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: March 31, 2008
[_] 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.
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(Exact name of small business issuer in its charter)
Nevada 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)
Issuer's Telephone Number: (858) 623-0000
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 [X] NO [ ]
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 MAY 13, 2008
---------------------------------------- --------------------------
Common Stock, par value $0.001 per share 13,231,491
Transitional Small Business Disclosure format (Check one): YES [ ] NO [X]
FRANKLIN WIRELESS CORP.
INDEX
PAGE NO.
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PART I - FINANCIAL INFORMATION
Item 1: Financial Statements
Statements of Operations for the Three and Nine
Months Ended March 31, 2008 and 2007 (Unaudited) ......... 3
Balance Sheets at March 31, 2008 (Unaudited) and
June 30, 2007 ............................................ 4
Statements of Cash Flows for the Nine Months Ended
March 31, 2008 and 2007 (Unaudited) ...................... 5
Notes to Unaudited Financial Statements .................... 6
Item 2: Management's Discussion and Analysis or Plan of Operations.... 14
Item 3A(T): Controls and Procedures ...................................... 23
PART II - OTHER INFORMATION
Item 1: Legal Proceedings ............................................ 23
Item 2: Unregistered Sales of Equity Securities and Use of
Proceeds ................................................... 23
Item 3: Defaults Upon Senior Securities .............................. 23
Item 4: Submission of Matters to a Vote of Security Holders .......... 23
Item 5: Other Information ............................................ 24
Item 6: Exhibits ..................................................... 24
Signatures ................................................... 25
Certifications ............................................... 54
-2-
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FRANKLIN WIRELESS CORP.
STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
-------------------------------- --------------------------------
2008 2007 2008 2007
-------------- -------------- -------------- --------------
Net sales $ 7,395,200 $ 3,226,915 $ 23,898,442 $ 5,997,065
Cost of goods sold 5,619,995 2,253,540 18,248,534 4,248,140
-------------- -------------- -------------- --------------
Gross profits 1,775,205 973,375 5,649,908 1,748,925
-------------- -------------- -------------- --------------
Operating expenses:
Selling, general, and administrative 873,869 582,595 2,333,239 1,057,309
-------------- -------------- -------------- --------------
Total operating expenses 873,869 582,595 2,333,239 1,057,309
-------------- -------------- -------------- --------------
Income from operations 901,336 390,780 3,316,669 691,616
Other income:
Interest income 33,513 10,760 108,230 22,989
Other income 256 846 18,935 1,164
Other expenses - (5) - (5)
Loss on impairment of intangible assets - (19,167) - (19,167)
-------------- -------------- -------------- --------------
Net other income (expense) 33,769 (7,566) 127,165 4,981
-------------- -------------- -------------- --------------
Net income before income taxes 935,105 383,214 3,443,834 696,597
Provision for income taxes 203,638 - 259,842 800
-------------- -------------- -------------- --------------
Net income $ 731,467 $ 383,214 $ 3,183,992 $ 695,797
============== ============== ============== ==============
Basic earnings per share $ 0.06 $ 0.03 $ 0.24 $ 0.06
Diluted earnings per share $ 0.06 $ 0.03 $ 0.24 $ 0.06
Weighted average common shares outstanding -
basic 13,231,491 12,814,858 13,231,491 12,729,613
Weighted average common shares outstanding -
diluted 13,231,491 12,814,858 13,231,491 12,729,613
See accompanying notes to unaudited financial statements.
-3-
FRANKLIN WIRELESS CORP.
BALANCE SHEETS
(UNAUDITED)
MARCH 31, JUNE 30,
2008 2007
-------------- --------------
ASSETS
Current assets:
Cash and cash equivalents $ 5,552,736 $ 2,477,593
Accounts receivable 2,291,045 44,915
Inventories 16,698 10,830
Prepaid expenses 657 6,649
-------------- --------------
Total current assets 7,861,136 2,539,987
Property and equipment, net 68,932 26,218
Intangible assets, net 87,444 130,264
Other assets 5,161 5,161
-------------- --------------
TOTAL ASSETS $ 8,022,673 $ 2,701,630
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 2,740,110 $ 68,064
Advance payment from customers - 354,500
Accrued liabilities 87,135 179,025
Note payable 334,000 434,000
-------------- --------------
Total current liabilities 3,161,245 1,035,589
-------------- --------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, par value of $0.001 per share,
authorized 10,000,000 shares; No preferred
stock issued and outstanding as of March 31,
2008 and June 30, 2007 - -
Common stock, par value of $0.001 per share,
authorized 50,000,000 shares; Common stock of
13,241,491 issued and outstanding as of
March 31, 2008 and June 30, 2007 13,242 13,242
Additional paid-in capital 5,016,151 5,016,151
Stock subscription receivable - (11,395)
Accumulated deficit (167,965) (3,351,957)
-------------- --------------
Total stockholders' equity 4,861,428 1,666,041
-------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 8,022,673 $ 2,701,630
============== ==============
See accompanying notes to unaudited financial statements.
-4-
FRANKLIN WIRELESS CORP.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
MARCH 31,
--------------------------------
2008 2007
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 3,183,992 $ 695,797
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 6,901 4,800
Amortization of intangible assets 42,820 59,714
Bad debt 2,200 -
Loss on impairment of intangible assets - 19,167
Increase (decrease) in cash due to change in:
Accounts receivable (2,248,330) (39,659)
Inventory (5,868) (13,370)
Prepaid expenses 5,992 -
Accounts payable 2,672,046 1,683
Advance payment from customers (354,500) -
Accrued liabilities (91,890) (57,834)
-------------- --------------
Net cash provided by operating activities 3,213,363 670,298
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (49,615) (19,418)
Purchases of intangible assets - (53,780)
-------------- --------------
Net cash used in investing activities (49,615) (73,198)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of note payable (100,000) (100,000)
Additional borrowings from stockholders - 400,000
Receipt of stock subscription receivable 11,395 -
-------------- --------------
Net cash used by financing activities (88,605) 300,000
-------------- --------------
Net increase in cash and cash equivalents 3,075,143 897,100
Cash and cash equivalents, beginning of period 2,477,593 568,387
-------------- --------------
Cash and cash equivalents, end of period $ 5,552,736 $ 1,465,487
============== ==============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ - $ -
Income taxes $ 259,842 $ 800
See accompanying notes to unaudited financial statements.
-5-
FRANKLIN WIRELESS CORP.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
NOTE 1 - NATURE OF BUSINESS
Franklin Wireless Corp. designs and sells broadband high speed wireless data
communication products such as 3G wireless modules and modems. The Company
focuses on wireless broadband USB modems, which provides a flexible way for
wireless subscribers to connect to the wireless broadband network with any
laptop, table PC or desktop USB port without a PC card slot. The broadband
wireless data communication products are positioned at the convergence of
wireless communications, mobile computing and the Internet, each of which the
Company believes represents a growing market.
The Company's wireless products are based on Evolution Data Optimized technology
("EV-DO technology") of Code Division Multiple Access ("CDMA") and High-Speed
Packet Access technology ("HSPA technology") of Wideband Code Division Multiple
Access ("WCDMA"), which are wireless radio broadband data standards adopted by
many CDMA and WCDMA mobile service providers, and enable end users to send and
receive email with large file attachments, play interactive games, receive, send
and download high resolution picture, video, and music contents.
The Company's wireless products are purchased through Original Equipment
Manufacturers ("OEMs") and marketed through distributors, as well as directly to
operators and end users. The Company's customer base extends from the United
States, Caribbean, and South American Countries to African countries; these
customers consist of major carriers / operators, distributors and end users. The
Company's USB modems are certified by Sprint, Alltel, Cellular South, NTELOS,
and ACS in the United States, by IUSACELL in Mexico, by Telefonica and Movilnet
in Venezuela and by TSTT in Trinidad and Tobago.
In the middle of 2007, the Company launched three new products, CDMA Revision A
USB modem CDU-680, CDMA Revision 0 CDU-650 USB modem, and CDMA Revision 0
CDX-650 Express card modem, to North and South American countries. The Company
also unveiled its CGU-628 Mobile Broadband USB modem, which provides a flexible
way for users to connect to high-speed downlink packet access ("HSDPA") network.
The Company anticipates that the sales of these new products will be a key to
the Company's future growth through its brand recognition and an increase in
marketing effort, leveraging sales to its existing customers.
The Company believes that the demand for wireless broadband data products will
continue to grow and expand worldwide. However, to be successful in this market,
the Company will need to continue to keep up with technology changes and
continue to invest and launch new products on a timely basis.
NOTE 2 - DISCONTINUED OPERATIONS
On October 30, 2007, the Board of Directors approved the dissolution of its only
subsidiary, ARG, which has been inactive since August 2003. As a part of the
dissolution, the Company assumed the liability of ARG of $434,000, a note
payable. During the three months ended March 31, 2008, the Company repaid
$100,000, and the remaining note amounted to $334,000 as of March 31, 2008. The
subsidiary did not have revenue, expense, asset or component of stockholders'
equity as of March 31, 2008 and June 30, 2007, and for the nine months ended
March 31, 2008 and 2007.
-6-
NOTE 3 - BASIS OF PRESENTATION
The accompanying unaudited financial statements of the Company have been
prepared in accordance with accounting principles generally accepted in the
United States ("GAAP") for interim financial information and are presented in
accordance with the requirements of Form 10-QSB. The balance sheet is unaudited
as of March 31, 2008 and audited as of June 30, 2007. The statements of
operations are unaudited for the three and nine months ended March 31, 2008 and
2007, and the statements of cash flows are unaudited for the nine months ended
March 31, 2008 and 2007. In the opinion of management, the unaudited financial
statements included herein contain all adjustments, including normal recurring
adjustments, considered necessary to present fairly the financial position, the
results of operations and cash flows of the Company for the periods presented.
These unaudited financial statements should be read in conjunction with the
consolidated financial statements and notes thereto for the fiscal year ended
June 30, 2007 included in the Company's Form 10-KSB, filed on September 19,
2007.
The operating results or cash flows of the interim periods presented herein are
not necessarily indicative of the results to be expected for any other interim
period or the full year.
NOTE 4 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
SEGMENT REPORTING
SFAS No. 131, "Disclosures About Segments of an Enterprise and Related
Information," requires public companies to report financial and descriptive
information about their reportable operating segments. The Company identifies
its operating segments based on how management internally evaluates separate
financial information, business activities and management responsibility. The
Company operates in a single business segment consisting of sale of wireless
access products.
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. Significant estimates
include useful lives of intangible and long-lived assets.
CASH AND CASH EQUIVALENTS
For purposes of the statements of cash flow, the Company considers all highly
liquid investments purchased with original maturities of six months or less to
be cash equivalents.
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.
-7-
SHIPPING AND HANDLING COST
Most of shipping and handling costs are paid by the customers directly to the
shipping companies. The Company does not collect and incur shipping and handling
costs, except for two customers. The shipping and handling costs totaled $18,111
and $11,678 for the nine and three months ended March 31, 2008.
INVENTORIES
The Company's inventories are made up of finished goods and are stated at the
lower of cost or market, cost being determined on a first-in, first-out basis.
The Company assesses the inventory carrying value and reduces it, if necessary,
to its net realizable value based on customer orders on hand, and internal
demand forecasts using management's best estimates given information currently
available. The Company's customer demand is highly unpredictable, and can
fluctuate significantly caused by factors beyond the control of the Company. The
Company may maintain an allowance for inventories for potentially excess and
obsolete inventories and inventories that are carried at costs that are higher
than their estimated net realizable values.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. The Company provides for depreciation
using the straight-line method over the estimated useful lives as follows:
Computers and software 5 years
Machinery and equipment 5 years
Furniture and fixtures 7 years
Expenditures for maintenance and repairs are charged to operations as incurred
while renewals and betterments are capitalized. Gains or losses on the sale of
property and equipment are reflected in the statements of operations.
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. Certifications
are stated at cost and are amortized using the straight-line method over the
certification periods of three years or life of the certifications.
IMPAIRMENT OF LONG-LIVED ASSETS
In accordance with Statement of Financial Accounting Standards No. 144,
"Accounting for Impairment on Disposal of Long-lived Assets", the Company
reviews for impairment of long-lived assets and certain identifiable intangibles
whenever events or circumstances indicate that the carrying amount of assets may
not be recoverable. The Company considers the carrying value of assets may not
be recoverable based upon its review of the following events or changes in
circumstances: the asset's ability to continue to generate income from
operations and positive cash flow in future periods; loss of legal ownership or
title to the assets; significant changes in the Company's strategic business
objectives and utilization of the asset; or significant negative industry or
economic trends. An impairment loss would be recognized when estimated future
cash flows expected to result from the use of the asset is less than its
carrying amount.
-8-
As of March 31, 2008, the Company is not aware of any events or changes in
circumstances that would indicate that the long-lived assets are impaired.
WARRANTIES
The Company does not allow the right of return on product sales but provides a
factory warranty for one year from the shipment, which is covered by its vendor.
These products are shipped directly from its vendor to customers. As a result,
the Company does not accrue any warranty expenses.
INCOME TAXES
The Company accounts for income taxes under the asset and liability method of
accounting. Under this method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date. A valuation
allowance is required when it is less likely than not that the Company will be
able to realize all or a portion of its deferred tax assets. The Company
incurred significant losses in the previous years. These losses have been
carried over to off-set any future taxable income.
The components of the income tax provision for the nine months ended March 31,
2008 and 2007 are as follows:
(UNAUDITED) (UNAUDITED)
-------------- --------------
MARCH 31, MARCH 31,
2008 2007
-------------- --------------
Current income taxes expense:
Federal $ 179,602 $ -
State 80,240 800
-------------- --------------
Deferred income taxes expense (benefits): 259,842 800
- -
-------------- --------------
PROVISION FOR INCOME TAXES $ 259,842 $ 800
============== ==============
Provision for income taxes for the nine months ended March 31, 2008 consists of
alternative minimum taxes of $56,204 and regular taxes of $203,638. Provision
for income taxes for the corresponding period of 2007 was minimum state taxes of
$800. Since the Company recorded a valuation allowance to fully offset the
amount of net deferred tax assets, no deferred expenses or benefits were
recorded. The significant component of the deferred tax asset at March 31, 2008
and June 30, 2007 was the federal net operating loss carry-forwards. At March
31, 2008 and June 30, 2007, the effect on the deferred tax asset from the
federal net operating loss carry-forwards amounted to approximately $2,034,000
and $2,935,000, respectively, based on federal tax rate of 34%.
SFAS No. 109 requires a valuation allowance to be recorded when it is more
likely than not that some or all of the deferred tax assets will not be
realized. At March 31, 2008 and June 30 2007, 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.
-9-
EARNINGS PER SHARE
The Company reports earnings per share in accordance with Statement of Financial
Accounting Standards No. 128, "Earnings Per Share". Basic earnings per share are
computed using the weighted average number of shares outstanding during the
year. Diluted earnings per share include the potentially dilutive effect of
outstanding common stock options and warrants which are convertible to common
shares.
CONCENTRATION OF RISK
The Company extends credit to its customers and performs ongoing credit
evaluations of such customers. The Company evaluates its accounts receivable on
a regular basis for collectability and provides for an allowance for potential
credit losses as deemed necessary.
Substantially all of the Company's revenues are derived from sales of wireless
data products. Any significant decline in market acceptance of its products or
in the financial condition of its existing customers could impair the Company's
ability to operate effectively. A significant portion of the Company's revenue
is derived from a small number of customers. Three customers accounted for
43.7%, 22.6%, and 19.3% of revenues for the nine months ended March 31, 2008,
and had related accounts receivable in the total amount of $1,705,000, or 74.4%
of total accounts receivable at March 31, 2008.
The Company purchases its wireless products from C-Motech Co. Ltd., a design and
manufacturing company located in South Korea. If the design and manufacturing
company were to experience delays, capacity constraints or quality control
problems, product shipments to the Company's customers could be delayed, or its
customers could consequently elect to cancel the underlying product purchase
order, which would negatively impact the Company's revenue. However, there were
no significant delays, capacity constraints, or quality control problems that
negatively impacted the Company's revenue for the nine months ended March 31,
2008 and 2007. For those periods, the Company purchased approximately
$18,254,402 and $2,877,450, respectively, and had related accounts payable of
$2,394,700 and $2,250 at March 31, 2008 and 2007 respectively.
The Company maintains its cash accounts with established commercial banks. Such
cash deposits periodically exceed the Federal Deposit Insurance Corporation
insured limit of $100,000 for each account. However, the Company does not
anticipate any loss on excess deposits.
NOTE 5 - PROPERTY AND EQUIPMENT
Property and equipment at March 31, 2008 and June 30, 2007 consisted of the
following:
(UNAUDITED)
-------------- --------------
MARCH 31, JUNE 30,
2008 2007
-------------- --------------
Computers and software $ 46,130 $ 38,084
Furniture and fixtures 52,894 11,325
-------------- --------------
99,024 49,409
Less accumulated depreciation (30,092) (23,191)
-------------- --------------
TOTAL $ 68,932 $ 26,218
============== ==============
Depreciation expense associated with property and equipment was $6,901 and
$4,800 for the nine months ended March 31, 2008 and 2007, respectively.
-10-
NOTE 6 - INTANGIBLE ASSETS
Intangible assets at March 31, 2008 and June 30, 2007 consisted of the
following:
(UNAUDITED)
-------------- --------------
MARCH 31, JUNE 30,
2008 2007
-------------- --------------
Certifications: CDG test licenses $ 171,280 $ 171,280
Less accumulated amortization (83,836) (41,016)
-------------- --------------
TOTAL $ 87,444 $ 130,264
============== ==============
Certifications have life of 3 years or the life of the CDG test based on the
life of the CDMA wireless data product. CDG test certifications are required to
launch and market new CDMA wireless data products with carriers in North,
Caribbean and South American countries. Certifications are issued as being a
qualifier of CDG1 (CDMA Development Group Stage 1), CDG 2 and CDG 3.
Amortization expense associated with intangible assets was $42,820 and $59,714
for the nine months ended March 31, 2008 and 2007, respectively.
NOTE 7 - ACCRUED LIABILITIES
Accrued liabilities at March 31, 2008, and June 30, 2007 consisted of the
following:
(UNAUDITED)
-------------- --------------
MARCH 31, JUNE 30,
2008 2007
-------------- --------------
Salaries payable $ 55,918 $ 94,418
Accrued professional fees payable 31,217 50,217
Tax payable - 34,390
-------------- --------------
TOTAL $ 87,135 $ 179,025
============== ==============
NOTE 8 - NOTE PAYABLE
On August 20, 2002, the Company's wholly owned subsidiary, ARG issued a
promissory note to a stockholder of the Company in the amount of $550,000
including 10% interest due on March 20, 2004. ARG has been in active since
August 2003, and as a result, the Company and the stockholder agreed to assume
the liability in the amounts of $550,000 including 10% interest for the year
ended June 30, 2004. The Company repaid $10,000 and $100,000 during the 2006 and
2007 fiscal years respectively, and an additional $6,000 was offset by the stock
subscription receivable from the stockholder during the 2007 fiscal year. During
the three months ended March 31, 2008, the Company repaid $100,000, and the
remaining note amounted $334,000 as of March 31, 2008.
NOTE 9 - COMMITMENTS AND CONTINGENCIES
The Company had the following off-balance sheet obligations and other
commitments at March 31, 2008
-11-
OPERATING LEASES
The Company leases its administrative facilities under a non-cancelable
operating lease that expires on June 30, 2008, and its principal future
obligations and commitments as of the expiration date is $15,627. In
addition to the minimum annual rental commitments, the lease provides for
periodic cost of living increases in the base rent and payment of common
area costs. Rent expense related to the operating lease was $47,221 and
$49,355 for the nine months ended March 31, 2008 and 2007, respectively.
The Company leases its corporate housing facility under a non-cancelable
operating lease that expires on September 30, 2008 for its vendors, and
its principal future obligations and commitments as of the expiration date
is $8,952. Rent expense related to the operating lease was $13,203 and $0
for the nine months ended March 31, 2008 and 2007, respectively.
The Company leases one automobile under an operating lease that expires on
July 22, 2009. Lease expense was $4,839 and $5,182 for the nine months
ended March 31, 2008 and 2007, respectively.
LITIGATION
The Company may be involved in certain legal proceedings and claims which
arise in the normal course of business. Management does not believe that
the outcome of these matters will have any material adverse effect on its
financial condition.
CO-DEVELOPMENT, CO-OWNERSHIP AND SUPPLY AGREEMENT
In January 2005, the Company entered into a Co-development, Co-ownership,
and Supply Agreement (the "Agreement") with C-Motech Co. Ltd., located in
South Korea. The Agreement provides exclusive rights to market and sell
its CDMA wireless data products in North, Central and South American
countries. Furthermore, the Agreement provides that the Company is
responsible for marketing, sales, field testing, and certifications of
these products to wireless service operators and other commercial buyers
within a designated territory and C-Motech Co. Ltd. is responsible for
design, development, testing, certification, and completion of these
products. Under the Agreement, products include all access devices
designed with Qualcomm's MSM 5100, 5500 and 6500 chipset solutions
provided or designed by C-Motech Co. Ltd. or both companies. Both
companies own the rights to the products: USB modems, Card Bus, PCI Bus
and Module designed with MSM 5500 dual band products. The term of the
Agreement commenced on January 5, 2005, with automatic renewal terms of
additional one year. The Agreement may be terminated by either party by
providing a written notice to terminate at least ninety days prior to the
end of the term.
NOTE 10 - EARNINGS PER SHARE
Basic earnings per share ("EPS") excludes dilution and is computed by dividing
net income attributable to common shareholders by the weighted-average number of
common shares outstanding for the period. As of March 31, 2008 and June 30,
2007, the Company did not have any dilutive securities outstanding.
NOTE 11 - RECENT ACCOUNTING PRONOUNCEMENTS
On September 15, 2006, the Financial Accounting Standards Board ("FASB") issued
FASB Statement No. 157, "Fair Value Measurements" ("SFAS No. 157"), which
addresses how companies should measure fair value when they are required to use
a fair value measure for recognition or disclosure purposes under generally
accepted accounting principles ("GAAP"). As a result of SFAS No. 157 there is
now a common definition of fair value to be used throughout GAAP. The FASB
believes that the new standard will make the measurement of fair value more
consistent and comparable and improve disclosures about those measures. The
Board has agreed to consider delaying the original effective date of fiscal
years beginning after November 15, 2007. Since the delay is not assured, the
Company is currently evaluating the effect that the adoption of SFAS No. 157
will have on its results of operations and financial position as of January 1,
2008.
-12-
In February 2007, FASB issued FASB Statement No. 159, "Fair Value Option for
Financial Assets and Financial Liabilities" ("SFAS No. 159"), which permits
entities to choose to measure many financial instruments and certain other items
at fair value that are not currently required to be measured at fair value. The
objective of SFAS No. 159 is to improve financial reporting by providing
entities with the opportunity to mitigate volatility in reported earnings caused
by measuring related assets and liabilities differently without having to apply
complex hedge accounting provisions. The Company will need to adopt SFAS No. 159
for financial statements issued for fiscal years beginning after November 15,
2007. The Company is currently evaluating the effect that the adoption of SFAS
No. 159 will have on its results of operations and financial position.
In December 2007, the FASB issued Statement No. 141 (revised), Business
Combinations (SFAS No. 141(R)). The standard changes the accounting for business
combinations including the measurement of acquirer shares issued in
consideration for a business combination, the recognition of contingent
consideration, the accounting for pre-acquisition gain and loss contingencies,
the recognition of capitalized in-process research and development, the
accounting for acquisition-related restructuring cost accruals, the treatment of
acquisition related transaction costs and the recognition of changes in the
acquirer's income tax valuation allowance. SFAS No. 141(R) is effective for
fiscal years beginning after December 15, 2008, with early adoption prohibited.
The Company does not expect this to have a material impact on the Company's
financial statements.
In December 2007, the FASB issued Statement No. 160, Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB No. 51 (SFAS No. 160).
The standard changes the accounting for noncontrolling (minority) interests in
consolidated financial statements including the requirements to classify
noncontrolling interests as a component of consolidated stockholders' equity,
and the elimination of "minority interest" accounting in results of operations
with earnings attributable to noncontrolling interests reported as part of
consolidated earnings. Additionally, SFAS No. 160 revises the accounting for
both increases and decreases in a parent's controlling ownership interest. SFAS
No. 160 is effective for fiscal years beginning after December 15, 2008, with
early adoption prohibited. The Company does not expect this to have a material
impact on the Company's financial statements.
There are no other accounting standards issued as of May 9, 2008 that are
expected to have a material impact on the Company's financial statements.
NOTE 12 - RELATED PARTY TRANSACTIONS
The Company purchased CDMA wireless data products in the amount of $18,254,402,
or 100% of total inventory purchases, from C-Motech Co. Ltd., for the nine
months ended March 31, 2008 and had related accounts payable of $2,394,700 at
March 31, 2008. C-Motech Co. Ltd owns 3,370,356 shares of the Company's Common
Stock, or approximately 25% of the outstanding Common Stock, after acquiring
1,460,577 shares of Common Stock during the three months ended March 31, 2008.
Jaeman Lee, Chief Executive Officer of C-Motech Co. Ltd., has served as a
director of the Company since September 2006.
-13-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN
OF OPERATION
The following discussion should be read in conjunction with the financial
statements and notes thereto included in Item 1 of this filing and the financial
statements and notes thereto and Management's Discussion and Analysis of
Financial Condition or Plan of Operations contained in the Company's Form 10-KSB
filed on September 19, 2007 for the year ended June 30, 2007.
BUSINESS OVERVIEW
Franklin Wireless Corp. designs and sells broadband high speed wireless data
communication products such as 3G wireless modules and modems. The Company
focuses on wireless broadband USB modems, which provides a flexible way for
wireless subscribers to connect to the wireless broadband network with any
laptop, table PC or desktop USB port without a PC card slot. The broadband
wireless data communication products are positioned at the convergence of
wireless communications, mobile computing and the Internet, each of which the
Company believes represents a growing market.
The Company's wireless products are based on Evolution Data Optimized technology
("EV-DO technology") of Code Division Multiple Access ("CDMA") and High-Speed
Packet Access technology ("HSPA technology") of Wideband Code Division Multiple
Access ("WCDMA"), which are wireless radio broadband data standards adopted by
many CDMA and WCDMA mobile service providers, and enable end users to send and
receive email with large file attachments, play interactive games, receive, send
and download high resolution picture, video, and music contents.
The Company's wireless products are marketed through Original Equipment
Manufacturers ("OEMs") and distributors, as well as directly to operators and
end users. The Company's customer base extends from the United States,
Caribbean, and South American Countries to African countries; these customers
consist of major carriers / operators, distributors and end users. The Company's
USB modems are certified by Sprint, Alltel, Cellular South, NTELOS, and ACS in
the United States, by IUSACELL in Mexico, by Telefonica and Movilnet in
Venezuela and by TSTT in Trinidad and Tobago.
In the middle of 2007, the Company launched three new products, CDMA Revision A
USB modem CDU-680, CDMA Revision 0 CDU-650 USB modem, and CDMA Revision 0
CDX-650 Express card modem, to North and South American countries. The Company
also unveiled its CGU-628 Mobile Broadband USB modem, which provides a flexible
way for users to connect to high-speed downlink packet access ("HSDPA") network.
The Company anticipates that the sales of these new products will be a key to
the Company's future growth through its brand recognition and an increase in
marketing effort, leveraging sales to its existing customers.
The Company believes that the demand for wireless broadband data products will
continue to grow and expand worldwide. However, to be successful in this market,
the Company will need to continue to keep up with technology changes and
continue to invest and launch new products on a timely basis.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company believes the following critical accounting policies affect the
Company's more significant judgments and estimates used in the preparation of
the financial statements.
-14-
SEGMENT REPORTING
SFAS No. 131, "Disclosures About Segments of an Enterprise and Related
Information," requires public companies to report financial and descriptive
information about their reportable operating segments. The Company identifies
its operating segments based on how management internally evaluates separate
financial information, business activities and management responsibility. The
Company operates in a single business segment consisting of the sale of wireless
access products.
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. Significant estimates
include useful lives of intangible and long-lived assets.
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.
IMPAIRMENT OF LONG-LIVED ASSETS
In accordance with Statement of Financial Accounting Standards No. 144,
"Accounting for Impairment on Disposal of Long-lived Assets", the Company
reviews for impairment of long-lived assets and certain identifiable intangibles
whenever events or circumstances indicate that the carrying amount of assets may
not be recoverable. The Company considers the carrying value of assets may not
be recoverable based upon its review of the following events or changes in
circumstances: the asset's ability to continue to generate income from
operations and positive cash flow in future periods; loss of legal ownership or
title to the assets; significant changes in the Company's strategic business
objectives and utilization of the asset; or significant negative industry or
economic trends. An impairment loss would be recognized when estimated future
cash flows expected to result from the use of the asset is less than its
carrying amount.
As of March 31, 2008, 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. The Company
incurred significant losses in the previous years. These losses have been
carried over to off-set any future taxable income.
-15-
The components of the income tax provision for the nine months ended March 31,
2008 and 2007 are as follows:
(UNAUDITED) (UNAUDITED)
-------------- --------------
MARCH 31, MARCH 31,
2008 2007
-------------- --------------
Current income taxes expense:
Federal $ 179,602 $ -
State 80,240 800
-------------- --------------
Deferred income taxes expense (benefits): 259,842 800
- -
-------------- --------------
PROVISION FOR INCOME TAXES $ 259,842 $ 800
============== ==============
Provision for income taxes for the nine months ended March 31, 2008 consists of
alternative minimum taxes of $56,204 and regular taxes of $203,638. Provision
for income taxes for the corresponding period of 2007 was minimum state taxes of
$800. Since the Company recorded a valuation allowance to fully offset the
amount of net deferred tax assets, no deferred expenses or benefits were
recorded. The significant component of the deferred tax asset at March 31, 2008
and June 30, 2007 was the federal net operating loss carry-forwards. At March
31, 2008 and June 30, 2007, the effect on the deferred tax asset from the
federal net operating loss carry-forwards amounted to approximately $2,034,000
and $2,935,000, respectively, based on federal tax rate of 34%.
SFAS No. 109 requires a valuation allowance to be recorded when it is more
likely than not that some or all of the deferred tax assets will not be
realized. At March 31, 2008 and June 30 2007, 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.
RESULTS OF OPERATIONS
The following table sets forth, for the three and nine months ended March 31,
2008 and 2007, selected statements of operations data expressed as a percentage
of sales:
THREE MONTHS ENDED NINE MONTHS ENDED
MARC 31, MARCH 31,
------------------------ ------------------------
2008 2007 2008 2007
---------- ---------- ---------- ----------
Net Sales 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 76.0% 69.8% 76.4% 70.8%
---------- ---------- ---------- ----------
Gross profit 24.0% 30.2% 23.6% 29.2%
---------- ---------- ---------- ----------
Operating expenses:
Selling, general and administrative expenses 11.8% 18.1% 9.7% 17.7%
---------- ---------- ---------- ----------
Total operating expenses 11.8% 18.1% 9.7% 17.7%
---------- ---------- ---------- ----------
Income from operations 12.2% 12.1% 13.9% 11.5%
Other income 0.5% (0.2)% 0.5% 0.1%
---------- ---------- ---------- ----------
Net income before income taxes 12.7% 11.9% 14.4% 11.6%
Provision for income taxes 2.8% - 1.1% -
---------- ---------- ---------- ----------
Net income 9.9% 11.9% 13.3% 11.6%
========== ========== ========== ==========
The results of the interim periods are not necessarily indicative of results for
the entire fiscal year.
-16-
THREE MONTHS ENDED MARCH 31, 2008
COMPARED TO THREE MONTHS ENDED MARCH 31, 2007
NET SALES
Net sales increased by $4,168,285, or 129.2%, to $7,395,200 for the three months
ended March 31, 2008 from $3,226,915 for the corresponding period of 2007. The
overall increase in sales was primarily due to strong demand for the Company's
new data products of CDU-680, CDU-650, and CDX-650, which were introduced in the
middle of 2007. The overall increase was also due to the increase in sales
volume in the United States as well as in Caribbean and South American
countries, in the amount of $1,445,841 and $5,949,322 respectively, for the
three months ended March 31, 2008, compared to $615,794 and $2,608,635 for the
corresponding period of 2007, an increase of 134.8% and 128.1%, respectively.
GROSS PROFIT
Gross profit increased by $801,830, or 82.4% to $1,775,205 for the three months
ended March 31, 2008 from $973,375 for the corresponding period of 2007. The
increase was primarily due to the increase in sales volume in the United States
as well as in Caribbean and South American countries. The gross profit in terms
of net sales percentage was 24.0% for the three months ended March 31, 2008
compared to 30.2% for the corresponding period of 2007. The overall decrease in
gross profit as a percentage of net sales was primarily due to the negative
impact of competitive pricing pressures on the Company's sales prices in the
overall market.
SELLING, GENERAL, AND ADMINISTRATIVE
Selling, general, and administrative expenses increased by $291,274, or 50.0%,
to $873,869 for the three months ended March 31, 2008 from $582,595 for the
corresponding period of 2007. The increase was primarily due to an increase in
sales and marketing efforts, which included hiring new personnel to expand our
marketing and customer support functions, which increased salary and related
expenses. For the three months ended March 31, 2008, the Company had an increase
in promotion and marketing expense of $122,572, an increase in travel expense of
$5,936, and an increase in payroll expense of $275,459, compared to the
corresponding period of 2007. Payroll expenses were increased due to not only
the hiring new personnel but also the bonus payment of $40,000 to share profits
with the management and employees for the three months ended March 31, 2008.
OTHER INCOME (EXPENSE), NET
The net of other income (expense) increased by $41,336, or 546.3%, to $33,769
for the three months ended March 31, 2008 from the negative net of $7,566 for
the corresponding period of 2007. The overall increase is primarily due to the
interest income of $33,513 for the three months ended March 31, 2008.
-17-
NINE MONTHS ENDED MARCH 31, 2008
COMPARED TO NINE MONTHS ENDED MARCH 31, 2007
NET SALES
Net sales increased by $17,901,377, or 298.5%, to $23,898,442 for the nine
months ended March 31, 2008 from $5,997,965 for the corresponding period of
2007. The overall increase in sales was primarily due to strong demand for the
Company's new data products of CDU-680, CDU-650, and CDX-650, which were
introduced in the middle of 2007. The overall increase was also due to the
increase in sales volume in the United States as well as in Caribbean and South
American countries, in the amount of $7,612,133 and $16,283,302 respectively,
for the nine months ended March 31, 2008, compared to $881,394 and $5,113,730
for the corresponding period of 2007, an increase of 763.6% and 218.4%
respectively.
GROSS PROFIT
Gross profit increased by $3,900,983, or 223.1% to $5,649,908 for the nine
months ended March 31, 2008 from $1,748,925 for the corresponding period of
2007. The increase was primarily due to the increase in sales volume of the
Company's data products in the United States as well as in Caribbean and South
American countries. The gross profit in terms of net sales percentage was 23.6%
for the nine months ended March 31, 2008 compared to 29.2% for the corresponding
period of 2007. The overall decrease in gross profit as a percentage of net
sales was primarily due to the negative impact of competitive pricing pressures
on the Company's sales prices in the United States. Net sales recognized for
CDMA data products in the United States was $7,612,133, or 31.9% of total sales,
for the nine months ended March 31, 2008, compared to $881,394, or 14.7% of
total sales, for the corresponding period of 2007, an increase of $6,730,739, or
763.6%.
SELLING, GENERAL, AND ADMINISTRATIVE
Selling, general, and administrative expenses increased by $1,275,930, or
120.7%, to $2,333,239 for the nine months ended March 31, 2008 from $1,057,309
for the corresponding period of 2007. The increase was primarily due to an
increase in sales and marketing efforts, which included hiring new personnel to
expand our marketing and customer support functions, which increased salary and
related expenses. For the nine months ended March 31, 2008, the Company had an
increase in promotion and marketing expense of $733,273, an increase in travel
expense of $20,459, and an increase in payroll expense of $442,648, compared to
the corresponding period of 2007. Payroll expenses were increased due to not
only the hiring new personnel but also the bonus payment of $157,000 to share
profits with the management and employees for the nine months ended March 31,
2008.
OTHER INCOME (EXPENSE), NET
Other income increased by $122,184, or 2,453.1%, to $127,165 for the nine months
ended March 31, 2008 from $4,981 for the corresponding period of 2007. The
overall increase is due to the interest income of $108,230 and the legal
settlement income of $16,304 for the nine months ended March 31, 2008.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents increased by $3,075,143 to $5,552,736 at March 31,
2008, compared to $2,477,593 at June 30, 2007. The increase was primarily from
the net income of $3,183,992.
-18-
OPERATING ACTIVITIES
Net cash provided by operating activities was $3,213,363 and $670,298 for the
nine months ended March 31, 2008, and 2007, respectively. The increase from the
prior period is primarily due to the increase in net sales and net income.
INVESTING ACTIVITIES
Net cash used in investing activities was $49,615 and $73,198 the nine months
ended March 31, 2008 and 2007, respectively, consisting of capital expenditures.
FINANCING ACTIVITIES
Net cash used by financing activities was $88,605 for the nine months ended
March 31, 2008, consisting of payment of note payable and receipt of stock
subscription receivable. Net cash provided by financing activities was $300,000
for the nine months ended March 31, 2007, consisting of proceeds from a
Common Stock issuance.
CONTRACTUAL OBLIGATIONS AND OTHER COMMITMENTS
The Company had the following off-balance sheet obligations and other
commitments at March 31, 2008:
OPERATING LEASES
The Company leases its administrative facilities under a non-cancelable
operating lease that expires on June 30, 2008, and its principal future
obligations and commitments as of the expiration date is $15,627. In
addition to the minimum annual rental commitments, the lease provides for
periodic cost of living increases in the base rent and payment of common
area costs. Rent expense related to the operating lease was $47,221 and
$49,355 for the nine months ended March 31, 2008 and 2007, respectively.
The Company leases its corporate housing facility under a non-cancelable
operating lease that expires on September 30, 2008 for its vendors, and
its principal future obligations and commitments as of the expiration date
is $8,952. Rent expense related to the operating lease was $13,203 and $0
for the nine months ended March 31, 2008 and 2007, respectively.
The Company leases one automobile under an operating lease that expires on
July 22, 2009. Lease expense was $4,839 and $5,182 for the nine months
ended March 31, 2008 and 2007, respectively.
LITIGATION
The Company may be involved in certain legal proceedings and claims which
arise in the normal course of business. Management does not believe that
the outcome of these matters will have any material adverse effect on its
financial condition.
CO-DEVELOPMENT, CO-OWNERSHIP AND SUPPLY AGREEMENT
In January 2005, the Company entered into a Co-development, Co-ownership,
and Supply Agreement (the "Agreement") with C-Motech Co. Ltd., located in
South Korea. The Agreement provides exclusive rights to market and sell
its CDMA wireless data products in North, Central and South American
countries. Furthermore, the Agreement provides that the Company is
responsible for marketing, sales, field testing, and certifications of
these products to wireless service operators and other commercial buyers
within a designated territory and C-Motech Co. Ltd. is responsible for
design, development, testing, certification, and completion of these
products. Under the Agreement, products include all access devices
designed with Qualcomm's MSM 5100, 5500 and 6500 chipset solutions
provided or designed by C-Motech Co. Ltd. or both companies. Both
companies own the rights to the products: USB modems, Card Bus, PCI Bus
and Module designed with MSM 5500 dual band products. The term of the
Agreement commenced on January 5, 2005 with automatic renewals of
additional one year. The Agreement may be terminated by either party by
providing a written notice to terminate at least ninety days prior to the
end of the term.
-19-
RISK FACTORS RELATED TO OUR BUSINESS
An investment in the Company's shares is highly speculative and involves a
significant degree of risk. Prospective investors should carefully consider the
following risk factors, in addition to the other information set forth herein or
in the material accompanying this report, prior to purchasing any of the
Company's shares. The following risk factors do not purport to be a complete
explanation of the risks involved in its business.
THE COMPANY HAS HAD A HISTORY OF LOSSES
The Company experienced significant operating losses and negative cash flows
from operating activities for the 2005 and 2006 fiscal years. If the Company's
sales do not continue to improve and operating expenses are not reduced and
monitored, it may incur additional significant net losses and negative cash
flows from operations.
THE COMPANY OPERATES IN AN INTENSIVELY COMPETITIVE MARKET
The wireless broadband data access market is highly competitive, and the Company
may be unable to compete effectively. The Company's primary competitors are
Sierra Wireless, Novatel Wireless, and Option International. Many of the
Company's competitors or potential competitors have significantly greater
financial, technical and marketing resources than the Company does. To survive
and be competitive, the Company will need to continuously invest in research and
development, sales and marketing, and customer support. Increased competition
could result in price reduction and smaller customer orders. The Company's
failure to compete effectively could seriously impair its business.
THE COMPANY OPERATES IN THE HIGH-RISK TELECOM SECTOR
The Company is in a volatile industry. In addition, its revenue model is
evolving and relies substantially on the assumption that the Company will be
able to successfully complete the development and sales of its products and
services in the marketplace. The Company's prospects must be considered in the
light of the risks, uncertainties, expenses and difficulties frequently
encountered by companies in the early stages of development and marketing. In
order to be successful in the market the Company must, among other things:
o Complete development and introduction of functional and attractive
products and services;
o Attract and maintain customer loyalty;
o Establish and increase awareness of its brand and develop customer
loyalty;
o Provide desirable products and services to customers at attractive
prices;
o Establish and maintain strategic relationships with strategic
partners and affiliates;
o Rapidly respond to competitive and technological developments;
o Build operations and customer service infrastructure to support
its business; and
o Attract, retain, and motivate qualified personnel.
The Company cannot guarantee that it will be able to achieve the above goals,
and its failure to achieve them could adversely affect its business, results of
operations, and financial condition. Moreover, there can be no assurance that
the Company will be able to obtain additional funding if its financial
resources are depleted. The Company expects that revenues and operating results
will fluctuate in the future. There is no assurance that any or all of its
efforts will produce a successful outcome. If its efforts are unsuccessful or
other unexpected events occur, purchasers of our shares could lose their entire
investment.
-20-
THE COMPANY OPERATES IN A FIELD WITH RAPIDLY CHANGING TECHNOLOGY
Since the Company's products and services are new, it cannot be certain that
these products and services will function as anticipated or be desirable to its
intended markets. The Company's current or future products and services may fail
to function properly, and if its products and services do not achieve and
sustain market acceptance, its business, results of operations and profitability
may suffer. If the Company are unable to predict and comply with evolving
wireless standards, its ability to introduce and sell new products will be
adversely affected. If the Company fails to develop and introduce products on
time, it may lose customers and potential product orders.
THE COMPANY DEPENDS ON THE DEMAND FOR WIRELESS NETWORK CAPACITY
The demand for the Company's products is completely dependent on the demand for
broadband wireless access to networks. If wireless operators do not deliver
acceptable wireless service, its product sales may dramatically decline. Thus,
if wireless operators experience financial or network difficulties, it will
likely reduce demand for the Company's products.
THE COMPANY DEPENDS ON COLLABORATIVE ARRANGEMENTS
The development and commercialization of the Company's products and services
depend in large part upon its ability to selectively enter into and maintain
collaborative arrangements with developers, distributors, service providers,
network systems providers, core wireless communications technology providers and
manufacturers, among others.
THE COMPANY RELIES ON A SINGLE SOURCE FOR THE MANUFACTURE OF ITS PRODUCTS
The Company relies on a single source to design, manufacture and supply its
products, which exposes the Company to a number of risks and uncertainties
outside its control. Due to its lack of working capital, the Company relies on
C-Motech Co., Ltd to manufacture and deliver all its products. Any significant
changes in C-Motech Co., Ltd., such as a change in ownership, operations or
financial status may cause difficulties in its ability to deliver products to
customers on a timely basis.
THE LOSS OF ANY OF THE COMPANY'S MATERIAL CUSTOMERS COULD ADVERSELY AFFECT ITS
REVENUES AND PROFITABILITY, AND THEREFORE SHAREHOLDER VALUE.
The Company depends on a small number of customers for a significant portion of
its revenues. During the nine months ended March 31, 2008, three customers
accounted for 43.7%, 22.6%, and 19.3% of revenues. If any of these customers
reduce their business with the Company or suffer from business failure, the
Company's revenues and profitability could decline, perhaps materially.
THE COMPANY'S PRODUCT DELIVERIES ARE SUBJECT TO LONG LEAD TIMES
Due to its limited capital resources, the Company is experiencing long lead
times to ship products to its customers, often in excess of 45 days. This could
cause the Company to lose customers, who may be able to secure faster delivery
times from its competitors, and require the Company to maintain higher levels of
working capital.
AS THE COMPANY'S BUSINESS EXPANDS INTERNATIONALLY, IT WILL BE EXPOSED TO
ADDITIONAL RISKS RELATING TO INTERNATIONAL OPERATIONS
The Company's expansion into international operations exposes the Company to
additional risks unique to such international markets, including the following:
o Increased credit management risks and greater difficulties in
collecting accounts receivable;
o Unexpected changes in regulatory requirements, wireless
communications standards, exchange rates, trading policies,
tariffs and other barriers;
o Uncertainties of laws and enforcement relating to the protection
of intellectual property;
o Language barriers; and
o Potential adverse tax consequences.
Furthermore, if the Company is unable to further develop distribution channels
in countries in North and South America and Africa, it may not be able to grow
its international operations, and its ability to increase revenue
will be negatively impacted.
-21-
THE COMPANY'S PRODUCTS MAY INFRINGE THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS
The industry in which the Company operates has many participants that own, or
claim to own, proprietary intellectual property. In the past the Company has
received, and in the future may receive, claims from third parties alleging that
it, and possibly its customers, violate their intellectual property rights.
Rights to intellectual property can be difficult to verify and litigation may be
necessary to establish whether or not the Company has infringed the intellectual
property rights of others. In many cases, these third parties are companies with
substantially greater resources than the Company, and they may be able to, and
may choose to, pursue complex litigation to a greater degree than the Company
could. Regardless of whether these infringement claims have merit or not, the
Company may be subject to the following:
o The Company may be liable for potentially substantial damages,
liabilities and litigation costs, including attorneys' fees;
o The Company may be prohibited from further use of the intellectual
property and may be required to cease selling its products that
are subject to the claim;
o The Company may have to license the third party intellectual
property, incurring royalty fees that may or may not be on
commercially reasonable terms. In addition, there is no assurance
that it will be able to successfully negotiate and obtain such a
license from the third party;
o The Company may have to develop a non-infringing alternative,
which could be costly and delay or result in the loss of sales. In
addition, there is no assurance that it will be able to develop
such a non-infringing alternative;
o The diversion of management's attention and resources;
o The Company's relationships with customers may be adversely
affected; and
o The Company may be required to indemnify its customers for certain
costs and damages they incur in such a claim.
In the event of an unfavorable outcome in such a claim and the Company's
inability to either obtain a license from the third party or develop a
non-infringing alternative, then its business, operating results and financial
condition may be materially adversely affected, and the Company may have to
restructure its business. Absent a specific claim for infringement of
intellectual property, from time to time, the Company has and expects to
continue to license technology, intellectual property and software from third
parties. There is no assurance that the Company will be able to maintain its
third party licenses or obtain new licenses when required, and this inability
could materially adversely affect its business and operating results and the
quality and functionality of its products. In addition, there is no assurance
that third party licenses the Company executes will be on commercially
reasonable terms. Under purchase orders and contracts for the sale of its
products, the Company may provide indemnification to its customers for potential
intellectual property infringement claims for which the Company may have no
corresponding recourse against its third party licensors. This potential
liability, if realized, could materially adversely affect its business,
operating results and financial condition.
GOVERNMENT REGULATION COULD RESULT IN INCREASED COSTS AND INABILITY TO SELL THE
COMPANY'S PRODUCTS
The Company's products are subject to certain mandatory regulatory approvals in
the United States and other regions in which it operates. In the United States,
the Federal Communications Commission regulates many aspects of communications
devices. Although the Company has obtained all the necessary Federal
Communications Commission and other required approvals for the products it
currently sells, the Company may not obtain approvals for future products on a
timely basis, or at all. In addition, regulatory requirements may change or the
Company may not be able to obtain regulatory approvals from countries other than
the United States in which it may desire to sell products in the future.
-22-
THE COMPANY MAY NEED ADDITIONAL FINANCING DUE TO LIMITED RESOURCES
The Company's financial resources are limited, and the amount of funding that is
required to develop and commercialize its products and technologies is highly
uncertain. Adequate funds may not be available when needed or on terms
satisfactory to the Company. Lack of funds may cause the Company to delay,
reduce and/or abandon certain or all aspects of its development and
commercialization programs. The Company may seek additional financing
through the issuance of equity or convertible debt securities. The percentage
ownership of its stockholders would be reduced, stockholders could experience
additional dilution, and such securities may have rights, preferences and
privileges senior to those of the Company's Common Stock. There
can be no assurance that additional financing will be available on terms
favorable to the Company or at all. If adequate funds are not available or are
not available on acceptable terms, the Company may not be able to fund its
expansion, take advantage of desirable acquisition opportunities, develop or
enhance services or products or respond to competitive pressures. Such inability
could have a materially adverse effect on its business, results of operations
and financial conditions.
ITEM 3A(T). CONTROLS AND PROCEDURES
The Company did not carry out a full evaluation of the effectiveness of the
design and operation of its disclosure controls and procedures at the end of the
period covered by this Form 10-QSB pursuant to Rule 13a-15 of the Exchange Act.
The Company has retained a consultant to design procedures for such evaluation,
and plans to have such procedures in place for the next fiscal quarter.
Notwithstanding the lack of a full evaluation at the end of the quarter, our
Chief Executive Officer and Acting Chief Financial Officer concluded that our
disclosure controls and procedures were effective to insure that information we
are required to disclose in reports that we file or submit under the Securities
Exchange Act of 1934 (i) is recorded, processed, summarized and reported within
the time periods specified in Securities and Exchange Commission rules and forms
and (ii) is accumulated and communicated to our management, including our Chief
Executive Officer and Acting Chief Financial Officer, as appropriate, to allow
timely decision regarding required disclosure.
There has been no change in our internal control over financial reporting during
the three months ended March 31, 2008 that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
2.1 Articles of Merger and Agreement and Plan of Reorganization, filed January
4, 2008 with the Nevada Secretary of State
3.1 Articles of Incorporation
3.2 By-Laws
10.1 Co-Development, Co-Ownership and Supply Agreement, dated January 5, 2005
between the Company and C-Motech Co., Ltd. (1)
10.2 Lease, dated March 16, 2005, between the Company and MP Sorrento Mesa, LLC
(1)
10.3 First Amendment to Lease, between the Company and MP Sorrento Mesa,
LLC, dated May 23, 2006 (2).
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
----------------
(1) Incorporated by reference from Annual Report on Form 10-KSB for the year
ended June 30, 2005, filed on May 23, 2006
(2) Incorporated by reference from Annual Report on Form 10-KSB for the year
ended June 30, 2006, filed on September 28, 2006
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SIGNATURES
Pursuant to the requirements of Section 13 of 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Franklin Wireless Corp.
By: /s/ OC Kim
-----------------------------
OC Kim
President and Acting Chief Financial Officer
Dated: May 14, 2008
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