UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2008
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
FOR THE TRANSITION PERIOD FROM __________ TO __________.
COMMISSION FILE NUMBER: 0-11616
FRANKLIN WIRELESS CORP.
(Exact name of Registrant as specified in its charter)
NEVADA 95-3733534
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
5440 MOREHOUSE DRIVE, SUITE 1000, 92121
SAN DIEGO, CALIFORNIA (Zip code)
(Address of principal executive offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (858) 623-0000
Indicated 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 |_|
Indicate by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer |_| Accelerated filer |_|
Non-accelerated filer |_| Smaller reporting company |X|
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes |_| No |X|
The Registrant has 13,231,491 shares of common stock outstanding as of November
14, 2008
FRANKLIN WIRELESS CORP.
INDEX TO QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2008
PAGE
PART I- FINANCIAL INFORMATION
Item 1: Financial Statements 3
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations 15
Item 3: Quantitative and Qualitative Disclosures About Market Risk 21
Item 4: Controls and Procedures 21
PART II- OTHER INFORMATION
Item 1: Legal Proceedings 22
Item 1A: Risk Factors 22
Item 2: Unregistered Sales of Equity Securities and Use of Proceeds 25
Item 3: Defaults Upon Senior Securities 25
Item 4: Submission of Matters to a Vote of Security Holders 25
Item 5: Other Information 25
Item 6: Exhibits 25
Signatures 26
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FRANKLIN WIRELESS CORP.
BALANCE SHEETS
(UNAUDITED)
SEPTEMBER 30, JUNE 30,
2008 2008
----------- -----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 7,010,264 $ 6,172,569
Accounts receivable 406,919 4,534,069
Inventories 35,758 72,162
Prepaid income tax 355,393 355,393
Prepaid expenses 20,566 23,430
----------- -----------
Total current assets 7,828,900 11,157,623
Property and equipment, net 74,146 68,012
Other assets 11,241 15,411
----------- -----------
TOTAL ASSETS $ 7,914,287 $11,241,046
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 1,052,947 $ 4,047,651
Advanced payment from customers -- 390,000
Accrued liabilities 258,703 875,046
Deferred rent payable 17,821 --
Notes payable to a stockholder 334,000 334,000
----------- -----------
Total current liabilities 1,663,471 5,646,697
----------- -----------
STOCKHOLDERS' EQUITY:
Preferred stock, par value of $0.001 per share, authorized
10,000,000 shares; No preferred stock issued and -- --
outstanding as of September 30, 2008 and June 30, 2008
Common stock, par value of $0.001 per share, authorized
50,000,000 shares; Common stock of 13,231,491 issued and
outstanding as of September 30, 2008 and June 30, 2008 13,232 13,232
Additional paid-in capital 5,016,161 5,016,161
Retained earnings 1,221,423 564,956
----------- -----------
Total stockholders' equity 6,250,816 5,594,349
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 7,914,287 $11,241,046
=========== ===========
See accompanying notes to unaudited financial statements.
3
FRANKLIN WIRELESS CORP.
STATEMENTS OF OPERATIONS
(UNAUDITED)
------------------------------
THREE MONTHS ENDED
SEPTEMBER 30,
------------------------------
2008 2007
------------ ------------
(Consolidated)
Net sales $ 6,251,168 $ 8,644,693
Cost of goods sold 4,394,124 6,687,871
------------ ------------
Gross profits 1,857,044 1,956,822
------------ ------------
Operating expenses:
Selling, general, and administrative 1,086,712 584,634
------------ ------------
Total operating expenses 1,086,712 584,634
------------ ------------
Income from operations 770,332 1,372,188
Other income (expense):
Interest income 29,200 36,043
Other income (expense) (287) 184
------------ ------------
Total other income (expense), net 28,913 36,227
------------ ------------
Net income before income taxes 799,245 1,408,415
Provision for income taxes 142,778 25,313
------------ ------------
Net income $ 656,467 $ 1,383,102
============ ============
Basic earnings per share $ 0.05 $ 0.10
Diluted earnings per share $ 0.05 $ 0.10
Weighted average common shares outstanding - basic 13,231,491 13,231,491
Weighted average common shares outstanding - diluted 13,231,491 13,231,491
See accompanying notes to unaudited financial statements.
4
FRANKLIN WIRELESS CORP.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
-----------------------------
THREE MONTHS ENDED
SEPTEMBER 30,
-----------------------------
2008 2007
----------- -----------
(Consolidated)
CASH FLOWS FROM OPERATIONS ACTIVITIES:
Net income $ 656,467 $ 1,383,102
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation 3,921 2,091
Amortization of intangible assets -- 14,273
Bad debt 315 --
Changes in operating assets and liabilities:
Accounts receivable 4,126,835 (2,400)
Inventory 36,404 (11,091)
Prepaid expense 2,864 1,237
Other assets 4,170 --
Accounts payable (2,994,704) (59,547)
Advance payment from customers (390,000) (259,500)
Accrued liabilities (616,343) (61,577)
Deferred rent payable 17,821 --
----------- -----------
Net cash provided by operating activities 847,750 1,006,588
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (10,055) (3,835)
----------- -----------
Net cash used in investing activities (10,055) (3,835)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES: -- --
----------- -----------
Net increase in cash and cash equivalents 837,695 1,002,753
Cash and cash equivalents, beginning of period 6,172,569 2,477,593
----------- -----------
Cash and cash equivalents, end of period $ 7,010,264 $ 3,480,346
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ -- $ --
Income taxes $ 685,000 $ --
See accompanying notes to unaudited financial statements.
5
FRANKLIN WIRELESS CORP.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited financial statements of the Company have been
prepared in accordance with accounting principles generally accepted in the
United States ("GAAP") for interim financial information and are presented in
accordance with the requirements of Form 10-Q. The balance sheet is unaudited as
of September 30, 2008 and audited as of June 30, 2008. The statement of
operations is unaudited for the three months ended September 30, 2008, and the
consolidated statement of operations is unaudited for the three months ended
September 30, 2007. The statement of cash flows is unaudited for the three
months ended September 30, 2008, and the consolidated statement of cash flow is
unaudited for the three months ended September 30, 2007. In the opinion of
management, the unaudited financial statements included herein contain all
adjustments, including normal recurring adjustments, considered necessary to
present fairly the financial position, the results of operations and cash flows
of the Company for the periods presented. These unaudited financial statements
should be read in conjunction with the financial statements and notes thereto
for the fiscal year ended June 30, 2008 included in the Company's Form 10-K,
filed on September 22, 2008.
The operating results or cash flows of the interim periods presented herein are
not necessarily indicative of the results to be expected for any other interim
period or the full year.
NOTE 2 - BUSINESS OVERVIEW
The Company designs and sells broadband high speed wireless data communication
products such as third generation ("3G") and fourth generation ("4G") wireless
modules and modems. The Company focuses 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. The broadband wireless data communication products are positioned at
the convergence of wireless communications, mobile computing and the Internet,
each of which the Company believes represents a growing market.
The Company markets its products through two channels: directly to wireless
operators, and indirectly through strategic partners and distributors. The
Company's customer base extends from the United States to the Caribbean and
South American countries. The Company's 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. The Company has strategic marketing relationships
with several of these customers.
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
SEGMENT REPORTING
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," requires public companies to report financial and
descriptive information about their reportable operating segments. The
Company identifies its operating segments based on how management
internally evaluates separate financial information, business
activities and management responsibility. The Company operates in a
single business segment consisting of sale of wireless access products.
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
6
estimates. Significant estimates include useful lives of intangible and
long-lived assets.
CASH AND CASH EQUIVALENTS
For purposes of the statements of cash flow, the Company considers all
highly liquid investments purchased with original maturities of three
months or less to be cash equivalents.
REVENUE RECOGNITION
The Company recognizes revenue from product sales when persuasive
evidence of an arrangement exists, the price is fixed or determinable,
collection is reasonably assured and delivery of products has occurred
or services have been rendered. Accordingly, the Company recognizes
revenues from product sales upon shipment of the product to the
customers. The Company does not allow the right of return on product
sales but warrant the products over one year from the shipment. The
Company may maintain an allowance for doubtful accounts for potentially
estimated losses related to customer receivable balances. Estimates are
developed by using standard quantitative measures based on historical
losses, adjusting for current economic conditions and, in some cases,
evaluating specific customer accounts for risk of loss. The
establishment of reserves requires the use of judgment and assumptions
regarding the potential for losses on receivable balances. Though the
Company considers these balances adequate and proper, changes in
economic conditions in specific markets in which the Company operates
could have a material effect on reserve balances required.
SHIPPING AND HANDLING COST
Most of shipping and handling costs are paid by the customers directly
to the shipping companies. As a result, the Company does not collect
and incur shipping and handling costs to be capitalized.
INVENTORIES
The Company's inventories are made up of finished goods and are stated
at the lower of cost or market, cost being determined on a first-in,
first-out basis. The Company assesses the inventory carrying value and
reduces it, if necessary, to its net realizable value based on customer
orders on hand, and internal demand forecasts using management's best
estimates given information currently available. The Company's customer
demand is highly unpredictable, and can fluctuate significantly caused
by factors beyond the control of the Company. The Company may maintain
an allowance for inventories for potential excess and obsolete
inventories and inventories that are carried at costs that are higher
than their estimated net realizable values.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. The Company provides for
depreciation using the straight-line method over the estimated useful
lives as follows:
Computers and software 5 years
Machinery and equipment 5 years
Furniture and fixtures 7 years
Expenditures for maintenance and repairs are charged to operations as
incurred while renewals and betterments are capitalized. Gains or
losses on the sale of property and equipment are reflected in the
statements of operations.
VALUATION ON LONG-LIVED ASSETS
In accordance with Statement of Financial Accounting Standards No. 144,
"Accounting for Impairment on Disposal of Long-lived Assets", the
Company reviews for impairment of long-lived assets and certain
identifiable intangibles whenever events or circumstances indicate that
7
the carrying amount of assets may not be recoverable. The Company
considers the carrying value of assets may not be recoverable based
upon its review of the following events or changes in circumstances:
the asset's ability to continue to generate income from operations and
positive cash flow in future periods; loss of legal ownership or title
to the assets; significant changes in the Company's strategic business
objectives and utilization of the asset; or significant negative
industry or economic trends. An impairment loss would be recognized
when estimated future cash flows expected to result from the use of the
asset is less than its carrying amount.
As of September 30, 2008, the Company is not aware of any events or
changes in circumstances that would indicate that the long-lived assets
are impaired.
WARRANTIES
The Company does not allow the right of return on product sales but
provides a factory warranty for one year from the shipment, which is
covered by its vendor. These products are shipped directly from its
vendor to customers. As a result, the Company does not accrue any
warranty expenses.
INCOME TAXES
The Company adopted the provisions of 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.
Under FIN 48, the impact of an uncertain income tax position on the
income tax return must be recognized at the largest amount that is
more-likely-not to be sustained upon audit by the relevant taxing
authority. An uncertain income tax position will not be recognized if
it has less than a 50% likelihood of being sustained.
The Company accounts for income taxes under the asset and liability
method of accounting. Under this method, deferred tax assets and
liabilities are recognized for the future tax consequences attributable
to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates
is recognized in income in the period that includes the enactment date.
A valuation allowance is required when it is less likely than not that
the Company will be able to realize all or a portion of its deferred
tax assets. The Company incurred significant losses in the previous
years. These losses have been carried over to off-set any future
taxable income.
Income tax provision from continuing operations for the three months
ended September 30, 2008 and 2007 consists of the following:
(UNAUDITED) (UNAUDITED)
------------- -------------
SEPTEMBER 30, SEPTEMBER 30,
2008 2007
------------- -------------
Current income taxes expense:
Federal $113,316 $ 19,073
State 29,462 6,240
-------- --------
Deferred income taxes expense (benefits): 142,778 25,313
-------- --------
PROVISION FOR INCOME TAXES $142,778 $ 25,313
======== ========
Deferred income taxes reflect the net effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes.
Significant components of the deferred tax assets at September 30, 2008
and June 30, 2008 consisted of the following:
8
(UNAUDITED)
------------- -----------
SEPTEMBER 30, JUNE 30,
2008 2008
----------- -----------
Current deferred tax assets (liabilities):
Net operating losses $ 170,883 $ 170,883
Other, net (9,238) 16,493
Non-current deferred tax assets (liabilities):
Net operating losses 1,876,011 2,011,633
Credit -- 30,196
Other, net (16,493) (4,477)
----------- -----------
Total deferred tax assets 2,021,163 2,224,728
Less valuation allowance (2,021,163) (2,224,728)
----------- -----------
Net deferred tax asset $ -- $ --
=========== ===========
The significant component of the deferred tax asset (liability) at
September 30, 2008 and June 30, 2008 was federal net operating loss
carry-forward in the amount of approximately $1,898,000 and $2,034,000,
respectively, based on federal tax rate of 34%. SFAS No. 109 requires a
valuation allowance to be recorded when it is more likely than not that
some or all of the deferred tax assets will not be realized. At
September 30, 2008 and June 30, 2008, management believes that it is
more likely than not that most of the deferred tax assets will not be
realized, and valuation allowances for the full amount of the net
deferred tax asset were established to reduce the deferred tax assets
to zero based on the level of historical taxable income and projections
for future taxable income over the periods in which the deferred tax
assets are deductible.
As of September 30, 2008, the Company has federal net operating loss
carryforwards of approximately $5,584,000 and state net operating loss
carryforwards of approximately $1,277,000 for income tax purposes with
application of IRC Section 382 limitation on net operating losses as
result of the Company's ownership change in prior period. The Federal
and state net operating loss carryforwards will begin to expire from
2009 to 2026 and 2009 to 2016, respectively.
EARNINGS PER SHARE
The Company reports earnings per share in accordance with Statement of
Financial Accounting Standards No. 128, "Earnings Per Share". Basic
earnings per share are computed using the weighted average number of
shares outstanding during the year. Diluted earnings per share include
the potentially dilutive effect of outstanding common stock options and
warrants which are convertible to common shares.
On January 8, 2008, a 1 for 70 reverse stock split was implemented in
connection with the reincorporation, under which each shareholder
received one share for each 70 shares held. As result of the reverse
stock split, a conversion was made to the weighted average number of
shares outstanding for the fiscal years of 2008 and 2007 that took into
consideration the effect of a reverse split on the total number of
shares outstanding, in order to compare the current weighted average
number of shares outstanding to its historical numbers in a consistent
form of valuation. In order to adjust a weighted average number of
shares outstanding of the Company, the pre-split outstanding shares
were divided by the split ratio.
CONCENTRATION OF RISK
The Company extends credit to its customers and performs ongoing credit
evaluations of such customers. The Company evaluates its accounts
receivable on a regular basis for collectability and provides for an
allowance for potential credit losses as deemed necessary.
9
Substantially all of the Company's revenues are derived from sales of
wireless data products. Any significant decline in market acceptance of
its products or in the financial condition of its existing customers
could impair the Company's ability to operate effectively.
A significant portion of the Company's revenue is derived from a small
number of customers. Three customers accounted for 55.7%, 15.3%, and
10.7% of revenues during the three months ended September 30, 2008, and
had related account receivables of $199,000, or 49% of the total
account receivable, at September 30, 2008.
The Company purchases its wireless products from one design and
manufacturing company located in South Korea. If the design and
manufacturing company were to experience delays, capacity constraints
or quality control problems, product shipments to the Company's
customers could be delayed, or its customers could consequently elect
to cancel the underlying product purchase order, which would negatively
impact the Company's revenue. However, there were no significant
delays, capacity constraints, or quality control problems that
negatively impacted the Company's revenue for the three months ended
September 30, 2008 and 2007. For those periods, the Company purchased
approximately $4,187,410 and $6,698,962 respectively and had related
accounts payable of $173,100 and $0 at September 30, 2008 and 2007
respectively.
The Company maintains its cash accounts with established commercial
banks. Such cash deposits periodically exceed the Federal Deposit
Insurance Corporation insured limit of $250,000 per each depositor, per
insured bank. As of September 30, 2008, the Company has two deposits
that exceeded the insured limit of $250,000 by approximately $6,437,000
and $73,000 respectively. However, the Company does not anticipate any
loss on excess deposits.
NOTE 4 - BALANCE SHEET DETAILS
ACCOUNTS RECEIVABLE
Accounts receivable at September 30, 2008 and June 30, 2008, consisted
of receivables from customers in the amounts of $406,919 and $4,534,069
respectively. The decrease was primarily due to a receipt of the
account receivable from a single customer, representing 72% of the
total accounts receivable at June 30, 2008.
PREPAID EXPENSES
Prepaid expenses at September 30, 2008 and June 30, 2008 consisted of
the following:
(UNAUDITED)
------------- --------
SEPTEMBER 30, JUNE 30,
2008 2008
------------- --------
Prepaid insurance $ 2,002 $ 2,725
Prepaid marketing fee 13,564 11,600
Prepaid professional fee 5,000 --
Prepaid office lease fee -- 9,105
------- -------
TOTAL $20,566 $23,430
======= ========
PREPAID INCOME TAX
Prepaid income tax at September 30, 2008 and June 30, 2008 consisted of
the following:
10
(UNAUDITED)
------------- --------
SEPTEMBER 30, JUNE 30,
2008 2008
------------- --------
Prepaid income tax expense
Federal $296,535 $296,535
Sate 58,858 58,858
-------- --------
TOTAL $355,393 $355,393
======== ========
PROPERTY AND EQUIPMENT
Property and equipment at September 30, 2008 and June 30, 2008
consisted of the following:
(UNAUDITED)
------------- --------
SEPTEMBER 30, JUNE 30,
2008 2008
------------- ---------
Computers and software $ 55,662 $ 48,827
Furniture and fixtures 56,114 52,894
--------- ---------
111,776 101,721
Less accumulated depreciation (37,630) (33,709)
--------- ---------
TOTAL $ 74,146 $ 68,012
========= =========
Depreciation expense associated with property and equipment was $3,921
and $2,091for the three months ended September 30, 2008 and 2007,
respectively.
OTHER ASSETS
Other assets at September 30, 2008 and June 30, 2008 consisted of the
following:
(UNAUDITED)
------------- --------
SEPTEMBER 30, JUNE 30,
2008 2008
------------- --------
Lease deposit, corporate housing $ 709 $ 709
Lease deposit, administrative office 9,833 14,003
Utility deposit 282 282
Other deposit 417 417
------- -------
TOTAL $11,241 $15,411
======= =======
ACCRUED LIABILITIES
Accrued liabilities at September 30, 2008, and June 30, 2008, consisted
of the following:
(UNAUDITED)
------------- --------
SEPTEMBER 30, JUNE 30,
2008 2008
------------- --------
Salaries payable $ 70,300 $135,000
Accrued professional fees payable 26,500 31,500
Tax payable 142,778 689,421
Other accrued liabilities 19,125 19,125
-------- --------
TOTAL $258,703 $875,046
======== ========
11
DEFERRED RENT PAYABLE
Deferred Rent Payable at September 30, 2008, and June 30, 2008,
consisted of the following:
(UNAUDITED)
------------- --------
SEPTEMBER 30, JUNE 30,
2008 2008
------------- --------
Deferred rent payable $17,821 $ --
------- --------
TOTAL $17,821 $ --
======= ========
Deferred rent payable is the sum of the difference between a monthly
rent payment and the monthly rent expense of an operating lease of the
Company that contains escalated payments in future periods. The rent
expense is the sum of all rent payments over the term of the lease
divided by the number of periods contained in the lease otherwise known
as straight-line amortization. This rent expense amount differs from
the monthly rent payments, which is deferred rent payable.
NOTES PAYABLE TO STOCKHOLDERS
Notes payable at September 30, 2008, and June 30, 2008, consisted of
the following:
(UNAUDITED)
------------- --------
SEPTEMBER 30, JUNE 30,
2008 2008
------------- --------
Non-interest bearing note $ 334,000 $ 334,000
--------- ---------
Total 334,000 334,000
Less current portion (334,000) (334,000)
========= =========
TOTAL $ -- $ --
========= =========
The Company's Korea-based subsidiary, ARG, has been inactive since
August 2003. On October 30, 2007, the Board of Directors approved the
dissolution of ARG. As a part of the dissolution, the Company assumed a
note payable of ARG of $434,000. During the year ended June 30, 2008,
it repaid $100,000, and the remaining balance of the note amounted to
$334,000 at September 30, 2008.
NOTE 5 - COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company leases its administrative facilities under a non-cancelable
operating lease that expires on August 31, 2011. 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 $26,926 and $15,534 for
the three months ended September 30, 2008 and 2007, respectively.
The Company leases its corporate housing facility under a
non-cancelable operating lease that expires on April 30, 2009 for its
vendors. Rent expense related to the operating lease was $4,621 and
$4,251 for the three months ended September 30, 2008 and 2007,
respectively.
The Company leases one automobile under an operating lease that expires
on July 22, 2009. Lease expense was $1,613 and $1,613 for the three
months ended September 30, 2008 and 2007, respectively.
12
LITIGATION
The Company is involved in certain legal proceedings and claims which
arise in the normal course of business. Management does not believe
that the outcome of these matters will have any material adverse effect
on its financial condition.
CO-DEVELOPMENT, CO-OWNERSHIP AND SUPPLY AGREEMENT
The Company's facility is located in San Diego, California.
Manufacturing of the Company's products has been contracted out to
C-Motech Co. Ltd. ("C-Motech"), located in South Korea.
In January 2005, the Company entered into an agreement with C-Motech
for the manufacture of the products. Under the manufacturing and supply
agreement, C-Motech provides the Company with services including all
licenses, component procurement, final assembly, testing, quality
control, fulfillment and after-sale service. The Agreement provides
exclusive rights to market and sell CDMA wireless data products in
countries in North America, the Caribbean, and South America.
Furthermore, the Agreement provides that the Company is responsible for
marketing, sales, field testing, and certifications of these products
to wireless service operators and other commercial buyers within a
designated territory, and C-Motech 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, 6500, and 6800 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. On January 30, 2007, C-Motech also
certified that the Company has the exclusive right to sell CDU-680 EVDO
USB modems directly and indirectly in these territories.
The initial term of the Agreement was for two years, commencing on
January 5, 2005. The agreement automatically renews for successive one
year periods unless either party provides a written notice to terminate
at least sixty days prior to the end of the term. This agreement may be
amended or supplemented by mutual agreement of the parties, as is
necessary to document the addition of any new products.
NOTE 6 - EARNINGS PER SHARE
The Company reports earnings per share in accordance with Statement of Financial
Accounting Standards No. 128, "Earnings per Share". Basic earnings per share
("EPS") excludes dilution and is computed by dividing net income attributable to
common shareholders by the weighted-average number of common shares outstanding
for the period. Diluted earnings per share include the potentially dilutive
effect of outstanding common stock options and warrants which are convertible to
common shares. As of September 30, 2008, the Company did not have any dilutive
common stock shares.
On January 8, 2008, a 1 for 70 reverse stock split was implemented in connection
with the reincorporation, under which each shareholder received one share for
each 70 shares held. As result of the reverse stock split, a conversion was made
to the weighted average number of shares outstanding for the fiscal years of
2008 and 2007 that took into consideration the effect of a reverse split on the
total number of shares outstanding, in order to compare the current weighted
average number of shares outstanding to its historical numbers in a consistent
form of valuation. In order to adjust a weighted average number of shares
outstanding of the Company, the pre-split outstanding shares were divided by the
split ratio.
NOTE 7 - RECENT 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
13
requirements for uncertain tax positions. The Company has currently adopted and
evaluated the impact, if any, that FIN 48 will have on its financial statements.
FIN 48 is not expected to have a material impact on the Company's 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. SFAS No.
157 is not expected to have a material impact on the Company's financial
statements.
In February 2007, the FASB issued SFAS No. 159, "THE FAIR VALUE OPTION FOR
FINANCIAL ASSETS AND FINANCIAL LIABILITIES--INCLUDING AN AMENDMENT OF FASB
STATEMENT NO. 115". SFAS No. 159 permits companies to choose to measure certain
financial instruments and other items at fair value. Most of the provisions in
SFAS 159 are elective; however the amendment to SFAS 115, ACCOUNTING FOR CERTAIN
INVESTMENTS IN DEBT AND EQUITY SECURITIES, applies to all entities with
available-for-sale securities. The fair value option established by SFAS 159
permits all entities to choose to measure eligible items at fair value at
specified election dates. The standard requires that unrealized gains and losses
are reported in earnings for items measured using the fair value option at each
subsequent reporting date. SFAS No. 159 is effective for the Company beginning
in the first quarter of fiscal year 2009. SFAS No. 159 and the amendments to
SFAS 115 are not expected to have a material impact on the Company's financial
statements.
In June 2007, the FASB ratified Emerging Issues Task Force ("EITF") 07-3,
Accounting for Nonrefundable Advance Payments for Goods or Services Received for
Use in Future Research and Development Activities ("EITF 07-3"). EITF 07-3
requires that nonrefundable advance payments for goods or services that will be
used or rendered for future research and development activities be deferred and
capitalized and recognized as an expense as the goods are delivered or the
related services are performed. EITF 07-3 is effective, on a prospective basis,
for fiscal years beginning after December 15, 2007. EITF 07-3 is not expected to
have a material impact on the Company's financial statements.
In December 2007, the FASB issued Statement No. 141 (revised), Business
Combinations ("SFAS No. 141(R)"). The standard changes the accounting for
business combinations including the measurement of acquirer shares issued in
consideration for a business combination, the recognition of contingent
consideration, the accounting for pre-acquisition gain and loss contingencies,
the recognition of capitalized in-process research and development, the
accounting for acquisition-related restructuring cost accruals, the treatment of
acquisition related transaction costs and the recognition of changes in the
acquirer's income tax valuation allowance. SFAS No. 141(R) is effective for
fiscal years beginning after December 15, 2008, with early adoption prohibited.
SFAS No. 141(R) is not expected to have a material impact on the Company's
financial statements.
In December 2007, the FASB issued Statement No. 160, Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB No. 51 ("SFAS No. 160").
The standard changes the accounting for noncontrolling (minority) interests in
consolidated financial statements including the requirements to classify
noncontrolling interests as a component of consolidated stockholders' equity,
and the elimination of "minority interest" accounting in results of operations
with earnings attributable to noncontrolling interests reported as part of
consolidated earnings. Additionally, SFAS No. 160 revises the accounting for
both increases and decreases in a parent's controlling ownership interest. SFAS
No. 160 is effective for fiscal years beginning after December 15, 2008, with
early adoption prohibited. SFAS No. 160 is not expected to have a material
impact on the Company's financial statements.
There are no other accounting standards issued as of November 15, 2008 that are
expected to have a material impact on the Company's financial statements.
14
NOTE 8 - RELATED PARTY TRANSACTIONS
The Company purchased CDMA wireless data products in the amount of $4,187,410,
or 100.0% of total purchases, from C-Motech Co. Ltd., for the three months ended
September 30, 2008 and had related accounts payable of $173,100 as of September
30, 2008. The Company also had an account receivable of $11,015 in connection
with a marketing development fund as of September 30, 2008. C-Motech owns
3,370,356 shares, or 25.5%, of the Company's outstanding Common Stock and Jaeman
Lee, Chief Executive Officer of C-Motech Co. Ltd., has served as a director of
the Company since September 2006.
NOTE 9 - SUBSEQUENT EVENTS
None.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the financial
statements and notes thereto included in Item 1 of this filing and the financial
statements and notes thereto and Management's Discussion and Analysis of
Financial Condition and Results of Operations contained in the Company's Form
10-K filed on September 22, 2008, for the fiscal year ended June 30, 2008.
BUSINESS OVERVIEW
Franklin Wireless Corp. designs and sells broadband high speed wireless data
communication products such as third generation ("3G") and fourth generation
("4G") wireless modules and modems. The Company focuses 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. The broadband wireless data communication products are
positioned at the convergence of wireless communications, mobile computing and
the Internet, each of which the Company believes represents a growing market.
The Company's wireless products are based on Evolution Data Optimized technology
("EV-DO technology") of Code Division Multiple Access ("CDMA"), High-Speed
Packet Access technology ("HSPA technology") of Wideband Code Division Multiple
Access ("WCDMA), and Worldwide Interoperability for Microwave Access ("WIMAX")
based on the IEEE 802.16 standard, which 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.
Since the Company launched three new products, CDMA Revision A USB modem
CDU-680, CDMA Revision 0 CDU-650 USB modem, and CDMA Revision 0 CDX-650 Express
Card modem in 2007, the Company has continued to add new features and
functionality to its products to enhance value and ease of use that its products
provide to customers and end users. In 2008, the Company launched the CGU-628A
HSDPA USB modem, which provides a flexible way for users to connect to
high-speed downlink packet access networks, and the CDM-650 Stand-alone Revision
0 USB modem, which provides internet connection in remote locations without
cable or DSL services.
The Company markets its products through two channels: directly to wireless
operators, and indirectly through strategic partners and distributors. The
Company's global customer base extends from the United States to the Caribbean
and South American countries. The Company's 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. The Company has strategic marketing relationships
with several of these customers.
15
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company believes the following critical accounting policies affect the
Company's more significant judgments and estimates used in the preparation of
the financial statements.
ESTIMATES
The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenue and expenses during the reporting periods. Actual results could
differ from those estimates. Significant estimates include useful lives
of intangible and long-lived assets.
REVENUE RECOGNITION
The Company recognizes revenue from product sales when persuasive
evidence of an arrangement exists, the price is fixed or determinable,
collection is reasonably assured and delivery of products has occurred
or services have been rendered. Accordingly, the Company recognizes
revenues from product sales upon shipment of the product to the
customers. The Company does not allow the right of return on product
sales but warrant the products over one year from the shipment. The
Company may maintain an allowance for doubtful accounts for potentially
estimated losses related to customer receivable balances. Estimates are
developed by using standard quantitative measures based on historical
losses, adjusting for current economic conditions and, in some cases,
evaluating specific customer accounts for risk of loss. The
establishment of reserves requires the use of judgment and assumptions
regarding the potential for losses on receivable balances. Though the
Company considers these balances adequate and proper, changes in
economic conditions in specific markets in which the Company operates
could have a material effect on reserve balances required.
SHIPPING AND HANDLING COST
Most of shipping and handling costs are paid by the customers directly
to the shipping companies. As a result, the Company does not collect
and incur shipping and handling costs to be capitalized.
VALUATION ON LONG-LIVED ASSETS
In accordance with Statement of Financial Accounting Standards No. 144,
"Accounting for Impairment on Disposal of Long-lived Assets", the
Company reviews for impairment of long-lived assets and certain
identifiable intangibles whenever events or circumstances indicate that
the carrying amount of assets may not be recoverable. The Company
considers the carrying value of assets may not be recoverable based
upon its review of the following events or changes in circumstances:
the asset's ability to continue to generate income from operations and
positive cash flow in future periods; loss of legal ownership or title
to the assets; significant changes in the Company's strategic business
objectives and utilization of the asset; or significant negative
industry or economic trends. An impairment loss would be recognized
when estimated future cash flows expected to result from the use of the
asset is less than its carrying amount.
As of September 30, 2008, the Company is not aware of any events or
changes in circumstances that would indicate that the long-lived assets
are impaired.
WARRANTIES
The Company does not allow the right of return on product sales but
provides a factory warranty for one year from the shipment, which is
covered by its vendor. These products are shipped directly from its
vendor to customers. As a result, the Company does not accrue any
warranty expenses.
16
INCOME TAXES
The Company adopted the provisions of 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.
Under FIN 48, the impact of an uncertain income tax position on the
income tax return must be recognized at the largest amount that is
more-likely-not to be sustained upon audit by the relevant taxing
authority. An uncertain income tax position will not be recognized if
it has less than a 50% likelihood of being sustained.
The Company accounts for income taxes under the asset and liability
method of accounting. Under this method, deferred tax assets and
liabilities are recognized for the future tax consequences attributable
to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates
is recognized in income in the period that includes the enactment date.
A valuation allowance is required when it is less likely than not that
the Company will be able to realize all or a portion of its deferred
tax assets. The Company incurred significant losses in the previous
years. These losses have been carried over to off-set any future
taxable income.
Income tax provision from continuing operations for the three months
ended September 30, 2008 and 2007 consists of the following:
(UNAUDITED) (UNAUDITED)
-------------------- --------------------
SEPTEMBER 30, 2008 SEPTEMBER 30, 2007
-------------------- --------------------
Current income taxes expense:
Federal $113,316 $ 19,073
State 29,462 6,240
-------- --------
Deferred income taxes expense (benefits): 142,778 25,313
-------- --------
PROVISION FOR INCOME TAXES $142,778 $ 25,313
======== ========
Deferred income taxes reflect the net effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes.
Significant components of the deferred tax assets at September 30, 2008
and June 30, 2008 consisted of the following:
(UNAUDITED)
------------------ ---------------
SEPTEMBER 30, 2008 JUNE 30, 2008
------------------ ---------------
Current deferred tax asset (liabilities):
Net operating losses $ 170,883 $ 170,883
Other, net (9,238) 16,493
Non-current deferred tax assets (liabilities):
Net operating losses 1,876,011 2,011,633
Credit -- 30,196
Other, net (16,493) (4,477)
----------- -----------
Total deferred tax assets 2,021,163 2,224,728
Less valuation allowance (2,021,163) (2,224,728)
Net deferred tax asset $ -- $ --
=========== ===========
17
The significant component of the deferred tax asset (liability) at
September 30, 2008 and June 30, 2008 was federal net operating loss
carry-forward in the amount of approximately $1,898,000 and $2,034,000,
respectively, based on federal tax rate of 34%. SFAS No. 109 requires a
valuation allowance to be recorded when it is more likely than not that
some or all of the deferred tax assets will not be realized. At
September 30, 2008 and June 30, 2008, management believes that it is
more likely than not that most of the deferred tax assets will not be
realized, and valuation allowances for the full amount of the net
deferred tax asset were established to reduce the deferred tax assets
to zero based on the level of historical taxable income and projections
for future taxable income over the periods in which the deferred tax
assets are deductible.
As of September 30, 2008, the Company has federal net operating loss
carryforwards of approximately $5,584,000 and state net operating loss
carryforwards of approximately $1,277,000 for income tax purposes with
application of IRC Section 382 limitation on net operating losses as
result of the Company's ownership change in prior period. The Federal
and state net operating loss carryforwards will begin to expire from
2009 to 2026 and 2009 to 2016, respectively.
RESULTS OF OPERATIONS
The following table sets forth, during the three months ended September 30, 2008
and 2007, selected statements of operations data expressed as a percentage of
sales:
THREE MONTHS ENDED
SEPTEMBER 30,
----------------------
2008 2007
------- -------
Net Sales 100.0% 100.0%
Cost of goods sold 70.3% 77.4%
------- -------
Gross profit 29.7% 22.6%
------- -------
Operating expenses:
Selling, general and administrative expenses 17.4% 6.7%
------- -------
Total operating expenses 17.4% 6.7%
------- -------
Income from operations 12.3% 15.9%
Other income (expense), net 0.5% 0.4%
------- -------
Net income before income taxes 12.8% 16.3%
Provision for income taxes 2.3% 0.3%
------- -------
Net income 10.5% 16.0%
======= =======
The results of the interim periods are not necessarily indicative of results for
the entire fiscal year.
THREE MONTHS ENDED SEPTEMBER 30, 2008 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2007
NET SALES
Net sales decreased by $2,393,525, or 27.7%, to $6,251,168 for the
three months ended September 30, 2008 from $8,644,693 for the
corresponding period of 2007. The overall decrease was primarily due to
the decrease in sales of CDMA data products in the United States by
$2,354,255, or 47.0%, to $2,652,218 for the three months ended
September 30, 2008, compared to $5,006,473 for the corresponding period
of 2007. The sales volume in the Caribbean and South American countries
were maintained for the three months ended September 30, 2008 compared
to the corresponding period of 2007.
18
GROSS PROFIT
Gross profit decreased by $99,778, or 5.1% to $1,857,044 for the three
months ended September 30, 2008 from $1,956,822 for the corresponding
period of 2007. The overall decrease was primarily due to the decrease
in sales of CDMA data products in the United States by $2,354,255, or
47.0%, to $2,652,218 for the three months ended September 30, 2008,
compared to $5,006,473 for the corresponding period of 2007. For the
three months ended September 30, 2008, the gross profit made a short
decrease by 5.1%, whereas the net sales decreased by 27.7% due to the
discontinued sales to a carrier customer in the United Sates, which had
a low gross profit margin in terms of net sales percentage of 18.8%.
The gross profit in terms of net sales percentage was 29.7% for the
three months ended September 30, 2008 compared to 22.6% for the
corresponding period of 2007. The gross profit increase in terms of net
sales percentage was primarily due to the discontinued sales to a
carrier customer in the United Sates, which had a low gross profit
margin in terms of net sales percentage of 18.8%, for the three months
ended September 30, 2008, whereas the customer accounted for 53.4% of
net sales for the corresponding period of 2007.
SELLING, GENERAL, AND ADMINISTRATIVE
Selling, general, and administrative expenses increased by $502,078, or
85.9%, to $1,086,712 for the three months ended September 30, 2008 from
$584,634 for the corresponding period of 2007. The increase was
primarily due to an increase in sales and marketing efforts, which
included hiring new personnel to expand its marketing and customer
support functions, which increased salary and related expenses. For the
three months ended September 30, 2008, the Company had an increase in
promotion and marketing expense of $326,301, an increase in travel
expense of $49,762, and an increase in payroll expense of $103,221,
compared to the corresponding period of 2007. Payroll expenses were
increased due to the hiring of new personnel and a bonus payment of
$35,300 to share profits with the management and employees for the
three months ended September 30, 2008.
OTHER INCOME (EXPENSE), NET
Other income decreased by $7,314, or 20.2%, to $28,913 for the three
months ended September 30, 2008 from $36,227 for the corresponding
period of 2007. The overall decrease is due to the lower interest
income of $29,200 in connection with a lower rate of interest for the
three months ended September 30, 2008, compared to $36,043 for the
corresponding period of 2007.
PROVISION FOR INCOME TAXES
For the three months ended September 30, 2008, provision for income
taxes of $142,778 consisted of federal and state taxes at its estimated
effective tax rate of approximately 18.2%. The difference between the
federal and state statutory rate of 40% and the Company's effective tax
rate was due to the federal and state net operating loss carry-forward
limited by the rules of Section 382 and the related deferred tax asset
generated in fiscal year 2009. For the three months ended September 30,
2007, the provision for income taxes of $25,313 consisted of federal
and state alternative minimum taxes.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents increased by $837,695 to $7,010,264 as of September
30, 2008 compared to $6,172,569 as of June 30, 2008. The increase was primarily
from the net income of $643,767.
19
OPERATING ACTIVITIES
Net cash provided by operating activities was $847,750 and $1,006,588
for the three months ended September 30, 2008, and 2007, respectively.
The decrease from the prior period is primarily due to the decrease in
net income.
INVESTING ACTIVITIES
Net cash used in investing activities was $10,055 and $3,835 for the
three months ended September 30, 2008 and 2007, respectively,
consisting of capital expenditures.
FINANCING ACTIVITIES
Net cash provided by financing activities was $0 for the three months
ended September 30, 2008 and 2007, respectively.
CONTRACTUAL OBLIGATIONS AND OTHER COMMITMENTS
The Company's material off-balance sheet contractual commitments are operating
lease obligations. The Company excluded these items from the balance sheet in
accordance with GAAP. The Company does not maintain any other off-balance sheet
arrangements, transactions, obligations or other relationships with
unconsolidated entities that would be expected to have a material current or
future effect upon its financial condition or results of operations. The
Company's principal future obligations and commitments at September 30, 2008,
include the following:
OPERATING LEASES
The Company leases its administrative facilities under a non-cancelable
operating lease that expires on August 31, 2011. 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 $26,926 and $15,534 for
the three months ended September 30, 2008 and 2007, respectively.
The Company leases its corporate housing facility under a
non-cancelable operating lease that expires on April 30, 2009 for its
vendors. Rent expense related to the operating lease was $4,621 and
$4,251 for the three months ended September 30, 2008 and 2007,
respectively.
The Company leases one automobile under an operating lease that expires
on July 22, 2009. Lease expense was $1,613 and $1,613 for the three
months ended September 30, 2008 and 2007, respectively.
LITIGATION
The Company is involved in certain legal proceedings and claims which
arise in the normal course of business. Management does not believe
that the outcome of these matters will have any material adverse effect
on its financial condition.
CO-DEVELOPMENT, CO-OWNERSHIP AND SUPPLY AGREEMENT
The Company's facility is located in San Diego, California.
Manufacturing of the Company's products has been contracted out to
C-Motech Co. Ltd. ("C-Motech"), located in South Korea.
In January 2005, the Company entered into an agreement with C-Motech
for the manufacture of the products. Under the manufacturing and supply
agreement, C-Motech provides the Company with services including all
licenses, component procurement, final assembly, testing, quality
control, fulfillment and after-sale service. The Agreement provides
exclusive rights to market and sell CDMA wireless data products in
countries in North America, the Caribbean, and South America.
Furthermore, the Agreement provides that the Company is responsible for
20
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
Qualcomm's MSM 5100, 5500, 6500, and 6800 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. On January 30, 2007, C-Motech also
certified that the Company has the exclusive right to sell CDU-680 EVDO
USB modems directly and indirectly in these territories.
The initial term of the agreement was for two years, commencing on
January 5, 2005. The agreement automatically renews for successive one
year periods unless either party provides a written notice to terminate
at least sixty days prior to the end of the term. This agreement may be
amended or supplemented by mutual agreement of the parties, as is
necessary to document the addition of any new products.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
As the Company is a "smaller reporting company," this Item is inapplicable.
ITEM 4. CONTROLS AND PROCEDURES.
The Company maintains disclosure controls and procedures as defined under the
Securities Exchange Act of 1934. They are designed to help ensure that material
information is: (1) gathered and communicated to its management, including its
principal executive and financial officers, in a manner that allows for timely
decisions regarding required disclosures; and (2) recorded, processed,
summarized, reported and filed with the SEC as required under the Securities
Exchange Act of 1934 and within the time periods specified by the SEC.
The Company's management, with the participation of its Chief Executive Officer
and Chief Financial Officer, evaluated the effectiveness of the design and
operation of its disclosure controls and procedures as of September 30, 2008.
Based on such evaluation, which included a determination that the material
weakness in internal control over financial that existed as of June 30, 2008,
and was disclosed in its Annual Report on Form 10-K for the fiscal year ended
June 30, 2008, had been remediated, the Company's Chief Executive Officer and
Chief Financial Officer concluded that its disclosure controls and procedures
were effective as of September 30, 2008.
There were no changes in our internal control over financial reporting during
our most recent fiscal quarter that have materially affected, or are reasonably
likely to materially affect, our internal control over financial reporting.
(
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The Company is not currently involved in any material legal proceedings. The
Company is, from time to time, involved in routine legal proceedings and claims
arising in the ordinary course of business.
ITEM 1A: RISK FACTORS.
An investment in the Company's shares is highly speculative and involves a
significant degree of risk. Prospective investors should carefully consider the
following risk factors, in addition to the other information set forth in this
Quarterly Report or in any material accompanying this report. The following
summary of risk factors does not purport to be a complete explanation of the
risks involved in the Company's business.
THE COMPANY HAS EXPERIENCED LOSSES IN THE PAST. The Company has experienced
significant operating losses and negative cash flows from operating activities
in the past, including the fiscal year ended June 30, 2006. If the Company's
sales do not continue to improve and operating expenses are not reduced and
monitored, it may incur additional significant net losses and negative cash
flows from operations.
THE COMPANY RELIES ON A SINGLE SOURCE FOR THE MANUFACTURE OF ITS PRODUCTS. The
Company relies solely on C-Motech Co., Ltd., a company located in South Korea,
to design, manufacture and supply its products, which exposes the Company to a
number of risks and uncertainties outside its control. The Company's agreement
with C-Motech is renewable annually, and it cannot be certain it will be renewed
each year. Thus, the Company relies solely on C-Motech to manufacture and
deliver all its products. If the Company was unable to purchase products from
C-Motech for any reason, it would be forced to seek an alternative source of
supply, which may not be available. Any significant changes in C-Motech, such as
a change in ownership, operations or financial status may cause difficulties in
its ability to deliver products to customers on a timely basis.
THE COMPANY OPERATES IN AN INTENSIVELY COMPETITIVE MARKET. The wireless
broadband data access market is highly competitive, and it may be unable to
compete effectively. Many of its competitors or potential competitors have
significantly greater financial, technical and marketing resources than it does.
To survive and be competitive, the Company will need to continuously invest in
research and development, sales and marketing, and customer support. Increased
competition could result in price reductions and smaller customer orders. The
failure to compete effectively could seriously impair its business.
22
THE COMPANY OPERATES IN THE HIGH-RISK TELECOM SECTOR. The Company is in a
volatile industry. In addition, its revenue model is evolving and relies
substantially on the assumption that the Company will be able to successfully
complete the development and sales of its products and services in the
marketplace. The Company's prospects must be considered in the light of the
risks, uncertainties, expenses and difficulties frequently encountered by
companies in the early stages of development and marketing. In order to be
successful in the market, the Company must, among other things:
o Complete development and introduction of functional and attractive
products and services;
o Attract and maintain customer loyalty;
o Establish and increase awareness of its brand;
o Provide desirable products and services to customers at attractive
prices;
o Establish and maintain strategic relationships with partners and
affiliates;
o Rapidly respond to competitive and technological developments;
o Build operations and customer service infrastructure to support its
business; and
o Attract, retain, and motivate qualified personnel.
The Company cannot guarantee that it will be able to achieve these goals, and
its failure to achieve them could adversely affect its business, results of
operations, and financial condition. Moreover, there can be no assurance that
the Company will be able to obtain additional funding if its financial resources
are depleted. The Company expects that revenues and operating results will
fluctuate in the future. If the Company's efforts are unsuccessful or other
unexpected events occur, purchasers of its shares could lose their entire
investment.
THE COMPANY OPERATES IN A FIELD WITH RAPIDLY CHANGING TECHNOLOGY. Since the
Company's products and services are new, it cannot be certain that these
products and services will function as anticipated or be desirable to its
intended markets. The Company's current or future products and services may fail
to function properly, and if its products and services do not achieve and
sustain market acceptance, its business, results of operations and profitability
may suffer. If the Company is unable to predict and comply with evolving
wireless standards, its ability to introduce and sell new products will be
adversely affected. If the Company fails to develop and introduce products on
time, it may lose customers and potential product orders.
THE COMPANY DEPENDS ON THE DEMAND FOR WIRELESS NETWORK CAPACITY. The demand for
the Company's products is completely dependent on the demand for broadband
wireless access to networks. If wireless operators do not deliver acceptable
wireless service, its product sales may dramatically decline. Thus, if wireless
operators experience financial or network difficulties, it will likely reduce
demand for its products.
THE COMPANY DEPENDS ON COLLABORATIVE ARRANGEMENTS. The development and
commercialization of its products and services depend in large part upon its
ability to selectively enter into and maintain collaborative arrangements with
developers, distributors, service providers, network systems providers, core
wireless communications technology providers and manufacturers, among others.
THE LOSS OF ANY OF THE COMPANY'S MATERIAL CUSTOMERS COULD ADVERSLY AFFECT ITS
REVENUES AND PROFITABILITY, AND THEREFORE SHAREHOLDER VALUE. The Company depends
on a small number of customers for a significant portion of its revenues. For
the three months ended September 30, 2008, three customers accounted for 55.7%,
15.3%, and 10.7% of revenues. If any of these customers reduce their business
with the Company or suffer from business failure, its revenues and profitability
could decline, perhaps materially.
THE COMPANY'S PRODUCT DELIVERIES ARE SUBJECT TO LONG LEAD TIMES. Due to its
limited capital resources, it is experiencing long-lead times to ship products
to its customers, often in excess of 45 days. This could cause it to lose
customers, who may be able to secure faster delivery times from its competitors,
and require it to maintain higher levels of working capital.
THE COMPANY'S PRODUCT-TO-MARKET CHALLENGE IS CRITICAL. The Company's success
depends on its ability to quickly enter the market and establish an early mover
advantage. It must implement an aggressive sales and marketing campaign to
solicit customers and strategic partners. Any delay could seriously affect its
ability to establish and effectively exploit an early-to-market-strategy.
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AS BUSINESS EXPANDS INTERNATIONALLY, THE COMPANY WILL BE EXPOSED TO ADDITIONAL
RISKS RELATING TO INTERNATIONAL OPERATIONS. The Company's expansion into
international operations exposes it to additional risks unique to such
international markets, including the following:
o Increased credit management risks and greater difficulties in
collecting accounts receivable;
o Unexpected changes in regulatory requirements, wireless communications
standards, exchange rates, trading policies, tariffs and other
barriers;
o Uncertainties of laws and enforcement relating to the protection of
intellectual property;
o Language barriers; and
o Potential adverse tax consequences.
Furthermore, if the Company is unable to further develop distribution channels
in countries in North America, the Caribbean and South America, it may not be
able to grow its international operations, and its ability to increase its
revenue will be negatively impacted.
THE COMPANY MAY INFRINGE THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS. The
industry in which the Company operates has many participants that own, or claim
to own, proprietary intellectual property. In the past it has received, and in
the future may receive, claims from third parties alleging that the Company, and
possibly its customers, violate their intellectual property rights. Rights to
intellectual property can be difficult to verify and litigation may be necessary
to establish whether or not the Company has infringed the intellectual property
rights of others. In many cases, these third parties are companies with
substantially greater resources than the Company, and they may be able to, and
may choose to, pursue complex litigation to a greater degree than the Company
could. Regardless of whether these infringement claims have merit or not, the
Company may be subject to the following:
o It may be liable for substantial damages, liabilities and litigation
costs, including attorneys' fees;
o It may be prohibited from further use of the intellectual property and
may be required to cease selling its products that are subject to the
claim;
o It may have to license the third party intellectual property,
incurring royalty fees that may or may not be on commercially
reasonable terms. In addition, there is no assurance that it will be
able to successfully negotiate and obtain such a license from the
third party;
o It may have to develop a non-infringing alternative, which could be
costly and delay or result in the loss of sales. In addition, there is
no assurance that it will be able to develop such a non-infringing
alternative;
o The diversion of management's attention and resources;
o Its relationships with customers may be adversely affected; and
o It may be required to indemnify its customers for certain costs and
damages they incur in such a claim.
In the event of an unfavorable outcome in such a claim and its inability to
either obtain a license from the third party or develop a non-infringing
alternative, then its business, operating results and financial condition may be
materially adversely affected, and it may have to restructure its business.
Absent a specific claim for infringement of intellectual property, from time to
time, the Company has and expects to continue to license technology,
intellectual property and software from third parties. There is no assurance
that it will be able to maintain its third party licenses or obtain new licenses
when required and this inability could materially adversely affect its business
and operating results and the quality and functionality of its products. In
addition, there is no assurance that third party licenses the Company executes
will be on commercially reasonable terms.
Under purchase orders and contracts for the sale of its products, the Company
may provide indemnification to its customers for potential intellectual property
infringement claims for which it may have no corresponding recourse against its
third party licensors. This potential liability, if realized, could materially
adversely affect its business, operating results and financial condition.
GOVERNMENT REGULATION COULD RESULT IN INCREASED COSTS AND INABILITY TO SELL ITS
PRODUCTS. The Company's products are subject to certain mandatory regulatory
approvals in the United States and other regions in which it operates. In the
United States, the Federal Communications Commission regulates many aspects of
communications devices. Although it has obtained all the necessary Federal
Communications Commission and other required approvals for the products it
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currently sells, it may not obtain approvals for future products on a timely
basis, or at all. In addition, regulatory requirements may change, or the
Company may not be able to obtain regulatory approvals from countries other than
the United States in which it may desire to sell products in the future.
THE COMPANY MAY NEED ADDITIONAL FINANCING DUE TO LIMITED RESOURCES. The
Company's financial resources are limited, and the amount of funding that is
required to develop and commercialize its products and technologies is highly
uncertain. Adequate funds may not be available when needed or on terms
satisfactory to us. Lack of funds may cause the Company to delay, reduce and/or
abandon certain or all aspects of its development and commercialization
programs. If it seeks additional financing through the issuance of equity or
convertible debt securities, the percentage ownership of its stockholders will
be reduced, stockholders may experience additional dilution, and such securities
may have rights, preferences and privileges senior to those of its Common Stock.
There can be no assurance that additional financing will be available on terms
favorable to it or at all. If adequate funds are not available or are not
available on acceptable terms, it may not be able to fund its expansion, take
advantage of desirable acquisition opportunities, develop or enhance services or
products or respond to competitive pressures. Such inability could have a
materially adverse effect on its business, results of operations and financial
conditions.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS.
31.1 Certificate of Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certificate of Acting Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
32.1 Certificate of Chief Executive Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
32.2 Certificate of Acting Chief Financial Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
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SIGNATURES
Pursuant to the requirements of Section 13 of 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Franklin Wireless Corp.
By: /s/ OC Kim
-----------------------------
OC Kim
President and Acting Chief Financial Officer
Dated: November 14, 2008
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