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: September 30, 2007
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from ____________ to _____________
Commission file number 0-11616
FRANKLIN WIRELESS CORP.
-----------------------
(Exact name of small business issuer in its charter)
California 95-3733534
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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, Including Area Code: (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 (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 November 12, 2007
----------------------------------- -------------------------------
Common Stock, no par value 926,040,050
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
Unaudited Consolidated Statements of Operations for the Three Months Ended
September 30, 2007 and 2006.......................................................................... 3
Consolidated Balance Sheets at September 30, 2007 (unaudited) and June 30, 2007...................... 4
Unaudited Consolidated Statements of Cash Flows for the Three Months Ended
September 30, 2007 and 2006.......................................................................... 5
Notes to Unaudited Consolidated Financial Statements................................................. 6
Item 2: Management's Discussion and Analysis of Financial Condition or Plan of Operation ......................... 14
Item 3: Controls and Procedures................................................................................... 23
PART II - OTHER INFORMATION
Item 1: Legal Proceedings......................................................................................... 24
Item 2: Unregistered Sales of Equity Securities and Use of Proceeds............................................... 24
Item 3: Defaults Upon Senior Securities........................................................................... 24
Item 4: Submission of Matters to a Vote of Security Holders....................................................... 24
Item 5: Other Information......................................................................................... 25
Item 6: Exhibits.................................................................................................. 25
Signatures................................................................................................ 26
Certifications............................................................................................ 27
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FRANKLIN WIRELESS CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
-----------------------------
THREE MONTHS ENDED
SEPTEMBER 30,
-----------------------------
2007 2006
------------ ------------
Net sales $ 8,644,693 $ 969,528
Cost of goods sold 6,687,871 675,850
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Gross profits 1,956,822 293,678
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Operating expenses:
Selling, general, and administrative 584,634 199,264
Research and development - -
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Total operating expenses 584,634 199,264
------------ ------------
Income from operations 1,372,188 94,414
Other income (expense):
Interest income 36,043 5,284
Other income 184 25
Other expenses - -
------------ ------------
Total other income (expense), net 36,227 5,309
------------ ------------
Net income before income taxes 1,408,415 99,723
Provision for income taxes 25,313 800
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Net income $ 1,383,102 $ 98,923
============ ============
Basic earnings per share $ 0.00 $ 0.00
Diluted earnings per share $ 0.00 $ 0.00
Weighted average common shares outstanding - basic 926,040,050 796,958,771
Weighted average common shares outstanding - diluted 926,040,050 796,958,771
See accompanying notes to unaudited consolidated financial statements.
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FRANKLIN WIRELESS CORP.
CONSOLIDATED BALANCE SHEETS
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(UNAUDITED)
SEPTEMBER 30, JUNE 30,
2007 2007
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 3,480,346 $ 2,477,593
Account receivables 47,315 44,915
Inventories 21,921 10,830
Prepaid expenses 5,412 6,649
------------ ------------
Total current assets 3,554,994 2,539,987
Property and equipment, net 27,962 26,218
Intangible assets, net 115,991 130,264
Other assets 5,161 5,161
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TOTAL ASSETS $ 3,704,108 $ 2,701,630
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 8,517 $ 68,064
Advance payment from customers 95,000 354,500
Accrued liabilities 117,448 179,025
Liability from discontinued operations 434,000 434,000
------------ ------------
Total current liabilities 654,965 1,035,589
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STOCKHOLDERS' EQUITY
Common stock, no par value, authorized 1,200,000,000 - -
shares and Preferred stock, no par value, authorized
10,000,000 shares; Common stock issued and outstanding -
926,040,050 as of September 30, 2007 and June 30, 2007,
and no Preferred stock issued and outstanding
Additional paid-in capital 5,029,393 5,029,393
Stock subscription receivable (11,395) (11,395)
Accumulated deficit (1,968,855) (3,351,957)
------------ ------------
Total stockholders' equity 3,049,143 1,666,041
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 3,704,108 $ 2,701,630
============ ============
See accompanying notes to unaudited consolidated financial statements.
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FRANKLIN WIRELESS CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
-----------------------------
THREE MONTHS ENDED
SEPTEMBER 30,
-----------------------------
2007 2006
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CASH FLOWS FROM OPERATIONS ACTIVITIES:
Net income $ 1,383,102 $ 98,923
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 2,091 1,436
Amortization of intangible assets 14,273 19,001
Changes in operating assets and liabilities:
(Increase) in accounts receivable (2,400) (242,602)
(Increase) in inventory (11,091) (197,250)
Decrease in prepaid expenses 1,237 -
Increase (decrease) in accounts payable (59,547) 572,946
(Decrease) in advance payment from customers (259,500) -
(Decrease) in accrued liabilities (61,577) (4,283)
Net cash provided by operating activities 1,006,588 248,171
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (3,835) (1,160)
Purchases of intangible assets - (53,780)
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Net cash used in investing activities (3,835) (54,940)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock - 400,000
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Net cash provided by financing activities -- 400,000
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Net increase in cash and cash equivalents 1,002,753 593,231
Cash and cash equivalents, beginning of period 2,477,593 568,387
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Cash and cash equivalents, end of period $ 3,480,346 $ 1,161,618
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the period
for:
Interest $ - $ -
Income taxes $ - $ 800
See accompanying notes to unaudited consolidated financial statements.
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FRANKLIN WIRELESS CORP.
NOTES TO UNAUDITED CONSOLIDATED 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 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, and they 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 through its brand
recognition, leveraging sales to its existing customers, and increase in
marketing effort, will be successful to the Company's future growth.
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 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of the Company and
its wholly-owned subsidiary 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 consolidated balance sheet is unaudited as of September 30,
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2007 and audited as of June 30, 2007. The consolidated statements of operations
are unaudited for the three months ended September 30, 2007 and 2006, and the
consolidated statements of cash flows are unaudited for the three months ended
September 30, 2007 and 2006. In the opinion of management, the unaudited
consolidated 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 consolidated 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 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include all accounts of the
Company and its wholly owned subsidiary located in South Korea, ARG. ARG has not
been in operation since August 2003, and all inter-company balances and
transactions have been eliminated since the 2004 fiscal year.
SEGMENT REPORTING
The Company had two reportable segments as defined by SFAS No. 131, Disclosure
About Segments of an Enterprise and Related Information. Since August 2003, the
Company's subsidiary located in South Korea, ARG, has not been in operation and
all of its subsidiary's assets were written off during the fiscal year 2004. As
a result, the Company's consolidated financial statements include $434,000 of
debt from ARG financial statements.
USE OF ESTIMATES
The preparation of financial statements requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
periods. Actual results could differ from those estimates. 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
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accounts for risk of loss. The establishment of reserves requires the use of
judgment and assumptions regarding the potential for losses on receivable
balances. Though the Company considers these balances adequate and proper,
changes in economic conditions in specific markets in which the Company operates
could have a material effect on reserve balances required.
SHIPPING AND HANDLING COST
All shipping and handling costs are paid by the customers directly to the
shipping companies. As a result, the Company does not collect and incur any
shipping and handling costs.
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
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industry or economic trends. An impairment loss would be recognized when
estimated future cash flows expected to result from the use of the asset is less
than its carrying amount.
As of September 30, 2007, 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.
Provision for income taxes for the three months ended September 30, 2007 and
2006 consists of alternative minimum taxes and minimum state taxes. Since the
Company recorded a valuation allowance to fully offset the amount of net
deferred tax assets, no deferred tax expenses or benefits were recorded. The
components of the income tax provision are as follows:
(UNAUDITED) (UNAUDITED)
---------- ----------
SEPTEMBER 30 SEPTEMBER 30,
2007 2006
---------- ----------
Current income taxes expense:
Federal $ 19,073 $ -
State 6,240 800
---------- ----------
Deferred income taxes expense (benefits): 25,313 800
---------- ----------
PROVISION FOR INCOME TAXES $ 25,313 $ 800
========== ==========
The significant component of the deferred tax asset at September 30, 2007 and
June 30, 2007 was the federal net operating loss carry-forwards. At September
30, 2007 and June 30, 2007, the effect on the deferred tax asset from the
federal net operating loss carry-forwards amounted to approximately $2,576,456
and $2,934,499, respectively, based on federal tax rate of 34%.
SFAS No. 109 requires a valuation allowance to be recorded when it is more
likely than not that some or all of the deferred tax assets will not be
realized. At September 30, 2007 and June 30 2006, 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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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
12.8%, 27.0%, and 53.4% of revenues during the three months ended September 30,
2007, and had no related account receivables at September 30, 2007.
The Company purchases its wireless products from one design and manufacturing
company located in South Korea. If the design and manufacturing company were to
experience delays, capacity constraints or quality control problems, product
shipments to the Company's customers could be delayed, or its customers could
consequently elect to cancel the underlying product purchase order, which would
negatively impact the Company's revenue. However, there were no significant
delays, capacity constraints, or quality control problems that negatively
impacted the Company's revenue for the three months ended September 30, 2007 and
2006. For those periods, the Company purchased approximately $6,698,962 and
$873,100 respectively and had related accounts payable of $0 and $572,800 at
September 30, 2007 and 2006 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 4 - BALANCE SHEET DETAILS
ACCOUNT RECEIVABLES
Accounts receivable at September 30, 2007 and June 30, 2007, consisted of
receivables from customers in the amounts of $47,315 and $44,915, respectively.
PREPAID EXPENSES
Prepaid expenses at September 30, 2007 and June 30, 2007 consisted of the
following:
(UNAUDITED)
-------- --------
SEPTEMBER 30, JUNE 30,
2007 2007
-------- --------
Prepaid expenses $ 5,412 $ 6,649
-------- --------
TOTAL $ 5,412 $ 6,649
======== ========
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PROPERTY AND EQUIPMENT
Property and equipment at September 30, 2007 and June 30, 2007 consisted of the
following:
(UNAUDITED)
-------- --------
SEPTEMBER 30, JUNE 30,
2007 2007
-------- --------
Computers and software $ 41,919 $ 38,084
Furniture and fixtures 11,325 11,325
-------- --------
53,244 49,409
Less accumulated depreciation (25,282) (23,191)
-------- --------
TOTAL $ 27,962 $ 26,218
======== ========
Depreciation expense associated with property and equipment was $2,091 and
$1,436 for the three months ended September 30, 2007 and 2006, respectively.
INTANGIBLE ASSETS
Intangible assets at September 30, 2007 and June 30, 2007 consisted of the
following:
(UNAUDITED)
--------- ---------
SEPTEMBER 30, JUNE 30,
2007 2007
--------- ---------
Certifications: CDG test licenses $ 171,280 $ 171,280
Less accumulated amortization (55,289) (41,016)
--------- ---------
TOTAL $ 115,991 $ 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 $14,273 and $19,001
for the three months ended September 30, 2007 and 2006, respectively.
OTHER ASSETS
Other assets at September 30, 2007 and June 30, 2007 consisted of the following:
(UNAUDITED)
------- -------
SEPTEMBER 30, JUNE 30,
2007 2007
------- -------
Lease deposit, corporate housing $ 709 $ 709
Lease deposit, administrative office 4,170 4,170
Utility deposit 282 282
------- -------
TOTAL $ 5,161 $ 5,161
======= =======
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LIABILITY FROM DISCONTINUED OPERATIONS
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. The Company and the stockholder
agreed to change the promissory note to a convertible promissory note in the
amount of $550,000, including 10% interest, in the year ended June 30, 2004. The
Company paid off $10,000 and $100,000 for the 2006 and 2007 fiscal years
respectively, and an additional $6,000 was offset by the stock subscription
receivable from the stockholder for the 2007 fiscal year. This note of $434,000
was not converted to our Common Stock for the three months ended September 30,
2007, and the total liability from discontinued operations is $434,000 at
September 30, 2007.
ACCRUED LIABILITIES
Accrued liabilities at September 30, 2007, and June 30, 2007 consisted of the
following:
(UNAUDITED)
--------- ---------
SEPTEMBER 30, JUNE 30,
2007 2007
--------- ---------
Salaries payable $ 55,918 $ 99,418
Accrued professional fees payable 36,217 50,217
Tax payable 25,313 34,390
--------- ---------
TOTAL $ 117,448 $ 179,025
========= =========
NOTE 5 - COMMITMENTS AND CONTINGENCIES
OPERATING 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 of common area costs. Rent expense related to the
operating lease was $15,534 and $14,702 for the three months ended September 30,
2007 and 2006, respectively.
The Company leases its corporate housing facility for its vendors under a
non-cancelable operating lease that expires on March 31, 2008. Rent expense
related to the operating lease was $4,251 and $0 for the three months ended
September 30, 2007 and 2006, respectively.
The Company leases one automobile under an operating lease that expires on July
22, 2009. Lease expense was $1,613 and $1,956 for the three months ended
September 30, 2007 and 2006, respectively.
LITIGATION
The Company is involved in certain legal proceedings and claims which arise in
the normal course of business. Management does not believe that the outcome of
these matters will have any material adverse effect on its consolidated
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
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market and sale its CDMA wireless data products in North, Central and South
American countries. Furthermore, the Agreement includes 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 is for two years, commencing on January 5, 2005, with automatic
renewable of additional one year. The Agreement may be terminated by either
party by providing a written notice to terminate at least sixty days prior to
the end of the term.
NOTE 6 - 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 September 30, 2007, the Company
did not have any dilutive shares.
NOTE 7 - RECENT ACCOUNTING PRONOUNCEMENTS
In July 2006, the FASB issued FASB interpretation (FIN) No. 48, "Accounting for
Uncertainty in Income Taxes -- an interpretation of FASB statement No. 109,"
which prescribes a recognition threshold and measurement process for recording
in the financial statements, uncertain tax positions taken or expected to be
taken in a tax return. In addition, FIN 48 provides guidance on the
derecognizing, classification, accounting in interim periods and disclosure
requirements for uncertain tax positions. The Company is currently adopting and
evaluating the impact, if any, that FIN 48 will have on its financial
statements, and FIN 48 is not expected to have a material impact on the
Company's consolidated financial statements.
In September 2006, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 157, FAIR VALUE MEASUREMENTS. This standard provides guidance for
using fair value to measure assets and liabilities. The standard also responds
to investors' requests for expanded information about the extent to which
companies measure assets and liabilities at fair value, the information used to
measure fair value, and the effect of fair value measurements on earnings. The
standard applies whenever other standards require (or permit) assets or
liabilities to be measured at fair value, but does not expand the use of fair
value in any new circumstances. SFAS No. 157 is effective for financial
statements issued for fiscal years beginning after November 15, 2007, and
interim periods within those fiscal years. There are numerous previously issued
statements dealing with fair values that are amended by SFAS No. 157. The
Company is in the process of evaluating the impact, if any, that the adoption of
SFAS No. 157 will have on its consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159, THE FAIR VALUE OPTION FOR
FINANCIAL ASSETS AND FINANCIAL LIABILITIES. SFAS No. 159 provides companies with
an option to report 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 reduce both complexity in accounting for
financial instruments and the volatility in earnings caused by measuring related
assets and liabilities differently. The FASB believes that SFAS No. 159 helps to
mitigate accounting-induced volatility by enabling companies to report related
assets and liabilities at fair value, which would likely reduce the need for
companies to comply with detailed rules for hedge accounting. SFAS No. 159 also
establishes presentation and disclosure requirements designed to facilitate
comparisons between companies that choose different measurement attributes for
similar types of assets and liabilities, and would require entities to display
the fair value of those assets and liabilities for which the company has chosen
to use fair value on the face of the balance sheet. The new statement does not
eliminate disclosure requirements included in other accounting standards,
including requirements for disclosures about fair value measurements included in
SFAS
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No. 157, FAIR VALUE MEASUREMENTS. This statement is effective as of the
beginning of an entity's first fiscal year beginning after November 15, 2007.
The Company is in the process of evaluating the impact, if any, that the
adoption of SFAS No. 159 will have on its consolidated financial statements.
There are no other accounting standards issued as of November 12, 2007 that are
expected to have a material impact on the Company's consolidated financial
statements.
NOTE 8 - RELATED PARTY TRANSACTIONS
The Company purchased CDMA wireless data products in the amount of $6,698,962,
or 100% of total purchases, from C-Motech Co. Ltd., during the three months
ended September 30, 2007, and had no related accounts payable at September 30,
2007. C-Motech Co. Ltd owns 110,000,000 shares of the Company's Common Stock,
and Jaeman Lee, Chief Executive Officer of C-Motech Co. Ltd., has served as a
director of the Company since September 2006.
NOTE 9 - SUBSEQUENT EVENTS
On August 16, 2007, the Board of Directors of the Company approved each of the
following proposals and approved the mailing of Proxy Statements and an
accompanying form of Consent to the Company's shareholders for their approval of
the transactions. If the Company receives Consents from shareholders owning more
than 50% of the outstanding shares, the officers would be authorized to effect
the transactions set forth in the proposal.
The proposals to the Company's shareholders are as follows:
1. The change of the state of incorporation from California to Nevada by
merger of the Company into a wholly owned Nevada subsidiary.
2. An amendment to the Articles of Incorporation to include a reverse
stock split of 1 share for each 70 shares held.
3. Establishing the authorized capital of the Company at 50,000,000
shares of Common Stock.
On October 30, 2007, the Board of Directors approved the dissolution of the
discontinued subsidiary, ARG, which has been inactive since August 2003. As a
part of the dissolution, the Company will assume the liability of ARG of
$434,000.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION OR PLAN OF
OPERATION
The following discussion should be read in conjunction with the consolidated
financial statements and notes thereto included in Item 1 of this filing and the
financial statements and notes thereto and Management's Discussion and Analysis
contained in the Company's Form 10-KSB filed on September 19, 2007 for the year
ended June 30, 2007.
- 14 -
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, and they 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, in 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")
networks. The Company anticipates that the sales of these new products through
its brand recognition, leveraging sales to its existing customers, and increase
in marketing effort, will be successful to the Company's future growth.
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.
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.
- 15 -
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 September 30, 2007, 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.
Provision for income taxes for the three months ended September 30, 2007 and
2006 consists of alternative minimum taxes and minimum state taxes. Since the
Company recorded a valuation allowance to fully offset the amount of net
deferred tax assets, no deferred tax expenses or benefits were recorded. The
components of the income tax provision are as follows:
- 16 -
(UNAUDITED) (UNAUDITED)
--------- ---------
SEPTEMBER 30, SEPTEMBER 30,
2007 2006
--------- ---------
Current income taxes expense:
Federal $ 19,073 -
State 6,240 800
--------- ---------
Deferred income taxes expense (benefits): 25,313 800
--------- ---------
PROVISION FOR INCOME TAXES $ 25,313 $ 800
========= =========
The significant component of the deferred tax asset at September 30, 2007 and
June 30, 2007 was the federal net operating loss carry-forwards. At September
30, 2007 and June 30, 2007, the effect on the deferred tax asset from the
federal net operating loss carry-forwards amounted to approximately $2,576,456
and $2,934,499, respectively, based on federal tax rate of 34%.
SFAS No. 109 requires a valuation allowance to be recorded when it is more
likely than not that some or all of the deferred tax assets will not be
realized. At September 30, 2007 and June 30 2006, 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, during the three months ended September 30, 2007
and 2006, selected consolidated statements of operations data expressed as a
percentage of sales:
THREE MONTHS ENDED
SEPTEMBER 30,
-------------------------
2007 2006
-------- ------
Net Sales 100.0% 100.0%
Cost of goods sold 77.4% 69.7%
-------- ------
Gross profit 22.6% 30.3%
-------- ------
Operating expenses:
Selling, general and administrative expenses 6.7% 20.6%
-------- ------
Total operating expenses 6.7% 20.6%
-------- ------
Income from operations 15.9% 9.7%
Other income (expense), net 0.4% 0.6%
-------- ------
Net income before income taxes 16.3% 10.3%
Provision for income taxes 0.3% 0.1%
-------- ------
Net income 16.0% 10.2%
======== ======
The results of the interim periods are not necessarily indicative of results for
the entire fiscal year.
- 17 -
THREE MONTHS ENDED SEPTEMBER 30, 2007
COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2006
NET SALES
Net sales increased by $7,675,165, or 791.6%, to $8,644,693 for the three months
ended September 30, 2007 from $969,528 for the corresponding period of 2006. The
overall increase was primarily due to the increase in sales of our CDMA data
products to a carrier customer in the United States, in the amount of
$4,616,675, or 53.4% of net sales, for the three months ended September 30,
2007, compared to $0 for the corresponding period of 2006. The increase was also
due to improved sales of our CDMA data products to customers in Caribbean and
South American countries, in the amount of $3,635,330, or 42.4% of net sales,
for the three months ended September 30, 2007, compared to $853,495 for the
corresponding period of 2006, an increase of $2,781,835, or 325.9%.
GROSS PROFIT
Gross profit increased by $1,663,144, or 566.3% to $1,956,822 for the three
months ended September 30, 2007 from $293,678 for the corresponding period of
2006. The overall increase was primarily due to the increase in sales of our
CDMA data products to a carrier customer in the United States, as well as
customers in Caribbean and South American countries, in the amount of $4,616,675
and $3,635,330 respectively, for the three months ended September 30, 2007,
compared to $0 and $853,495 for the corresponding period of 2006, an increase of
$4,616,675 and $2,781,835, respectively.
The gross profit in terms of net sales percentage was 22.6% for the three months
ended September 30, 2007 compared to 30.3% for the corresponding period of 2006.
The gross profit decrease in terms of net sales percentage was primarily due to
the increased sales to a carrier customer in the United Sates, which was 53.4%
of net sales and had a lower gross profit margin in terms of net sales
percentage of 18.8% compared to the average of 26.6% for the sales in Caribbean
and South American Countries. The overall net effect decreased the gross profit
in terms of net sales percentage compared to the corresponding period of 2006,
which had no sales to a carrier customer in the United Sates.
SELLING, GENERAL, AND ADMINISTRATIVE
Selling, general, and administrative expenses increased by $385,370, or 193.4%,
to $584,634 for the three months ended September 30, 2007 from $199,264 for the
corresponding period of 2006. 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 September 30, 2007, the Company had an
increase in sales commission expense of $203,400, an increase in marketing
expense of $5,392, an increase in travel expense of $3,451, an increase in
professional fees of $12,052, and an increase in payroll expense of $151,703,
compared to the corresponding period of 2006. Payroll expenses increased due to
the hiring new personnel and a bonus payment of $68,500, to share profits with
management and employees for the three months ended September 30, 2007.
OTHER INCOME (EXPENSE), NET
Other income increased by $30,918, or 582.3%, to $36,227 for the three months
ended September 30, 2007 from $5,309 for the corresponding period of 2006. The
overall increase is due to the interest income of $36,043 for the three months
ended September 30, 2007, compared to $5,284 for the corresponding period of
2006, an increase of $30,759.
- 18 -
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents increased by $1,002,753 to $3,480,346 as of September
30, 2007 compared to $2,477,593 as of June 30, 2007. The increase was primarily
from the net income of $1,383,102.
OPERATING ACTIVITIES
Net cash provided by operating activities was $1,006,588 and $248,171 for the
three months ended September 30, 2007, and 2006, respectively. The increase from
the prior period is primarily due to the increase in net income.
INVESTING ACTIVITIES
Net cash used in investing activities was $3,835 and $54,940 for the three
months ended September 30, 2007 and 2006, respectively, consisting of capital
expenditures.
FINANCING ACTIVITIES
Net cash provided by financing activities was $0 and $400,000 for the three
months ended September 30, 2007 and 2006, respectively, consisting of proceeds
from a future common stock issuance.
CONTRACTUAL OBLIGATIONS AND OTHER COMMITMENTS
The Company's material off-balance sheet contractual commitments are operating
lease obligations. The Company excluded these items from the balance sheet in
accordance with GAAP. The Company does not maintain any other off-balance sheet
arrangements, transactions, obligations or other relationships with
unconsolidated entities that would be expected to have a material current or
future effect upon its financial condition or results of operations. The
Company's principal future obligations and commitments at September 30, 2007,
include the following:
OPERATING 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 of common area costs. Rent expense related to the
operating lease was $15,534 and $14,702 for the three months ended September 30,
2007 and 2006, respectively.
The Company leases its corporate housing facility under a non-cancelable
operating lease that expires on March 31, 2008 for its vendors. Rent expense
related to the operating lease was $4,251 and $0 for the three months ended
September 30, 2007 and 2006, respectively.
The Company leases one automobile under an operating lease that expires on July
22, 2009. Lease expense was $1,613 and $1,956 for the three months ended
September 30, 2007 and 2006, respectively.
LITIGATION
The Company is involved in certain legal proceedings and claims which arise in
the normal course of business. Management does not believe that the outcome of
these matters will have any material adverse effect on its consolidated
financial condition.
- 19 -
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 sale 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 is for two years, commencing on January 5, 2005 with automatic annual
renewals. The Agreement may be terminated by either party by providing a written
notice to terminate at least sixty days prior to the end of the term.
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 had 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 risk, uncertainties, expenses and difficulties frequently
encountered by companies in the early stages of development and marketing. In
order to be successful in the market 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;
- 20 -
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 once 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.
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 three months ended September 30, 2007, three customers
accounted for 12.8%, 27.0%, and 53.4% of revenues.
- 21 -
If either 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.
THE COMPANY'S PRODUCT-TO-MARKET CHALLENGE IS CRITICAL
The Company's success depends on its ability to quickly enter the market and
establish an early mover advantage. The Company must implement an aggressive
sales and marketing campaign to solicit customers and strategic partners. Any
delay could seriously affect its ability to establish and exploit effectively an
early-to-market-strategy.
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 it to additional
risks unique to such international markets, including the following:
o Increased credit management risks and greater difficulties in
collecting accounts receivable;
o Unexpected changes in regulatory requirements, wireless communications
standards, exchange rates, trading policies, tariffs and other
barriers;
o Uncertainties of laws and enforcement relating to the protection of
intellectual property;
o Language barriers; and
o Potential adverse tax consequences.
Furthermore, if the Company is unable to further develop distribution channels
in countries in North and South America and Africa, it may not be able to grow
its international operations and its ability to increase the Company's revenue
will be negatively impacted.
THE COMPANY MAY INFRINGE THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS
The industry in which the Company operates has many participants that own, or
claim to own, proprietary intellectual property. In the past 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;
- 22 -
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.
THE COMPANY NEEDS 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 plans to seek additional financing
through the issuance of equity or convertible debt securities. The percentage
ownership of its stockholders will be reduced, stockholders may experience
additional dilution, and such securities may have rights, preferences and
privileges senior to those of the Company's Common and Preferred 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.
- 23 -
ITEM 3. 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.
However, the Company's Chief Executive Officer ("CEO") and Chief Financial
Officer ("CFO") have concluded that its disclosure controls and procedures
related to internal control over financial reporting were effective.
LIMITATIONS ON THE EFFECTIVENESS OF CONTROLS
The Company's management, including our CEO and CFO, does not expect that its
disclosure controls and internal controls will prevent all errors and all fraud.
A control system, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the control system
are met. Further, the design of a control system must reflect the fact that
there are resource constraints, and the benefits of controls must be considered
relative to their costs. Because of the inherent limitations in all control
systems, no controls can provide absolute assurance that all control issues and
instances of fraud, if any, within the Company have been detected. These
inherent limitations include the realities that judgments in decision-making can
be faulty, and that breakdowns can occur because of a simple error or mistake.
Additionally, controls can be circumvented by the individual acts of some
persons, by collusion of two or more people, or by management or board override
of the control.
The design of any system of controls also is based in part upon certain
assumptions about the likelihood of future events, and there can be no assurance
that any design will succeed in achieving its stated goals under all potential
future conditions; over time, controls may become inadequate because of changes
in conditions, or the degree of compliance with the policies or procedures may
deteriorate. Because of the inherent limitations in a cost-effective control
system, misstatements due to error or fraud may occur and not be detected.
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
On August 16, 2007, the Board of Directors approved each of the following
proposals and approved the mailing of Proxy Statements and an accompanying form
of Consent to the Company's shareholders for their approval of the transactions.
If the Company receives Consents from shareholders owning more than 50% of the
outstanding shares, the officers would be authorized to effect the transactions
set forth in the proposal.
- 24 -
The proposals to our shareholders are as follows:
1. The change of the state of incorporation from California to Nevada by
merger of the Company into a wholly owned Nevada subsidiary.
2. An amendment to the Articles of Incorporation to include a reverse stock
split of 1 share for each 70 shares held.
3. Establishing the authorized capital of the Company at 50,000,000 shares
of Common Stock.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
31.1 Certificate of Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certificate of Acting Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
32.1 Certificate of Chief Executive Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
32.2 Certificate of Acting Chief Financial Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
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SIGNATURES
Pursuant to the requirements of Section 13 of 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Franklin Wireless Corp.
By: /s/ OC Kim
------------------------
OC Kim
President and Acting Chief Financial
Officer
Dated: November 12, 2007
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