UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the quarterly period ended: December 31, 2005
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from ____________ to _____________
Commission file number 0-11616
FRANKLIN WIRELESS CORP.
(Exact name of small business issuer in its charter)
California 95-3733534
---------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9853 Pacific Heights Suite N, San Diego, California 92121
------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(858) 623-0000
----------------------
Issuer's Telephone Number, Including Area Code:
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, without par value
---------------
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
YES [ ] NO [X]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
YES [ ] NO [X]
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
TITLE OF EACH CLASS OF COMMON STOCK OUTSTANDING AT April 15, 2006
-------------------------- --------------------------
Common Stock, no par value 835,040,550
Transitional Small Business Disclosure format (Check one): YES [ ] NO [X]
FRANKLIN WIRELESS CORP.
INDEX
PART I - FINANCIAL INFORMATION
Item 1: Financial Statements (Unaudited)
Consolidated Statements of Operations (Unaudited)...................3
Consolidated Balance Sheets (Unaudited).............................4
Consolidated Statements of Cash Flows (Unaudited)...................5
Notes to Consolidated Financial Statements..........................6
Item 2: Management's Discussion and Analysis or Plan of Operation.............11
Item 3: Controls and Procedures...............................................14
PART II - OTHER INFORMATION
Item 1: Legal Proceedings.....................................................15
Item 2: Unregistered Sales of Equity Securities and Use of Proceeds...........15
Item 3: Defaults Upon Senior Securities.......................................15
Item 4: Submission of Matters to a Vote of Security Holders...................15
Item 5: Other Information ....................................................15
Item 6: Exhibits..............................................................15
Signatures ...................................................................16
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FRANKLIN WIRELESS CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------------------ ------------------------------
2005 2004 2005 2004
------------- ------------- ------------- -------------
Net sales $ 80,500 $ 110,810 $ 160,390 $ 116,940
Cost of goods sold 42,700 103,200 60,200 109,200
------------- ------------- ------------- -------------
Gross profit 37,800 7,610 100,190 7,740
------------- ------------- ------------- -------------
Operating expenses:
Selling, general and administrative 181,638 163,729 285,372 477,120
Research and development -- -- 36,300 --
------------- ------------- ------------- -------------
Total operating expenses 181,638 163,729 321,672 477,120
------------- ------------- ------------- -------------
Loss from operations (143,838) (156,119) (221,482) (469,380)
------------- ------------- ------------- -------------
Other income, net 14,814 446 14,512 388
------------- ------------- ------------- -------------
Net loss before income taxes (129,024) (155,673) (206,970) (468,992)
Provision for income taxes 800 800 800 800
------------- ------------- ------------- -------------
Net loss $ (129,824) $ (156,473) $ (207,770) $ (469,792)
============= ============= ============= =============
Basic loss per share $ (0.0002) $ (0.0002) $ (0.0003) $ (0.0006)
Diluted loss per share $ (0.0002) $ (0.0002) $ (0.0003) $ (0.0006)
Weighted average common shares outstanding:
Basic 812,640,050 773,040,050 804,240,050 773,040,050
Diluted 812,640,050 773,040,050 804,240,050 773,040,050
SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
3
FRANKLIN WIRELESS CORP.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
DECEMBER 31, JUNE 30,
2005 2005
------------- -------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 207,794 $ 39,542
Accounts receivable 10,250 --
------------- -------------
Total current assets 218,044 39,542
Property and equipment, net 13,657 14,921
Intangible asset 75,417 97,917
Other assets 2,107 2,107
------------- -------------
TOTAL ASSETS $ 309,225 $ 154,487
============= =============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable $ 31,001 $ 17,926
Accrued liabilities 194,581 150,147
Notes payable to stockholders, current portion 560,000 590,000
------------- -------------
Total current liabilities 785,582 758,073
Notes payable to stockholders, long-term portion -- --
Other long-term liabilities 3,878 3,878
------------- -------------
Total liabilities 789,460 761,951
------------- -------------
Stockholders' deficit:
Common stock, no par value, authorized 900,000,000
shares and Preferred stock, no par value, authorized
10,000,000 shares; Common stock issued and outstanding
835,040,050 as of December 31, 2005 and 793,040,050
as of June 30, 2005 and no Preferred stocks issued
and outstanding. -- --
Additional paid-in capital 4,119,393 3,784,393
Stock subscription receivable (17,395) (17,395)
Accumulated deficit (4,582,233) (4,374,462)
------------- -------------
Total stockholders' deficit (480,235) (607,464)
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 309,225 $ 154,487
============= =============
SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
4
FRANKLIN WIRELESS CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED
DECEMBER 31,
----------------------
2005 2004
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(207,770) $(469,792)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 25,600 25,600
Increase (decrease) in cash due to change in:
Accounts receivable (10,250) 99,390
Other assets -- 5,317
Accounts payable 13,075 --
Accrued liabilities 44,434 29,909
--------- ---------
Net cash used in operating activities (134,911) (309,576)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (1,837) (3,000)
--------- ---------
Net cash used in investing activities (1,837) (3,000)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings (payments) from (to) stockholders (30,000) 30,000
Proceeds from issuance of common stock 335,000 120,450
--------- ---------
Net cash provided by financing activities 305,000 150,450
--------- ---------
Net decrease in cash 168,252 (162,126)
Cash and cash equivalents, beginning of year 39,542 209,048
--------- ---------
Cash and cash equivalents, end of period $ 207,794 $ 46,922
========= =========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ -- $ --
Incomes taxes $ 800 $ 800
SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
5
FRANKLIN WIRELESS CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - NATURE OF OPERATIONS
Franklin Wireless Corp. ("Franklin" or the "Company") designs, builds, and
markets broadband high speed data communication products such as 3G wireless
modules and modems. Franklin is dedicated to serving the global wireless
community by becoming a leading developer/marketer of wireless communications
devices and enabling technologies, as well as an applications provider catering
to the dynamic needs of its customers, global wireless carriers In addition,
service for its technology is provided to vertical application companies.
The Company's products are marketed through Original Equipment Manufacturers
("OEMs") and distributors, as well as directly to operators and end users. The
Company's customers are located primarily in the United States, Canada, South
America, Asia, and parts of Europe in a wide range of industries including
cellular operators, government, PC maker, and application integrator. In
summary, the Company's products are marketed to cellular operators for end-users
as well as computer/handheld computing industry, automotive industry, telemetry,
other vertical markets.
NOTE 2 - GOING CONCERN MATTERS
The accompanying consolidated financial statements have been prepared in
conformity with U.S. generally accepted accounting principles ("GAAP"), which
contemplate continuation of the Company as a going concern. The Company incurred
a net loss of $207,770 and had negative cash flows from operations of $134,911
during the six months ended December 31, 2005. These factors raise substantial
doubt about the Company's ability to continue as a going concern.
Recovery of the Company's assets is dependent upon future events, the outcome of
which is indeterminable. The Company's attainment of profitable operations is
dependent upon its obtaining adequate debt and equity financing and achieving a
level of sales adequate to support the Company's cost structure. In addition,
realization of a major portion of the assets in the accompanying balance sheet
is dependent upon the Company's ability to meet its financing requirements and
the success of its plans to sell its products. The financial statements do not
include any adjustments relating to the recoverability and classification of
recorded asset amounts or amounts and classification of liabilities that might
be necessary should the Company be unable to continue in existence. Management
plans to raise additional equity capital, continue to develop its products, and
market the products.
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION AND SEGMENT REPORTING
The accompanying consolidated financial statements include the accounts of
Franklin and ARG. ARG is a wholly owned subsidiary in South Korea that designs
the cellular phone. All inter-company balances and transactions have been
eliminated in consolidation.
The Company has two reportable segments as defined by SFAS No. 131, Disclosure
About Segments of an Enterprise and Related Information. The Company's
subsidiary located in South Korea, ARG, was not active and in operation during
the six months ended December 31, 2005 and 2004. Furthermore, all of its
subsidiary's assets were written off during the fiscal year 2004 as the
operation was shut-down during the period. As a result, the Company's
consolidated financial statements include $550,000 of debt from ARG financial
statements. During the latter part of 2003, the Company discontinued its
financial support and operations of ARG but kept the business as an inactive
subsidiary for future use. The subsidiary will be used for supporting
manufacturing and sourcing new product and business in the future.
6
USE OF ESTIMATES
The preparation of financial statements requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
periods. Actual results could differ from those estimates.
REVENUE RECOGNITION
The Company recognizes revenue when persuasive evidence of an arrangement
exists, the price is fixed or determinable, collection is reasonably assured and
delivery of products has occurred or services have been rendered. Accordingly,
the Company recognizes revenues from product sales upon shipment of the product
to the customers. The Company does not allow the right of return on product
sales but warrant the products over one year from the shipment. Allowance for
doubtful accounts is estimated based on estimates of losses related to customer
receivable balances. Estimates are developed by using standard quantitative
measures based on historical losses, adjusting for current economic conditions
and, in some cases, evaluating specific customer accounts for risk of loss. The
establishment of reserves requires the use of judgment and assumptions regarding
the potential for losses on receivable balances. Though the Company considers
these balances adequate and proper, changes in economic conditions in specific
markets in which the Company operates could have a material effect on reserve
balances required.
CASH AND CASH EQUIVALENTS
For purposes of the statements of cash flows, the Company considers all highly
liquid investments purchased with original maturities of three months or less to
be cash equivalents.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. The Company provides for depreciation
using the straight-line method over the estimated useful lives as follows:
Computers and software 5 years
Machinery and equipment 5 years
Furniture and fixtures 5 years
Expenditures for maintenance and repairs are charged to operations as incurred
while renewals and betterments are capitalized. Gains or losses on the sale of
property and equipment are reflected in the statements of operations.
INTANGIBLE ASSETS - LICENSES
Licenses are stated at cost and are amortized using the straight-line method
over the license periods of five years or life of the license.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company, in accordance with Statement of Financial Accounting Standards No.
144, "Accounting for Impairment on Disposal of Long-lived Assets", reviews for
impairment of long-lived assets and certain identifiable intangibles whenever
events or circumstances indicate that the carrying amount of the asset may not
be recoverable. An impairment loss would be recognized when estimated future
cash flows expected to result from the use of the asset and its eventual
disposition is less than its carrying amount. As of December 31, 2005, the
Company is not aware of any events or changes in circumstances that would
indicate that the long-lived assets are impaired.
WARRANTIES
The Company does not provide any warranties on its products. However, the
manufacturer provides limited warranties up to one year from the date of the
sale to the Company's customers. These products are shipped directly from the
manufacturer to the customers. As a result, the Company is not required to and
does not accrue any warranty expenses.
7
ADVERTISING AND MARKETING COSTS
The company expenses the costs of advertising and marketing as incurred. The
Company incurred no advertising and marketing expenses during the three and six
months ended December 31, 2005 and 2004.
INCOME TAXES
The Company accounts for income taxes under the asset and liability method of
accounting. Under this method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date. A valuation
allowance is required when it is less likely than not that the Company will be
able to realize all or a portion of its deferred tax assets.
LOSS PER SHARE
The Company reports loss per share in accordance with Statement of Financial
Accounting Standards No. 128, "Earnings Per Share". Basic loss per share is
computed using the weighted average number of shares outstanding during the
year. Diluted earnings per share include the potentially dilutive effect of
outstanding common stock options and warrants which are convertible to common
shares.
CONCENTRATIONS OF CREDIT RISK
The Company sells its products throughout the United States and South America
and extends credit to its customers and performs ongoing credit evaluations of
such customers. The Company evaluates its accounts receivable on a regular basis
for collectibility and provides for an allowance for potential credit losses as
deemed necessary.
NOTE 4 - PROPERTY AND EQUIPMENT
Property and equipment at December 31, 2005 and June 30, 2005 consisted of the
following:
(Unaudited)
December 31, June 30,
2005 2005
-------- --------
Computers and software $ 24,062 $ 22,224
Machinery and equipment 3,000 3,000
Furniture and fixtures 8,713 8,713
-------- --------
35,775 33,937
Less accumulated depreciation (22,118) (19,016)
-------- --------
TOTAL $ 13,657 $ 14,921
======== ========
NOTE 5 - INVESTMENT IN SUBSIDIARY
In April 2002, the Company invested $384,615 in its wholly owned subsidiary in
South Korea for R&D and manufacturing support. Since August 2003 and as of
December 31, 2005 and June 30, 2005, ARG has been inactive.
8
NOTE 6 - INTANGIBLE ASSETS
The Company purchased licenses to design phone and data communication products.
Below are the details for the licenses.
(Unaudited)
December 31, June 30,
2005 2005
--------- ---------
GSM software license $ 200,000 $ 200,000
Text input methods licenses 25,000 25,000
--------- ---------
225,000 225,000
Less accumulated amortization (149,583) (127,083)
--------- ---------
Net Balance $ 75,417 $ 97,917
========= =========
Amortization expense associated with intangible assets was $11,250 for the three
months ended December 31, 2005 and 2004 and $22,500 for the six months ended
December 31, 2005 and 2004.
GSM software license was contracted with a supplier for the Company to design
GSM phone and module and was paid in September of 2002. This software license
has an approximate life of 5 years based on the life of the GSM software.
Text input method license was paid in October of 2002 and has an approximate
life of 5 yeas or the life of the text input license.
NOTE 7 - OTHER ASSETS
Other assets as of December 31, 2005 and June 30, 2005 consisted of facility
lease and utility deposits.
NOTE 8 - NOTES PAYABLE TO STOCKHOLDERS
(Unaudited)
December 31, June 30,
2005 2005
--------- ---------
Promissory Note $ 10,000 $ 10,000
Promissory Note -- 30,000
Non-interest Bearing Note 550,000 550,000
--------- ---------
Total 560,000 590,000
Less current portion (560,000) (590,000)
--------- ---------
Long-term portion $ -- $ --
========= =========
The Company issued a non-interest bearing promissory note in the amount of
$10,000 to the Company's former chief technology officer on June 30, 2004. This
note is due upon demand.
During June 2005, the Company issued a promissory note to its stockholder in the
amount of $30,000 with no interest. The note is convertible to the Company's
common stocks upon issuance at the option of the holder at exercise price on the
date of issuance, or $0.005. The note was converted to the Company's common
stock at $0.005 on November 11, 2005.
On August 20, 2002, the Company's wholly owned subsidiary, ARG, issued a
promissory note to a stockholder in the amount of $550,000, bearing interest at
10%, due on March 20, 2004. The Company and the stockholder agreed to change the
9
promissory note to a convertible promissory note during the year ended June 30,
2004. The note is convertible into shares of Common Stock at the option of the
holder at a conversion price equal to the fair value of the Company's Common
Stock on the date of issuance, or $0.005 per share. As of December 31, 2005,
this note was outstanding and had not been converted.
NOTE 9 - ACCRUED LIABILITIES
Accrued liabilities at December 31, 2005 and June 30, 2005 consisted of the
following:
(Unaudited)
December 31, June 30,
2005 2005
-------- --------
Salaries $129,750 $111,000
Other accrued liabilities 64,831 39,147
-------- --------
TOTAL $194,581 $150,147
======== ========
NOTE 10 - COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company leases its administrative facilities under a non-cancelable
operating lease that expire on April 30, 2007. In addition to the minimum annual
rental commitments, the leases provide for periodic cost of living increases in
the base rent and payment by the Company of common area costs. Rent expense
related to the operating lease was $6,890 and $19,163 for the three months ended
December 31, 2005 and 2004, respectively, and $13,058 and $33,010 for the six
months ended December 31, 2005 and 2004, respectively.
LITIGATION
During June 2005, the Company's landlord filed a suit against the Company
alleging that the Company defaulted under the terms and conditions of the
Company's lease agreement when the Company failed to pay for its facility lease
valued at $18,221. The parties have settled at $9,308, to be paid in twelve
equal monthly installments on December 6, 2005.
In addition, the Company is involved in certain legal proceedings and claims
which arise in the normal course of business. Management does not believe that
the outcome of these matters will have any material adverse effect on the
Company's consolidated financial condition.
SUPPLY AND PURCHASE AGREEMENTS
In May 2005, the Company entered into a contract for low cost GSM phone and a
worldwide distribution agreement with a design and manufacturing company. The
agreement provides for a one-year term and may be extended on a year-to-year
basis thereafter.
NOTE 11 - EARNINGS PER SHARE
Basic earnings per share ("EPS") excludes dilution and is computed by dividing
net income or loss attributable to common shareholders by the weighted-average
number of common shares outstanding for the period. As of December 31, 2005 and
June 30, 2005, the Company did not have any dilutive common stock shares.
10
NOTE 12 - SUBSEQUENT EVENTS
REPURCHASE OF SHARES
The Company has agreed to repurchase the shares held by Hanjin Jhun, its former
Chief Executive Officer, for the price paid by Mr. Jhun, $.005 per share. Mr.
Jhun, who resigned during the third quarter of fiscal 2006, holds approximately
20,000,000 shares. The Company plans to repurchase the shares for cash during
the fourth quarter of its 2006 fiscal year.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion should be read in conjunction with the consolidated
financial statements and notes thereto included in Item 1 of this filing and the
financial statements and notes thereto and Management's Discussion and Analysis
or Plan of Operation contained in the Company's Form 10-KSB for the year ended
June 30, 2005.
BUSINESS OVERVIEW
Franklin Wireless Corp. ("Franklin" or the "Company") designs, builds, and
markets broadband high speed data communication products such as 3G wireless
modules and modems. Franklin is dedicated to serving the global wireless
community by becoming a leading developer/marketer of wireless communications
devices and enabling technologies, as well as an applications provider catering
to the dynamic needs of its customers, global wireless carriers In addition,
service for its technology is provided to vertical application companies.
The Company's products are marketed through Original Equipment Manufacturers
("OEMs") and distributors, as well as directly to operators and end users. The
Company's customers are located primarily in the United States, Canada, South
America, Asia, and parts of Europe in a wide range of industries including
cellular operators, government, PC maker, and application integrator. In
summary, the Company's products are marketed to cellular operators for end-users
as well as computer/handheld computing industry, automotive industry, telemetry,
other vertical markets.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company believes the following critical accounting policies affect the
Company's more significant judgments and estimates used in the preparation of
the financial statements.
USE OF ESTIMATES
The preparation of financial statements requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
periods. Actual results could differ from those estimates.
REVENUE RECOGNITION
The Company recognizes revenue when persuasive evidence of an arrangement
exists, the price is fixed or determinable, collection is reasonably assured and
delivery of products has occurred or services have been rendered. Accordingly,
the Company recognizes revenues from product sales upon shipment of the product
to the customers. The Company does not allow the right of return on product
sales but warrant the products over one year from the shipment. Allowance for
doubtful accounts is estimated based on estimates of losses related to customer
receivable balances. Estimates are developed by using standard quantitative
measures based on historical losses, adjusting for current economic conditions
and, in some cases, evaluating specific customer accounts for risk of loss. The
establishment of reserves requires the use of judgment and assumptions regarding
the potential for losses on receivable balances. Though the Company considers
these balances adequate and proper, changes in economic conditions in specific
markets in which the Company operates could have a material effect on reserve
balances required.
11
IMPAIRMENT OF LONG-LIVED ASSETS
The Company, in accordance with Statement of Financial Accounting Standards No.
144, "Accounting for Impairment on Disposal of Long-lived Assets", reviews for
impairment of long-lived assets and certain identifiable intangibles whenever
events or circumstances indicate that the carrying amount of the asset may not
be recoverable. An impairment loss would be recognized when estimated future
cash flows expected to result from the use of the asset and its eventual
disposition is less than its carrying amount. As of December 31, 2005, the
Company is not aware of any events or changes in circumstances that would
indicate that the long-lived assets are impaired.
INCOME TAXES
The Company accounts for income taxes under the asset and liability method of
accounting. Under this method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date. A valuation
allowance is required when it is less likely than not that the Company will be
able to realize all or a portion of its deferred tax assets.
RESULTS OF OPERATIONS
The results of the interim periods are not necessarily indicative of results for
the entire fiscal year
THREE MONTHS ENDED DECEMBER 31, 2005 COMPARED TO THREE MONTHS ENDED DECEMBER 31,
2004
NET SALES - Net sales decreased by $30,310 or 27.4%, to $80,500 for the three
months ended December 31, 2005 from $110,810 for the corresponding period of
2004. The decrease is primarily due to certain products being in the testing
phase by certain customers during the 2005 quarter period and as a result, not
being available for sale.
GROSS PROFIT - Gross profit increased in terms of net sales percentage as the
percentage of gross profit, which was 47.0% for the three months ended December
31, 2005, compared to 6.9% for the corresponding period of 2004. The gross
profit percentage increase can be attributed to its shift from phone sales to
module sales, a more profitable product.
SELLING, GENERAL, AND ADMINISTRATIVE - Selling, general, and administrative
expenses increased by $17,909, or 10.9%, to $181,638 for the three months ended
December 31, 2005 from $163,729 for the corresponding period of 2004. The
decrease can be attributed to cost savings from cutting back the general and
administrative infrastructure during the three months ended December 31, 2005
compared to the corresponding period of 2004.
OTHER INCOME - Other income increased by $14,368, or 3,221.4%, to $14,814, for
the three months ended December 31, 2005 from $446 for the corresponding period
of 2004. This is primarily due to a settlement of an account payable with a
customer in an amount less than what had been accrued.
SIX MONTHS ENDED DECEMBER 31, 2005 COMPARED TO SIX MONTHS ENDED DECEMBER 31,
2004
NET SALES - Net sales increased by $43,450, or 37.2%, to $160,390 for the six
months ended December 31, 2005 from $116,940 for the corresponding period of
2004. The change is principally due to the shift in the Company's business
strategy, from being a product engineering company to a product
development/marketing company.
GROSS PROFIT - Gross profit increased in terms of net sales percentage as the
percentage of gross profit, which was 62.5% for the six months ended December
31, 2005, compared to 6.6% for the corresponding period of 2004. The gross
profit percentage increase can be attributed to its shift from being a product
engineering and sales company to a product development/marketing company and the
module products having higher gross profit margins compared to other products.
12
SELLING, GENERAL, AND ADMINISTRATIVE - Selling, general, and administrative
expenses decreased by $191,748, or 40.2%, to $285,372 for the six months ended
December 31, 2005 from $477,120 for the corresponding period of 2004. The
decrease can be attributed to decreased sales/marketing efforts, a reduced
engineering group, accounting charges and cost savings from cutting back the
general and administrative infrastructure.
RESEARCH AND DEVELOPMENT - Research and development expenses of $36,300, mainly
attributable for the design of a phone product, were incurred during the six
months ended December 31, 2005. No research and development costs were incurred
during the six months ended December 31, 2004
OTHER INCOME - Other income increased by $14,124, or 3642.2%, to $14,512 for the
six months ended December 31, 2005 from $388 for the corresponding period of
2004. This is primarily due to a settlement of an account payable with a
customer in an amount less than what had been accrued.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents increased by $168,252, to $207,794 as of December 31,
2005 compared to $39,542 as of June 30, 2005. The increase was primarily from
the issuance of equity securities, offset by operating losses.
The Company believes that its current negative working capital of $567,538 and
anticipated working capital to be generated by future operations will not be
sufficient to support the Company's working capital requirements through
December 31, 2006. Accordingly, the Company will have to rely on outside
financing.
OPERATING ACTIVITIES - Net cash used in operating activities amounted to
$134,911 and $309,576 for the six months ended December 31, 2005 and 2004,
respectively. The decrease from the prior period relates mainly to reduced
engineering expense, including payroll expense, by terminating the outside
service and focusing on research and development for the Company's own module
INVESTING ACTIVITIES - Net cash used in investing activities totaled $1,837 and
$3,000 for the six months ended December 31, 2005 and 2004, respectively,
consisting of capital expenditures.
FINANCING ACTIVITIES - Net cash provided by financing activities for the six
months ended December 31, 2005 and 2004 totaled $305,000 and $150,450,
respectively, which consisted of proceeds from issuances of common stock.
CONTRACTUAL OBLIGATIONS AND OTHER COMMITMENTS
The Company's principal future obligations and commitments as of December 31,
2005, include the following:
LEASES
The Company leases its administrative facilities under a non-cancelable
operating lease that expires on April 30, 2007. In addition to the
minimum annual rental commitments, the lease provides for periodic cost
of living increases in the base rent and payment by the Company of
common area costs. Rent expense related to the operating lease was
$6,890 and $19,163 for the three months ended December 31, 2005 and
2004, respectively, and $13,058 and $33,010 for the six months ended
December 31, 2005 and 2004, respectively.
LITIGATION
During June 2005, the Company's landlord filed a suit against the
Company alleging that the Company defaulted under the terms and
conditions of the Company's lease agreement when the Company failed to
pay for its facility lease valued at $18,221. The parties have settled
at $9,308, to be paid in twelve equal monthly installments commencing
on December 6, 2005.
In addition, the Company is involved in certain legal proceedings and
claims which arise in the normal course of business. Management does
not believe that the outcome of these matters will have a material
adverse effect on the Company's consolidated financial condition.
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SUPPLY AND PURCHASE AGREEMENTS
In May 2005, the Company entered into a contract for low cost GSM phone
and a worldwide distribution agreement with a design and manufacturing
company. The agreement provides for a one-year term and may be extended
on a year-to-year basis thereafter.
ITEM 3. CONTROLS AND PROCEDURES
At the end of the period covered by this Form 10-QSB, the Company
carried out an evaluation, under the supervision and with the participation of
members of our management, including our Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of our
company's disclosure controls and procedures pursuant to Rule 13a-15(b) of the
U.S. Securities Exchange Act of 1934 (the "Exchange Act"). Based on this
evaluation, our Chief Executive Officer and Chief Financial Officer concluded
that, as of December 31, 2005, our disclosure controls and procedures, related
to internal control over financial reporting and the recording of certain equity
transactions, were not effective in light of the material weaknesses described
below.
1. INADEQUATE FINANCIAL STATEMENT PREPARATION AND REVIEW PROCEDURES -
We do not have adequate procedures and controls to ensure that
accurate financial statements can be prepared and reviewed on a
timely basis, including insufficient
a. review and supervision within the accounting and finance
departments;
b. underlying accurate data to ensure that balances are properly
summarized and posted to the general ledger; and
c. technical accounting resources.
2. INADEQUATE SEGREGATION OF DUTIES - We do not have adequate
procedures and controls in place to ensure proper segregation of
duties within the accounting department. As a result, adjustments in
the financial statements could occur and not be prevented or
detected by our controls in a timely manner.
3. INADEQUATE TECHNICAL ACCOUNTING EXPERTISE - We lacked the necessary
depth of personnel with adequate technical accounting expertise to
ensure the preparation of interim and annual financial statements in
accordance with GAAP. This material weakness represented more than a
remote likelihood that a material misstatement of our interim
financial statements for the six months ended December 31, 2005
would not have been prevented or detected.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projection of any
evaluation of effectiveness to future periods is subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
On November 11, 2005, the Company issued 6,000,000 shares of Common Stock upon
conversion of a $30,000 promissory note, at a conversion rate of $0.005 per
share.
Also on November 11, 2005, the Company issued 36,000,000 shares of Common Stock
for cash, at a purchase price of $0.0085 per share, or an aggregate of $305,000
to an unaffiliated investor.
The Company believes that each of the foregoing transactions was exempt from the
registration requirements of the Securities Act of 1933, as amended by reason of
Section 4(2) thereof and Regulation D thereunder.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
31.1 Certificate of Chief Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
31.2 Certificate of Acting Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certificate of Chief Executive Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
32.2 Certificate of Acting Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
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SIGNATURES
Pursuant to the requirements of Section 13 of 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Franklin Wireless Corp.
Dated: May 24, 2006 By: /s/ OC Kim
--------------------------------------------
OC Kim
President and Acting Chief Financial Officer
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