacturing operations, 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 revenues.
ITEM 3. CONTROLS AND PROCEDURES
The Company's management did not carry out an evaluation at the end of the
period covered by this Form 10-QSB, but management concluded that, as of March
31, 2007, our disclosure controls and procedures, related to internal control
over financial reporting and the recording of certain equity transactions, were
not effective in light of the material weaknesses described below.
1. INADEQUATE FINANCIAL STATEMENT PREPARATION AND REVIEW PROCEDURES - We
do not have adequate procedures and controls to ensure that accurate
financial statements can be prepared and reviewed on a timely basis,
including insufficient
a. Review and supervision within the accounting and finance
departments;
b. Underlying accurate data to ensure that balances are
properly summarized and posted to the general ledger; and
c. Technical accounting resources.
2. INADEQUATE SEGREGATION OF DUTIES - We do not have adequate procedures
and controls in place to ensure proper segregation of duties within
the accounting department. As a result, adjustments in the financial
statements could occur and not be prevented or detected by our
controls in a timely manner.
3. INADEQUATE TECHNICAL ACCOUNTING EXPERTISE - We lacked the necessary
depth of personnel with adequate technical accounting expertise to
ensure the preparation of interim and annual financial statements in
accordance with GAAP. This material weakness represented more than a
remote likelihood that a material misstatement of our interim
financial statements for the nine months ended March 31, 2007 would
not have been prevented or detected.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projection of any evaluation of
effectiveness to future periods is 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.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
- 19 -
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
During the period of nine months ended March 31, 2007, the Company received
$400,000 in advance from an unaffiliated company for a future issuance of Common
Stock. On October 18, 2006, the Company issued 15,000,000 shares of Common
Stock, valued at $0.0091 per share, or a total value of $136,364. The issuance
of the balance of shares due was suspended until such time as the Company could
increase its authorized shares. The Company planned to issue an additional
29,000,000 shares of its common stock, valued at $0.0091 per share, or a total
value of $263,636, during the three months ended March 31, 2007. However, the
amendment of the Articles of Incorporation to increase the authorized shares was
not effective until March 31, 2007, so the Company plans to issue the additional
29,000,000 shares of Common Stock during the three months ended June 30, 2007.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On September 11, 2006, the Company's Board of Directors approved an increase in
the authorized Common Stock, to 1,200,000,000 shares from 900,000,000 shares. In
March of 2007, shareholders owning over 50% of the issued and outstanding shares
of Common Stock approved, by written consent, an amendment of the Articles of
Incorporation to increase the authorized shares. The Amendment to the Articles
of Incorporation effecting the increase was filed with the California Secretary
of State on March 31, 2007.
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
- 20 -
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: May 15, 2007
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