franklin_10k-063009.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
DC 20549
FORM
10-K
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x
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
fiscal year ended June 30, 2009
OR
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¨
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the transition period from
to
.
Commission
file number: 0-11616
FRANKLIN WIRELESS
CORP.
(Exact
name of Registrant as specified in its charter)
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Nevada
(State or other jurisdiction
of incorporation or organization)
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95-3733534
(I.R.S.
Employer Identification Number)
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5440
Morehouse Drive, Suite 1000,
San
Diego, California
(Address
of principal executive offices)
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92121
(Zip
code)
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Securities
registered pursuant to Section 12(b) of the Act: None
Securities
registered pursuant to Section 12(g) of the Act: Common Stock, par value
$.001 per share
Indicate
by check mark if the Registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes ¨ No x
Indicate
by check mark if the Registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the 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 o
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes No
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not 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-K or any amendment to this
Form 10-K.
x
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.
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Large accelerated
filero
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Accelerated filero
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Non-accelerated filero
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Smaller reporting
companyx
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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
aggregate market value of the voting common stock held by non-affiliates of the
Registrant, based on the closing price of the Registrant’s common stock on
December 31, 2008, as reported by The OTC Bulletin Board, was approximately
$3,034,949. For the purpose of this calculation only, shares owned by
officers, directors (and their affiliates) and 5% or greater stockholders have
been excluded. The Registrant does not have any non-voting stock issued or
outstanding.
The
Registrant has 13,231,491 shares of common stock outstanding as of October 12,
2009.
FRANKLIN
WIRELESS CORP.
INDEX
TO ANNUAL REPORT ON FORM 10-K
FOR
THE FISCAL YEAR ENDED JUNE 30, 2009
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Page
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PART I
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Item
1:
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Business
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4
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Item
1A:
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Risk
Factors
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7
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Item
1B:
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Unresolved
Staff Comments
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9
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Item
2:
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Description
of Properties
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10
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Item
3:
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Legal
Proceedings
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Item
4:
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Submission
of Matters to a Vote of Security Holders
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PART II
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Item
5:
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Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
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Item
6:
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Selected
Financial Data
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11
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Item
7:
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
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12 |
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Item
7A:
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Quantitative
and Qualitative Disclosures About Market Risk
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17
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Item
8:
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Financial
Statements and Supplementary Data
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Item
9:
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Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
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Item
9A(T):
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Controls
and Procedures
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Item
9B:
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Other
Information
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18
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PART III
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Item
10:
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Directors,
Executive Officers and Corporate Governance
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19
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Item
11:
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Executive
Compensation
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20
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Item
12:
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Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
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22
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Item
13:
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Certain
Relationships and Related Transactions, and Director
Independence
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Item
14:
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Principal
Accounting Fees and Services
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23
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PART IV
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Item
15:
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Exhibits,
and Financial Statement Schedules
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Signatures
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S-1
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Index
to Financial Statements
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F-1
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NOTE
ON FORWARD LOOKING STATEMENTS
You
should keep in mind the following points as you read this Report on Form
10-K:
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the
terms "we", "us", "our", “Franklin”, “Franklin Wireless”, or the "Company"
refer to Franklin Wireless Corp.
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our
fiscal year ends on June 30; references to fiscal 2009 and fiscal 2008 and
similar constructions refer to the fiscal year ended on June 30 of the
applicable year.
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This
Annual Report on Form 10-K 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-K. 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 "Risk
Factors" These forward looking statements are made only as of the date of this
Annual Report on Form 10-K. We do not undertake to update or revise the forward
looking statements, whether as a result of new information, future events or
otherwise.
PART
I
ITEM
1. BUSINESS.
BUSINESS
OVERVIEW
We design
and sell broadband high speed wireless data communication products such as third
generation (“3G”) and fourth generation (“4G”) 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, table PC or desktop USB port without a PC card slot. The broadband
wireless data communication products are positioned at the convergence of
wireless communications, mobile computing and the Internet, each of which we
believe represents a growing market.
We market
our products directly to wireless operators, and indirectly through strategic
partners and distributors. Our global customer base extends from the
United States to Caribbean and South American countries. Our
Universal Serial Bus (“USB”) modems are certified by Sprint, Comcast Cable,
Clearwire, Time Warner Cable, Cellular South, Mobi PCS, NTELOS, Cincinnati Bell,
and ACS in the United States, by IUSACELL in Mexico, by Telefonica and Movilnet
in Venezuela, by Centennial in Puerto Rico, by Alegro in Ecuador, by CellularOne
in Bermuda and by TSTT in Trinidad and Tobago. We have built upon our strong
customer relationships to help drive strategic marketing initiatives with our
customers that provide additional opportunities to expand market reach by
combining our expertise in wireless technologies with our customers’ sales and
marketing base, creating access to additional indirect distribution
channels.
OUR
STRUCTURE
We were
incorporated in 1982 in California and reincorporated in Nevada on January 2,
2008. The reincorporation had no effect on the nature of our business
or our management.
Our
headquarters office is located in San Diego, California. The 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, ARG, is a wholly owned
subsidiary, and this entity has been inactive since August 2003. On
October 30, 2007, the Board of Directors approved the dissolution of ARG, and as
a part of the dissolution, we assumed a note payable of $334,000. The
subsidiary did not have any operations for the years ended June 30, 2009, 2008,
and 2007 or since August 2003.
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. We identify our operating
segments based on how management internally evaluates separate financial
information, business activities and management responsibility. We operate in a
single business segment consisting of sale of wireless access products with
operating facility in the United States. We generate revenues from
two geographic areas which consist of United States and Caribbean and South
America.
OUR
PRODUCTS
We are
one of the first companies 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
products are designed to operate on a majority of wireless networks in the
world, provide mobile subscribers with secure and convenient high speed access
to 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 products are based
on widely deployed cellular technologies and operate across 3G and 4G networks,
including:
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Code
Division Multiple Access (“CDMA”) technology 1xEVDO - Evolution Data
Optimized technology in both revision 0 and revision A releases. Revision
0 modems have a download speed of up to 2.4 Mbps and the revision A
products achieve broadband like speed of 3.1
Mbps.
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High
Speed Packet Access (“HSPA”) based on the 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.
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Worldwide
Interoperability for Microwave Access (“WIMAX”) based on the IEEE 802.16
standard.
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The
followings are a representative selection of our current CDMA and HSPA wireless
data products:
USB
MODEMS
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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°. 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.
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The
CMU-300 WIMAX plus CDMA USB Modem is the first device that operates on
both the 3G EVDO and 4G WIMAX networks. With the CMU-300, customers will
have simple-to-access to the best possible mobile broadband
connection: 3G or 4G.
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The
CGU-628A tri band 850/1900/2100 MHz HSDPA and quad band 800/900/1800/1900
MHz GSM/GPRS USB modem features a downlink speed of up to 14.4 Mbps and an
uplink speed of up to 384 Kbps. The tri band radio allows the
modem to be used worldwide wherever there is HSDPA service and features a
retractable USB connector.
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The
CGU-720A quad band plus AWS 850/1700/1900/2100 MHz HSPA and quad band
800/900/1800/1900 MHz GSM/GPRS USB modem features a downlink speed of up
to 7.2 Mbps and an uplink speed of up to 5.76 Mbps. The quad
band plus AWS radio allows the modem to be used worldwide wherever there
is HSPA service and features a retractable USB
connector.
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WIRELESS
PC CARDS
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The
CDX-680 Dual-band 800/1900 MHz EVDO Rev A Express Card
modem has the same wireless connection performance as the
CDU-680 but features an Express Card 34 form
factor.
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STAND-ALONE
MODEMS
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The
CDM-650 is a stand-alone Dual-band 800/1900 MHz EVDO rev 0 USB modem
available for Machine-to-Machine and Vertical Application markets, such as
customers who need internet connection in a kiosk or remote locations
where there are no cable or DSL services. The CDM-650 is a completely
stand-alone modem with a metallic housing, external antenna, a serial port
and a USB port for ease of integration with any applications and computer
systems.
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CUSTOMERS
Our
global customer base is comprised of wireless operators, strategic partners and
distributors, and it extends from the United States to Caribbean and South
American countries. Our Universal Serial Bus (“USB”) modems are
certified by Sprint, Comcast Cable, Clearwire, Time Warner Cable, Cellular
South, Mobi PCS, NTELOS, Cincinnati Bell, and ACS in the United States, by
IUSACELL in Mexico, by Telefonica and Movilnet in Venezuela, by Centennial in
Puerto Rico, by Alegro in Ecuador, by CellularOne in Bermuda and by TSTT in
Trinidad and Tobago. We have built upon our strong customer
relationships to help drive strategic marketing initiatives with our customers
that provide additional opportunities to expand market reach by combining our
expertise in wireless technologies with our customers’ sales and marketing base,
creating access to additional indirect distribution channels.
SALES
AND MARKETING
We market
our products primarily to wireless operators either directly or indirectly
through strategic partners and distributors located in North America, the
Caribbean, and South America. Most of our sales to wireless operators
are through the use of our indirect strategic partners and selected sales
distributors. A significant portion of our revenue comes from the
United States.
CDMA
Development Group (“CDG”) test certifications are required to launch and market
new CDMA wireless data products with wireless operators in North America, the
Caribbean and South America, and PCS Type Certification Review Board (“PTCRB”)
test certifications are required for HSPA wireless data
products. Certifications are issued as being a qualifier of CDG1, CDG
2 and CDG 3 as well as PTCRB. We are currently selling our wireless
broadband modems with about nine wireless operators in the North America and
about seven wireless operators in the Caribbean and South America.
In order
to maintain and enhance our strong sales relationships, we are expanding our
sales and technical team as well as access to additional distribution
channels. We are also engaged in a variety of marketing activities,
such as co-marketing with our vendor, trade show support, and products marketing
development support. In the United States, we are continuing to
expand our strategic relationships with major wireless operators and industry
leaders through increased marketing activities in order to drive our market
reach and sales by combining our expertise in wireless technologies with their
global subscriber bases.
PRODUCTION
AND MANUFACTURING OPERATIONS
Our
facility is located in San Diego, California. Manufacturing of our
products is contracted out to C-Motech Co. Ltd. (“C-Motech”), an electronics
manufacturing company, located in South Korea.
In
January 2005, the Company entered into a manufacturing and supply agreement (the
“Agreement”) with C-Motech for the manufacture of its products. Under the
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 that are customers or potential customers within a designated
territory, and C-Motech is responsible for design, development, testing, CDG
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 rights 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. The agreement will be valid for an additional one year
period and expires on January 4, 2010.
EMPLOYEES
As of
June 30, 2009, we had sixteen full time employees and four full time
consultants. 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 our employees is
amicable.
ITEM
1A: RISK FACTORS.
The
following risk factors do not purport to be a complete explanation of the risks
involved in our business.
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 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.
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:
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We
may be liable for potentially substantial damages, liabilities and
litigation costs, including attorneys’
fees;
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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;
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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;
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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;
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The
diversion of management’s attention and
resources;
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Our
relationships with customers may be adversely affected;
and
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We
may be required to indemnify our customers for certain costs and damages
they incur in such a claim.
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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.
WE
OPERATE IN AN INTENSIVELY COMPETITIVE MARKET. The wireless broadband data access
market is highly competitive, and we may be unable to compete effectively. 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:
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Complete
development and introduction of functional and attractive products and
services;
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Attract
and maintain customer loyalty;
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Establish
and increase awareness of our brand and develop customer
loyalty;
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Provide
desirable products and services to customers at attractive
prices;
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Establish
and maintain strategic relationships with strategic partners and
affiliates;
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Rapidly
respond to competitive and technological
developments;
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Build
operations and customer service infrastructure to support our business;
and
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Attract,
retain, and motivate qualified
personnel.
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We cannot
guarantee that we will be able to achieve these goals, and our failure to
achieve them could adversely affect our business, results of operations, and
financial condition. 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.
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
production facilities, 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.
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. For
the year ended June 30, 2009, three customers represented approximately 63.5% of
our revenue. If any of these customers reduce their business with us, 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:
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Increased
credit management risks and greater difficulties in collecting accounts
receivable;
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Unexpected
changes in regulatory requirements, wireless communications standards,
exchange rates, trading policies, tariffs and other
barriers;
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Uncertainties
of laws and enforcement relating to the protection of intellectual
property;
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·
|
Potential
adverse tax consequences.
|
Furthermore,
if we are unable to further develop distribution channels in countries in North
America, the Caribbean and South America, we may not be able to grow our
international operations, and our ability to increase our revenue will be
negatively impacted.
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.
ITEM
1B. UNRESOLVED STAFF COMMENTS.
Inapplicable.
ITEM
2. DESCRIPTION OF PROPERTIES.
We lease
approximately 6,070 square feet of office space in San Diego, California, at a
monthly rent of $9,105, and the lease expires on August 31, 2011. In addition to
a monthly rent, the lease provides for periodic cost of living increases in the
base rent and payment of common area costs. 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.
We are
from time to time involved in certain legal proceedings and claims arising in
the ordinary course of business. On January 14, 2009, DNT, LLC filed
a complaint in the United States District Court for the Eastern District of
Virginia against one of our customers as one of six nominal defendants on behalf
of alleged patent infringement of U.S. Patent No. RE 37,660 by the products that
have been provided by us. Pursuant to our agreement with the
customer, the customer has sent the notice that we will defend and indemnify it
in this matter, including hiring counsel to prepare an answer or other response
to the complaint. As of June 30, 2009, this legal proceeding is
pending and we do not expect a material adverse effect on our financial
condition for the year ended June 30, 2009 and thereafter.
ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No
matters were submitted to a vote of our stockholders during the fourth quarter
of the fiscal year 2009.
PART
II
ITEM
5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES.
MARKET
PRICE OF OUR COMMON STOCK
Share of
our Common Stock are quoted and traded on the OTC Bulletin Board" under the
trading symbol "FKWL.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, 2009 and 2008. The bid price reflects inter-dealer prices and
does not include retail mark-up, markdown, or commission. Prices have been
adjusted to reflect a 1 for 70 reverse stock split in January 2008.
|
|
|
High
|
|
Low
|
|
June
30, 2009
|
|
|
|
|
|
First
Quarter
|
|
1.50
|
|
1.36
|
|
Second
Quarter
|
|
0.45
|
|
0.45
|
|
Third
Quarter
|
|
0.40
|
|
0.38
|
|
Fourth
Quarter
|
|
0.75
|
|
0.45
|
| |
|
|
|
|
|
June
30, 2008
|
|
|
|
|
|
First
Quarter
|
|
3.50
|
|
0.70
|
|
Second
Quarter
|
|
3.15
|
|
1.40
|
|
Third
Quarter
|
|
3.00
|
|
1.72
|
|
Fourth
Quarter
|
|
2.75
|
|
1.85
|
We have
one class of common stock. As of October 12, 2009, we had
approximately 811 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.
DIVIDENDS
We have
never declared or paid any dividends on our Common Stock. We
currently intend to retain all available funds for use in the operation and
development of our business and, therefore, and do not expect to declare or pay
any cash dividends in the foreseeable future.
UNREGISTERED
SALE OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM
6. SELECTED FINANCIAL DATA.
As a
“smaller reporting company” as defined by Rule 12b-2 of the Exchange Act, we are
not required to respond to this item.
ITEM
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION.
The
following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our financial statements and
related notes included elsewhere in this report. This report contains
certain forward-looking statements relating to future events or our future
financial performance. These statements are subject to risks and
uncertainties which could cause actual result to differ materially from those
discussed in this report. You are cautioned not to place undue
reliance on this information which speaks only as of the date of this
report. We are not obligated to publicly update this information,
whether as a result of new information, future events or otherwise, except to
the extent we are required to do so in connection with our obligation to file
reports with the SEC. For a discussion of the important risks to our business
and future operating performance, see the discussion under the caption “Item 1A.
Risk Factors” and under the caption “Factors That May Influence Future Results
of Operations” below. In light of these risks, uncertainties and
assumptions, the forward-looking events discussed in this report might not
occur.
BUSINESS
OVERVIEW
We design
and sell broadband high speed wireless data communication
products. Our products include third generation (“3G”) and fourth
generation (“4G”) wireless modules and modems. Our products are designed to
operate on a majority of wireless networks in the world, provide mobile
subscribers with secure and convenient high speed access to 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.
We market
our products through two channels: directly to wireless operators, and
indirectly through strategic partners and distributors. Our global
customer base extends from the United States to Caribbean and South American
countries. Our Universal Serial Bus (“USB”) modems are certified by
Sprint, Comcast Cable, Clearwire, Time Warner Cable, Cellular South, Mobi PCS,
NTELOS, Cincinnati Bell, and ACS in the United States, by IUSACELL in Mexico, by
Telefonica and Movilnet in Venezuela, by Centennial in Puerto Rico, by Alegro in
Ecuador, by CellularOne in Bermuda and by TSTT in Trinidad and
Tobago.
In order
to maintain and enhance our strong sales relationships, we are expanding our
sales and technical team as well as access to additional distribution
channels. We are also engaged in a variety of marketing activities,
such as co-marketing with our vendor, trade show support, and product marketing
development support. In the United States, we are continuing to
expand our strategic relationships with leading wireless operators and industry
leaders through increased marketing activities in order to drive our market
reach and sales by combining our expertise in wireless technologies with their
global subscriber bases.
FACTORS
THAT MAY INFLUENCE FUTURE RESULTS OF OPERATIONS
We
believe that our revenue growth will be influenced largely by (1) the successful
maintenance of our existing customers, (2) the rate of increase in demand for
wireless data products, (3) customer acceptance for our new products, (4) new
customer relationships and contracts, and (4) our ability to meet
customers’ demands.
We have a
manufacturing and supply agreement with C-Motech for the manufacturing of our
products. Under the agreement, C-Motech is responsible for design,
development, testing, certification, and completion of these
products. We believe that our results of operations and gross margin
will depend on our ability to negotiate product purchase prices with
C-Motech.
We have
entered into and expect to continue to enter into new customer relationships and
contracts for the supply of our products, and this may require significant
demands on our resources, resulting in increased operating, selling, and
marketing expenses associated with such new customers.
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. We identify our operating
segments based on how management internally evaluates separate financial
information, business activities and management responsibility. We operate in a
single business segment consisting of sale of wireless access products with
operating facility in the United States. We generate revenues from
two geographic areas which consist of United States and Caribbean and South
America.
REVENUE
RECOGNITION
We
recognize 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,
we recognize revenues from product sales upon shipment of the product to the
customers or when the products are received by the customers in accordance with
shipping or delivery terms. We provide a factory warranty for one year form the
shipment which is covered by our vendor under the purchase agreement between the
Company and the vendor.
INVENTORIES
Our
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. We
assess the inventory carrying value and reduce it, if necessary, to its net
realizable value based on customer orders on hand, and internal demand forecasts
using management’s best estimates given information currently available. Our
customer demand is highly unpredictable, and can fluctuate significantly caused
by factors beyond the control of the Company. We may maintain an allowance for
inventories for potentially excess and obsolete inventories and inventories that
are carried at costs that are higher than their estimated net realizable values.
As of June 30, 2009 and 2008, no allowance was recorded.
LONG-LIVED
ASSETS
In
accordance with Statement of Financial Accounting Standards No. 144 (“SFAS
144”), "Accounting for Impairment on Disposal of Long-lived Assets," we review
for impairment of long-lived assets 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.
INCOME
TAXES
We
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.
We
recognize federal and state tax liabilities or assets based on our estimate of
taxes payable to or refundable by tax authorities in the current fiscal
year. We also recognize federal and state tax liabilities or assets
based on our estimate of 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 computed by applying the U.S. federal rate of 34% and California state tax
rate of 8.84% to taxable income in the years in which those temporary
differences are expected to be recovered or settled. 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.
RECENTLY
ISSUED ACCOUNTING PRONOUNCEMENTS
In
December 2007, the FASB issued SFAS No. 141 (revised 2007), Business
Combinations (SFAS No. 141R). SFAS No. 141R establishes principles and
requirements for how companies recognize and measure identifiable assets
acquired, liabilities assumed, and any non-controlling interest in connection
with a business combination; recognize and measure the goodwill acquired in a
business combination or a gain from a bargain purchase; and determine what
information to disclose to enable users of the financial statements to evaluate
the nature and financial effects of the business combination. SFAS No. 141R
is effective for business combinations for which the acquisition date is on or
after January 1, 2009. We do not expect the adoption of SFAS No. 141R
to have a material impact on our results of operations or financial
position.
In
December 2007, the FASB issued SFAS No. 160, Non-controlling Interests in
Consolidated Financial Statements-an amendment of ARB No. 51 (SFAS
No. 160). SFAS No. 160 applies to all companies that prepare
consolidated financial statements, except not-for-profit organizations, but will
affect only those entities that have an outstanding non-controlling interest in
one or more subsidiaries or that deconsolidate a subsidiary. SFAS No. 160
is effective for the Company on January 1, 2009. Earlier adoption is prohibited.
We do not expect the adoption of SFAS No. 160 to have a material impact on
our results of operations or financial position.
In
February 2008, the FASB issued FASB Staff Position (FSP) No. FAS 157-2,
Effective Date of FASB Statement No. 157 (FSP No. 157-2). The FSP
amends SFAS No. 157 to delay the effective date for non-financial assets
and liabilities, except for items that are recognized or disclosed at fair value
in the financial statements on a recurring basis. For items within its scope,
the FSP defers the effective date of SFAS No. 157 to fiscal years beginning
after November 15, 2008. We do not expect the adoption of FSP
No. 157-2 to have a material effect on our results of operations or
financial position.
In May
2008, the FASB issued SFAS No. 162 (“SFAS No. 162”), “The Hierarchy of
Generally Accepted Accounting Principles.” This statement identifies the sources
of accounting principles and the framework for selecting the principles to be
used in the preparation of financial statements of nongovernmental entities that
are presented in conformity with accounting principles generally accepted in the
United States (“GAAP”). While this statement formalizes the sources and
hierarchy of GAAP within the authoritative accounting literature, it does not
change the accounting principles that are already in place.
In May
2009, the FASB issued SFAS No. 165, Subsequent Events (SFAS No. 165),
effective for financial periods ending after June 15, 2009. SFAS
No. 165 established principles and requirements for subsequent events,
including the period after the balance sheet date during which management of a
reporting entity shall evaluate events for potential disclosure in the financial
statements, the circumstances that warrant disclosure, and the specific
disclosure requirements for transactions that occur after the balance sheet
date. The adoption of SFAS No. 165 did not have a material effect on the results
of our operations and financial position.
In June
2009, the FASB issued SFAS No. 167 Amendments to FASB Interpretation
No. 46(R) (SFAS No. 167). SFAS No. 167 amends FIN 46 (revised
December 2003), Consolidation of Variable Interest Entities (FIN 46R), regarding
when and how to determine, or re-determine, whether an entity is a variable
interest entity. In addition, SFAS No. 167 replaces FIN 46R’s quantitative
approach for determining who has a controlling financial interest in a variable
interest entity with a qualitative approach. Furthermore, SFAS No. 167
requires ongoing assessments of whether an entity is the primary beneficiary of
a variable interest entity. SFAS No. 167 is effective beginning
January 1, 2010. We do not expect the adoption of SFAS No. 167 to have a
material effect on our results of operations or financial position.
RESULT
OF OPERATIONS
The
following table sets forth, for the years ended June 30, 2009, 2008 and 2007 our
statements of operations data expressed as a percentage of sales:
|
|
|
Year
Ended June 30,
|
|
|
|
2009
|
|
2008
|
|
2007
|
|
|
|
(as
a percentage of sales)
|
|
|
|
|
|
|
|
|
|
Net
Sales
|
|
100.0%
|
|
100.0%
|
|
100.0%
|
|
Cost
of goods sold
|
|
78.4%
|
|
77.8%
|
|
74.0%
|
|
Gross
profit
|
|
21.6%
|
|
22.2%
|
|
26.0%
|
|
Selling,
general and administrative expenses
|
|
11.9%
|
|
9.5%
|
|
13.3%
|
|
Income
from operations
|
|
9.7%
|
|
12.7%
|
|
12.7%
|
|
Other
income, net
|
|
0.4%
|
|
0.3%
|
|
0.2%
|
|
Net
income before income taxes
|
|
10.1%
|
|
13.0%
|
|
12.9%
|
|
Provision
for income taxes
|
|
5.1%
|
|
(1.7%)
|
|
(0.4%)
|
|
Net
income
|
|
15.2%
|
|
11.3%
|
|
12.5%
|
YEAR
ENDED JUNE 30, 2009 COMPARED TO YEAR ENDED JUNE 30, 2008
NET SALES - Net sales
decreased by $10,722,795, or 30.9%, to $24,000,504 for the year ended June 30,
2009 from $34,723,299 for the corresponding period of 2008. For the
year ended June 30, 2009, the mix of net sales by geographic region consisted
primarily of Caribbean and South American countries and the United States,
amounted to $9,665,548, or 40.3% of net sales, and $14,334,956, or 59.7% of net
sales, respectively. The overall decrease in sales was primarily due to a mix of
decrease in sales and sales price for our “EV-DO technology” products in
Caribbean and South American countries, caused by a decline in purchasing power
of customers and their currencies. The sales in Caribbean and South American
countries decreased by $15,683,284, or 61.9%, to $9,665,548 for the year ended
June 30, 2009 from $25,348,832, compared to the corresponding period of
2008. This decrease was offset by an increase in sales in the
United States by approximately $4,960,489, or 52.9%, to $14,334,956 from
$9,374,467 as a result of the increase in demand for our new “EV-DO technology”
product, CMU-300 WIMAX plus CDMA USB Modem (“CMU-300”), which was launched in
late year 2008 or first half of the year of fiscal 2009. The sales in
United Sates represented 59.7% of the net sales for the year ended June 30,
2009, compared to 27.0% for the corresponding period of 2008, while “CMU-300”
represented approximately 54.9% of the net sales in the United States for the
year ended June 30, 2009, compared to 0.0% for the corresponding period of
2008.
GROSS PROFIT – Gross profit
decreased by $2,517,789, or 32.7%, to $5,176,495, or 21.6% of net sales, for the
year ended June 30, 2009 from $7,694,284, or 22.2% of net sales, for the
corresponding period of 2008. The decrease was primarily due to a decrease in
net sales by $10,722,795, or 30.9%. The decrease in gross profit
margin was primarily due to higher sales of lower margin “EV-DO technology
product”, “CMU-300”, for the year ended June 30, 2009, compared to the
corresponding period of 2008.
SELLING, GENERAL, AND
ADMINISTRATIVE - Selling, general, and administrative expenses decreased
by $540,992, or 16.4%, to $2,759,148 for the year ended June 30, 2009 from
$3,300,070 for the corresponding period of 2008. The decrease was
primarily due to a $773,423 decrease in sales commission expenses due to
decrease in sales and $276,367 increase in salaries and related expenditures due
to increase in our sales-force.
OTHER INCOME (EXPENSE), NET -
The net of other income (expense) decreased by $12,093, or 10.8%, to $100,055
for the year ended June 30, 2009 from $112,149 for the corresponding period of
2008. The decrease was primarily due to the net effect of the
decrease of $50,249 in interest income, the decrease of $4,544 in other income,
the increase of $11,125 in other expenses, and the decrease of $53,825 in loss
on disposals of assets.
PROVISION FOR INCOME TAXES –
The provision for income taxes was a benefit of $1,222,324 for fiscal 2009
compared with a provision of $589,449 for fiscal 2008, reflecting reduction of
valuation allowance of deferred tax assets in fiscal 2009. Our effective tax
rate was 39.8% for fiscal 2009 compared with 41.3% for fiscal 2008. Our lower
effective tax rate for fiscal 2009 compared to the prior year primarily reflects
the impact of lower pre-tax income on income tax credits for the current
year.
YEAR
ENDED JUNE 30, 2008 COMPARED TO YEAR ENDED JUNE 30, 2007
NET SALES - Net sales
increased by $24,338,209, or 234.4%, to $34,723,299 for the year ended June 30,
2008 from $10,385,090 for the corresponding period of 2007. For the
year ended June 30, 2008, the mix of net sales by geographic region consisted
primarily of Caribbean and South American countries and the United States,
amounted to $25,348,832, or 73.0% of net sales, and $9,374,467, or 27.0% of net
sales, respectively. The increase was primarily
due to an increase in demand for our CDMA USB modem products in Caribbean and
South American countries. Our sales of CDMA USB modem products in
Caribbean and South American countries increased by $19,242,792, or 315.1%, to
$25,348,832 for the year ended June 30, 2008 from $6,106,040 for the
corresponding period of 2007. Our sales of CDMA USB modem products in
North America also increased by $5,095,417, or 119.1%, to $9,374,467 for the
year ended June 30, 2008, from $4,279,050 for the corresponding period of
2007.
GROSS PROFIT – Gross profit
margin increased by $4,998,924, or 185.5%, to $7,694,284, or 22.2% of net sales,
for the year ended June 30, 2008 from $2,695,360, 26.0%, for the corresponding
period of 2007. The decrease was primarily due to a decrease in net
sales by $24,338,209, or 234.4%. The gross profit decrease in
terms of net sales percentage was primarily due to higher sales of lower margin
products as a result of the competitive pricing pressures on our sales
prices.
SELLING, GENERAL, AND
ADMINISTRATIVE - Selling, general, and administrative expenses increased
by $1,917,644, or 138.7%, to $3,300,070 for the year ended June 30, 2008 from
$1,382,426 for the corresponding period of 2007. The increase was
primarily due to $897,746 increase in sales commission expenses due to the
increase in sales, $169,857 increase in other sales and marketing expenses to
promote expansion of sales, $69,264 increase in travel expenses to support
increase in sales, and $559,735 increase in payroll expenses due to increase in
the number of employees to support increase in sales and
operations.
OTHER INCOME (EXPENSE), NET -
The net of other income increased by $89,795, or 401.7%, to $112,149 for the
year ended June 30, 2008 from $22,354 for the corresponding period of
2007. The increase was primarily due to the net effect of $96,579
increase in interest income, as we had an increase in cash balances earning
interest.
PROVISION FOR INCOME TAXES –
The provision for income taxes was $589,449 for fiscal 2008 compared with a
provision of $35,190 for fiscal 2007. Our effective tax rate was 41.3% for
fiscal 2008 compared with 42.8% for fiscal 2007. Our lower effective tax rate
for fiscal 2009 compared to the prior year primarily reflects the impact of
lower state tax income.
LIQUIDITY
AND CAPITAL RESOURCES
Our
principal liquidity requirements are for working capital and capital
expenditures. We fund our liquidity requirements with cash on hand and cash flow
from operations.
OPERATING ACTIVITIES – Net
cash provided by operating activities for the years ended June 30, 2009, 2008,
and 2007 was $443,393, $3,835,893, and $1,746,391 respectively. The
$444,393 in net cash provided by operating activities for the year ended June
30, 2009, was primarily due to our net income of $3,639,166, offset by the
changes in our operating assets and liabilities of approximately $3.2 million.
The $3,835,893 and $1,746,391 in net cash provided by operating activities for
the years ended June 30, 2008 and 2007 was primarily due to our net income of
$3,916,913 and $1,300,097, respectively.
INVESTING ACTIVITIES – Net
cash used in investing activities for the years ended June 30, 2009, 2008, and
2007 was $61,833, $52,312, and $137,185, respectively, primarily consisting of
capital expenditures. The net cash used in investing activities for
the year ended June 30, 2009 and 2008 was due to purchases of long-lived
assets. The net cash used in investing activities for the year ended
June 30, 2007 was primarily due to purchases of CDMA Development Group
certifications in the amount of $115,780.
FINANCING ACTIVITIES – Net
cash used in financing activities for the years ended June 30, 2009 and 2008 was
$300,600 and $88,605, respectively, primarily consisting of repayment of a note
payable. Net cash provided by financing activities for the year ended June 30,
2007 was $300,000, primarily consisting of proceeds of $400,000 from the
issuance of common stock and offset by repayment of a loan in the amount of
$100,000.
CONTRACTUAL
OBLIGATIONS AND OTHER COMMITMENTS
The
following table summarizes our contractual obligations and commitments as of
June 30, 2009, and the effect such obligations could have on our liquidity and
cash flow in future periods:
| |
|
Payments
Due by June 30,
|
|
|
|
|
|
Lease
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
Total
|
|
|
Administrative
office facility
|
|
$ |
112,900 |
|
|
$ |
117,418 |
|
|
$ |
19,696 |
|
|
$ |
- |
|
|
$ |
250,014 |
|
|
Corporate
housing facility
|
|
|
13,380 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
13,380 |
|
|
Total
Obligation
|
|
$ |
126,280 |
|
|
$ |
117,418 |
|
|
$ |
19,696 |
|
|
$ |
- |
|
|
$ |
263,394 |
|
LEASES
We lease
our 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 $107,704 and $62,848 for the years ended June 30, 2009 and
2008, respectively.
We lease
a corporate housing facility for our vendors under a non-cancelable operating
lease that expires on May 9, 2010. Rent expense related to the
operating lease was $18,194 and $17,829 for the years ended June 30, 2009 and
2008, respectively.
We lease
one automobile under an operating lease that expires on July 4, 2012. The
related lease expense was $6,467 and $6,452 for the years ended June 30, 2009
and 2008, respectively.
OFF-BALANCE
SHEET ARRANGEMENTS
Our sole
facility is located in San Diego, California. Manufacturing of our
products has ordinarily been contracted out to C-Motech Co. Ltd. (“C-Motech”),
an electronics manufacturing company located in South Korea.
In
January 2005, we entered into a manufacturing and supply agreement with C-Motech
for the manufacture of our products. Under the manufacturing and supply
agreement, C-Motech will provide us 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 we are responsible for marketing, sales, field testing, and CDG
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 we have 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. The agreement will be valid for an additional one year
period and expire on January 4, 2010.
FUTURE
LIQUIDITY AND CAPITAL REQUIREMENTS
For the
next twelve months, we expect to incur approximately $2.0 million to $3.0
million for capital expenditures and the acquisition of additional
certifications, excluding non-cash acquisitions.
We
believe we will be able to fund our future cash requirements for operations from
our cash available, 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, we
will be required to refinance or restructure our indebtedness or raise
additional debt or equity capital if we are unable to generate sufficient cash
flow from operation to fund the continued expansion of our sales and to satisfy
the related working capital requirements for next twelve months. Our
ability to satisfy such obligations also 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 1A, “Risk Factors” 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.
ITEM
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK.
None.
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The
financial statements and the supplementary financial information required by
this Item and included in this report are listed in the Index to Financial
Statements beginning on page F-1.
ITEM
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
ITEM
9A(T). CONTROLS AND PROCEDURES.
We
maintain disclosure controls and procedures (as defined in Exchange
Act Rule 13a-15(e) and 15d-15(e)) that are designed to ensure
that information required to be disclosed in reports that
we file or submit under the Securities Exchange Act of 1934 is
recorded, processed, summarized, and
reported within the time periods specified in the Securities and
Exchange Commission's rules and forms, and that
such information is
accumulated and communicated to our management,
including our Chief Executive Officer and our
principal financial officer, as
appropriate, to allow timely decisions regarding the
required disclosures. In designing and evaluating the
disclosure controls and procedures, we recognize that any controls and
procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives.
Our Chief
Executive Officer and Chief Financial officer have evaluated the effectiveness
of the design and operation of our disclosure controls and procedures pursuant
to Rule 13a-15(e) and 15d-15(e) of the Exchange Act as of June 30, 2009 covered
by this Form 10-K based upon the Internal Control — Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (“COSO”). Based on such evaluation, the Chief Executive
Officer and Chief Financial officer have concluded that, as of the end of such
period, our disclosure controls and procedures were effective.
This annual report does
not include an attestation report of the company's
registered public accounting firm
regarding internal control over financial
reporting. Management’s report was not subject to attestation by
the company's registered
public accounting firm pursuant to temporary rules of the Securities and
Exchange Commission that permit the company
to provide only management’s report in this annual report.
There has
been no change in our internal control over financial reporting that occurred
during the fourth quarter of fiscal year 2009 that has materially affected, or
is reasonably likely to materially affect, our internal control over financial
reporting.
Limitations
on the Effectiveness of Controls
Our
management, including our Chief Executive Officer and Acting Chief Financial
Officer, 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.
ITEM
9B. OTHER INFORMATION.
None.
PART
III
ITEM
10. EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
Set forth
below are the names, ages, titles and present and past positions of our
directors and executive officers.
|
Name
|
|
Age
|
|
Position
|
|
OC
Kim
|
|
46
|
|
President,
Acting Chief Financial Officer, Secretary and a
Director
|
|
Gary
Nelson
|
|
68
|
|
Chairman
of the Board and a Director
|
|
Jaeman
Lee
|
|
49
|
|
Director
|
|
Joon
Won Jyoung
|
|
67
|
|
Director
|
|
Johnathan
Chee
|
|
47
|
|
Director
|
|
Yun
J. (David) Lee
|
|
47
|
|
Chief
Operating Officer
|
OC Kim
has been our President, Acting Chief Financial Officer, Secretary and a director
since September 2003. 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 U.S. 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.
Jaeman
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.
Joon Won
Jyoung has been a director since September 2009. He has owned several
private companies in South Korea since 1997. Between 1992 and 1996,
he served as the President of Sneakers Classic Ltd., and between 1987 and 1991,
he was the Chairman of Empire State Bank in New York. Between 1972
and 1982, he was the Chairman of Downtown Mart, a distribution company in New
York and Virginia. He holds a B.S. in Mathematics from Seoul National University
and an M.S. in Statistics from the University of Connecticut.
Johnathan
Chee has been a director since September 2009. He is an attorney and
has owned the Law Offices of Johnathan Chee, in Niles, Illinois, since August
2007. Between 1998 and 2007, he served as an attorney with the C&S Law
Group, P.C., in Glenview, Illinois. He holds a B.A. from the University of
Illinois-Chicago and a J.D. from IIT Chicago-Kent College of Law. He is a member
of the Illinois Bar Association.
Yun J.
(David) Lee has been the Chief Operating Officer since September 2008. Mr. Lee
has seventeen years of upper level management experience in telecommunications,
including experience in the cellular telephone business in the U.S. and South
America. Prior to joining the Company, he was President of Ace Electronics, and
served as Chief Financial Officer and Director of Sales and Marketing for RMG
Wireless. Prior to that, he served as Controller and Director of International
Sales for Focus Wireless in Chicago.
COMPLIANCE
WITH SECTION 16(A) OF EXCHANGE ACT
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 2009 were complied with.
CODE
OF ETHICS
The Board
of Directors has adopted a Code of Ethics, which is applicable to Company's
principal executive officer, principal financial officer, principal accounting
officer or controller, or persons performing similar
functions. The Code of Ethics covers all areas of professional
conduct, including honest and ethical conduct, conflicts of interest, compliance
with laws, disclosure obligation, and accountability for adherence to this
Code.
CORPORATE
GOVERANCE
During
fiscal 2009, the Board of Directors held three meetings. Each director except
Jaeman Lee attended at least 75% of such meetings. The Board of Directors
has no committees. During fiscal 2009 no compensation was paid to directors for
serving on the Board of Directors.
ITEM
11. EXECUTIVE COMPENSATION.
The
following table sets all compensation paid or accrued by us for the years ended
June 30, 2009 and 2008 to our Chief Executive Officer, President and Chief
Technology Officer, and Chief Operating Officer. (The "Named Executive
Officers")
|
Annual
Compensation
|
All
Other Compensation
|
No.
of Securities Underlying Stock Options Granted
|
Total
|
|
Name
and
Principal
Position
|
Fiscal
Year
|
Salary
|
Bonus
|
|
OC
Kim,
President
and Acting Financial Officer
|
2008
|
$150,000
|
$58,137
|
None
|
None
|
$208,137
|
|
2009
|
$150,000
|
$32,000
|
None
|
97,500
|
$182,000
|
|
Yun
J. (David) Lee,
Chief
Operating Officer
|
2008
|
$
91,667
|
$35,137
|
None
|
None
|
$126,804
|
|
2009
|
$120,000
|
$27,000
|
None
|
125,000
|
$147,000
|
EMPLOYMENT
CONTRACTS
On
September 21, 2009 the Company entered into Change of Control Agreements with OC
Kim, its President and Acting Chief Financial Officer, Yun J. (David) Lee, Chief
Operating Officer, and Yong Bae Won, Vice President-Engineering. Each Change of
Control Agreement provides for a lump sum payment to the officer in case of a
change of control of the Company. The term includes the acquisition of Common
Stock of the Company resulting in one person or company owning more than 50% of
the outstanding shares, a significant change in the composition of the Board of
Directors of the Company during any 12-month period, a reorganization, merger,
consolidation or similar transaction resulting in the transfer of ownership of
more than fifty percent (50%) of the Company's outstanding Common Stock, or a
liquidation or dissolution of the Company or sale of substantially all of the
Company's assets.
The
Change of Control Agreement with Mr. Kim is for three years and calls for a
payment of $5 million upon a change of control; the agreement with Mr. Lee is
for two years and calls for a payment of $2 million upon a change of control;
and the agreement with Mr. Won is for two years and calls for a payment of $1
million upon a change of control.
On
November 7, 2008, the Company entered into a renewable two-year employment
agreement with its President. The annual salary for the officer is
$150,000.
LONG-TERM
INCENTIVE PLAN AWARDS
In June
2009, the Company adopted the 2009 Stock Option Plan (“2009 Plan”). The 2009
Plan provided for the grant of incentive stock options and non-qualified stock
options to the Company’s employees and directors. Options granted under the 2009
Plan generally vest and become exercisable at the rate of between 50% and 100%
per year with a life of between four and five years. Upon exercise of granted
options, shares are expected to be issued from new shares previously registered
for the 2009 Plan.
The
Company adopted SFAS No. 123(R), Share-Based Payment, The estimated
forfeiture rate considers historical turnover rates stratified into employee
pools in comparison with an overall employee turnover rate, as well as
expectations about the future. The Company periodically revises the estimated
forfeiture rate in subsequent periods if actual forfeitures differ from those
estimates. Compensation expense recorded under this method for fiscal 2009 was
$2,560 and reduced operating income and income before income taxes by the same
amount by increasing compensation expense recognized in selling and
administrative expense. The recognized tax benefit related to the compensation
expense for fiscal 2009 was nil.
COMPENSATION
DISCUSSION AND ANALYSIS
GENERAL PHILOSOPHY - We
compensate our executive officers through a mix of base salary and bonus. We
plan to add an equity incentive through adoption of a Stock Option Plan in
fiscal 2009. Our compensation policies are designed to be competitive with
comparable employers and to align management’s incentives with both near term
and long-term interests of our stockholders. We use informal methods of
benchmarking our executive compensation, based on the experience of our
directors or, in some cases, studies of industry standards. Our compensation is
negotiated on a case by case basis, with attention being given to the amount of
compensation necessary to make a competitive offer and the relative compensation
among our executive officers.
BASE SALARIES - We want to
provide our senior management with a level of assured cash compensation in the
form of base salary that facilitates an appropriate lifestyle given their
professional status and accomplishments.
INCENTIVE COMPENSATION - Our
practice is to award cash bonuses based upon performance objectives set by the
Board of Directors. We maintain a bonus plan which provides our executive
officers and non-executive officers the ability to earn cash bonuses based on
the achievement of performance targets. The performance targets are set annually
by the Board of Directors, and bonuses are awarded to executive officers and
non-executive officers on a quarterly basis. The actual amounts of cash bonuses
to executive officers and non-executive officers are in the sole discretion of
the Board of Directors For fiscal 2009, the performance targets were based on
achieving revenue and operating income targets.
SEVERANCE BENEFITS - We are
generally at will employer, and have no employment agreements with severance
benefits; however, we have entered into Change of Control Agreements
with our two executive officers and one other officer that provide
them with lump sum payments in the event off a change in control of the
Company
RETIREMENT PLANS - We do not
maintain any retirement plans.
ITEM
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS.
The
following table sets forth certain information regarding the beneficial
ownership of our Common Stock as of June 30, 2009 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
5440
Morehouse Drive, Suite 1000, San Diego, CA 92121
|
|
1,499,195
|
|
11.33%
|
|
|
|
|
|
|
|
Gary
Nelson
5440
Morehouse Drive, Suite 1000, San Diego, CA 92121
|
|
269,562
|
|
2.04%
|
|
|
|
|
|
|
|
Jaeman
Lee
5440
Morehouse Drive, Suite 1000, San Diego, CA 92121
|
|
3,370,356
|
(1)
|
25.47%
|
|
|
|
|
|
|
|
Joon
Won Jyoung
5440
Morehouse Drive, Suite 1000, San Diego, CA 92121
|
|
540,169
|
|
4.08%
|
|
|
|
|
|
|
|
Johnathan
Chee
5440
Morehouse Drive, Suite 1000, San Diego, CA 92121
|
|
7,324
|
|
0.01%
|
|
|
|
|
|
|
|
All
directors and executive officers of the Company as a group (4
persons)
|
|
5,686,606
|
|
42.93%
|
|
|
(1)
|
Consists
of shares owned by C-Motech Co. Ltd., of which Jaeman Lee is an
officer.
|
ITEM
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE.
We
purchased CDMA wireless data products in the amount of $21,655,374, or 98.6% of
total purchases, from C-Motech, for the year ended June 30, 2009 and had related
accounts payable of $4,466,741 as of June 30, 2009. C-Motech owns
3,370,356 shares, or 25.5%, of our Common Stock and Jaeman Lee, Chief Executive
Officer of C-Motech Co. Ltd., has served as a director of the Company since
September 2006.
ITEM
14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
The
aggregate fees billed for the two most recently completed fiscal period ended
June 30, 2009 for the audit of our annual financial statements and services
normally provided by the independent accountant for this fiscal period were as
follows:
|
|
|
FY
2009
|
|
|
FY
2008
|
|
|
Audit
Fees
|
|
$ |
38,000 |
* |
|
$ |
67,500 |
|
|
Audit-Related
Fees
|
|
|
- |
|
|
|
2,604 |
|
|
Tax
Fees
|
|
|
- |
|
|
|
15,000 |
|
|
Total
Fees
|
|
$ |
38,000 |
|
|
$ |
85,104 |
|
In the
above table, "audit fees" are fees billed by the Company's external auditor for
services provided in auditing our company's annual financial statements for the
subject year. The fees set forth on the foregoing table for the
year ended June 30, 2009 relate to year-end audit as of and for the year ended
June 30, 2009 audit services from BDO Seidman, LLP. All of the
services described above were approved in advance by the Board of
Directors.
*- This
does not include $13,500 for quarterly review fees for fiscal year ending June
30, 2009 which was performed by the previous accounting firm, Choi, Kim, &
Park, LLP.
On July
27, 2009, the Board of Directors of the Company dismissed Choi, Kim & Park,
LLP ("CKP"). CKP's audit reports on the Company's financial statements for the
fiscal year ended June 30, 2008 and 2007 did not contain an adverse opinion or a
disclaimer of opinion, nor were they qualified or modified as to uncertainty,
audit scope, or accounting principles. During the Company's two most recent
fiscal years and for the subsequent interim period through July 27, 2009, there
were no disagreements between the Company and CKP on any matter of accounting
principles or practices, financial statement disclosure or auditing scope or
procedure which, if not resolved to the satisfaction of CKP would have caused
CKP to make reference to the subject matter of the disagreement in connection
with its report.
PART
IV
ITEM
15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
|
|
(a)
|
1. Index
to the financial statements
|
The
following Exhibits are files as part of, or incorporated by reference into, this
Report on Form 10-K:
|
Exhibit
No.
|
|
Description
|
|
2.1
|
|
Articles
of Merger and Agreement and Plan of Reorganization, filed January 2, 2008
with the Nevada Secretary of State (1)
|
|
3.1
|
|
Restated
Articles of Incorporation of Franklin Wireless Corp. (1)
|
|
3.2
|
|
Amended
and Restated Bylaws of Franklin Wireless Corp.
|
|
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 May 1, 2008, between the Company and RDLFA, LLC, a California
Limited Liability Company (3)
|
|
10.3
|
|
Employment
Agreement, dated November 7, 2008, between Franklin Wireless Corp. and OC
Kim
|
|
10.4
|
|
Change
of Control Agreement, dated September 21, 2009, between Franklin Wireless
Corp. and OC Kim
|
|
10.5
|
|
Change
of Control Agreement, dated September 21, 2009, between Franklin Wireless
Corp. and David Lee
|
|
14.1
|
|
Code
of Ethics (3)
|
|
31
|
|
Certificate
of Chief Executive Officer Acting Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
|
|
32
|
|
Certificate
of Chief Executive Officer and Acting Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
|
(1)
Incorporated by reference from Report on Form 10-QSB for the quarterly period
ended March 31, 2008, filed on May 14, 2008
(2)
Incorporated by reference from Annual Report on Form 10-KSB for the year ended
June 30, 2005, filed on May 23, 2006
(3)
Incorporated by reference from Annual Report on Form 10-KSB for the year ended
June 30, 2008, filed on September 26. 2008
(c)
Supplementary
Information
None.
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:
October 13, 2009
|
|
|
|
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
|
|
October
13, 2009
|
|
OC
Kim
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
(3)
Directors
|
|
|
|
|
|
|
|
|
|
|
|
/s/
GARY NELSON
|
|
Chairman
of the Board of Directors
|
|
October
13, 2009
|
|
Gary
Nelson
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Director
|
|
October
__, 2009
|
|
Jae
Man Lee
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Director
|
|
October
__, 2009
|
|
Joon
Won Jyoung
|
|
|
|
|
|
|
|
|
|
|
|
/s/
JOHNATHAN CHEE
|
|
Director
|
|
October
13, 2009
|
|
Johnathan
Chee
|
|
|
|
|
FRANKLIN
WIRELESS CORP.
INDEX
TO FINANCIAL STATEMENTS
|
|
Page
No.
|
|
|
|
|
Index
to Financial Statements
|
F–1
|
|
|
|
|
Report
of Independent Registered Public Accounting Firm
|
F–2
|
|
Report
of Independent Registered Public Accounting Firm
|
F–3
|
|
|
|
|
Balance
Sheets at June 30, 2009 and June 30, 2008
|
F–4
|
|
|
|
|
Statements
of Income for the years ended June 30, 2009, 2008, and
2007
|
F–5
|
|
|
|
|
Statements
of Stockholders' Equity (Deficit) for the years ended
June
30, 2009, 2008 and 2007
|
F–6
|
|
|
|
|
Statements
of Cash Flows for the years ended June 30, 2009, 2008, and
2007
|
F–7
|
|
|
|
|
Notes
to Financial Statements
|
F–8
|
|
|
|
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 balance sheet of Franklin Wireless Corp. (the
“Company”) as of June 30, 2009 and the related statements of income,
stockholders’ equity, and cash flows for the year then ended. 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 audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit 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 purpose 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, assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall presentation of the financial
statements. We believe that our audit provides a reasonable basis for
our opinion.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Franklin Wireless Corp. at June 30,
2009, and the results of its operations and its cash flows for the year then
ended, in conformity with accounting principles generally accepted in the United
States of America.
BDO
Seidman, LLP
Los
Angeles, California
October
13, 2009
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 balance sheets of Franklin Wireless Corp. as of June
30, 2008 and 2007 and the related statements of operations, changes in
stockholders' equity (deficiency), and cash flows for the years ended June 30,
2008, 2007 and 2006. 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 provide a reasonable basis for our opinion.
The
disclosures to the financial statements for the year ended June 30, 2008 in
Notes 3 and 14 have been amended.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Franklin Wireless Corp. as of June
30, 2008 and 2007, and the results of its operations and cash flows for the
years ended June 30, 2008, 2007 and 2006 in conformity with accounting
principles generally accepted in the United States of America.
Choi, Kim
& Park, LLP
Los
Angeles, California
September
22, 2008, except for Paragraphs 4, 14, 15, and 16 of Note 3, and
Paragraphs
3 through 7 of Note 14, as to which the date is April 1, 2009
FRANKLIN
WIRELESS CORP.
Balance
Sheets
|
|
|
Fiscal
Years Ended June 30,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
ASSETS
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
6,253,529 |
|
|
$ |
6,172,569 |
|
|
Accounts
receivable
|
|
|
2,812,607 |
|
|
|
4,534,069 |
|
|
Inventories
|
|
|
2,618,344 |
|
|
|
72,162 |
|
|
Prepaid
expenses and other current assets
|
|
|
4,107 |
|
|
|
23,430 |
|
|
Prepaid
income taxes
|
|
|
18,503 |
|
|
|
355,393 |
|
|
Deferred
tax assets, current
|
|
|
169,731 |
|
|
|
– |
|
|
Total current
assets
|
|
|
11,876,821 |
|
|
|
11,157,623 |
|
|
Property
and equipment, net
|
|
|
89,807 |
|
|
|
68,012 |
|
|
Deferred
tax assets, non-current
|
|
|
1,880,081 |
|
|
|
– |
|
|
Other
assets
|
|
|
11,016 |
|
|
|
15,411 |
|
|
TOTAL
ASSETS
|
|
$ |
13,857,725 |
|
|
$ |
11,241,046 |
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
|
|
|
Trade
accounts payable
|
|
$ |
45,112 |
|
|
$ |
349,758 |
|
|
Trade
accounts payable – related party
|
|
|
4,466,741 |
|
|
|
3,697,893 |
|
|
Advanced
payments from customers
|
|
|
970 |
|
|
|
390,000 |
|
|
Accrued
liabilities
|
|
|
108,827 |
|
|
|
875,046 |
|
|
Note
payable
|
|
|
– |
|
|
|
334,000 |
|
|
Total current
liabilities
|
|
|
4,621,650 |
|
|
|
5,646,697 |
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity:
|
|
|
|
|
|
|
|
|
|
Preferred
stock, par value $0.001 per share, authorized 10,000,000 shares; No
preferred stock issued or outstanding as of June 30, 2009 and
2008
|
|
|
– |
|
|
|
–
|
|
|
Common
stock, par value $0.001 per share, authorized 50,000,000
shares; 13,231,491 shares issued and outstanding as of June 30,
2009 and 2008
|
|
|
13,232 |
|
|
|
13,232 |
|
|
Additional
paid-in capital
|
|
|
5,018,721 |
|
|
|
5,016,161 |
|
|
Retained
earnings
|
|
|
4,204,122 |
|
|
|
564,956 |
|
|
Total
stockholders’ equity
|
|
|
9,236,075 |
|
|
|
5,594,349 |
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
$ |
13,857,725 |
|
|
$ |
11,241,046 |
|
See
accompanying notes to financial statements.
FRANKLIN
WIRELESS CORP.
Statements
of Operations
| |
|
|
|
|
|
|
Fiscal
Years Ended June 30,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
(Consolidated)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
24,000,504 |
|
|
$ |
34,723,299 |
|
|
$ |
10,385,090 |
|
|
Cost
of goods sold
|
|
|
18,824,010 |
|
|
|
27,029,015 |
|
|
|
7,689,730 |
|
|
Gross
profit
|
|
|
5,176,494 |
|
|
|
7,694,284 |
|
|
|
2,695,360 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general, and administrative
|
|
|
2,859,707 |
|
|
|
3,300,071 |
|
|
|
1,382,426 |
|
|
Total
operating expenses
|
|
|
2,859,707 |
|
|
|
3,300,071 |
|
|
|
1,382,426 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from operations
|
|
|
2,316,787 |
|
|
|
4,394,213 |
|
|
|
1,312,934 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
84,845 |
|
|
|
135,094 |
|
|
|
38,515 |
|
|
Loss
on disposal of property and equipment
|
|
|
(19,346 |
) |
|
|
– |
|
|
|
(767 |
) |
|
Impairment
of intangible assets
|
|
|
– |
|
|
|
(73,171 |
) |
|
|
(19,167 |
) |
|
Other
income, net
|
|
|
34,556 |
|
|
|
50,226 |
|
|
|
3,772 |
|
|
Total
other income, net
|
|
|
100,055 |
|
|
|
112,149 |
|
|
|
22,353 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income before income taxes
|
|
|
2,416,842 |
|
|
|
4,506,362 |
|
|
|
1,335,287 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax provision (benefit)
|
|
|
(1,222,324 |
) |
|
|
589,449 |
|
|
|
35,190 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
3,639,166 |
|
|
$ |
3,916,913 |
|
|
$ |
1,300,097 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share
|
|
$ |
0.28 |
|
|
$ |
0.30 |
|
|
$ |
0.10 |
|
|
Diluted
earnings per share
|
|
$ |
0.27 |
|
|
$ |
0.30 |
|
|
$ |
0.10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding – basic
|
|
|
13,231,491 |
|
|
|
13,231,491 |
|
|
|
12,824,643 |
|
|
Weighted
average common shares outstanding – diluted
|
|
|
13,250,417 |
|
|
|
13,231,491 |
|
|
|
12,824,643 |
|
See
accompanying notes to financial statements.
FRANKLIN
WIRELESS CORP.
Statements
of Stockholders' Equity (Deficit)
|
|
|
Common
Stock
|
|
|
Additional
Paid-in
|
|
|
Retained
Earnings (Accumulated |
|
|
Stock |
|
|
Total
Stockholders’ |
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit)
|
|
|
Subscription
|
|
|
Equity
(Deficit)
|
|
|
Balance
– June 30, 2006
|
|
|
12,602,911 |
|
|
$ |
12,603 |
|
|
$ |
4,616,790 |
|
|
$ |
(4,652,054 |
) |
|
$ |
(17,395 |
) |
|
$ |
(40,056 |
) |
|
Issuance
of common stock
|
|
|
628,580 |
|
|
|
629 |
|
|
|
399,371 |
|
|
|
– |
|
|
|
– |
|
|
|
400,000 |
|
|
Cash
receipt of stock subscription receivables
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
6,000 |
|
|
|
6,000 |
|
|
Net
income
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
1,300,097 |
|
|
|
– |
|
|
|
1,300,097 |
|
|
Balance
– June 30, 2007
|
|
|
13,231,491 |
|
|
|
13,232 |
|
|
|
5,016,161
|
|
|
|
(3,351,957 |
) |
|
|
(11,395 |
) |
|
|
1,666,041 |
|
|
Cash
receipt from stock subscription receivables
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
11,395 |
|
|
|
11,395 |
|
|
Net
income
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
3,916,913 |
|
|
|
– |
|
|
|
3,916,913 |
|
|
Balance
– June 30, 2008
|
|
|
13,231,491 |
|
|
|
13,232 |
|
|
|
5,016,161 |
|
|
|
564,956 |
|
|
|
– |
|
|
|
5,594,349 |
|
|
Share-based
compensation
|
|
|
– |
|
|
|
– |
|
|
|
2,560 |
|
|
|
– |
|
|
|
– |
|
|
|
2,560 |
|
|
Net
income
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
3,639,166 |
|
|
|
– |
|
|
|
3,639,166 |
|
|
Balance
– June 30, 2009
|
|
|
13,231,491 |
|
|
$ |
13,232 |
|
|
$ |
5,018,721 |
|
|
$ |
4,204,122 |
|
|
$ |
– |
|
|
$ |
9,236,075 |
|
See
accompanying notes to financial statements.
FRANKLIN
WIRELESS CORP.
Statements
of Cash Flows
| |
|
|
|
|
|
|
Fiscal
Years Ended June 30,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
(Consolidated)
|
|
|
CASH
FLOWS FROM OPERATIONS ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
3,639,166 |
|
|
$ |
3,916,913 |
|
|
$ |
1,300,097 |
|
|
Adjustments
to reconcile net income to net cash provided
by (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
on disposal of property and equipment
|
|
|
19,346 |
|
|
|
– |
|
|
|
767 |
|
|
Impairment
of intangible assets
|
|
|
– |
|
|
|
73,171 |
|
|
|
19,167 |
|
|
Depreciation
|
|
|
20,692 |
|
|
|
10,518 |
|
|
|
7,135 |
|
|
Amortization
of intangible assets
|
|
|
– |
|
|
|
57,093 |
|
|
|
70,544 |
|
|
Write
off of uncollectible accounts receivable
|
|
|
2,715 |
|
|
|
1,250 |
|
|
|
– |
|
|
Forgiveness
of debt
|
|
|
(33,400 |
) |
|
|
– |
|
|
|
– |
|
|
Deferred
tax assets
|
|
|
(2,049,812 |
) |
|
|
– |
|
|
|
– |
|
|
Share-based
compensation
|
|
|
2,560 |
|
|
|
– |
|
|
|
– |
|
|
Increase
(decrease) in cash due to change in:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
1,718,747 |
|
|
|
(4,490,404 |
) |
|
|
(43,165 |
) |
|
Inventory
|
|
|
(2,546,182 |
) |
|
|
(61,332 |
) |
|
|
(10,830 |
) |
|
Prepaid
expense and other current assets
|
|
|
19,323 |
|
|
|
(16,781 |
) |
|
|
(6,649 |
) |
|
Prepaid
income taxes
|
|
|
336,890 |
|
|
|
(355,393 |
) |
|
|
– |
|
|
Other
assets
|
|
|
4,395 |
|
|
|
(10,250 |
) |
|
|
(709 |
) |
|
Trade
accounts payable including related party
|
|
|
464,202 |
|
|
|
3,979,587 |
|
|
|
67,478 |
|
|
Accrued
liabilities
|
|
|
(766,219 |
) |
|
|
696,021 |
|
|
|
(11,944 |
) |
|
Advance
payment from customers
|
|
|
(389,030 |
) |
|
|
35,500 |
|
|
|
354,500 |
|
|
Net
cash provided by (used in) operating activities
|
|
|
443,393 |
|
|
|
3,835,893 |
|
|
|
1,746,391 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases
of property and equipment
|
|
|
(61,833 |
) |
|
|
(52,312 |
) |
|
|
(21,405 |
) |
|
Purchases
of intangible assets
|
|
|
– |
|
|
|
– |
|
|
|
(115,780 |
) |
|
Net
cash used in investing activities
|
|
|
(61,833 |
) |
|
|
(52,312 |
) |
|
|
(137,185 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment
of note payable
|
|
|
(300,600 |
) |
|
|
(100,000 |
) |
|
|
(100,000 |
) |
|
Proceeds
from issuance of common stock
|
|
|
–
|
|
|
|
–
|
|
|
|
400,000
|
|
|
Receipt
of stock subscription receivable
|
|
|
– |
|
|
|
11,395 |
|
|
|
– |
|
|
Net
cash provided by (used in) financing activities
|
|
|
(300,600 |
) |
|
|
(88,605 |
) |
|
|
300,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
increase in cash and cash equivalents
|
|
|
80,960 |
|
|
|
3,694,976 |
|
|
|
1,909,206 |
|
|
Cash
and cash equivalents, beginning of year
|
|
|
6,172,569 |
|
|
|
2,477,593 |
|
|
|
568,387 |
|
|
Cash
and cash equivalents, end of year
|
|
$ |
6,253,529 |
|
|
$ |
6,172,569 |
|
|
$ |
2,477,593 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
paid during the years for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$ |
– |
|
|
$ |
– |
|
|
$ |
– |
|
|
Income
taxes
|
|
$ |
1,173,046 |
|
|
$ |
259,842 |
|
|
$ |
800 |
|
See
accompanying notes to financial statements.
FRANKLIN
WIRELESS CORP.
Notes
to Financial Statements
NOTE
1 – 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, table PC or desktop USB port without a PC
card slot. The broadband wireless data communication products are positioned at
the convergence of wireless communications, mobile computing and the Internet,
each of which the Company believes represents a growing market.
The
Company’s wireless products are based on Evolution Data Optimized technology
("EV-DO technology") of Code Division Multiple Access ("CDMA"), 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, and
receive, send and download high resolution picture, video, and music
contents.
In 2008,
the Company launched the CGU-628A HSDPA USB modem and CGU-720A HSUPA, which
provide a flexible way for users to connect to high-speed downlink and uplink
packet access networks, the CDM-650 Stand-alone Revision 0 USB modem, which
provides internet connection in remote locations without cable or DSL services,
and the CMU-300 WIMAX plus CDMA USB modem.
The
Company markets its products directly to wireless operators and indirectly
through strategic partners and distributors. Its global customer base
extends from the United States to Caribbean and South American
countries. The Company’s Universal Serial Bus (“USB”) modems are
certified by Sprint, Comcast Cable, Clearwire, Time Warner Cable, Cellular
South, Mobi PCS, NTELOS, Cincinnati Bell, and ACS in the United States, by
IUSACELL in Mexico, by Telefonica and Movilnet in Venezuela, by Centennial in
Puerto Rico, by Alegro in Ecuador, by CellularOne in Bermuda and by TSTT in
Trinidad and Tobago. The Company has built upon its strong customer
relationships to help drive strategic marketing initiatives with its customers
that provide additional opportunities to expand market reach by combining the
Company’s expertise in wireless technologies with its customers’ sales and
marketing base, creating access to additional indirect distribution
channels.
NOTE
2 - 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. We identify our operating
segments based on how management internally evaluates separate financial
information, business activities and management responsibility. We operate in a
single business segment consisting of sale of wireless access products with
operating facility in the United States. We generate revenues from
two geographic areas which consist of United States and Caribbean and South
America.
The
following enterprise wide disclosure was prepared on a basis consistent with the
preparation of the financial statements. The following table contains
certain financial information by geographic area:
|
Net
sales:
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
United
States
|
|
$ |
14,334,956 |
|
|
$ |
9,374,467 |
|
|
$ |
4,279,050 |
|
|
Caribbean
and South America
|
|
|
9,665,548 |
|
|
|
25,348,832 |
|
|
|
6,106,040 |
|
|
Totals
|
|
$ |
24,000,504 |
|
|
$ |
34,723,299 |
|
|
$ |
10,385,090 |
|
|
Long-lived
assets:
|
|
June
30, 2009
|
|
|
June
30, 2008
|
|
|
United
States
|
|
$ |
89,807 |
|
|
$ |
68,012 |
|
|
|
|
$ |
89,807 |
|
|
$ |
68,012 |
|
ESTIMATES
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could materially differ from those
estimates.
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 or when the products are received by the customers
in accordance with shipping or delivery terms. The Company provides a factory
warranty for one year form the shipment which is covered by its vendor under the
purchase agreement between the Company and the vendor.
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.
SHIPPING
AND HANDLING COSTS
Most of
shipping and handling costs are paid by the customers directly to the shipping
companies. The Company does not collect and incur shipping and
handling costs. As a result, the Company did not incur shipping and
handling costs for the years ended June 30, 2009, 2008, and 2007.
INVENTORIES
The
Company’s inventories consist 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 its
control. The Company may maintain an allowance for inventories for potentially
excess and obsolete inventories and inventories that are carried at costs that
are higher than their estimated net realizable values. As of June 30, 2009 and
2008, no allowance was recorded.
PROPERTY
AND EQUIPMENT
Property
and equipment are recorded at cost. Significant additions or improvements
extending useful lives of assets are capitalized. Maintenance and repairs are
charged to expense as incurred. Depreciation is computed using the straight-line
method over the estimated useful lives as follows:
Computers
and
software 5
years
Furniture
and
fixtures 7
years
Expenditures
for maintenance and repairs are charged to operations as incurred while renewals
and betterments are capitalized.
LONG-LIVED
ASSETS
In
accordance with Statement of Financial Accounting Standards No. 144 (“SFAS
144”), "Accounting for Impairment on Disposal of Long-lived Assets", the Company
reviews for impairment of long-lived assets 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 its strategic business objectives
and utilization of the asset; or significant negative industry or economic
trends. An impairment would be recognized when estimated future cash
flows expected to result from the use of the asset are less than its carrying
amount.
WARRANTIES
We
provide a factory warranty for one year form the shipment which is covered by
our vendor under the purchase agreement between the Company and the vendor.
These products are shipped directly from its vendor to its customers. As a
result, the Company is not exposed to warranty exposure and does not accrue any
warranty expenses.
ADVERTISING
AND PROMOTION COSTS
Costs
associated with advertising and promotions are expensed as incurred. Advertising
and promotion costs amounted to $40,677, $1,370,125 and $302,522 for the years
ended June 30, 2009, 2008, and 2007, respectively.
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 recognizes federal and state tax liabilities or assets based on its
estimate of taxes payable to or refundable by tax authorities in the current
fiscal year. The Company also recognizes federal and state tax
liabilities or assets based on its estimate of 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 computed by applying the U.S. federal rate of 34% and
California state tax rate of 8.84% to taxable income in the years in which those
temporary differences are expected to be recovered or settled. A
valuation allowance is required when it is more likely than not that the Company
will not be able to realize all or a portion of its deferred tax
assets.
Income
tax provision (benefit) from continuing operations for the years ended June 30,
2009 and 2008 consists of the following:
|
|
|
Years Ended June
30,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Current
income tax expense:
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$ |
611,955 |
|
|
$ |
433,067 |
|
|
$ |
26,409 |
|
|
State
|
|
|
215,533 |
|
|
|
156,382 |
|
|
|
8,781 |
|
|
|
|
|
827,488 |
|
|
|
589,449 |
|
|
|
35,190 |
|
|
Deferred
income tax expense (benefit):
|
|
|
(2,049,812 |
) |
|
|
– |
|
|
|
– |
|
|
Provision
(benefit) for income taxes
|
|
$ |
(1,222,324 |
) |
|
$ |
589,449 |
|
|
$ |
35,190 |
|
The
provision for income taxes reconciles to the amount computed by applying
effective federal statutory income tax rate to income before provision for
income taxes as follows:
|
|
|
Years
Ended June 30,
|
|
|
|
|
2009
|
|
|
%
|
|
|
2008
|
|
|
%
|
|
|
2007
|
|
|
%
|
|
|
Federal
tax provision, at
statutory rate
|
|
$ |
821,916 |
|
|
|
34.0 |
|
|
$ |
1,532,163 |
|
|
|
34.0 |
|
|
$ |
453,998 |
|
|
|
34.0 |
|
|
State
tax, net of fed tax benefit
|
|
|
140,403 |
|
|
|
5.8 |
|
|
|
329,327 |
|
|
|
7.3 |
|
|
|
118,358 |
|
|
|
8.8 |
|
|
Nondeductible
expenses
|
|
|
6,924 |
|
|
|
0.3 |
|
|
|
5,957 |
|
|
|
0.1 |
|
|
|
5,217 |
|
|
|
0.4 |
|
|
Alternative
minimum tax credit
|
|
|
– |
|
|
|
– |
|
|
|
(23,291 |
) |
|
|
(0.5 |
) |
|
|
– |
|
|
|
– |
|
|
Reduction
in valuation allowance
|
|
|
(2,194,532 |
) |
|
|
(90.8 |
) |
|
|
(1,213,017 |
) |
|
|
(26.9 |
) |
|
|
(546,519 |
) |
|
|
(40.9 |
) |
|
Others
|
|
|
2,965 |
|
|
|
(0.1 |
) |
|
|
(41,690 |
) |
|
|
(0.9 |
) |
|
|
4,136 |
|
|
|
0.3 |
|
|
Provision
for income taxes
|
|
$ |
(1,222,324 |
) |
|
|
(50.8 |
) |
|
$ |
589,449 |
|
|
|
13.1 |
|
|
$ |
35,190 |
|
|
|
2.6 |
|
Deferred
income taxes reflect the net effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes. Significant components of our deferred
tax assets are as follows:
| |
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Current
deferred tax assets (liabilities):
|
|
|
|
|
|
|
|
Net
operating losses
|
|
$ |
135,622 |
|
|
$ |
170,883 |
|
|
Other,
net
|
|
|
34,109 |
|
|
|
16,493 |
|
|
Non-current
deferred tax assets (liabilities):
|
|
|
|
|
|
|
|
|
|
Net
operating losses
|
|
|
1,911,272 |
|
|
|
2,011,633 |
|
|
Other,
net
|
|
|
(31,191 |
) |
|
|
(4,477 |
) |
|
Total
deferred tax assets
|
|
|
2,049,812 |
|
|
|
2,194,532 |
|
|
Less
valuation allowance
|
|
|
– |
|
|
|
(2,194,532 |
) |
|
Net
deferred tax asset
|
|
$ |
2,049,812 |
|
|
$ |
– |
|
The
significant component of the deferred tax asset at June 30, 2009 and 2008 was
the Company’s federal net operating loss carry-forward in the amounts of
approximately $1,901,020 and $2,034,327, respectively, based on the applicable
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 June 30, 2009, management
believed that it is more likely than not that all of the deferred tax assets
will be realized, and prior recorded valuation allowances for the full amount of
the net deferred tax asset were reversed based on the level of historical
taxable income and projections for future taxable income over the periods in
which the deferred tax assets are realizable.
As of
June 30, 2009, the Company has federal net operating loss carry-forwards of
approximately $5,584,000 and state net operating loss carry-forwards of
approximately $1,676,000 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 periods. The Federal and state net operating loss carry-forwards
will begin to expire from 2010 to 2026 and 2010 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
fiscal year. Diluted earnings per share include the potentially dilutive effect
of outstanding common stock options.
On
January 8, 2008, a reverse stock split was implemented in connection with
the reincorporation, under which the shareholders will receive one
share of Franklin-Nevada for each 70 shares held in
Franklin-California. As a 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 number of pre-split
outstanding shares was divided by the split ratio.
CONCENTRATIONS
OF CREDIT 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. No reserve was required and recorded for
any of the years presented.
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 31.9%, 17.1%, and 14.5% of total
revenues for the year ended June 30, 2009, and had related account receivables
in the amounts of $12,150, $1,040,000, and $0, or 0.4%, 37.0% and 0.0% of total
account receivables at June 30, 2009, respectively. Three customers
accounted for 37.0%, 34.3%, and 13.3% of total revenues for the year ended June
30, 2008, and had related account receivables in the amounts of $611,820,
$3,250,000, and $0, or 13.5%, 71.7% and 0% of total account receivables at June
30, 2008, respectively.
The
Company purchases its wireless products from one design and manufacturing
company located in South Korea. If this company were to experience
delays, capacity constraints or quality control problems, product shipments to
its customers could be delayed, or its customers could consequently elect to
cancel the underlying product purchase order, which would negatively impact the
Company’s revenue. The Company purchased wireless data products from
this supplier in the amounts of $21,655,374 and $27,090,347 for the years ended
June 30, 2009 and 2008, respectively, and had related accounts payable of
$4,466,741 and $3,697,893 at June 30, 2009 and 2008, respectively.
The
Company maintains its cash accounts with established commercial banks.
Such cash deposits periodically exceed the Federal Deposit Insurance Corporation
insured limit of $100,000 for each account. However, the Company does not
anticipate any losses on excess deposits.
RECENTLY
ISSUED ACCOUNTING PRONOUNCEMENTS
In
December 2007, the FASB issued SFAS No. 141 (revised 2007), Business
Combinations (SFAS No. 141R). SFAS No. 141R establishes principles and
requirements for how companies recognize and measure identifiable assets
acquired, liabilities assumed, and any non-controlling interest in connection
with a business combination; recognize and measure the goodwill acquired in a
business combination or a gain from a bargain purchase; and determine what
information to disclose to enable users of the financial statements to evaluate
the nature and financial effects of the business combination. SFAS No. 141R
is effective for business combinations for which the acquisition date is on or
after January 1, 2009. The Company does not expect the adoption of SFAS
No. 141R to have a material impact on the results of operations or
financial position.
In
December 2007, the FASB issued SFAS No. 160, Non-controlling Interests in
Consolidated Financial Statements-an amendment of ARB No. 51 (SFAS
No. 160). SFAS No. 160 applies to all companies that prepare
consolidated financial statements, except not-for-profit organizations, but will
affect only those entities that have an outstanding non-controlling interest in
one or more subsidiaries or that deconsolidate a subsidiary. SFAS No. 160
is effective for the Company on January 1, 2009. Earlier adoption is prohibited.
The Company does not expect the adoption of SFAS No. 160 to have a material
impact on the results of operations or financial position.
In
February 2008, the FASB issued FASB Staff Position (FSP) No. FAS 157-2,
Effective Date of FASB Statement No. 157 (FSP No. 157-2). The FSP
amends SFAS No. 157 to delay the effective date for non-financial assets
and liabilities, except for items that are recognized or disclosed at fair value
in the financial statements on a recurring basis. For items within its scope,
the FSP defers the effective date of SFAS No. 157 to fiscal years beginning
after November 15, 2008. The Company does not expect the adoption of FSP
No. 157-2 to have a material effect on the results of operations or
financial position.
In May
2008, the FASB issued SFAS No. 162 (“SFAS No. 162”), “The Hierarchy of
Generally Accepted Accounting Principles.” This statement identifies the sources
of accounting principles and the framework for selecting the principles to be
used in the preparation of financial statements of nongovernmental entities that
are presented in conformity with accounting principles generally accepted in the
United States (“GAAP”). While this statement formalizes the sources and
hierarchy of GAAP within the authoritative accounting literature, it does not
change the accounting principles that are already in place.
In May
2009, the FASB issued SFAS No. 165, Subsequent Events (SFAS No. 165),
effective for financial periods ending after June 15, 2009. SFAS
No. 165 established principles and requirements for subsequent events,
including the period after the balance sheet date during which management of a
reporting entity shall evaluate events for potential disclosure in the financial
statements, the circumstances that warrant disclosure, and the specific
disclosure requirements for transactions that occur after the balance sheet
date. The adoption of SFAS No. 165 did not have a material effect on the results
of the Company’s operations and financial position.
In June
2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation
No. 46(R) (SFAS No. 167). SFAS No. 167 amends FIN 46 (revised
December 2003), Consolidation of Variable Interest Entities (FIN 46R), regarding
when and how to determine, or re-determine, whether an entity is a variable
interest entity. In addition, SFAS No. 167 replaces FIN 46R’s quantitative
approach for determining who has a controlling financial interest in a variable
interest entity with a qualitative approach. Furthermore, SFAS No. 167
requires ongoing assessments of whether an entity is the primary beneficiary of
a variable interest entity. SFAS No. 167 is effective beginning
January 1, 2010. The Company does not expect the adoption of SFAS No. 167
to have a material effect on the results of operations or financial
position.
NOTE
3 - PROPERTY AND EQUIPMENT
Property
and equipment consisted of the following at:
|
|
|
June
30, 2009
|
|
|
June
30, 2008
|
|
|
Computers
and software
|
|
$ |
86,579 |
|
|
$ |
48,827 |
|
|
Furniture
and fixtures
|
|
|
45,267 |
|
|
|
52,894 |
|
|
|
|
|
131,846 |
|
|
|
101,721 |
|
|
Less
accumulated depreciation
|
|
|
(42,039 |
) |
|
|
(33,709 |
) |
|
Total
|
|
$ |
89,807 |
|
|
$ |
68,012 |
|
NOTE
4 - NOTE PAYABLE
Notes
payable consisted of the following at:
|
|
|
June
30, 2009
|
|
|
June
30, 2008
|
|
|
Non-interest
bearing note
|
|
$ |
– |
|
|
$ |
334,000 |
|
|
Total
|
|
|
– |
|
|
|
334,000 |
|
|
Less
current portion
|
|
|
– |
|
|
|
(334,000 |
) |
|
Total
|
|
$ |
– |
|
|
$ |
– |
|
On
October 30, 2007, the Board of Directors approved the dissolution of its only
subsidiary, ARG, which had been inactive since August 2003. As a part of the
dissolution, the Company assumed a note payable from ARG in the amount of
$434,000. For the year ended June 30, 2008, the Company repaid
$100,000, and the remaining note amounted to $334,000. For the year
ended June 30, 2009, the Company paid $300,600, net of a 10% discount of
$33,400. The discount of $33,400 was presented as a forgiveness of debt in the
statements of income.
NOTE
5 - ACCRUED LIABILITIES
Accrued
liabilities consisted of the following at:
|
|
|
June
30, 2009
|
|
|
June
30, 2008
|
|
|
Accrued
salaries
|
|
$ |
– |
|
|
$ |
135,000 |
|
|
Accrued
vacations
|
|
|
46,995 |
|
|
|
- |
|
|
Accrued
professional fees
|
|
|
32,625 |
|
|
|
31,500 |
|
|
Taxes
payable
|
|
|
2,552 |
|
|
|
689,421 |
|
|
Other
accrued liabilities
|
|
|
26,655 |
|
|
|
19,125 |
|
|
Total
|
|
$ |
108,827 |
|
|
$ |
875,046 |
|
NOTE
6 – EARNINGS PER SHARE
The
Company calculates earnings per share in accordance with SFAS No. 128,
Earnings Per Share, which requires a dual presentation of basic and diluted
earnings per share. Basic earnings per share is calculated by dividing net
income by the weighted-average shares of common stock outstanding, which is
reduced by shares repurchased and held in treasury, during the period. Diluted
earnings per share is calculated by using the weighted-average shares of common
stock outstanding adjusted to include the potentially dilutive effect of
outstanding stock options.
The
following table sets forth the computation of basic and diluted net income per
common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended June
30,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Net
income
|
|
$
|
3,639,166
|
|
|
$
|
3,916,913
|
|
|
$
|
1,300,097
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
shares of common stock outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
13,231,491
|
|
|
|
13,231,491
|
|
|
|
12,824,643
|
|
|
Dilutive
effect of common stock equivalents arising from stock
options
|
|
|
18,926
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
13,250,417
|
|
|
|
13,231,491
|
|
|
|
12,824,643
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share
|
|
$
|
0.28
|
|
|
$
|
0.30
|
|
|
$
|
0.10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share
|
|
$
|
0.27
|
|
|
$
|
0.30
|
|
|
$
|
0.10
|
|
NOTE
7 - COMMITMENTS AND CONTINGENCIES
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 $107,704 and $62,848 for the years ended June 30, 2009 and
2008, respectively.
The
Company leases a corporate housing facility for its vendors under a
non-cancelable operating lease that expires on May 9, 2010. Rent
expense related to the operating lease was $18,194 and $17,829 for the years
ended June 30, 2009 and 2008, respectively.
The
following table summarizes the Company’s contractual obligations and commitments
as of June 30, 2009, and the effect such obligations could have on its liquidity
and cash flow in future periods:
|
|
|
Payments
Due by June 30,
|
|
|
|
|
|
Lease
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
Total
|
|
|
Administrative
office facility
|
|
$
|
112,900
|
|
|
$
|
117,418
|
|
|
$
|
19,696
|
|
|
$
|
-
|
|
|
$
|
250,014
|
|
|
Corporate
housing facility
|
|
|
13,380
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
13,380
|
|
|
Total
Obligation
|
|
$
|
126,280
|
|
|
$
|
117,418
|
|
|
$
|
19,696
|
|
|
$
|
-
|
|
|
$
|
263,394
|
|
LITIGATION
The
Company is from time to time involved in certain legal proceedings and claims
arising in the ordinary course of business. On January 14,
2009, DNT, LLC filed a complaint in the United States District Court
for the Eastern District of Virginia against one of its customers as one of six
nominal defendants on behalf of alleged patent infringement of U.S. Patent No.
RE 37,660 by the products that have been provided by the
Company. Pursuant to the Company’s agreement with the customer, the
customer has sent the notice that the Company will defend and indemnify it in
this matter, including hiring counsel to prepare an answer or other response to
the complaint. As of June 30, 2009, this legal proceeding is pending,
but the Company does not expect a material adverse effect on its financial
condition for the year ended June 30, 2009 and thereafter.
CO-DEVELOPMENT,
CO-OWNERSHIP AND SUPPLY AGREEMENT
The
Company’s sole facility is located in San Diego,
California. Manufacturing of the Company products has ordinarily been
contracted out to C-Motech Co. Ltd. (“C-Motech”), an electronics manufacturing
company located in South Korea.
In
January 2005, the Company entered into a manufacturing and supply agreement (the
“Agreement”) with C-Motech for the manufacture of its products. Under the
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, CDG 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. The agreement will be valid for an additional one year
period and expires on January 4, 2010.
NOTE
8 – STOCK-BASED COMPENSATION
In June
2009, the Company adopted the 2009 Stock Incentive Plan (“2009 Plan”). The 2009
Plan provided for the grant of incentive stock options and non-qualified stock
options to the Company’s employees and directors. Options granted under the 2009
Plan generally vest and become exercisable at the rate of between 50% and 100%
per year with a life between four and five years. Upon exercise of granted
options, shares are expected to be issued from new shares previously registered
for the 2009 Plan.
The
Company adopted SFAS No. 123, “Accounting for Share-Based Payments, as Revised”
(“SFAS 123R”), using a modified prospective application, and the Black-Scholes
model, as permitted under SFAS 123R. Under this application, the Company is
required to record compensation expense for all awards granted after the date of
adoption and for the unvested portion of previously granted awards that remain
outstanding at the date of adoption. Compensation cost will be recognized over
the period that an employee provides service in exchange for the
award.
The
estimated forfeiture rate considers historical turnover rates stratified into
employee pools in comparison with an overall employee turnover rate, as well as
expectations about the future. The Company periodically revises the estimated
forfeiture rate in subsequent periods if actual forfeitures differ from those
estimates. Compensation expense recorded under this method for fiscal 2009 was
$2,560 and reduced operating income and income before income taxes by the same
amount by increasing compensation expense recognized in selling and
administrative expense. The recognized tax benefit related to the compensation
expense for fiscal 2009 was nil.
The fair
value of each option on the date of grant was estimated using the Black-Scholes
method based on the following weighted-average assumptions:
|
|
|
June
30, 2009
|
|
|
Risk-free
interest rate
|
|
|
3.26%
|
|
|
Expected
term
|
|
|
3.50 years
|
|
|
Expected
volatility
|
|
|
20.61%
|
|
|
Expected
dividend yield
|
|
|
0%
|
|
The
risk-free interest rate is based on the U.S. Treasury yield curve in effect
at the time of grant for periods corresponding with the expected term of the
option; the expected term represents the weighted-average period of time that
options granted are expected to be outstanding giving consideration to vesting
schedules and using the simplified method pursuant to SAB No. 107,
Share-Based Payment; the expected volatility is based upon historical
volatilities of the Company’s common stock; and the expected dividend yield is
based upon the Company’s current dividend rate and future
expectations.
The
weighted-average grant-date fair value of stock options granted for fiscal 2009
was $0.09 per share.
A summary
of the status of the Company’s stock options is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
Remaining
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Contractual
|
|
|
Aggregate
|
|
|
|
|
|
|
|
Exercise
|
|
|
Life
|
|
|
Intrinsic
|
|
|
Options
|
|
Shares
|
|
|
Price
|
|
|
(In
Years)
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In
thousands)
|
|
|
Outstanding
at June 30, 2008
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Granted
|
|
|
472,500
|
|
|
|
0.45
|
|
|
|
-
|
|
|
|
-
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Forfeited
or Expired
|
|
|
(25,000
|
)
|
|
|
0.45
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at June 30, 2009
|
|
|
447,500
|
|
|
$
|
0.45
|
|
|
|
1.5
|
|
|
$
|
97,988
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
at June 30, 2009
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested
and Expected to Vest at June 30, 2009
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
The
weighted-average grant-date fair value of stock options granted for fiscal 2009
was $0.09 per share.
The
aggregate intrinsic value in the preceding table represents the total pretax
intrinsic value, based upon the Company’s closing stock price of $0.70 as of
June 30, 2009, which would have been received by the option holders had all
option holders exercised their options as of that date.
As of
June 30, 2009, there was $17,646 of total unrecognized compensation cost
related to non-vested stock options granted. That cost is expected to be
recognized over a weighted-average period of 1.4 years.
NOTE
9 – RELATED PARTY TRANSACTIONS
The
Company purchased CDMA wireless data products in the amount of $21,655,374, and
$27,090,347 from C-Motech, for the years ended June 30, 2009 and 2008
respectively, and had related accounts payable of $4,466,741 and
$3,697,893 as of June 30, 2009 and 2008, respectively. C-Motech
owns 3,370,356 shares, or 25.5%, of the Company’s 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
10 - SUBSEQUENT EVENTS
On
September 21, 2009, the Company entered into Change of Control Agreements
(“Agreement”) with OC Kim, President, David Yun Lee, Chief Operating Officer,
and Yong Bae Won, Vice President-Engineering. Each Agreement provides for a lump
sum payment to the officer in case of a change of control of the Company. The
term includes the acquisition of common stock of the Company resulting in one
person or company owning more than 50% of the outstanding shares, a significant
change in the composition of the Board of Directors of the Company during any
twelve-month period, a reorganization, merger, consolidation or similar
transaction resulting in the transfer of ownership of more than fifty percent of
the Company's outstanding Common Stock, or a liquidation or dissolution of the
Company or sale of substantially all of the Company's assets.
The
Agreement with Mr. Kim is for three years and calls for a payment of $5 million
upon a change of control; the agreement with Mr. Lee is for two years and calls
for a payment of $2 million upon a change of control; and the agreement with Mr.
Won is for two years and calls for a payment of $1 million upon a change of
control.
In
May 2009, the FASB Issued Statement of Financial Accounting Standards No. 165,
"Subsequent Events" ("FAS 165"). FAS 165 establishes general standards of
accounting for and disclosure of events that occur after the balance sheet date
but before financial statements are issued or are available to be issued. The
standard, which includes a new required disclosure of the date through which an
entity has evaluated subsequent events, is effective for interim or annual
periods ending after June 15, 2009. The Company's management evaluated all
events or transactions that occurred after June 30, 2009 up through October 13,
the date the Company issued the financial statements for the year ended June 30,
2009. During this period, the Company did not have any material recognizable
subsequent events other than those disclosed in this note to the financial
statements for the year ended June 30, 2009 included elsewhere in this Form
10-K.