UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 2007
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OF 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-11616
FRANKLIN WIRELESS CORP.
(Name of small business issuer in its charter)
California 95-3733534
---------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9823 Pacific Heights Blvd., Suite J, San Diego, California 92121
----------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Issuer's Telephone Number: (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
Check whether the issuer is not required to file reports pursuant to Section 13
or 15(d) of the Exchange Act. [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]
The issuer's revenue for its most recent fiscal year was $10,385,090.
State the aggregate market value of the voting and non-voting common equity held
by non-affiliates computed by reference to the price at which the common equity
was sold, or the average bid and asked price of such common equity, as a
specified date within the past 60 days: $11,263,979 as of September 12, 2007.
State the number of shares outstanding of each of the issuer's class of common
stock, as of the latest practicable date:
TITLE OF EACH CLASS OF COMMON STOCK OUTSTANDING AT September 12, 2007
----------------------------------- -----------------------------
Common Stock, without par value 926,040,050
Transitional Small Business Disclosure Format (Check one) Yes [ ]; No [X]
2
FRANKLIN WIRELESS CORP.
INDEX TO ANNUAL REPORT ON FORM 10-KSB
FOR THE FISCAL YEAR ENDED JUNE 30, 2007
PAGE NO.
--------
PART I
------
Item 1: Description of Business ......................................... 5
Item 2: Description of Property ......................................... 13
Item 3: Legal Proceedings ............................................... 13
Item 4: Submission of Matters to a Vote of Security Holders ............. 13
PART II
-------
Item 5: Market for Common Equity and Related Stockholder Matters
and Small Business Issuer Purchases of Equity Securities ........ 14
Item 6: Management's Discussion and Analysis of Financial Condition
and Results of Operation ........................................ 15
Item 7: Financial Statements ............................................ 24
Item 8: Changes in and Disagreements with Accountants on Accounting and 24
Financial Disclosure ............................................
Item 8A: Controls and Procedures ......................................... 24
Item 8B: Other Information ............................................... 26
PART III
--------
Item 9: Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act ............... 26
Item 10: Executive Compensation .......................................... 27
Item 11: Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters ................................. 28
Item 12: Certain Relationships and Related Transactions .................. 29
Item 13: Exhibits ........................................................ 29
Item 14: Principal Accountant Fees and Services .......................... 30
Signatures ...................................................... 31
3
INTRODUCTION AND NOTE ON FORWARD LOOKING STATEMENTS
Franklin Wireless Corp. is a California corporation; its principal executive
office is located at 9823 Pacific Heights Blvd. Suite J, San Diego, CA 92121.
You should keep in mind the following points as you read this Report on Form
10-KSB:
o the terms "we", "us", "our", "Franklin", "Franklin Wireless", or the
"Company" refer to Franklin Wireless Corp. and its subsidiary; and
o our fiscal year ends on June 30; references to fiscal 2007 and fiscal
2006 and similar constructions refer to the fiscal year ended on June
30 of the applicable year.
This Annual Report on Form 10-KSB contains statements which, to the
extent they do not recite historical fact, constitute "forward looking"
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
Forward looking statements are used under the captions "Business," "Management's
Discussion and Analysis of Financial Condition and Results of Operation", and
elsewhere in this Annual Report on Form 10-KSB. You can identify these
statements by the use of words like "may," "will," "could," "should," "project,"
"believe," "anticipate," "expect," "plan," "estimate," "forecast," "potential,"
"intend," "continue," and variations of these words or comparable words. Forward
looking statements do not guarantee future performance and involve risks and
uncertainties. Actual results may differ substantially from the results that the
forward looking statements suggest for various reasons, including those
discussed under the caption "Risks Related to Our Business." These forward
looking statements are made only as of the date of this Annual Report on Form
10-KSB. We do not undertake to update or revise the forward looking statements,
whether as a result of new information, future events or otherwise.
4
PART I
ITEM 1. DESCRIPTION OF BUSINESS
BUSINESS OVERVIEW
We design and sell 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.
Our 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.
Our products are marketed through Original Equipment Manufacturers
("OEMs") and distributors, as well as directly to operators and end users. Our
customer base extends from the United States, Caribbean and South American
countries to African countries, and they consist of major carriers/operators,
distributors and end users. Our Universal Serial Bus ("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 2005, we designed and marketed Global System for Mobile
telecommunications, 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 recognition,
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 to designing and marketing of wireless broadband modules and modems on
Code Division Multiple Access ("CDMA") technology and focusing on North and
South American countries, which have large demands for these products. Teaming
up with C-Motech Co. Ltd, a designer and original equipment manufacturer
("OEMs") of our wireless broadband modems and modules in South Korea, 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 revenues. 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 keys to our future growth.
5
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.
OUR STRUCTURE
Our headquarters office is located in San Diego, California. Our
business is comprised of two segments: a San Diego-based business unit,
including corporate functions, and a Korea-based business unit that mainly
supports the manufacturing of products.
The San Diego office is principally composed of marketing, sales,
operations, finance and administrative support. It is responsible for all
customer-related activities, such as marketing communications, product planning,
product management and customer support, along with sales and business
development activities on a worldwide basis.
The Korea-based business unit is a wholly owned subsidiary, and this
entity has been inactive since August 2003.
OUR PRODUCTS AND SERVICES
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.
We are the first company to introduce USB-type mobile broadband modems
to the countries located in North America, the Caribbean, and South America. Our
mobile broadband and data products include wireless USB modems, embedded
modules, and stand-alone mobile broadband modems used for high-speed data
services. Our two state-of-the-art 3G wireless data technologies form the bases
for our products and they include:
o Code Division Multiple Access ("CDMA") technology 1xEVDO - Evolution
Data Optimized technology in both revision 0 and revision A releases.
Revision 0 modems sport a download speed of up to 2.4 Mbps and the
revision A products achieve broadband like speed of 3.1 Mbps.
o High Speed Downlink Packet Access ("HSDPA") based on Universal Mobile
Telecommunications System standard or sometimes referred to as Wideband
Code Division Multiple Access ("WCDMA") technology. This technology
allows download speed of up to 14.4 Mbps.
6
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 and increase in marketing
effort, influencing sales to our existing customers as well as entrance into new
customer contracts, will continue to be keys to our future growth. Below is a
list of our product offerings:
o The CDU-550 Dual-band 800/1900 MHz EVDO rev 0 USB modem was the
industry first USB EVDO card to be launched in the countries in North
America, the Caribbean, and South America. The modem has a downlink
speed of 2.4 Mbps and an uplink speed of 153 Kbps. More flexible and
versatile than the PCMCIA card, the CDU-550 not only works on laptop
PCs, it also works on desktop PCs and Macintosh laptops where PCMCIA
card slots are not available. The CDU-550 works with Windows OS,
Macintosh and Linux.
o The CDU-650 Dual-band 800/1900 MHz EVDO rev 0 USB modem is the second
generation EVDO USB modem with the same performance as the CDU-550, but
features a retractable USB connector which rotates 270(degree). This
allows the modem body and its antenna to be raised vertically for
better wireless connection performance and the USB connector can be
folded away when not in use.
o The CDX-650 Dual-band 800/1900 MHz EVDO rev 0 Express Card modem has
the same wireless connection performance as the CDU-650 but features an
Express Card 34 form factor.
o The CDU-680 Dual band 800/1900 MHz rev A USB modem is a
state-of-the-art product featuring an upgraded EVDO revision A radio
with downlink speed of up to 3.1 Mbps and uplink speed of up to 1.8
Mbps, it is the first product in its kind to incorporate onboard flash
memory, a GPS receiver and a retractable USB connector which rotates
more than 270(degree). The industry's first onboard flash memory
feature allows the Connection Manager software for Windows, Macintosh
OS X and driver for Linux to be stored on the device so that CD or CD
drive is not required for software installation. The Quick Installation
Guide is also stored in the memory and is always within easy reach of
the user.
o The CGU-628 quad band 850/900/1800/1900/2100 MHz HSDPA USB modem
features a downlink speed of up to 14.4 Mbps and an uplink speed of up
to 384 Kbps. The quad band radio allows the modem to be used worldwide
wherever there is HSDPA service and features a retractable USB
connector. This product will be available at the end of 2007.
SALES AND MARKETING
We market our products through two channels: directly to operators, and
indirectly through strategic partners. Most of our sales to wireless carriers
and OEMs are sold directly by our sales force and our customer base extends from
the United States, Caribbean and South American Countries to African countries.
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. We are currently selling the 1x
7
EVDO USB modem with five carriers in the North American countries and about ten
CDMA carriers in Caribbean and South American countries. Our USB modems are
certified by Sprint, Alltel, Cellular South, NTELOS and ACS in the North
American countries, by IUSACELL in Mexico, by Telefonica and Movilnet in
Venezuela, and by TSTT in Trinidad and Tobago.
Our carriers are interested in 1x EVDO single and dual band USB modem
product for laptop computers or handheld devices equipped with USB but not
equipped with PCMCIA slots. Our CDU-550 and CCU-550 are the first products to
access the internet over CDMA 1xEVDO network with a USB modem. These products
are designed for the users to browse the internet and send and receive e-mail
anywhere and anytime in the CDMA 1xEVDO network. We have introduced a
stand-alone modem for application companies, such as wireless security and
telemetric companies, as well as the convergence product, EVDO Access Point,
which was combined with EVDO and WiFi products. The EVDO access point product is
designed for the small office or home using several PCs at the same time.
Our sales of the CDMA based modems to our customers in Caribbean and
South American countries have been successful since May 2006, and have been a
key factor to our increase in revenue. For the year ended June 30, 2007,
approximately 55.8% of our revenue was derived from Caribbean and South American
countries. We also have received sizable purchase orders from a major carrier in
the United States for our products, and 41.2% of our revenue was derived from
this carrier for the year ended June 30, 2007.
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 the countries located in North America, the Caribbean and South
America. We anticipate that our sales of these new products through our brand
recognition and increase in marketing effort will continue to be keys to our
future growth.
ASSEMBLY AND MANUFACTURING OPERATIONS
Our main facility is located in San Diego, California. Assembly of our
products has ordinarily been contracted out to overseas electronics
manufacturing companies in South Korea. In January 2005, we entered into an
agreement with C-Motech Co. Ltd. ("C-Motech"), located in South Korea, for the
manufacture of the products. Under the manufacturing and supply agreement,
C-Motech provides us with services including all licenses, component
procurement, final assembly, testing, quality control, fulfillment and
after-sale service.
In January 2005, we entered into a co-development, co-ownership, and
supply agreement (the "Agreement") with C-Motech, 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 we are 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 is responsible for
design, development, testing, certification, and completion of these products.
Under the Agreement, products include all access devices designed with
8
Qualcomm's MSM 5100, 5500 and 6500 chipset solutions provided or designed by
C-Motech 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.
EMPLOYEES
As of June 30, 2007, we had nine full time employees and we also use
the services of consultants and contract workers from time to time. Our
employees are not represented by any collective bargaining organization, and we
have never experienced a work stoppage. We believe that our relationship with
the employees to be amicable.
RISKS RELATED TO OUR BUSINESS
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 our shares.
The following risk factors do not purport to be a complete explanation of the
risks involved in our business.
WE HAVE HAD HISTORY OF LOSSES. We had experienced significant operating
losses and negative cash flows from operating activities during our last two
fiscal years. If our sales do not continue to improve and operating expenses are
not reduced and monitored, we may incur additional significant net losses and
negative cash flows from operations.
WE OPERATE IN AN INTENSIVELY COMPETITIVE MARKET. The wireless broadband
data access market is highly competitive, and we may be unable to compete
effectively. Our primary competitors are Sierra Wireless, Novatel Wireless and
Option International. Many of our competitors or potential competitors have
significantly greater financial, technical and marketing resources than we do.
To survive and be competitive, we 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. Our
failure to compete effectively could seriously impair our business.
WE OPERATE IN THE HIGH-RISK TELECOM SECTOR. We are in a volatile
industry. In addition, our revenue model is evolving and relies substantially on
the assumption that we will be able to successfully complete the development and
sales of our products and services in the marketplace. Our 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 we must, among other things:
o Complete development and introduction of functional and attractive
products and services;
o Attract and maintain customer loyalty;
9
o Establish and increase awareness of our 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 our
business; and
o Attract, retain, and motivate qualified personnel.
We cannot guarantee that we will be able to achieve the above goals,
and our failure to achieve them could adversely affect our business, results of
operations, and financial condition. Moreover, there can be no assurance that we
will be able to obtain additional funding once our financial resources are
depleted. We expect that revenues and operating results will fluctuate in the
future. There is no assurance that any or all of our efforts will produce a
successful outcome. If our efforts are unsuccessful or other unexpected events
occur, purchasers of our shares could lose their entire investment.
WE OPERATE IN A FIELD WITH RAPIDLY CHANGING TECHNOLOGY. Since our
products and services are new, we cannot be certain that these products and
services will function as anticipated or be desirable to our intended markets.
Our current or future products and services may fail to function properly, and
if our products and services do not achieve and sustain market acceptance, our
business, results of operations and profitability may suffer. If we are unable
to predict and comply with evolving wireless standards, our ability to introduce
and sell new products will be adversely affected. If we fail to develop and
introduce products on time, we may lose customers and potential product orders.
WE DEPEND ON THE DEMAND FOR WIRELESS NETWORK CAPACITY. The demand for
our products is completely dependent on the demand for broadband wireless access
to networks. If wireless operators do not deliver acceptable wireless service,
our product sales may dramatically decline. Thus, if wireless operators
experience financial or network difficulties, it will likely reduce demand for
our products.
WE DEPEND ON COLLABORATIVE ARRANGEMENTS. The development and
commercialization of our products and services depend in large part upon our
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
WE RELY ON A SINGLE SOURCE FOR THE MANUFACTURE OF OUR PRODUCTS. We rely
on a single source to design, manufacture and supply our products, which exposes
us to a number of risks and uncertainties outside our control. Due to our lack
of working capital, we rely on C-Motech to manufacture and deliver all our
products. Any significant changes in C-Motech, such as a change in ownership,
operations or financial status may cause difficulties in our ability to deliver
products to customers on a timely basis.
10
THE LOSS OF ANY OF OUR MATERIAL CUSTOMERS COULD ADVERSLY AFFECT OUR
REVENUES AND PROFITABILITY, AND THEREFORE SHAREHOLDER VALUE. We depend on a
small number of customers for a significant portion of our revenues. During the
year ended June 30, 2007, two customers represented approximately 79.8% of our
revenue. If either of these customers reduce their business with us or suffer
from business failure, our revenues and profitability could decline, perhaps
materially.
OUR PRODUCT DELIVERIES ARE SUBJECT TO LONG LEAD TIMES. Due to our
limited capital resources, we are experiencing long-lead times to ship products
to our customers, often in excess of 45 days. This could cause us to lose
customers, who may be able to secure faster delivery times from our competitors,
and require us to maintain higher levels of working capital.
OUR PRODUCT-TO-MARKET CHALLENGE IS CRITICAL. Our success depends on our
ability to quickly enter the market and establish an early mover advantage. We
must implement an aggressive sales and marketing campaign to solicit customers
and strategic partners. Any delay could seriously affect our ability to
establish and exploit effectively an early-to-market-strategy.
AS OUR BUSINESS EXPANDS INTERNATIONALLY, WE WILL BE EXPOSED TO
ADDITIONAL RISKS RELATING TO INTERNATIONAL OPERATIONS. Our expansion into
international operations exposes us 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 we are unable to further develop distribution channels
in countries in North and South America and Africa, we may not be able to grow
our international operations and our ability to increase our revenue will be
negatively impacted.
WE MAY INFRINGE THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS. The
industry in which we operate has many participants that own, or claim to own,
proprietary intellectual property. In the past we have received, and in the
future may receive, claims from third parties alleging that we, and possibly our
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 we have infringed the intellectual property rights of others. In
many cases, these third parties are companies with substantially greater
resources than us, and they may be able to, and may choose to, pursue complex
litigation to a greater degree than we could. Regardless of whether these
infringement claims have merit or not, we may be subject to the following:
o We may be liable for potentially substantial damages, liabilities and
litigation costs, including attorneys' fees;
11
o We may be prohibited from further use of the intellectual property and
may be required to cease selling our products that are subject to the
claim;
o We 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 we will be able to successfully
negotiate and obtain such a license from the third party;
o We 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 we will be able to develop such a non-infringing
alternative;
o The diversion of management's attention and resources;
o Our relationships with customers may be adversely affected; and
o We may be required to indemnify our customers for certain costs and
damages they incur in such a claim.
In the event of an unfavorable outcome in such a claim and our
inability to either obtain a license from the third party or develop a
non-infringing alternative, then our business, operating results and financial
condition may be materially adversely affected and we may have to restructure
our business.
Absent a specific claim for infringement of intellectual property, from
time to time we have and expect to continue to license technology, intellectual
property and software from third parties. There is no assurance that we will be
able to maintain our third party licenses or obtain new licenses when required
and this inability could materially adversely affect our business and operating
results and the quality and functionality of our products. In addition, there is
no assurance that third party licenses we execute will be on commercially
reasonable terms.
Under purchase orders and contracts for the sale of our products we may
provide indemnification to our customers for potential intellectual property
infringement claims for which we may have no corresponding recourse against our
third party licensors. This potential liability, if realized, could materially
adversely affect our business, operating results and financial condition.
GOVERNMENT REGULATION COULD RESULT IN INCREASED COSTS AND INABILITY TO
SELL OUR PRODUCTS. Our products are subject to certain mandatory regulatory
approvals in the United States and other regions in which we operate. In the
United States, the Federal Communications Commission regulates many aspects of
communications devices. Although we have obtained all the necessary Federal
Communications Commission and other required approvals for the products we
currently sell, we may not obtain approvals for future products on a timely
basis, or at all. In addition, regulatory requirements may change or we may not
be able to obtain regulatory approvals from countries other than the United
States in which we may desire to sell products in the future.
WE NEED ADDITIONAL FINANCING DUE TO LIMITED RESOURCES. Our financial
resources are limited, and the amount of funding that is required to develop and
commercialize our products and technologies is highly uncertain. Adequate funds
may not be available when needed or on terms satisfactory to us. Lack of funds
may cause us to delay, reduce and/or abandon certain or all aspects of our
development and commercialization programs. We plan to seek additional financing
12
through the issuance of equity or convertible debt securities. The percentage
ownership of our stockholders will be reduced, stockholders may experience
additional dilution, and such securities may have rights, preferences and
privileges senior to those of our Common and Preferred Stock. There can be no
assurance that additional financing will be available on terms favorable to us
or at all. If adequate funds are not available or are not available on
acceptable terms, we may not be able to fund our 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 our business, results of operations and financial conditions.
ITEM 2. DESCRIPTION OF PROPERTY
We lease approximately 3,800 square feet of office space in, San Diego,
California, at a monthly rent of $4,989. The lease expires on June 30, 2008. Our
facility is covered by an appropriate level of insurance and we believe it to be
suitable for our respective use and adequate for our present needs.
ITEM 3. LEGAL PROCEEDINGS
In June 2005, our landlord filed a suit against us alleging that we
defaulted under the terms and conditions of our lease agreement when we failed
to pay for our facility lease valued at $18,221. On December 19, 2006, we
settled with our landlord by paying $9,308 and the case was dismissed.
In addition, we are 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 our
consolidated financial condition
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On September 11, 2006, our Board of Directors approved an increase in
the authorized shares of Common Stock, to 1,200,000,000 shares from 900,000,000
shares. In March of 2007, our shareholders approved, by written consent, an
amendment of the Articles of Incorporation to increase the authorized shares.
The Amendment to the Articles of Incorporation implementing the increase was
filed with the California Secretary of State on March 31, 2007.
13
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND SMALL
BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES
Our Common Stock is traded on the OTC Bulletin Board" under the trading
symbol "FKLT.OB". The following table sets forth the range of high and low bid
quotation per share for the Common Stock as reported during the years ending
June 30, 2007 and 2006. The bid price reflects inter-dealer prices and does not
include retail mark-up, markdown, or commission.
HIGH LOW
-------------- -----------
JUNE 30, 2006
-------------
First Quarter 0.02 0.01
Second Quarter 0.01 0.00
Third Quarter 0.01 0.00
Fourth Quarter 0.01 0.00
JUNE 30, 2007
-------------
First Quarter 0.01 0.01
Second Quarter 0.01 0.01
Third Quarter 0.02 0.01
Fourth Quarter 0.02 0.01
As of June 30, 2007, we had approximately 838 shareholders of record.
Since many of the shares of our Common Stock are held by brokers and other
institutions on behalf of shareholders, it is impossible to estimate the total
number of beneficial holders represented by these record holders.
DIVIDEND POLICY
We have never declared or paid any dividends on our Common Stock and do
not expect to declare or pay any cash dividends in the foreseeable future.
PENNY STOCK REGULATIONS
Our common stock is subject to the provisions of Section 15(g) and Rule
15g-9 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
commonly referred to as the "penny stock rule." Section 15(g) sets forth certain
requirements for transactions in penny stocks, and Rule 15g-9(d) incorporates
the definition of "penny stock" that is found in Rule 3a51-1 of the Exchange
Act. The SEC generally defines "penny stock" to be any equity security that has
a market price less than $5.00 per share, subject to certain exceptions. As long
as our common stock is deemed to be a penny stock, trading in the shares will be
subject to additional sales practice requirements on broker-dealers who sell
penny stocks to persons other than established customers and accredited
investors.
14
RECENT SALES OF UNREGISTERED SECURITIES
We received $400,000 in advance from an unaffiliated company for a
future Common Stock issuance during the year ended June 30, 2007. On October 18,
2006, we issued 15,000,000 shares of Common Stock for $0.0091 per share, for a
total of $136,364. On April 27, 2007, we issued an additional 29,000,000 shares
of Common Stock for $0.0091 per share, for a total of $263,636. The proceeds of
the transaction were utilized for general working capital purposes. We believe
the issuance of Common Stock was exempt from the registration requirements of
the Securities Act of 1933, as amended, by reason of Section 4(2) thereof.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION.
BUSINESS OVERVIEW
Franklin Wireless Corp. 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.
Our products are marketed through Original Equipment Manufacturers
("OEMs") and distributors, as well as directly to operators and end users. Our
customer base extends from the United States, Caribbean and South American
countries to African countries, and consists of major carriers / operators,
distributors and end users. Our 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 2005, we designed and marketed Global System for Mobile
telecommunications, 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 C-Motech Co. Ltd, a designer and original equipment manufacturer
("OEMs") of our wireless broadband modems and modules in South Korea, 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
15
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 keys 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 following discussion and analysis of our financial condition and
results of operations is based upon our consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States of America. The preparation of these financial statements
requires us to make estimates and judgments that affect the reported amounts on
those financial statements. Note 2 to the consolidated financial statements
(included in this Annual Report on Form 10-KSB) describes the significant
accounting policies and methods used in the preparation of the consolidated
financial statements. On an ongoing basis, we evaluate those estimates
including, but not limited to, those related to our allowance for doubtful
accounts, and intangible assets. We base those estimates on historical
experience and on various other assumptions we believe to be reasonable under
the circumstances, the results of which form the basis for making judgments
about the carrying values of assets and liabilities that are not readily
apparent from other sources. Actual results may differ from these estimates
under different conditions or if our assumptions change.
We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our financial
statements:
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
We recognize 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,
we recognize revenues from product sales upon shipment of the product to the
customers. We do not allow the right of return on product sales but provides a
factory warranty for one year from the shipment, which is covered by our vendor.
16
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 judgments
and assumptions regarding the potential for losses on receivable balances.
Though we consider these balances adequate and proper, changes in economic
conditions in specific markets in which we operate could have a material effect
on reserve balances required.
CASH AND CASH EQUIVALENTS
For purposes of the statements of cash flow, we consider all highly
liquid investments purchased with original maturities of six months or less to
be cash equivalents.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. We provide 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 5 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 AND CERTIFICATIONS
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 state 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", we review for
impairment of long-lived assets and certain identifiable intangibles whenever
events or circumstances indicate that the carrying amount of assets may not be
recoverable. We consider the carrying value of assets may not be recoverable
based upon our review of the following events or changes in circumstances: the
asset's ability to continue to generate income from operations and positive cash
flow in future periods; loss of legal ownership or title to the assets;
significant changes in our strategic business objectives and utilization of the
asset; or significant negative industry or economic trends. An impairment loss
would be recognized when estimated future cash flows expected to result from the
use of the asset is less than its carrying amount.
17
During the year ended June 30, 2007, we wrote off two intangible assets
(GSM/SPRS license and GSM text license) in the amount of $225,000, resulting in
a total loss of $19,167, as these intangible assets were deemed impaired due to
their inability to continue to generate income from operations and positive cash
flow in future periods. We also wrote off fixed assets (computers and office
equipment) in the amount of $11,348, with a total loss of $767 on disposal of
these assets.
WARRANTIES
We do not allow the right of return on product sales but provides a
factory warranty for one year from the shipment, which is covered by our vendor.
These products are shipped directly from our vendor to our customers. As a
result, we do not accrue any warranty expenses.
RESEARCH AND DEVELOPMENT COSTS
We expense research and development costs, primarily made up of
developmental activities relating to our products, to operations.
ADVERTISING AND MARKETING COSTS
We expense the costs of advertising and marketing as incurred. We
incurred $63,112 and $3,421 of advertising and marketing expenses for the years
ended June 30, 2007 and 2006, respectively.
INCOME TAXES
No provision for income taxes for the years ended June 30, 2007 and
2006 is required, except for alternative minimum taxes and minimum state taxes,
since we reported a full valuation allowance during such years.
We account 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 more likely than not that we will not be able
to realize all or a portion of our deferred tax assets.
The significant component of the deferred tax asset (liability) at June
30, 2007 and 2006 was federal net operating loss carry-forwards in the amount of
approximately $2,881,000 and $3,466,000, respectively, based on a federal tax
rate of 34%. We had available approximately of $8,474,000 unused federal net
operating loss carry-forwards at June 30, 2007, that may be applied against
18
future taxable income. 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 June 30, 2007 and 2006, 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 our deferred tax asset or liability.
RECENTLY ISSUED 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. We are in
the process of evaluating the impact, if any, that the adoption of SFAS No. 157
will have on our 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. We
are in the process of evaluating the impact, if any, that the adoption of SFAS
No. 159 will have on our consolidated financial statements.
There are no other accounting standards that are expected to have a
material impact on our consolidated financial statements.
19
RESULT OF OPERATIONS
The following table sets forth, for the years ended June 30, 2007, 2006
and 2005 (fiscal 2007, fiscal 2006, and fiscal 2005), selected consolidated
statements of operations data expressed as a percentage of sales:
2007 2006 2005
----------------- ----------------- -----------------
Net Sales 100.0% 100.0% 100.0%
Cost of goods sold 74.0% 67.6% 68.7%
----------------- ----------------- -----------------
Gross profit 26.0% 32.4% 31.3%
----------------- ----------------- -----------------
Operating expenses:
Selling, general and administrative expenses 13.3% 58.0% 237.7%
Research and development 0.0% 3.6% 8.0%
----------------- ----------------- -----------------
Total operating expenses 13.3% 61.6% 245.7%
----------------- ----------------- -----------------
Income (loss) from operations 12.7% (29.2%) (214.4%)
Other income (expense), net 0.2% 1.6% (1.5%)
----------------- ----------------- -----------------
Net income (loss) before income taxes 12.9% (27.6%) (215.9%)
Provision for income taxes (0.4%) (0.1%) (0.3%)
----------------- ----------------- -----------------
Net income (loss) 12.5% (27.7%) (216.2%)
================= ================= =================
RESULTS OF OPERATIONS
YEAR ENDED JUNE 30, 2007 COMPARED TO YEAR ENDED JUNE 30, 2006
NET SALES - Net sales increased by $9,382,137, or 935.5%, to $10,385,090 during
the year ended June 30, 2007 from $1,002,953 during the corresponding period of
2006. The primary increase was due to sales of our CDMA USB modem products to a
new carrier customer in North America, in the amount of $4,279,050 during the
2007 fiscal year, as well as a strong increase in demand for our CDMA EV-DO data
products in South American countries. Our sales of CDMA EV-DO data products in
South American countries were $5,789,674 during the 2007 fiscal year, compared
to $753,130 during the 2006 fiscal year, an increase of $5,036,544, or 668.8%.
GROSS PROFIT - Gross profit margin increased by $2,370,562, or 729.9%, to
$2,695,360 during the year ended June 30, 2007 from $324,798 during the
corresponding period of 2006. Gross profit in terms of net sales percentage as
the percentage of gross profit was 26.0% during the year ended June 30, 2007,
compared to 32.4% during the corresponding period of 2006. The gross profit
20
decrease in terms of net sales percentage was due to one-time commission revenue
recognized as a non-refundable brokerage fee in the amount of $57,280 and sales
of products which were provided by our vendors at no cost as part of initial
seed stock incentive in the amount of $48,860 during the 2006 fiscal year.
SELLING, GENERAL, AND ADMINISTRATIVE - Selling, general, and administrative
expenses increased by $800,507, or 137.6%, to $1,382,426 during the year ended
June 30, 2007 from $581,919 during the corresponding period of 2006. The
increase was primarily a result of 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. During the 2007 fiscal
year, we had an increase in sales commission expense of $239,410, an increase in
marketing expense of $54,850, an increase in travel expense of $71,425, and an
increase in payroll expense of $291,475, compared to the 2006 fiscal year.
RESEARCH AND DEVELOPMENT - Research and development expenses decreased by
$36,300, or 100.0%, to nil during the year ended June 30, 2007 from $36,300
during the corresponding period of 2006. We incurred research and development
expense for design GSM products during the 2006 fiscal year. During the 2007
fiscal year, we did not incur research and development expense, as we have
contracted out our research and development to C-Motech Co. Ltd, a designer and
original equipment manufacturer ("OEMs") of our wireless broadband modems and
modules in South Korea.
OTHER INCOME (EXPENSE), NET - The net of other income (expense) increased by
$5,723 or 34.41%, to income of $22,354 during the year ended June 30, 2007 from
income of $16,631 during the corresponding period of 2006. The increase was due
to increase in interest income of $38,515, offset by a loss of $19,934 from
write-off of fixed assets and intangible assets during the 2007 fiscal year.
YEAR ENDED JUNE 30, 2006 COMPARED TO YEAR ENDED JUNE 30, 2005
NET SALES - Net sales increased by $700,884, or 232.0%, to $1,002,953 during the
year ended June 30, 2006, from $302,069 during the corresponding period of 2005.
The primary increase in sales was an increase in sales on the CDMA module and
modem products in South American countries. Net sales to customers in South
American countries totaled $731,265, representing 72% of net sales.
GROSS PROFIT - Gross profit increased in terms of net sales percentage, as the
percentage of gross profit was 32.4% during the year ended June 30, 2006,
compared to 31.3% during the corresponding period of 2005. The gross profit
percentage increase can be attributed to an increase in sales of the CDMA module
and modem products, which have higher gross profit margin compared to other
products.
SELLING, GENERAL, AND ADMINISTRATIVE - Selling, general, and administrative
expenses decreased by $136,240, or 19.0%, to $581,919 for the year ended June
30, 2006, from $718,159 during the year ended June 30, 2005. The decrease can be
attributed to decreased engineering expense and professional service charges.
21
RESEARCH AND DEVELOPMENT - Research and development expenses increased by
$12,100, or 50.0%, to $36,300 during the year ended June 30, 2006, from $24,200
during the corresponding period of 2005. The increase can be attributed to the
design of CDMA modules and modems.
OTHER INCOME (EXPENSE), NET - The net of other income (expense) increased by
$21,145 or 468.4%, to net income of $16,631 during the year ended June 30, 2006,
from net expense of $4,514 during the corresponding period of 2005. This
primarily can be attributed to a settlement of an account payable with a
customer in an amount less than what was accrued during the 2006 fiscal year.
There were no losses on impairment of fixed assets and intangible assets during
the 2005 and 2006 fiscal years.
LIQUIDITY AND CAPITAL RESOURCES
Our principal liquidity requirements are for working capital and
capital expenditures. We fund our liquidity requirements with cash on hand, cash
flow from operations, and issuance of equity securities.
OPERATING ACTIVITIES - Net cash provided by operating activities for fiscal 2007
was $1,746,391, and net cash used in operating activities for fiscal 2006 and
fiscal 2005 was $205,239 and $413,516 respectively. The increase in cash
provided by operating activities for fiscal 2007 compared to fiscal 2006
primarily reflects higher net income and increase in advance cash collections
from customers for the year versus the prior year. The decrease in cash used in
operating activities for fiscal 2006 compared to fiscal 2005 primarily reflects
a lower net loss.
INVESTING ACTIVITIES - Net cash used in investing activities for fiscal 2007,
fiscal 2006, and fiscal 2005 was $137,185, $60,916, and $4,000, respectively,
consisting of capital expenditures. The increase in capital expenditure in
fiscal 2007 compared to fiscal 2006 was due to purchase of certifications
required to sell CDMA data products in North and South American countries.
FINANCING ACTIVITIES - Net cash provided by financing activities in fiscal 2007
was $300,000, consisting of proceeds of $400,000 from the issuance of Common
Stock, offset by repayment of a loan in the amount of $100,000. Net cash
provided by financing activities in fiscal 2006 was $795,000, consisting of
proceeds of $905,000 from the issuance of Common Stock, offset by repayment of
borrowings to shareholders and a line of credit in the amount of $110,000. Net
cash provided by financing activities in fiscal 2005 was $248,010, consisting of
proceeds of $218,010 from the issuance of Common Stock and additional borrowings
from shareholders of $30,000.
FUTURE CAPITAL REQUIREMENTS
We had cash on hand of $2,477,593 at June 30, 2007. We expect working
capital expenditures for fiscal 2008, excluding non-cash acquisitions, to range
between $10,000,000 and $15,000,000 primarily to fund purchases of inventories,
payment of debt, and purchases of fixed assets for corporate office.
22
We believe we will be able to fund our future cash requirements for
operations from cash on hand, operating cash flows and issuance of equity
securities. We believe these sources of funds will be sufficient to continue our
operations and planned capital expenditures. However, our ability to satisfy
such obligations depends upon our future performance, which in turn is subject
to general economic conditions and regional risks, and to financial, business
and other factors affecting our operations, including factors beyond our
control. See Item 1, "Risk Related to Our Business" included in this report.
If we are unable to generate sufficient cash flow from operations to
meet our obligations and commitments, we will be required to refinance or
restructure our indebtedness or raise additional debt or equity capital.
Additionally, we may be required to sell material assets or operations or delay
or forego expansion opportunities. We might not be able to affect these
alternative strategies on satisfactory terms, if at all.
CONTRACTUAL OBLIGATIONS AND OTHER COMMITMENTS
Our principal future obligations and commitments as of June 30, 2008, include
the following:
LEASE JUNE 30, 2008
Administrative office facility 62,137
Corporate housing facility 12,753
---------------
TOTAL $ 74,890
===============
LEASES
We lease our 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 of common area costs. Rent expense
related to the operating lease was $59,420 and $24,679 for the years
ended June 30, 2007 and 2006, respectively.
We lease a corporate housing facility for our vendors under a
non-cancelable operating lease that expires on March 31, 2008. Rent
expense related to the operating lease was $2,770 and $0 for the years
ended June 30, 2007 and 2006, respectively.
We lease one automobile under an operating lease that expires on July 22,
2009. The related lease expense was $6,795 and $6,564 for the years ended
June 30, 2007 and 2006, respectively.
LITIGATION
In June 2005, our landlord filed a suit against us alleging that we
defaulted under the terms and conditions of our lease agreement when we
failed to pay for our facility lease valued at $18,221. On December 19,
2006, we settled with our landlord by paying $9,308 and the case was
dismissed.
23
In addition, we are 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
our consolidated financial condition
CO-DEVELOPMENT, CO-OWNERSHIP AND SUPPLY AGREEMENT
In January 2005, we 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
our CDMA wireless data products in North, Central and South American
countries. Furthermore, the Agreement includes that we are 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.
ITEM 7. FINANCIAL STATEMENTS
The financial statements and the supplementary financial information
required by this Item and included in this report are listed in the Index to
Consolidated Financial Statements beginning on page F-1.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 8A. CONTROLS AND PROCEDURES
We did not carry out a full evaluation of the effectiveness of the
design and operation of our disclosure controls and procedures at the end of the
period covered by this Form 10-KSB pursuant to Rule 13a-15 of the Exchange Act.
However, our Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO")
concluded that our disclosure controls and procedures related to internal
control over financial reporting and the recording of certain equity
transactions were effective as described below:
24
1. ADEQUATE FINANCIAL STATEMENT PREPARATION AND REVIEW PROCEDURES
- We did have adequate procedures and controls to ensure that accurate
financial statements can be prepared and reviewed on a timely basis,
including sufficient
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. ADEQUATE SEGREGATION OF DUTIES - We did have adequate procedures and
controls in place to ensure proper segregation of duties within the
accounting department.
3. ADEQUATE TECHNICAL ACCOUNTING EXPERTISE - We have the necessary depth
of personnel with adequate technical accounting expertise to ensure the
preparation of interim and annual financial statements in accordance
with GAAP.
LIMITATIONS ON THE EFFECTIVENESS OF CONTROLS
Our management, including our CEO and CFO, does not expect that our
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 we 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.
CEO AND CFO CERTIFICATIONS
Appearing immediately following the Signatures section of this report
there are Certifications of the CEO and the CFO. The Certifications are required
in accordance with Section 302 of the Sarbanes-Oxley Act of 2002 (the Section
302 Certifications).
25
ITEM 8B. OTHER INFORMATION
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below are the names, ages, titles and present and past positions of
our executive officers.
NAME AGE POSITION
------------------------ ---------- -------------------------------------------------------
OC Kim 44 President, Director, and Acting Chief Financial Officer
Gary Nelson 66 Chairman of Board and Director
David Kim 54 Director
Jae mMan Lee 47 Director
OC Kim has been a director since September 2003 and is currently
serving as our President and Acting Chief Financial Officer. Prior to joining
us, Mr. Kim was the Chief Operating Officer of Axesstel Inc., a pioneering
developer of CDMA Wireless Local Loop Products. Before joining Axesstel, he was
the president of the US Sales office for Kolon Data Communications Co., Ltd.,
one of Korea's most prominent technology conglomerates. He began his career at
Lucky Goldstar (LG) Electronics. He has more than 18 years of experience in
sales, marketing and operations management in the telecommunications and
information systems industries. He earned a B.A. from Sogang University in
Korea.
Gary Nelson has been a director since April 2001. He is also the
co-founder and current President of Churchill Mortgage Corporation, an income
property mortgage banking firm based in Los Angeles, California, which is the
loan correspondent for the general and real estate separate accounts of major
life insurance companies and their pension fund sources. The Churchill portfolio
consists of approximately $4.5 billion in loans. In addition, Mr. Nelson is the
Chairman of the Board of Directors for Churchill Mortgage of Arizona, Inc., and
Churchill Real Estate, Inc. Prior experiences include computer marketing to the
aerospace industry with Control Data Corporation and design engineering on the
Apollo Project with North American Aviation. He holds a B.S. in Mechanical
Engineering from Kansas State University and an MBA from the University of
Southern California.
David Kim has been a director since September 2003. He currently serves
as Chairman of Westech Korea, a Korean firm.
26
Jae Mman Lee has been a director since September 2006. He currently
serves as Chief Executive Officer of C-Motech Co. Ltd, a Korea-based CDMA EV-DO
data products manufacturing firm.
The Board of Directors has no committees, and has not adopted a Code of
Ethics. Directors do not receive compensation for serving on the Board of
Directors.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires officers
and directors, and persons who own more than ten percent of our equity
securities, to file reports of ownership and changes in ownership with the
Securities and Exchange Commission (the "Commission"). Officers, directors and
greater than regulations to furnish us with copies of all forms they file
pursuant to Section 16(a). Based solely on our review of the copies of such
forms it received and written representations from reporting persons required to
file reports under Section 16(a), to our knowledge all of the Section 16(a)
filing requirements applicable to such persons with respect to fiscal 2007 were
complied with.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets all compensation paid or accrued by us during
the years ended June 30, 2006,and 2007 to our Chief Executive Officer, President
and Chief Technology Officer, and Chief Operating Officer. (The "Named Executive
Officers")
ANNUAL COMPENSATION
NO. OF
SECURITIES
NAME AND ALL OTHER UNDERLYING
PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION OPTIONS GRANTED
--------------------------- -------- ---------------- ----------- -------------- -----------------
OC Kim, 2005 $100,000(1) None None None
President 2006 $100,000(2) None None None
2007 $110,000 $20,500 None None
Nick Lim, 2007 $50,000(3) $18,500 None None
Senior Vice Present
(1) $50,500 of this amount was deferred in 2005
(2) $13,750 of this amount was deferred in 2006
(3) Nick Lim has been a Senior Vice President of Business Development and
Technology, with us since January 2007.
We had no outstanding employee stock options as of June 30, 2007 and 2006.
27
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The following table sets forth certain information regarding the
beneficial ownership of our Common Stock as of June 30, 2007 by each director
and executive officer of the Company, each person known to us to be the
beneficial owner of more than 5% of the outstanding Common Stock, and all
directors and executive officers of the Company as a group. Except as otherwise
indicated below, each person has sole voting and investment power with respect
to the shares owned, subject to applicable community property laws.
SHARES BENEFICIALLY OWNED
--------------------------------------------------------------------------------------------
NAME AND ADDRESS NUMBER PERCENT
------------------------------------- ------------------- -----------------
OC Kim 104,943,534 11.33%
9823 Pacific Heights Blvd. Suite J,
San Diego, CA 92121
Gary Nelson 23,917,500 2.58%
9823 Pacific Heights Blvd. Suite J,
San Diego, CA 92121
Nick Kim 35,174,300 3.80%
9823 Pacific Heights Blvd. Suite J,
San Diego, CA 92121
iPacific Partners 54,968,889 5.94%
9823 Pacific Heights Blvd. Suite J,
San Diego, CA 92121
David Kim 88,805,746 (1) 9.59%
9823 Pacific Heights Blvd. Suite J,
San Diego, CA 92121
Jae Mman Lee 110,000,000 (2) 11.88%
9823 Pacific Heights Blvd. Suite J,
San Diego, CA 92121
All directors and executive officers of 362,841,080 39.18%
the Company as a group (5 persons)
(1) Consists of shares owned by Westech Korea, of which David Kim is an officer.
(2) Consists of shares owned by C-Motech Co. Ltd., of which Jae mMan Lee is an
officer.
28
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
We purchased CDMA wireless data products in the amount of $7,565,040,
or 99.9% of total purchases, from C-Motech Co. Ltd., during the year ended June
30, 2007 and had related accounts payable of $3,875 as of June 30, 2007.
C-Motech owns 110,000,000 shares of our Common Stock, and Jae Mman Lee,
Chief Executive Officer of C-Motech Co. Ltd., has served as a director of the
Company since. September 2006.
ITEM 13. EXHIBITS
No. Description
--- -----------
2.1 Amended and Restated Agreement and Plan of Merger, dated July 31, 2003,
between Accetio, Inc. and Franklin Telecommunications Corp. (1)
3.1 Restated Articles of Incorporation of Franklin Wireless Corp. (2)
3.2 Bylaws of Franklin Wireless Corp. (3)
10.1 Co-Development, Co-Ownership and Supply Agreement, dated January 5,
2005 between the Company and C-Motech Co., Ltd. (2)
10.2 Lease, dated March 16, 2005, between the Company and MP Sorrento Mesa,
LLC (2)
31.1 Certification of Chief Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer and Chief Financial Officer
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
-----------------
(1) Incorporated by reference from Report on Form 8-K, filed on September 26,
2003
(2) Incorporated by reference from Annual Report on Form 10-KSB for the year
ended September 30, 2006, filed on May 23, 2006
(3) Incorporated by reference from Amendment No. 2 to Registration Statement on
Form S-3, filed on July 28, 2000
29
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The following table shows the fees paid or accrued for the audit and
other services provided by Choi, Kim & Park, LLP for fiscal 2007 and 2006.
FY 2007 FY 2006
---------------- ----------------
Audit Fees $ 38,000 $ 25,000
Audit-Related Fees - -
Tax Fees - -
All Other Fees - -
---------------- ----------------
Total Fees $ 38,000 $ 25,000
================ ================
The fees set forth on the foregoing table were paid during fiscal 2007,
but relate to the audits of the fiscal years set forth. Audit services of Choi,
Kim & Park, LLP for fiscal 2007 and 2006 consisted of the examination of our
consolidated financial statements. All of the services described above were
approved in advance by the Board of Directors.
30
SIGNATURES
In accordance with Section 13 of 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Franklin Wireless Corp.
By: /s/ OC Kim
-----------------------------
OC Kim, President
Dated: September 19, 2007
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
(1) Principal Executive, Financial and Accounting Officer
/s/ OC KIM President, Acting Chief Financial Officer
-------------------- and a Director September 19, 2007
OC Kim
(3) Directors
/s/ GARY NELSON Chairman of the Board of Directors September 19, 2007
--------------------
Gary Nelson
/s/ DAVID KIM Director September 19, 2007
--------------------
David Kim
/s/ JAE MAN LEE Director September 19, 2007
--------------------
Jae Man Lee
31
FRANKLIN WIRELESS CORP.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE NO.
--------
Index to Consolidated Financial Statements ............................................... F-1
Report of Independent Registered Public Accounting Firm .................................. F-2
Consolidated Balance Sheets at June 30, 2007 and June 30, 2006 ........................... F-3
Consolidated Statements of Operations for the years ended June 30, 2007, 2006, and 2005 F-4
Consolidated Statements of Stockholders' Equity (Deficit) for the years ended
June 30, 2007, 2006, and 2005............................................................. F-5
Consolidated Statements of Cash Flows for the years ended June 30, 2007, 2006, and 2005 F-6
Notes to Consolidated Financial Statements ............................................... F-7
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Franklin Wireless Corp.
San Diego, California
We have audited the accompanying consolidated balance sheets of Franklin
Wireless Corp. and subsidiary as of June 30, 2007 and 2006 and the related
consolidated statements of operations, changes in stockholders' equity
(deficit), and cash flows for each of the three years in the period ended June
30, 2007. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audit included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purposes of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provided a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Franklin Wireless Corp. and subsidiary as of June 30, 2007 and 2006, and the
results of their operations and their cash flows for each of the three years in
the period ended June 30, 2007 in conformity with accounting principles
generally accepted in the United States of America.
Choi, Kim & Park, LLP
Los Angeles, California
September 19, 2007
F-2
FRANKLIN WIRELESS CORP.
CONSOLIDATED BALANCE SHEETS
FISCAL YEARS ENDED JUNE 30,
----------------------------
2007 2006
----------- -----------
ASSETS
Current Assets:
Cash and cash equivalents $ 2,477,593 $ 568,387
Accounts receivable 44,915 1,750
Inventories 10,830 --
Prepaid expenses 6,649 --
----------- -----------
Total current assets 2,539,987 570,137
Property and equipment, net 26,218 12,715
Intangible assets, net 130,264 104,195
Other assets 5,161 4,452
----------- -----------
TOTAL ASSETS $ 2,701,630 $ 691,499
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Accounts payable $ 68,064 $ 586
Advanced payment from customers 354,500 --
Accrued liabilities 179,025 190,969
Note payable to a stockholder 434,000 540,000
----------- -----------
Total current liabilities 1,035,589 731,555
Stockholders' Equity (Deficit):
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 and 882,040,050 for 2007 and 2006, respectively,
and no Preferred Stock issued for 2007 and 2006 -- --
Additional paid-in capital 5,029,393 4,629,393
Stock subscription receivable (11,395) (17,395)
Accumulated deficit (3,351,957) (4,652,054)
----------- -----------
Total stockholders' equity (deficit) 1,666,041 (40,056)
----------- -----------
Total liabilities and stockholders' equity (deficit) $ 2,701,630 $ 691,499
=========== ===========
See accompanying notes to consolidated financial statements.
F-3
FRANKLIN WIRELESS CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
---------------------------------------------------
FISCAL YEARS ENDED JUNE 30,
---------------------------------------------------
2007 2006 2005
------------- ------------- -------------
Net sales $ 10,385,090 $ 1,002,953 $ 302,069
Cost of goods sold 7,689,730 678,155 207,638
------------- ------------- -------------
Gross profit 2,695,360 324,798 94,431
------------- ------------- -------------
Operating expenses:
Research and development -- 36,300 24,200
Selling, general, and administrative 1,382,426 581,919 718,159
------------- ------------- -------------
Total operating expenses 1,382,426 618,219 742,359
------------- ------------- -------------
Income (Loss) from operations 1,312,934 (293,421) (647,928)
Other income (expense):
Interest expense -- (559) --
Interest income 38,515 2,359 571
Loss on disposal of property and equipment (767) -- --
Loss on write-off of intangible assets (19,167) -- --
Other income (expenses), net 3,772 14,831 (5,085)
------------- ------------- -------------
Total other income (expense), net 22,353 16,631 (4,514)
------------- ------------- -------------
Net income (loss) before income taxes 1,335,287 (276,790) (652,442)
Provision for income taxes 35,190 800 800
------------- ------------- -------------
Net income (loss) $ 1,300,097 $ (277,590) $ (653,242)
============= ============= =============
Basic earnings (loss) per share $ 0.00 $ (0.00) $ (0.00)
Diluted earnings (loss) per share $ 0.00 $ (0.00) $ (0.00)
Weighted average common shares outstanding - basic 897,724,982 817,976,717 778,040,050
Weighted average common shares outstanding - diluted 897,724,982 817,976,717 778,040,050
See accompanying notes to consolidated financial statements.
F-4
FRANKLIN WIRELESS CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
COMMON STOCKS
-------------------------- TOTAL
ADDITIONAL STOCKHOLDERS'
PAID-IN ACCUMULATED STOCK SUB EQUITY
SHARES AMOUNT CAPITAL DEFICIT -SCRIPTION (DEFICIT)
----------- ----------- ----------- ----------- ----------- -----------
Balance - June 30, 2004 773,040,050 $ -- $ 3,566,383 $(3,721,222) $ (17,395) $ (172,234)
Issuance of common stock 20,000,000 -- 218,010 -- -- 218,010
Net loss -- -- -- (653,242) -- (653,242)
----------- ----------- ----------- ----------- ----------- -----------
Balance - June 30, 2005 793,040,050 -- 3,784,393 (4,374,464) (17,395) (607,466)
Issuance of common stock,
net of common stock 89,000,000 -- 845,000 -- -- 845,000
repurchase
Net loss -- -- -- (277,590) -- (277,590)
----------- ----------- ----------- ----------- ----------- -----------
Balance - June 30, 2006 882,040,050 $ -- $ 4,629,393 $(4,652,054) $ (17,395) $ (40,056)
Issuance of common stock 44,000,000 -- 400,000 -- -- 400,000
Payment of Stock subscription
receivables -- -- -- -- 6,000 6,000
Net income -- -- -- 1,300,097 -- 1,300,097
----------- ----------- ----------- ----------- ----------- -----------
Balance - June 30, 2007 926,040,050 $ -- $ 5,029,393 $(3,351,957) $ (11,395) $ 1,666,041
=========== =========== =========== =========== =========== ===========
See accompanying notes to consolidated financial statements.
F-5
FRANKLIN WIRELESS CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
---------------------------------------------
FISCAL YEARS ENDED JUNE 30,
---------------------------------------------
2007 2006 2005
----------- ----------- -----------
CASH FLOWS FROM OPERATIONS ACTIVITIES:
Net income (loss) $ 1,300,097 $ (277,590) $ (653,242)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Loss on disposal of property and equipment 767 -- --
Loss on impairment of intangible assets 19,167 -- --
Depreciation 7,135 7,622 6,199
Amortization of intangible assets 70,544 49,222 45,000
Increase (decrease) in cash due to change in:
Accounts receivable (43,165) (1,750) 100,000
Inventory (10,830) -- --
Prepaid expense (6,649) -- --
Other assets (709) (2,346) 3,211
Accounts payable 67,478 (17,340) (28,709)
Accrued liabilities (11,944) 40,821 110,147
Advanced payment from customers 354,500 -- --
Other liabilities -- (3,878) 3,878
----------- ----------- -----------
Net cash provided by (used in) operating activities 1,746,391 (205,239) (413,516)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (21,405) (5,416) (4,000)
Purchases of intangible assets (115,780) (55,500) --
----------- ----------- -----------
Net cash used in investing activities (137,185) (60,916) (4,000)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings (Payments) from (to) stockholders -- (10,000) 30,000
Cash payment for common stock repurchase -- (100,000) --
Payment of note payable (100,000) -- --
Proceeds from issuance of common stock 400,000 905,000 218,010
----------- ----------- -----------
Net cash provided by financing activities 300,000 795,000 248,010
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents 1,909,206 528,845 (169,506)
Cash and cash equivalents, beginning of year 568,387 39,542 209,048
----------- ----------- -----------
Cash and cash equivalents, end of year $ 2,477,593 $ 568,387 $ 39,542
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ -- $ 559 $ --
Income taxes $ 800 $ 800 $ 800
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITY:
Common stock conversion from note payable $ -- $ (40,000) $ --
See accompanying notes to consolidated financial statements.
F-6
FRANKLIN WIRELESS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2007 AND 2006
NOTE 1 - NATURE OF BUSINESS
Franklin Wireless Corp. ("We") designs and sells broadband high speed
wireless data communication products such as 3G wireless modules and modems. We
focus on wireless broadband USB modems, which provide a flexible way for
wireless subscribers to connect to the wireless broadband network with any
laptop, tablet PC or desktop USB port without a PC card slot. Our 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.
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.
Our products are marketed through Original Equipment Manufacturers
("OEMs") and distributors, as well as directly to operators and end users. Our
customer base extends from the United States, Caribbean, and South American
Countries to African countries and they consist of major carriers / operators,
distributors and end users. Our 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.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts
of Franklin and our wholly owned subsidiary, ARG. All inter-company balances and
transactions have been eliminated since the 2004 fiscal year. Our subsidiary,
ARG, has not been in operation since August 2003.
SEGMENT REPORTING
We have two reportable segments as defined by SFAS No. 131, Disclosure
About Segments of an Enterprise and Related Information. Our subsidiary located
in South Korea, ARG, was not active during the 2007 and 2006 fiscal years.
Furthermore, all of our subsidiary's assets were written off during the 2004
fiscal year as the operation was shut-down during the period. As a result, our
consolidated financial statements only include $550,000 of debt from ARG
financial statements. All of our investments in subsidiary and inter-company
balances have been eliminated.
F-7
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
We recognize 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,
we recognize revenues from product sales upon shipment of the product to the
customers. We do not allow the right of return on product sales but provides a
factory warranty for one year from the shipment, which is covered by our vendor.
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 judgments
and assumptions regarding the potential for losses on receivable balances.
Though we consider these balances adequate and proper, changes in economic
conditions in specific markets in which we operate could have a material effect
on reserve balances required.
CASH AND CASH EQUIVALENTS
For purposes of the statements of cash flow, we consider all highly
liquid investments purchased with original maturities of six months or less to
be cash equivalents.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. We provide 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 5 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.
F-8
INTANGIBLE ASSETS - LICENSES AND CERTIFICATIONS
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 state 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", we review for
impairment of long-lived assets and certain identifiable intangibles whenever
events or circumstances indicate that the carrying amount of assets may not be
recoverable. We consider the carrying value of assets may not be recoverable
based upon our review of the following events or changes in circumstances: the
asset's ability to continue to generate income from operations and positive cash
flow in future periods; loss of legal ownership or title to the assets;
significant changes in our strategic business objectives and utilization of the
asset; or significant negative industry or economic trends. An impairment loss
would be recognized when estimated future cash flows expected to result from the
use of the asset is less than its carrying amount.
During the year ended June 30, 2007, we wrote off two intangible assets
(GSM/SPRS license and GSM text license) in the amount of $225,000, resulting in
a total loss of $19,167, as these intangible assets were deemed impaired due to
their inability to continue to generate income from operations and positive cash
flow in future periods. We also wrote off fixed assets (computers and office
equipment) in the amount of $11,348, with a total loss of $767 on disposal of
these assets.
WARRANTIES
We do not allow the right of return on product sales but provides a
factory warranty for one year from the shipment, which is covered by our vendor.
These products are shipped directly from our vendor to our customers. As a
result, we do not accrue any warranty expenses.
RESEARCH AND DEVELOPMENT COSTS
We expense research and development costs, primarily made up of
developmental activities relating to our products, to operations.
F-9
ADVERTISING AND MARKETING COSTS
We expense the costs of advertising and marketing as incurred. We
incurred $63,112 and $3,421 of advertising and marketing expenses during the
years ended June 30, 2007 and 2006, respectively.
INCOME TAXES
No provision for income taxes for the years ended June 30, 2007 and
2006 is required, except for alternative minimum taxes and minimum state taxes,
since we reported a full valuation allowance during such years.
We account 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 more likely than not that we will not be able
to realize all or a portion of our deferred tax assets.
The significant component of the deferred tax asset (liability) at June
30, 2007 and 2006 was federal net operating loss carry-forwards in the amount of
approximately $2,881,000 and $3,466,000, respectively, based on a federal tax
rate of 34%. We had approximately $8,474,000 unused federal net
operating loss carry-forwards at June 30, 2007, that may be applied against
future taxable income. 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 June 30, 2007 and 2006, 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 our deferred tax asset or liability.
EARNINGS PER SHARE
We report earnings per share in accordance with Statement of Financial
Accounting Standards No. 128, "Earnings Per Share". Basic earning per share is
computed using the weighted average number of shares outstanding during the
fiscal year. Diluted earnings per share include the potentially dilutive effect
of outstanding common stock options and warrants which are convertible to common
shares.
CONCENTRATIONS OF CREDIT RISK
We extend credit to our customers and perform ongoing credit
evaluations of such customers. We evaluate our accounts receivable on a regular
basis for collectibility and provides for an allowance for potential credit
losses as deemed necessary.
F-10
Substantially all of our revenues are derived from sales of wireless
data products. Any significant decline in market acceptance of our products or
in the financial condition of our existing customers could impair our ability to
operate effectively.
A significant portion of our revenue is derived from a small number of
customers. Two customers accounted for 41.2% and 38.6% of revenues during the
year ended June 30, 2007, and had related account receivables in the amount of
$12,025 and $1,800, or 26.8% and 4.0% of total account receivables at June 30,
2007, respectively. Four customers accounted for 36.6%, 11.3%, 23.6% and 10.5%
of revenues during the year ended June 30, 2006.
We purchase our 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 our
customers could be delayed, or our customers could consequently elect to cancel
the underlying product purchase order, which would negatively impact our
revenue. We purchased approximately $7,565,040 and $678,155 during the year
ended June 30, 2007 and 2006 respectively and had related accounts payable of
$3,875 and $560 at June 30, 2007 and 2006, respectively. However, there were no
significant delays, capacity constraints, or quality control problems that
negatively impacted the Company's revenue during those fiscal years.
We maintain our 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, we do not anticipate any
loss on excess deposits.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
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
evaluating the impact, if any, that FIN 48 will have on its financial
statements.
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. We are in
the process of evaluating the impact, if any, that the adoption of SFAS No. 157
will have on our 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
F-11
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. We
are in the process of evaluating the impact, if any, that the adoption of SFAS
No. 159 will have on our consolidated financial statements.
There are no other accounting standards that are expected to have a
material impact on our consolidated financial statements.
NOTE 3 - ACCOUNTS RECEIVABLE
Accounts receivable at June 30, 2007 and 2006 consisted of receivables
from customers in the amounts of $44,915 and $1,750, respectively.
NOTE 4 - PREPAID EXPENSES
Prepaid expenses at June 30 consisted of the following:
2007 2006
-------------- ---------------
Prepaid expenses $ 6,649 $ -
-------------- ---------------
TOTAL $ 6,649 $ -
============== ===============
NOTE 5 - PROPERTY AND EQUIPMENT
Property and equipment at June 30 consisted of the following:
2007 2006
-------------- ---------------
Computers and software $ 38,084 $ 30,640
Furniture and fixtures 11,325 8,713
-------------- ---------------
49,409 39,353
Less accumulated depreciation (23,191) (26,638)
-------------- ---------------
TOTAL $ 26,218 $ 12,715
============== ===============
F-12
NOTE 6 - INTANGIBLE ASSETS
We purchased licenses to design and market GSM phones and CDG test
certifications to launch and market new CDMA wireless data communication
products. Below are the details for the certifications and licenses.
2007 2006
-------------- ---------------
GSM software license $ - $ 200,000
GSM text input methods license - 25,000
Certifications 171,280 55,500
-------------- ---------------
171,280 280,500
Less accumulated amortization (41,016) (176,305)
-------------- ---------------
TOTAL $ 130,264 $ 104,195
============== ===============
GSM software license was contracted with a supplier for the Company to
design GSM phone and module and was paid in September of 2002. This software
license was written off with a loss of $16,667 on impairment for the year ended
June 30, 2007.
GSM text input method license was purchased in October of 2002 and has
an approximate life of 5 years or the life of the text input license. This text
input method license was written off with a loss of $2,500 on impairment for the
year ended June 30, 2007.
Certifications in the total amount of $115,780 were purchased for the
year ended June 30, 2007 and have life of the lesser of 3 years or the life of
the CDG test. 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. The estimated life of CDG test
certifications are three years based on the life of the CDMA wireless data
product.
NOTE 7 - OTHER ASSETS
Security deposits at June 30 consisted of the following:
2007 2006
---------- ----------
Lease deposit, corporate housing 709 --
Lease deposit, administrative office 4,170 4,170
Utility deposit 282 282
---------- ----------
TOTAL $ 5,161 $ 4,452
========== ==========
F-13
NOTE 8 - NOTES PAYABLE TO STOCKHOLDERS
Notes payable as of June 30, 2007 and 2006 consisted of the following:
2007 2006
--------- ---------
Non-interest bearing note $ 434,000 $ 540,000
--------- ---------
Total 434,000 540,000
Less current portion (434,000) (540,000)
--------- ---------
TOTAL $ -- $ --
========= =========
On August 20, 2002, our wholly owned subsidiary, ARG issued a
promissory note to our stockholder in the amount of $550,000 including 10%
interest due on March 20, 2004. We and the stockholder agreed to change the
promissory note to a convertible promissory note in the amounts of $550,000
including 10% interest during the year ended June 30, 2004. We paid $10,000 for
the year ended June 30, 2006.
For the year ended June 30, 2007, this note of $540,000 was not
converted to our Common Stock, but we paid off $100,000 during the year, and an
additional $6,000 was offset by the stock subscription receivable from our
stockholder. The total liability from discontinued operations is $434,000 at
June 30, 2007.
In accordance with U.S. generally accepted accounting principles, all
non-interest bearing notes must be discounted using our average borrowing rate.
The balance was deemed immaterial and did not record the discounted amount as of
June 30, 2007.
NOTE 9 - ACCRUED LIABILITIES
Accrued liabilities at June 30 consisted of the following:
2007 2006
-------- --------
Salaries payable $ 94,418 $131,750
Accrued professional fees payable 50,217 52,840
Income tax payable 34,390 --
Other accrued liabilities -- 6,379
-------- --------
TOTAL $179,025 $190,969
======== ========
F-14
NOTE 10 - COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
We lease our 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 of common area costs. Rent expense
related to the operating lease was $59,420, $24,679, and $37,103 for the years
ended June 30, 2007, 2006, and 2005, respectively.
We lease a corporate housing facility under a non-cancelable operating
lease that expires on March 31, 2008 for our vendors. Rent expense related to
the operating lease was $2,770 and $0 for the years ended June 30, 2007 and
2006, respectively.
We lease one automobile under an operating lease that expires on July
22, 2009. Lease expense was $6,795, $6,564, and $6,780 for the years ended June
30, 2007, 2006, and 2005, respectively.
Future minimum lease payments under operating leases as of June 30,
2008 are as follows:
LEASE JUNE 30, 2008
Administrative office facility $ 62,137
Corporate housing facility 12,753
-----------
TOTAL $ 74,890
===========
LITIGATION
During June 2005, our landlord filed a suit against us alleging that
we defaulted under the terms and conditions of our lease agreement when we
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. We 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, we are 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 our
consolidated financial condition
CO-DEVELOPMENT, CO-OWNERSHIP AND SUPPLY AGREEMENT
In January 2005, we 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 our CDMA
wireless data products in North, Central and South American countries.
Furthermore, the Agreement includes that we are 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
F-15
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.
OFFICER EMPLOYMENT AGREEMENT
On September 8, 2006, we entered into a renewable two-year employment
agreement with our president. The annual salary for the officer is $150,000.
NOTE 11 - STOCKHOLDERS' EQUITY
COMMON STOCK
We authorized 1,200,000,000 shares of Common Stock and 10,000,000
shares of Preferred Stock of which 926,040,050 and 882,040,050 shares of Common
Stock were outstanding as of June 30, 2007 and 2006, respectively. No Preferred
Stock was issued or outstanding as of June 30, 2007 and 2006. No dividends have
been declared or paid during fiscal years 2007 and 2006.
STOCK ISSUANCES & REPURCHASES
During the years ended June 30, 2007, 2006 and 2005, we completed the
following common stock transactions:
o September 2004 - One of our officers returned his shares according to
the milestone contract with us, and we repurchased 34,174,300 shares at
his original investment, $10,000. A private investor purchased
34,174,300 shares for $118,010 from us. $118,010 was recorded as an
increase of additional paid in capital.
o April 2005 - We issued 20,000,000 shares to our CEO at $0.005 per
share, for gross proceeds of $100,000. The issuance price approximated
market price at the time of issuance and, as a result, no stock
compensation expense was recorded during the year ended June 30, 2005.
o November 11, 2005
o We converted our $30,000 note payable to the shareholder to
Common Stock. As a result, we issued 6,000,000 shares to a
stockholder at $0.005 per share. The Common Stock share price
approximated its fair market value at the date of the
conversion and, as a result, no compensation expense was
required or booked during the year ended June 30, 2006.
o We issued 36,000,000 shares to unaffiliated investors at
$0.0085 per share in the amount of $305,000. The Common Stock
share price approximated its fair market value at the date of
the issuance and, as a result, no compensation expense was
required or booked during the year ended June 30, 2006.
F-16
o May 15, 2006 - We purchased 20,000,000 shares of our Common Stock from
our former Chief Executive Officer and board member, Hajin Jhun, at
$0.005 per share, or the price purchased by Mr. Jhun. The purchased
share price approximated its fair market value at the date of the
purchase and, as a result, no compensation expense was required or
booked during the year ended June 30, 2006.
o June 27, 2006
o We issued 1,000,000 shares to a stockholder holding a $10,000
note payable. These shares were converted at $0.01 per share
for $10,000. The converted share price approximated its fair
market value at the date of the conversion and, as a result,
no compensation expense was required or booked during the year
ended June 30, 2006.
o We issued 66,000,000 shares to an unaffiliated investor
approximately at $0.0091 per share in the gross proceeds of
$600,000.00. The Common Stock share price approximated its
fair market value at the date of the issuance and a result, no
compensation expense was required or booked during the year
ended June 30, 2006.
o October 18, 2006 - We issued 15,000,000 shares of our Common Stock to
an unaffiliated investor for $0.0091 per share, total valued at
$136,364. The Common stock share price approximated its fair market
value at the date of the issuance and, as a result, no compensation
expense was required or booked during the year ended June 30, 2007.
o On April 27, 2007 - We issued an additional 29,000,000 shares of our
Common Stock to the unaffiliated investor for $0.0091 per share, total
valued at $263,636. The common stock share price approximated its fair
market value at the date of the issuance and, as a result, no
compensation expense was required or booked during the year ended June
30, 2007.
We believe the foregoing issuances of Common Stock were exempt from the
registration requirements of the Securities Act of 1933, as amended, by reason
of Section 4(2) thereof.
NOTE 12 - INCOME TAXES
No provision for income taxes for the years ended June 30, 2007 and
2006 is required, except for alternative minimum taxes and minimum state taxes,
since we reported a full valuation allowance during such years.
We account 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
F-17
recognized in income in the period that includes the enactment date. A valuation
allowance is required when it is more likely than not that we will not be able
to realize all or a portion of our deferred tax assets.
The significant component of the deferred tax asset (liability) at June
30, 2007 and 2006 was federal net operating loss carry-forward in the amount of
approximately $2,881,000 and $3,466,000, respectively, based on federal tax rate
of 34%. We had available approximately $8,474,000 unused federal net operating
loss carry-forwards at June 30, 2007, that may be applied against future taxable
income. 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 June 30, 2007 and 2006, 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 our deferred tax asset or liability.
NOTE 13 - RELATED PARTY TRANSACTIONS
We purchased CDMA wireless data products in the amount of $7,565,040,
or 99.9% of total purchases, from C-Motech Co. Ltd. for the year ended June 30,
2007 and had related accounts payable of $3,875 as of June 30, 2007.
C-Motech owns 110,000,000 shares of our Common Stock, and JaeMman Lee,
Chief Executive Officer of C-Motech Co. Ltd., has served as a director of the
Company since September 2006.
NOTE 14 - SUBSEQUENT EVENTS
On August 16, 2007, the Board of Directors approved each of the
following proposals and approved the mailing of Proxy Statements and an
accompanying form of Consent to shareholders of the Company for their approval
of the transactions. If we receive Consents from shareholders owning more than
50% of the outstanding shares, the officers would be authorized to effect the
transactions set forth in the proposal.
The proposals to the shareholders of the Company are as follows:
1. The change of the state of incorporation from California to Nevada by
merger of the Company into a wholly owned Nevada subsidiary.
2. An amendment to the Articles of Incorporation to include a reverse
stock split of 1 share for each 70 shares held.
3. Establishing the authorized capital of the Company at 50,000,000 shares
of Common Stock.
F-18