UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB/A
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 2006
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OF 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-11616
FRANKLIN WIRELESS CORP.
(Name of small business issuer in its charter)
California 95-3733534
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9823 Pacific Heights Blvd., Suite J, San Diego, California 92121
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(Address of Principal Executive Offices) (Zip Code)
Issuer's Telephone Number: (858) 623-0000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
without par value
Check whether the issuer is not required to file reports pursuant to Section 13
or 15(d) of the Exchange Act. [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes [] No [X]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]
The issuer's revenue for its most recent fiscal year was $1,002,953.
State the aggregate market value of the voting and non-voting common equity held
by non-affiliates computed by reference to the price at which the common equity
was sold, or the average bid and asked price of such common equity, as a
specified date within the past 60 days: $6,090,948 as of September 20, 2006.
State the number of shares outstanding of each of the issuer's class of common
stock, as of the latest practicable date:
TITLE OF EACH CLASS OF COMMON STOCK OUTSTANDING AT September 20, 2006
----------------------------------- -----------------------------
Common Stock, without par value 882,040,050
Transitional Small Business Disclosure Format (Check one) Yes [ ]; No [X]
2
FRANKLIN WIRELESS CORP.
INDEX TO ANNUAL REPORT ON FORM 10-KSB
FOR THE FISCAL YEAR ENDED JUNE 30, 2006
PAGE NO.
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PART I
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Item 1: Description of Business ....................................................... 5
Item 2: Description of Property ....................................................... 9
Item 3: Legal Proceedings ............................................................. 9
Item 4: Submission of Matters to a Vote of Security Holders ........................... 9
PART II
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Item 5: Market for Common Equity and Related Stockholder Matters ...................... 9
Item 6: Management's Discussion and Analysis or Plan of Operation ..................... 10
Item 7: Financial Statements .......................................................... 17
Item 8: Changes in and Disagreements with Accountants on Accounting and 17
Financial Disclosure .......................................................... 17
Item 8A: Controls and Procedures ....................................................... 17
Item 8B: Other Information ............................................................. 18
PART III
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Item 9: Directors, Executive Officers, Promoters and Control Persons; Compliance
with Section 16(a) of the Exchange Act ........................................ 18
Item 10: Executive Compensation ........................................................ 19
Item 11: Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters ............................................... 20
Item 12: Certain Relationships and Related Transactions ................................ 21
Item 13: Exhibits ...................................................................... 21
Item 14: Principal Accountant Fees and Services ........................................ 22
Signatures .................................................................... 23
3
INTRODUCTION AND NOTE ON FORWARD LOOKING STATEMENTS
Franklin Wireless Corp. (the "Company" or "Franklin" or "our" or "we") is a
California corporation; its principal executive office is located at 9823
Pacific Heights Blvd. Suite J, San Diego, CA 92121.
You should keep in mind the following points as you read this Report on Form
10-KSB:
o the terms "we," "us," "our", "Franklin", "Franklin Wireless",
or the "Company" refer to Franklin Wireless Corp. and its
subsidiary; and
o our fiscal year ends on June 30; references to fiscal 2006 and
fiscal 2005 and similar constructions refer to the fiscal year
ended on June 30 of the applicable year.
This Annual Report on Form 10-KSB contains statements which, to the
extent they do not recite historical fact, constitute "forward looking"
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
Forward looking statements are used under the captions "Business," "Management's
Discussion and Analysis or Plan of Operation", and elsewhere in this Annual
Report on Form 10-KSB. You can identify these statements by the use of words
like "may," "will," "could," "should," "project," "believe," "anticipate,"
"expect," "plan," "estimate," "forecast," "potential," "intend," "continue," and
variations of these words or comparable words. Forward looking statements do not
guarantee future performance and involve risks and uncertainties. Actual results
may differ substantially from the results that the forward looking statements
suggest for various reasons, including those discussed under the caption "Risks
Related to Our Business." These forward looking statements are made only as of
the date of this Annual Report on Form 10-KSB. We do not undertake to update or
revise the forward looking statements, whether as a result of new information,
future events or otherwise.
4
PART I
ITEM 1. DESCRIPTION OF BUSINESS
BUSINESS OVERVIEW
At Franklin Wireless Corp., we design, build and market broadband high
speed data communication products, such as 3rd Generation 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. Franklin's wireless
broadband data products include wireless USB modems, PC cards, embedded modules,
and stand-alone broadband modems used for high-speed data services. The basis
for most of our products is Code Division Multiple Access (CDMA) technology. In
addition, as a wireless technologies/applications provider, Franklin offers
services designed to meet specific needs of each of its customers.
We are committed to developing a reputation for:
o Developing next-generation wireless communications products at
affordable prices and ensuring timely and reliable product
delivery,
o Flexibility in providing wireless enabling technologies that
satisfy the specific needs of each carrier, and
o Deploying client-specific, value-enhancing, wireless
applications
Our products are marketed through Original Equipment Manufacturers
("OEMs") and distributors, as well as directly to operators and end users. Our
customers are located primarily in the United States, Canada, and South America
including cellular operators and government agencies. .
OUR STRUCTURE
Franklin Wireless, headquartered in San Diego, California, is comprised
of two segments: a San Diego-based business unit, including corporate functions,
and a Korea-based business unit mainly to support the manufacturing of products.
The San Diego office is principally composed of marketing, sales,
operations, finance and administrative support. It is responsible for all
customer-related activities, such as marketing communications, product planning,
product management and customer support, along with sales and business
development activities on a worldwide basis.
5
The Korea-based business unit is a wholly owned subsidiary, and is
responsible for researching wireless subscriber terminal devices and supporting
manufacturing of wireless broadband devices. This entity has been inactive since
August 2003.
OUR PRODUCTS AND SERVICES
We offer two distinct product segments: our CDMA 1xEVDO Embedded Module
and USB/PC card Modem Segment, and our Data Application Supporting
Segment.
Our CDMA Embedded Module and USB/PC Card Segment represents our
greatest growth opportunity. In 2004, the market for embedded wireless modules
grew at an unprecedented rate, especially in the GSM space. The extraordinary
success of the GSM module companies has paved the way for an equally successful
module venture based on the CDMA technology that has been widely adopted, and is
expected to occupy more than 40% of the global wireless market share in 2006.
However, CDMA technology is highly complex, and few companies possess the
expertise required to develop CDMA products. Accordingly, only a few CDMA
companies are capable of creating CDMA modules and seizing this opportunity.
To support this rapidly expanding market, major wireless device
manufacturers are planning to integrate embedded CDMA modules into their
application products. The current low-speed data subscriber base also represents
a substantial potential market opportunity for CDMA 1x EVDO modules. Since the
next-generation (3G) wireless technologies are based on the CDMA high speed data
technology, GSM developers will soon be required to add CDMA capabilities to
their devices.
In this rapidly growing market segment, the Company currently has two
products: a dual-band (800/1900Mhz) embedded module/modem for the US and Latin
American markets, and a single band (800Mhz) module/modem for the Latin America
market. All of the present products are based on Qualcomm's MSM 5500/6500
technology. The Company plans to market its existing 1x EVDO embedded modem and
USB/PCMCIA modem products to operators in the US and Latin America during 2006.
In addition, the Company is in the process of developing a dual band USB modem,
stand-alone wireless terminal and Express card based on Qualcomm's 1x EV-DO 6800
Rev A technology. Working with its Korean development partner CMOTech, Inc., the
Company has initiated the development of a single band PC card and USB modem
access device, as well as a stand-alone wireless modem based on Qualcomm's 5500
series and 6500 series chipset. Accordingly, our product lines have been
expanded to address the US and Latin American markets to get certifications and
sales.
In the next few years, we see great potential for our new line of CDMA
1x EV-DO based products. For the first time, 1x EV-DO will provide users with
broadband speeds (up to 2.4Mbps) wirelessly in wide-area coverage. This third
generation, or 3G, technology is just now being deployed commercially by major
US wireless carriers committing to a nationwide 1x Ev-Do network deployment, as
well as other wireless carriers planning to incorporate Qualcomm's CDMA 2000 1x
EV-DO as their 3G wireless data standard in the US and Latin America. 1x EV-DO
is particularly advantageous in regions as an alternative to wired broadband
(e.g., DSL and cable) and in regions where wired broadband access is simply
unavailable despite the need and demand for such services. Franklin aims to work
closely with carriers deploying 1x EV-DO in order to develop the 3G terminals
that best meet their commercial needs in the US and Latin American market.
6
Franklin's Data Application Supporting Segment collaborates with major
carriers and wireless product manufacturers and provides them with solutions
that meet their specific needs. This segment will be provided majority of our
revenue in the near future. Franklin believes that the consumer product market
is experiencing consolidation and rapid changes, making it less attractive to
Franklin. Therefore, the management has elected to focus Franklin's resources on
the wireless data module business segment. This will shift in focus aligns our
marketing resources and engineering capabilities behind our core product
business units.
SALES AND MARKETING
We market our products through two channels: directly to operators and
indirectly, through strategic partners. Most of our sales to wireless carriers
and OEMs are sold directly by our sales force.
There are three steps to test for the sales of the data products with
carriers: CDG1 (CDMA Development Group Stage 1), CDG 2 and CDG 3. The Company is
currently selling the CDU-550 1x EVDO USB modem after completion of
certifications with one of the major carriers in the US and approximately ten
CDMA carriers in Latin America. Some units have been shipped to carriers in
Latin America as samples for the certifications and marketing evaluation
purpose.
The carriers are interested in 1x EVDO single and dual band USB modem
product for laptop computers or handheld devices equipped with USB but not
equipped with PCMCIA slots. The Company's CDU-550 and CCU-550 are the first
products to access the internet over CDMA 1xEVDO network with a USB modem. These
products are designed for the users to browse the internet and send and receive
e-mail anywhere and anytime in the CDMA 1xEVDO network. The Company has
introduced a stand-alone modem for application companies, such as wireless
security and telemetric companies, as well as the convergence products, EVDO to
Ethernet Router and EVDO Access Point which was combined with EVDO and WiFi
solution. The EVDO access point product is designed for the small office or home
office using several PCs at the same time.
ASSEMBLY AND MANUFACTURING OPERATIONS
The Company's main facility is located in San Diego, California.
Assembly of the Company's products has ordinarily been contracted out to an
overseas manufacturing company in South Korea. In May 2005, the Company entered
into an agreement with CMotech Co. Ltd., located in South Korea, for the
manufacture of the products. Under the manufacturing and supply agreement,
CMotech provides the Company with services including all licenses, component
procurement, final assembly, testing, quality control, fulfillment and
after-sale service.
7
EMPLOYEES
As of June 30, 2006, the Company had six full time employees and two
part time employees. The Company's employees are not represented by any
collective bargaining organization, and the Company has never experienced a work
stoppage. The Company believes its relations with the employees to be amicable.
RISKS RELATED TO OUR BUSINESS
WE HAVE A HISTORY OF LOSSES. We have experienced significant operating
losses and negative cash flows from operating activities during our last two
fiscal years. If our sales do not improve and operating expenses are not reduced
and monitored, we may incur additional significant net losses and negative cash
flows from operations.
WE OPERATE IN AN INTENSIVELY COMPETITIVE FIELD. The wireless broadband
data access market is highly competitive, and we may be unable to compete
effectively. Our primary competitors are Sierra Wireless, Novatel Wireless and
Option International. Many of our competitors or potential competitors have
significantly greater financial, technical and marketing resources than we do.
To survive and be competitive, we will need to continuously invest in research
and development, sales and marketing, and customer support. Increased
competition could result in price reduction and smaller customer orders. Our
failure to compete effectively could seriously harm our business.
WE OPERATE IN A FIELD WITH RAPIDLY CHANGING TECHNOLOGY. If we are
unable to predict and comply with evolving wireless standards, our ability to
introduce and sell new products will be adversely affected. At the same time, 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 RELY ON A SINGLE SOURCE FOR THE MANUFACTURE OF OUR PRODUCTS. We rely
on a single source to design, manufacture and supply our products, which exposes
us to a number of risks and uncertainties outside our control. Due to our lack
of working capital, we rely on CMotech to manufacture and deliver all our
products. Any significant changes in CMotech, 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.
OUR PRODUCT DELIVERIES ARE SUBJECT TO LONG LEAD TIMES. Due to our
financial difficulties, 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.
8
ITEM 2. DESCRIPTION OF PROPERTY
The Company leases approximately 3,800 square feet office space in San
Diego, California, at a monthly rent of approximately $3,981. The lease expires
on June 30, 2008. Our facility is covered by appropriate level of insurance and
we believe it to be suitable for its respective use and adequate for our present
needs.
ITEM 3. LEGAL PROCEEDINGS
During June 2005, the Company's landlord filed a suit against the
Company alleging that the Company defaulted under the lease when the Company
failed to pay rent. The action was settled, with the Company agreeing to pay
$9,308, to be paid in twelve equal monthly installments starting 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of the security holders
during either of the two past fiscal years.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the "pink sheets" under the
trading symbol "FKLT". The following table sets forth the range of high and low
bid quotations per share for the Common Stock as reported during the fiscal
years ending June 30, 2006 and 2005. The bid price reflects inter-dealer prices
and does not include retail mark-up, markdown, or commission.
HIGH LOW
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JUNE 30, 2005
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First Quarter 0.035 0.012
Second Quarter 0.014 0.007
Third Quarter 0.010 0.004
Fourth Quarter 0.038 0.002
JUNE 30, 2006
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First Quarter 0.016 0.007
Second Quarter 0.010 0.005
Third Quarter 0.011 0.004
Fourth Quarter 0.009 0.004
9
The Company has never declared or paid any dividends on its Common
Stock and does not expect to declare or pay any cash dividends in the
foreseeable future.
As of June 30, 2006, the Company had approximately 770 shareholders of
record. Since many of the shares of the Company's Common Stock are held by
brokers and other institutions on behalf of stockholders, it is impossible to
estimate the total number of beneficial holders represented by these record
holders.
RECENT SALES OF UNREGISTERED SECURITIES
During the three months ended June 30, 2006, the Company engaged in the
following sales of unregistered securities:
o The Company issued 1,000,000 shares of Common Stock to a
shareholder upon conversion of a $10,000 note payable, at a
conversion price of $0.01 per share.
o The Company issued 66,000,000 shares of Common Stock to
unaffiliated investors for cash at a price of $0.009 per
share, for gross proceeds of $600,000. .
The Company believes that each of the foregoing stock issuances 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 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
BUSINESS OVERVIEW
Franklin Wireless Corp. ("Franklin" or the "Company") designs, builds
and markets broadband high speed data communication products, such as 3rd
Generation wireless module and modems. We offer two distinct product lines: our
CDMA 1xEVDO Embedded Module and USB/PC card Modem product line, and our Data
Application Supporting product line. The Company's products are marketed through
Original Equipment Manufacturers ("OEMs") and distributors, as well as directly
to operators and end users. Our customers are located primarily in Latin
America, the United States and Canada including cellular operators and
government agencies.
In 2004, the market for embedded wireless modules grew at an
unprecedented rate, especially in the GSM space. The extraordinary success of
the GSM module companies paved the way for a successful module venture based on
the CDMA technology, which has been widely adopted, and is expected to occupy
more than 40% of the global wireless market share in 2006. Accordingly, the
Company concentrated on the design of CDMA module and modem products, for
incorporation into future products which can replace the GSM product. In
addition, our shift from GSM module to CDMA Embedded Module and USB/PC Card
Segment represented our best growth opportunity, since we could avoid the
intense competition posed by the GSM module companies, which generally have
substantially greater financial resources
During the fiscal year ended June 30, 2006, the Company was successful
in obtaining and maintaining customers for CDMA products. The primary increase
in sales was an increase in sales of the CDMA module and modem in Latin America,
which became our major source of revenue. As a result, the Company is focusing
on developing additional products for the Latin American market.
10
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following discussion and analysis of our financial condition and
results of operations is based upon our consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States of America. The preparation of these financial statements
requires the Company to make estimates and judgments that affect the reported
amounts on those financial statements. Note 1 to the consolidated financial
statements (included in this Annual Report on Form 10-KSB) describes the
significant accounting policies and methods used in the preparation of the
consolidated financial statements. On an ongoing basis, the Company evaluates
its estimates including, but not limited to, those related to our allowance for
doubtful accounts, and intangible assets. The Company bases its estimates on
historical experience and on various other assumptions that the Company believes
to be reasonable under the circumstances, the results of which form the basis
for making judgments about the carrying values of assets and liabilities that
are not readily apparent from other sources. Actual results may differ from
these estimates under different conditions or if our assumptions change.
The Company believes the following critical accounting policies affect
our more significant judgments and estimates used in the preparation of its
financial statements:
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 provides a factory warranty for one year from the shipment,
which is provided by the Company's vendor. Allowance for doubtful accounts is
estimated based on estimates of losses related to customer receivable balances.
Estimates are developed by using standard quantitative measures based on
historical losses, adjusting for current economic conditions and, in some cases,
evaluating specific customer accounts for risk of loss. The establishment of
reserves requires the use of judgments and assumptions regarding the potential
for losses on receivable balances. Though 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 flow, 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:
11
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.
LICENSES
Licenses are stated at cost and are amortized using the straight-line
method over the license periods of five years.
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 June 30, 2006 and 2005, the
Company was not aware of any events or changes in circumstances that would
indicate that the long-lived assets are impaired.
WARRANTIES
The Company does not allow the right of return on product sales but
provides a factory warranty for one year from the shipment which is covered by
the Company's vendor. These products are shipped directly from the vendor to the
customers. As a result, the Company does not accrue any warranty expenses.
RESEARCH AND DEVELOPMENT COSTS
The Company expenses research and development costs to operations which
are primarily made up of developmental activities.
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
years ending June 30, 2006 and 2005, respectively.
12
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.
RESULT OF OPERATIONS
The following table sets forth, for the fiscal years ended June 30,
2006, 2005 and 2004, selected consolidated statements of operations data
expressed as a percentage of sales:
2006 2005 2004
------- -------- --------
Net Sales 100.0% 100.0% 100.0%
Cost of goods sold 67.6% 68.7% 93.6%
------- -------- --------
Gross profit 32.4% 31.3% 6.4%
------- -------- --------
Operating expenses:
Selling, general and administrative expenses 58.0% 237.7% 106.2%
Research and development 3.6% 8.0% 3.9%
------- -------- --------
Total operating expenses 61.6% 245.7% 110.1%
------- -------- --------
Loss from operations (29.2%) (214.4%) (103.7%)
Other (expense) income, net 1.6% (1.5%) (32.4%)
------- -------- --------
Net loss before income taxes (27.6%) (215.9%) (136.1%)
Provision for income taxes 0.1% 0.3% 0.1%
------- -------- --------
Net loss (27.7%) (216.2%) (136.2%)
======= ======== ========
RESULTS OF OPERATIONS
YEAR ENDED JUNE 30, 2006 COMPARED TO YEAR ENDED JUNE 30, 2005
NET SALES - Net sales increased by $700,884 or 232.0%, from $302,069 for the
year ended June 30, 2005 to $1,002,953 for the year ended June 30, 2006. The
primary increase in sales was an increase in sales on the CDMA module and modem
products in Latin America. Net sales to customers in Latin America totaled
$731,265, representing 72% of net sales.
13
GROSS PROFIT - Gross profit increased in terms of net sales percentage as the
percentage of gross profit was 32.4% for the year ended June 30, 2006, compared
to 31.3% for the corresponding period of 2005. The gross profit percentage
increase can be attributed to its increase in sales in the CDMA module and modem
products which have higher gross profit margin compared to other products.
SELLING, GENERAL, AND ADMINISTRATIVE - Selling, general, and administrative
expenses decreased by $136,240 or 19.0%, from $718,159 for the year ended June
30, 2005 to $581,919 for the year ended June 30, 2006. The decrease can be
attributed to decreased engineering
expense and professional service charges.
RESEARCH AND DEVELOPMENT - Research and development expenses increased by
$12,100 or 50.0%, from $24,200 for the year ended June 30, 2005 to $36,300 for
the year ended June 30, 2006. The increase was mainly attributable to the design
of CDMA modules and modems.
OTHER EXPENSE (INCOME), NET - Other expense (income) decreased by $21,145, or
468.4%, from net expense of $4,514 for the year ended June 30, 2005 to income of
$16,631 for the year ended June 30, 2006. This is primarily due to a settlement
of an account payable with a customer in an amount less than what was accrued
during the year ended June 30, 2006.
YEAR ENDED JUNE 30, 2005 COMPARED TO YEAR ENDED JUNE 30, 2004
NET SALES - Net sales decreased by $1,376,199, or 82.0%, from $1,678,268 for the
year ended June 30, 2004 to $302,069 for the year ended June 30, 2005. The
decrease was primarily due to a significant decrease in sales of GSM products,
which decreased by $1,431,176, from $1,678,268 for the year ended June 30, 2004
to $247,092 for the year ended June 30, 2005. The overall decrease for this
product was attributed to the Company's decision to focus on the design of CDMA
module and modem products for future products, opportunities and demands which
can replace the GSM product.
GROSS PROFIT - Gross profit increased in terms of net sales percentage as the
percentage of gross profit was 31.3% for the year ended June 30, 2005, compared
to 6.4% for the corresponding period of 2004. The gross profit percentage
increase can be attributed to its shift from being a product engineering company
to a product development/marketing company. During our first year as the
developer of our own mobile phone products, we spent more than the expected cost
to develop and manufacture the products, including numerous re-works,
re-developments, and other product related activities, all of which contributed
to the low gross profit margin for the fiscal year 2004. . Selling, General, and
Administrative - Selling, general, and administrative expenses decreased by
$1,063,471 or 59.7%, from $1,781,630 for the year ended June 30, 2004 to
$718,159 for the year ended June 30, 2005. The decrease can be attributed to
decreased sales/marketing efforts, reducing engineering expense, accounting
charges and cost savings resulting from reduction of the general and
administrative infrastructure.
RESEARCH AND DEVELOPMENT - Research and development expenses decreased by
$40,664 or 62.7%, from $64,864 for the year ended June 30, 2004 to $24,200 for
the year ended June 30, 2005. The decrease was mainly attributable to the design
of CDMA modules and modems, rather than GSM phone design and development.
14
OTHER EXPENSE, NET - Other expenses decreased by $540,011 or 99.2%, from
$544,525 for the year ended June 30, 2004 to $4,514 for the year ended June 30,
2005. The decrease was due to losses on impairment of fixed assets and
intangible assets of $478,904 for the year ended June 30, 2004. There were no
losses on impairment of fixed assets and intangible assets for the fiscal year
ended June 30, 2005.
GOING CONCERN MATTERS
The accompanying consolidated financial statements have been prepared
in conformity with generally accepted accounting principles, which contemplate
continuation of the Company as a going concern. The Company incurred net losses
of $277,590 and had negative cash flows from operations of $260,739 for the year
ended June 30, 2006. These factors raise 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.
LIQUIDITY AND CAPITAL RESOURCES
Our cash and cash equivalents increased by $528,845 to $568,387 as of
June 30, 2006 compared to $39,542 as of June 30, 2005. The cash sources came
primarily from issuance of equity securities, and to a lesser extent,
collections of sales revenues. The Company has relied on sales of new shares to
supplement the funding of operations for an extended period of time. The
Company's working capital increased by $557,115 as the Company was able to
increase its cash balance through sales of its common stock shares to investors
during the year ended June 30, 2006.
Our cash and cash equivalents decreased by $169,506 to $39,542 as of
June 30, 2005 compared to $209,048 as of June 30, 2004. The cash sources came
primarily from issuance of equity securities, and to a lesser extent,
collections of sales revenues. The Company has relied on sales of new shares to
supplement the funding of operations for an extended period of time. The
Company's working capital decreased by $960,944 as we continued to invest in our
development and business development efforts and fund the loss incurred in 2005
and 2004.
15
The Company believes that its current working capital deficit of
$161,416 and anticipated working capital to be generated by future operations
will not be sufficient to support the Company's working capital requirements
through least June 30, 2007.
OPERATING ACTIVITIES - Net cash used in operating activities amounted to
$260,739 in 2006, $413,516 in 2005, and $1,675,222 in 2004. The decrease from
the prior period relates mainly to lower net loss compared to the prior period.
The decrease from 2004 to 2005 relates mainly to lower amounts used in research
and development service by stopping the service and focusing on the research and
development for the Company's own module, and write-off of fixed assets and
intangible assets of $478,904, as they were deemed to be impaired as of June 30,
2004.
INVESTING ACTIVITIES - Net cash used in investing activities totaled $5,416,
$4,000, and $1,829 in 2006, 2005, and 2004, respectively, consisting of capital
expenditures.
FINANCING ACTIVITIES - Net cash provided by financing activities in 2006 totaled
$795,000, mainly consisting of proceeds of $945,000 from the issuance of its
common stock. Net cash provided by financing activities in 2005 totaled
$248,010, consisting of proceeds of $218,010 from the issuance of Common Stock
and additional borrowings from stockholders of $30,000. Net cash provided by
financing activities in 2004 totaled $1,431,373, consisting of proceeds of
$1,736,768 from the issuance of Common Stock and off-set by repayment of line of
credit in the amount of $298,000.
CONTRACTUAL OBLIGATIONS AND OTHER COMMITMENTS
Our principal future obligations and commitments as of June 30, 2006, include
the following:
LEASES
The Company leases its administrative facilities under a non-cancelable
operating lease that expires on June 30, 2008 In addition to the minimum
annual rental commitments, the lease provides for periodic cost of living
increases in the base rent and payment by the Company of common area
costs. Rent expense related to the operating lease was $24,679 and
$37,104 for the years ended June 30, 2006 and 2005, respectively.
The Company also leases an automobile under an operating lease. Lease
expenses related to these items were $6,564 and $8,393 during the years
ended June 30, 2006 and 2005, respectively.
LITIGATION
During June 2005, the Company's landlord filed a suit against the Company
alleging that the Company defaulted under the lease when the Company
failed to pay rent. The action was settled, with the Company agreeing to
pay $9,308, to be paid in twelve equal monthly installments starting on
December 6, 2005. This balance has been accrued in the current and
long-term liabilities in the balance sheet as of June 30, 2005 and
accrued liabilities in the balance sheet as of June 30, 2006.
16
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.
ITEM 7. FINANCIAL STATEMENTS
The financial statements and the supplementary financial information
required by this Item and included in this report are listed in the Index to
Consolidated Financial Statements beginning on page F-1.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 8A. CONTROLS AND PROCEDURES
As of the end of the fiscal year ended June 30, 2006, 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 June 30, 2006, 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;
17
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 annual or interim
financial statements for fiscal 2006 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.
There has been no change in our internal control over financial
reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the most
recent fiscal quarter that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting in those
reporting periods
ITEM 8B. OTHER INFORMATION
Not applicable.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT
EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below are the names, ages, titles and present and past positions of
the executive officers of the Company.
NAME AGE POSITION
----------- --- -----------------------------------------------
OC Kim 43 President, Director, and Acting Chief Financial
Officer
Gary Nelson 65 Director
David Kim 53 Director
Taejin Kim 42 Director
18
Mr. OC Kim has been a director of the Company since September 2003 and
is currently serving as the President and Acting Chief Financial Officer of the
Company. Prior to joining the Company, Mr. Kim was the Chief Operating Officer
of Axesstel Inc., a pioneering developer of CDMA Wireless Local Loop Products.
Before joining Axesstel, he was the president of the US Sales office for Kolon
Data Communications Co., Ltd., one of Korea's most prominent technology
conglomerates. He began his career at Lucky Goldstar (LG) Electronics. He has
more than 15 years of successful experience in sales, marketing and operations
management in the telecommunications and information systems industries. He
earned a B.A. from Sogang University in Korea.
Mr. Gary Nelson became a director of Franklin Wireless in 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 of
Churchill Mortgage of Arizona, Inc., and Churchill Real Estate, Inc. His prior
experience includes 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.
Mr. David Kim has been a director since September 2003. He currently
serves as Chairman of Westech Korea, a Korean venture capital firm.
Dr. Taejin Kim has been a director since September 2003. He currently
serves as director of iPacific Partners Inc., a Korean venture capital company.
The Board of Directors has no committees, and has not adopted a Code of
Ethics. Directors do not receive compensation for serving on the Board of
Directors.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires officers
and directors, and persons who own more than ten percent of our equity
securities, to file reports of ownership and changes in ownership with the
Securities and Exchange Commission (the "Commission"). Officers, directors and
greater than regulations to furnish the Company 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 2005 were
complied with.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets all compensation paid or accrued by the
Company during the years ended June 30, 2005 and 2006 to its Chief Executive
Officer, President and Chief Operating Officer, and Chief Technology Officer.
(the "Named Executive Officers")
19
----------------------------------
ANNUAL COMPENSATION NO. OF
---------------------------------- SECURITIES
UNDERLYING
ALL OTHER OPTIONS
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION GRANTED
---------------------------- ----- -------------- ------- -------------- ----------
Hajin Jhun, CEO * 2005 $ 6,000 (1) None None None
2006 $ 6,400 (2) None None None
OC Kim, President 2005 $100,000 (3) None None None
2006 $100,000 (4) None None None
Peter Won, VP of 2005 $ 90,000 (5) None None None
Engineering 2006 $ 90,000 None None None
*Mr. Jhun resigned from all positions with the Company in March 2006.
(1) $50,000 per year contracted but agreed to receive $2,000 per month
until the Company is able to obtain future funding from other
investors.
(2) $7,000 was deferred.
(3) $50,500 of this amount was deferred in 2005 and $35,000 was also
deferred in 2004.
(4) $13,750 of this amount was deferred.
(5) $25,500 of this amount was deferred.
The Company had no outstanding employee stock options as of June 30, 2006 and
2005.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The following table sets forth certain information regarding the
beneficial ownership of the Company's Common Stock as of June 30, 2005 by each
director and executive officer of the Company, each person known to the Company
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.
20
SHARES BENEFICIALLY OWNED
-------------------------------------------------------------------------------------
NAME AND ADDRESS NUMBER PERCENT
------------------------------------------------------- ------------- -------
OC Kim 104,943,534 11.89%
9823 Pacific Heights Blvd. Suite J, San Diego, CA 92121
Gary Nelson 24,227,000 2.75%
9823 Pacific Heights Blvd. Suite J, San Diego, CA
92121
Taejin Kim 54,968,889 (1) 6.23%
9823 Pacific Heights Blvd. Suite J. San Diego,
CA 92121
David Kim 88,805,746 (2) 10.07%
9823 Pacific Heights Blvd. Suite J. San Diego, CA
92121
All directors and executive officers of 272,945,169 30.94%
the Company as a group (4 persons)
(1) Consists of shares owned by iPacific Partners, of which Taejin Kim is an
officer (2) Consists of shares owned by Westech Korea, of which David Kim is an
officer.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In May of 2006 the Company repurchased 20,000,000 shares of Common Stock from
Hajin Jhun, its former Chief Executive Officer, for cash in the amount of
$100,000.
ITEM 13. EXHIBITS
No. Description
--- -----------
2.1 Amended and Restated Agreement and Plan of Merger, dated July 31, 2003,
between Accetio, Inc. and Franklin Telecommunications Corp. (1)
3.1 Restated Articles of Incorporation of Franklin Wireless Corp. (2)
3.2 Bylaws of Franklin Wireless Corp. (3)
10.1 Co-Development, Co-Ownership and Supply Agreement, dated January 5,
2005 between the Company and C-Motech Co., Ltd.(2)
10.2 Lease, dated March 16, 2005, between the Company and MP Sorrento Mesa,
LLC (2)
10.3 First Amendment to Lease, between the Company and MP Sorrento Mesa,
LLC, dated May 23, 2006 (previously filed).
10.4 Stock Repurchase Agreement, dated May 5, 2006, between the Company and
Hajin Jhun (previously filed).
21
31.1 Certification of Chief Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer and Chief Financial Officer
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
-----------------
(1) Incorporated by reference from Report on Form 8-K, filed on September 26,
2003
(2) Incorporated by reference from Annual Report on Form 10-KSB for the year
ended June 30, 2005, filed on May 23, 2006
(3) Incorporated by reference from Amendment No. 2 to Registration Statement on
Form S-3, filed on July 28, 2000
22
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The following table shows the fees paid or accrued for the audit and
other services provided by Choi, Kim & Park, LLP for fiscal 2006 and 2005.
FY 2006 FY 2005
------- -------
Audit Fees $25,000 $25,000
Audit-Related Fees -- --
Tax Fees -- --
All Other Fees -- --
------- -------
Total Fees $25,000 $25,000
======= =======
The fees set forth on the foregoing table were paid during the 2006
fiscal year, but relate to the audits of the fiscal years set forth. Audit
services of Choi, Kim & Park, LLP for fiscal 2006 and 2005 consisted of the
examination of the consolidated financial statements of the Company. All of the
services described above were approved in advance by the Board of Directors.
23
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: March 30, 2007
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
(1) Principal Executive, Financial and Accounting Officer
/s/ OC KIM President, Acting Chief Financial
------------- Officer and a Director March 30, 2007
OC Kim
(3) Directors
/s/ GARY NELSON Chairman of the Board of Directors March 30, 2007
---------------
Gary Nelson
/s/ DAVID KIM Director March 30, 2007
---------------
David Kim
/s/ TAE JIN KIM Director March 30, 2007
---------------
Tae Jin Kim
24
FRANKLIN WIRELESS CORP.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE NO.
--------
Index to Consolidated Financial Statements ........................................................F-1
Report of Independent Registered Public Accounting Firm ...........................................F-2
Consolidated Balance Sheets at June 30, 2006 and 2005 .............................................F-3
Consolidated Statements of Operations for the years ended June 30, 2006, 2005 and 2004 ............F-4
Consolidated Statements of Stockholders' Equity (Deficit) for the years ended
June 30, 2006, 2005 and 2004 ......................................................................F-5
Consolidated Statements of Cash Flows for the years ended June 30, 2006, 2005 and 2004.............F-6
Notes to Consolidated Financial Statements ...................................................F-7~F-16
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Franklin Wireless Corp.
San Diego, California
We have audited the accompanying consolidated balance sheets of Franklin
Wireless Corp. and subsidiary as of June 30, 2006 and 2005 and the related
consolidated statements of operations, changes in stockholders' deficit, and
cash flows for each of the three years in the period ended June 30, 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 provided a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Franklin Wireless Corp. and subsidiary as of June 30, 2006 and 2005, and the
results of their operations and their cash flows for each of the three years in
the period ended June 30, 2006 in conformity with accounting principles
generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As more fully described in Note 2, the
Company has incurred operating losses in fiscal 2006 and 2005, negative cash
flows from operations, and has limited cash and other resources to fund future
operations. These factors raise substantial doubt about the Company's ability to
continue as a going concern. Management's plans concerning these matters are
also discussed in Note 2. The financial statements do not include any
adjustments that might result from the outcome of these uncertainties.
Choi, Kim & Park, LLP
San Diego, California
September 20, 2006
F-2
FRANKLIN WIRELESS CORP.
CONSOLIDATED BALANCE SHEETS
FISCAL YEARS ENDED JUNE 30,
----------------------------
2006 2005
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 568,387 $ 39,542
Accounts receivable 1,750 --
----------- -----------
Total current assets 570,137 39,542
Property and equipment, net 12,715 14,921
Intangible assets, net 104,195 97,917
Other assets 4,452 2,107
----------- -----------
TOTAL ASSETS $ 691,499 $ 154,487
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable $ 585 $ 17,926
Accrued liabilities 190,968 150,147
Notes payable to stockholders 540,000 590,000
----------- -----------
Total current liabilities 731,553 758,073
Other long-term liabilities -- 3,878
----------- -----------
Total liabilities 731,553 761,951
----------- -----------
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 - 882,040,050 and 793,040,050 for 2006 and 2005, respectively,
and no Preferred Stock issued for 2006 and 2005
Additional paid-in capital 4,629,393 3,784,393
Stock subscription receivable (17,395) (17,395)
Accumulated deficit (4,652,052) (4,374,462)
----------- -----------
Total stockholders' deficit (40,054) (607,464)
----------- -----------
Total liabilities and stockholders' deficit $ 691,499 $ 154,487
=========== ===========
See accompanying notes to consolidated financial statements.
F-3
FRANKLIN WIRELESS CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
FISCAL YEARS ENDED JUNE 30,
---------------------------------------------------
2006 2005 2004
------------- ------------- -------------
Net sales $ 1,002,953 $ 302,069 $ 1,678,268
Cost of goods sold 678,155 207,638 1,571,517
------------- ------------- -------------
Gross profit 324,798 94,431 106,751
------------- ------------- -------------
Operating expenses:
Research and development 36,300 24,200 64,864
Selling, general, and administrative 581,919 718,159 1,781,630
------------- ------------- -------------
Total operating expenses 618,219 742,359 1,846,494
------------- ------------- -------------
Loss from operations (293,421) (647,928) (1,739,743)
Other income (expense):
Interest expense (559) -- (55,352)
Interest income 2,359 571 13,122
Loss on impairment of fixed -- -- (332,053)
assets
Loss on impairment of intangible -- -- (146,851)
assets
Other income (expense), net 14,831 (5,085) (23,391)
------------- ------------- -------------
Total other income (expense), net 16,631 (4,514) (544,525)
------------- ------------- -------------
Net loss before income taxes (276,790) (652,442) (2,284,268)
Provision for income taxes 800 800 800
------------- ------------- -------------
Net loss $ (277,590) $ (653,242) $ (2,285,068)
============= ============= =============
Basic loss per share $ (0.00) $ (0.00) $ (0.00)
Diluted loss per share $ (0.00) $ (0.00) $ (0.00)
Weighted average common shares outstanding - basic 817,976,717 778,040,050 510,242,611
Weighted average common shares outstanding - diluted 817,976,717 778,040,050 510,242,611
See accompanying notes to consolidated financial statements. .
F-4
FRANKLIN WIRELESS CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
COMMON STOCKS
-------------------------
ADDITIONAL STOCK TOTAL
PAID-IN ACCUMULATED SUB STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT -SCRIPTION EQUITY (DEFICIT)
----------- --------- ----------- ----------- ----------- ----------------
Balance - June 30, 2003 149,395,606 $ -- $ 430,000 $(1,436,152) $ -- $ (1,006,152)
Issuance of common stock 623,644,444 -- 3,136,383 -- -- 3,136,383
Stock subscription receivables -- -- -- -- (17,395) (17,395)
Net loss -- -- -- (2,285,068) -- (2,285,068)
----------- --------- ----------- ----------- ----------- ----------------
Balance - June 30, 2004 773,040,050 $ -- $ 3,566,383 $(3,721,220) $ (17,395) $ (172,232)
Issuance of common stock 20,000,000 -- 218,010 -- -- 218,010
Net loss -- -- -- (653,242) -- (653,242)
----------- --------- ----------- ----------- ----------- ----------------
Balance - June 30, 2005 793,040,050 -- 3,784,393 (4,374,462) (17,395) (607,464)
Issuance of common stock, net of 89,000,000 -- 845,000 -- -- 845,000
common stock repurchase
Net loss -- -- -- (277,590) -- (277,590)
----------- --------- ----------- ----------- ----------- ----------------
Balance - June 30, 2006 882,040,050 $ -- $ 4,629,393 $(4,652,052) $ (17,395) $ (40,054)
=========== ========= =========== =========== =========== ================
See accompanying notes to consolidated financial statements.
F-5
FRANKLIN WIRELESS CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------
FISCAL YEARS ENDED JUNE 30,
--------------------------------------------
2006 2005 2004
------------ ------------ ------------
CASH FLOWS FROM OPERATIONS ACTIVITIES:
Net loss $ (277,590) $ (653,242) $ (2,285,068)
Adjustments to reconcile net loss to net cash used in operating activities:
Loss on impairment of fixed assets -- -- 332,053
Intangible assets impairment charge -- -- 146,851
Depreciation and amortization 7,622 6,199 43,494
Amortization of intangible assets 49,222 45,000 82,083
Increase (decrease) in cash due to change in:
Accounts receivable (1,750) 100,000 (25,156)
Intangible assets (55,500) -- (67,171)
Other assets (2,346) 3,211 41,592
Accounts payable (17,340) (28,709) 23,513
Accrued liabilities 40,821 110,147 32,587
Other long-term liabilities (3,878) 3,878 --
------------ ------------ ------------
Net cash used in operating activities (260,739) (413,516) (1,675,222)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (5,416) (4,000) (1,829)
------------ ------------ ------------
Net cash used in investing activities (5,416) (4,000) (1,829)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Line of Credit -- -- (298,000)
Borrowings (Payments) from (to) stockholders (10,000) 30,000 10,000
Cash payment for common stock repurchase (100,000) -- --
Increase in stock subscriptions receivable -- -- (17,395)
Proceeds from issuance of common stock 905,000 218,010 1,736,768
------------ ------------ ------------
Net cash provided by financing activities 795,000 248,010 1,431,373
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents 528,845 (169,506) (245,678)
Cash and cash equivalents, beginning of year 39,542 209,048 454,726
------------ ------------ ------------
Cash and cash equivalents, end of year $ 568,387 $ 39,542 $ 209,048
------------ ------------ ------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the year for:
Interest $ 559 $ -- $ 5,352
Income taxes $ 800 $ 800 $ 800
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITY:
Common stock conversion from note payable $ (40,000) $ -- $ --
See accompanying notes to consolidated financial statements.
F-6
FRANKLIN WIRELESS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2006 AND 2005
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
module and modem. The Company offers Wireless Solution
Provider/Enabler. The Company is in position of an enabler of new markets and
products to technology provider. The Company is in position of a solution
provider to electronic consumer product 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, and South America including cellular operators and government agencies.
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 $277,590 and had negative cash flows from operations of $260,739
for the year ended June 30, 2006. These factors raise 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.
F-7
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts
of Franklin and its wholly owned subsidiary, ARG. All inter-company balances and
transactions have been eliminated. The Company's subsidiary, ARG, was not in
operation during the fiscal years 2006 and 2005.
SEGMENT REPORTING
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 during the
fiscal years 2006 and 2005. 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 only
include $540,000 of debt from ARG financial statements. All of the Company's
investments in subsidiary and inter-company balances have been eliminated.
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 provides a factory warranty for one year from the shipment
which is covered by the Company's vendor. Allowance for doubtful accounts is
estimated based on estimates of losses related to customer receivable balances.
Estimates are developed by using standard quantitative measures based on
historical losses, adjusting for current economic conditions and, in some cases,
evaluating specific customer accounts for risk of loss. The establishment of
reserves requires the use of 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:
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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 June 30, 2006 and 2005, the
Company was not aware of any events or changes in circumstances that would
indicate that the long-lived assets are impaired.
WARRANTIES
The Company does not allow the right of return on product sales but
provides a factory warranty for one year from the shipment which is covered by
the Company's vendor. These products are shipped directly from the vendor to the
customers. As a result, the Company does not accrue any warranty expenses.
RESEARCH AND DEVELOPMENT COSTS
The Company expenses research and development costs to operations which
are primarily made up of developmental activities.
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
years ending June 30, 2006, 2005, and 2004.
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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 Latin
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.
The Company had amounts in excess of $100,000 in a single bank during
the year. Amounts over $100,000 are not covered by the Federal Deposit Insurance
Corporation.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
The Company does not expect the adoption of any recently issued
accounting pronouncements to have a significant impact on ITS results of
operations, financial position or cash flows.
NOTE 4 - ACCOUNTS RECEIVABLE
Accounts receivable at June 30, 2006 and 2005 consisted of receivables
from customers in the amounts of $1,750 and $0, respectively.
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NOTE 5 - PROPERTY AND EQUIPMENT
Property and equipment at June 30 consisted of the following:
2006 2005
-------- --------
Computers and software $ 30,640 $ 22,224
Machinery and equipment -- 3,000
Furniture and fixtures 8,713 8,713
-------- --------
39,353 33,937
Less accumulated depreciation (26,638) (19,016)
-------- --------
TOTAL $ 12,715 $ 14,921
======== ========
NOTE 6 - INVESTMENT IN SUBSIDIARY
In April 2002, the Company invested $384,615 to its wholly owned
subsidiary in South Korea for R&D and manufacturing support. Since August 2003
and as of June 30, 2006 and 2005, ARG has been inactive.
NOTE 7 - INTANGIBLE ASSETS
The Company purchased licenses to design phone and data communication
products. Below are the details for the licenses.
2006 2005
--------- ---------
GSM software license $ 200,000 $ 200,000
Text input method license 25,000 25,000
Certifications:CDG test 55,500 --
--------- ---------
280,500 225,000
Less accumulated depreciation (176,305) (127,083)
--------- ---------
TOTAL $ 104,195 $ 97,917
========= =========
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 purchased in October of 2002 and has an
approximate life of 5 years or the life of the text input license.
Certification (CDG test) was purchased during the year ended
June 30, 2006 and has life of 3 years or the life of the CDG test.
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NOTE 8 - OTHER ASSETS
Security deposits as of June 30, 2006 and 2005 consisted of the following:
2006 2005
------ ------
Lease deposit $4,170 $1,824
Utility deposit 282 283
------ ------
TOTAL $4,452 $2,107
====== ======
NOTE 9 - NOTES PAYABLE TO STOCKHOLDERS
Notes payable as of June 30, 2006 and 2005 consisted of the following:
2006 2005
--------- ---------
Non-interest bearing note $ 540,000 $ 550,000
Promissory note -- 30,000
Promissory note -- 10,000
--------- ---------
Total 540,000 590,000
Less current portion (540,000) (590,000)
--------- ---------
TOTAL $ -- $ --
========= =========
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 was converted to the Company's common stock at $0.01 on June 27, 2006.
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 stock 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 the Company's stockholder in the amount of $550,000 including
10% interest due on March 20, 2004. The Company and the stockholder agreed to
change the promissory note to a convertible promissory note in the amounts of
$550,000 including 10% interest during the year ended June 30, 2004. The note is
convertible to the Company's common stock at the option of the holder at a
conversion price equal to the fair value of the Company's common stock on the
date of issuance, or $0.005. As of June 30, 2006, this note was not converted to
the Company's common stock and $10,000 was paid during the year ended June 30,
2006.
In accordance with U.S. generally accepted accounting principles, all
non-interest bearing notes must be discounted using the Company's average
borrowing rate. The balance was deemed immaterial and did not record the
discounted amount as of June 30, 2006 and 2005.
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NOTE 10 - ACCRUED LIABILITIES
Accrued liabilities as of June 30, 2006 and 2005 consisted of the following:
2006 2005
-------- --------
Salaries $131,750 $111,000
Accrued professional fees 52,840 --
Other accrued liabilities 6,378 39,147
-------- --------
TOTAL $190,968 $150,147
======== ========
NOTE 11 - COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company leases its administrative facilities under a non-cancelable
operating lease that expire on June 30, 2008. In addition to the minimum annual
rental commitments, the leases provide for periodic cost of living increases in
the base rent and payment by the Company of common area costs. Rent expense
related to the operating lease was $24,679, $37,103, and $51,467 for the years
ended June 30, 2006, 2005, and 2004, respectively.
The Company also leases an automobile under an operating lease. Lease
expense was $6,564, $11,620, and $28,616 during the years ended June 30, 2006,
2005, and 2004, respectively.
Future minimum lease payments under operating leases as of June 30, 2006 are as
follows:
YEAR ENDING JUNE OPERATING
LEASE
30, (FACILITY)
---------------- ----------
2007 47,767
2008 50,041
----------
97,808
==========
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. Both parties have settled at $9,308 to be paid in
twelve equal monthly installments starting on December 6, 2005. This balance is
properly accrued in the current and long-term liabilities in the balance sheet
as of June 30, 2005 and accrued liabilities in the balance sheet as of June 30,
2006. In addition, the Company is involved in certain legal proceedings and
claims which arise in the normal course of business. Management does not believe
that the outcome of these matters will have any material adverse effect on the
Company's consolidated financial condition.
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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.
PRIVATE PLACEMENT EXEMPTIONS
The Company's private placements of securities have been issued in
transactions intended to be exempt from registration under the Securities Act of
1933 pursuant to the provisions of Regulation D promulgated thereunder. These
rules include factors pursuant to which one or more private placement
transactions may be integrated as part of other offerings and include rules that
limit the dollar amount that can be raised and the number of non-accredited
investors that can participate
In the event any of the Company's private placement transactions,
including private placement transactions undertaken by the Company since the
transactions referred to above, were deemed to be integrated, it is possible
that the exemption from the registration requirements of the Securities Act of
1933 would not be available for one or more of those offerings. In the event
that one or more of such transactions are determined not to have been exempt
from such registration requirements, the purchasers may have the right to seek
rescission of the sales and/or seek money damages against the Company.
Management believes that each of the Company's private offerings were exempt
from the registration requirements of the Securities Act of 1933.
OFFICER EMPLOYMENT AGREEMENT
On April 15, 2002, the Company entered into a renewable three-year
employment agreement with its president. The annual salary for the officer is
$100,000. No stocks were provided as of June 30, 2006 and 2005.
NOTE 12 - 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 June
30, 2006 and 2005, the Company did not have any dilutive common stock shares.
NOTE 13 - STOCKHOLDERS' DEFICIT
COMMON STOCK
The Company has authorized 900,000,000 shares of common stock and
10,000,000 shares of preferred stock, of which 882,040,050 and 793,040,050
shares were outstanding as of June 30, 2006 and 2005, respectively. No shares of
preferred stock were issued as of June 30, 2006 and 2005, respectively. No
dividends have been declared or paid during fiscal years 2006 and 2005.
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STOCK ISSUANCES & REPURCHASES
During the year ended June 30, 2006 and 2005 the Company completed the
following common stock transactions:
o September 2004 - One of the Company's officers returned his shares
according to the milestone contract with the Company and the Company
repurchased 34,174,300 shares at his original investment, $10,000. A
private investor purchased 34,174,300 shares at $118,010 from the
Company. $118,010 was recorded as increase of additional paid in
capital as of June 30, 2005 without any change of common stocks.
o April 2005 - The Company issued 20,000,000 shares to CEO at $0.005 per
share in the gross proceeds of $100,000. The issuance price
approximated market price at that time off issuance and as result, no
stock compensation expense was recorded during the year ended June 30,
2005.
o November 11, 2005
o The Company converted its $30,000 note payable to the
shareholder to common stocks. As a result, the Company issued
6,000,000 shares to a stockholder at $0.005 per share. The
common stock share price approximated its fair market value at
the date of the conversion and a result, no compensation
expense was required or booked during the year ended June 30,
2006.
o The Company issued 36,000,000 shares to unaffiliated investors
at $0.0085 per share in the amount of $305,000. The common
stock share price approximated its fair market value at the
date of the issuance and a result, no compensation expense was
required or booked during the year ended June 30, 2006.
o May 15, 2006 - The Company purchased 20,000,000 shares of its common
stock from the Company's former chief executive officer and board
member, Hajin Jhun, at $0.005 per share or the price purchased by Mr.
Jhun. The purchased share price approximated its fair market value at
the date of the purchase and as a result, no compensation expense was
required or booked during the year ended June 30, 2006.
o June 27, 2006
o The Company issued 1,000,000 shares to a stockholder holding
$10,000 note payable. These shares were converted at $0.01 per
share for $10,000. The converted share price approximated its
fair market value at the date of the conversion and as a
result, no compensation expense was required or booked during
the year ended June 30, 2006.
o The Company issued 66,000,000 shares to unaffiliated investors
at $0.009 per share in the gross proceeds of $600,000.00. The
common stock share price approximated its fair market value at
the date of the issuance and a result, no compensation expense
was required or booked during the year ended June 30, 2006.
NOTE 14 - INCOME TAXES
No provision for income taxes for the years ended June 30, 2006 and
2005 is required, except for minimum state taxes, since the Company incurred
losses during such years.
The Company accounts for income taxes under the asset and liability
method of accounting. Under this method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date. A valuation
allowance is required when it is less likely than not that the Company will be
able to realize all or a portion of its deferred tax assets.
The significant component of the deferred tax asset (liability) at June
30, 2006 and 2005 was net operating loss carry-forward in the amount of
approximately $955,000 and $378,000, respectively, based on statutory tax rate
or effective tax rate of 39%. The Company had available approximately $2,449,000
unused net operating loss carry-forwards at June 30, 2006, that may be applied
against future taxable income. SFAS No. 109 requires a valuation allowance to be
recorded when it is more likely than not that some or all of the deferred tax
assets will not be realized. At June 30, 2006 and 2005, valuation allowances for
the full amount of the net deferred tax asset were established due to the
uncertainties as to the amount of the taxable income that would be generated in
future years. There are no other temporary differences or carry-forward tax
effects that would significantly affect the Company's deferred tax asset or
liability.
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NOTE 15 - INACTIVE OPERATION (ARG, INC)
The Company has a wholly owned subsidiary in South Korea to
utilize to design the cellular phone. 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.
NOTE 16 - SUBSEQUENT EVENTS
The Company has agreed to issue 44,000,000 shares of Common Stock at a
price of $0.009 per share to an unaffiliated investment company for $400,000 in
cash.
NOTE PAYABLE TO STOCKHOLDER
During June 2005, the Company issued a promissory note to a stockholder
in the amount of $30,000, without interest. The note is convertible into the
Company's Common Stock at the option of the holder at an exercise price of
$0.005 per share. The note was converted into shares of the Company's common
stock at $0.005 on November 11, 2005. The common stock share price approximated
its fair market value at the date of the conversion and a result, no
compensation expense was required or booked during the year ended June 30, 2006.
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 was converted to the Company's common stock at $0.01 on June 27, 2006.
The common stock share price approximated its fair market value at the date of
the conversion and a result, no compensation expense was required or booked
during the year ended June 30, 2006.
F-16