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, 2006
[ ] 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 as specified 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
------------------------------------------------------
(Address of Principal Executive Offices)
(858) 623-0000
---------------------------------------------------
Issuer's Telephone Number
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, without par value
---------------
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. YES [ ] NO [X]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). YES [ ] NO [X]
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
TITLE OF EACH CLASS OF COMMON STOCK OUTSTANDING AT November 10, 2006
----------------------------------- -------------------------------
Common Stock, no par value 897,040,050
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, 2006 and 2005 .................................. 3
Consolidated Balance Sheets at September 30, 2006 (Unaudited)
and June 30, 2006................................................... 4
Unaudited Consolidated Statements of Cash Flows for the Three Months
Ended September 30, 2006 and 2005................................... 5
Notes to Consolidated Financial Statements................................... 6
Item 2: Management's Discussion and Analysis or Plan of Operation.......................... 12
Item 3: Controls and Procedures............................................................ 16
PART II - OTHER INFORMATION
Item 1: Legal Proceedings.................................................................. 17
Item 2: Unregistered Sales of Equity Securities and Use of Proceeds........................ 17
Item 3: Defaults Upon Senior Securities.................................................... 17
Item 4: Submission of Matters to a Vote of Security Holders................................ 17
Item 5: Other Information.................................................................. 17
Item 6: Exhibits........................................................................... 17
Signatures......................................................................... 18
Certifications..................................................................... 19
FRANKLIN WIRELESS CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
-------------------------------
THREE MONTHS ENDED
SEPTEMBER 30,
-------------------------------
2006 2005
------------- -------------
Net sales $ 969,528 $ 79,890
Cost of goods sold 675,850 17,500
------------- -------------
Gross profit 293,678 62,390
------------- -------------
Operating expenses:
Selling, general, and administrative 199,264 103,734
Research and development -- 36,300
------------- -------------
Total operating expenses 199,264 140,034
------------- -------------
Income (Loss) from operations 94,414 (77,644)
Other income (expense):
Interest income 5,284 30
Other income 25 17
Other expenses -- (349)
------------- -------------
Total other income (expense), net 5,309 (302)
------------- -------------
Net income (loss) before income taxes 99,723 (77,946)
Provision for income taxes 800 --
------------- -------------
Net income (loss) $ 98,923 $ (77,946)
============= =============
Basic earnings (loss) per share $ 0.0001 $ (0.0001)
Diluted earnings (loss) per share $ 0.0001 $ (0.0001)
Weighted average common shares outstanding - basic 796,958,771 793,040,050
Weighted average common shares outstanding - diluted 796,958,771 793,040,050
See accompanying notes to unaudited consolidated financial statements.
3
FRANKLIN WIRELESS CORP.
CONSOLIDATED BALANCE SHEETS
----------------------------
(UNAUDITED)
SEPTEMBER 30, JUNE 30,
2006 2006
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 1,161,618 $ 568,387
Inventory 197,250 --
Accounts receivable 244,352 1,750
----------- -----------
Total current assets 1,603,220 570,137
Property and equipment, net 12,439 12,715
Intangible assets, net 138,974 104,195
Other assets 4,452 4,452
----------- -----------
TOTAL ASSETS $ 1,759,085 $ 691,499
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 573,531 $ 585
Accrued liabilities 186,685 190,968
Other current liability 400,000 --
Notes payable to stockholders, current portion 540,000 540,000
----------- -----------
Total current liabilities 1,700,216 731,553
----------- -----------
STOCKHOLDERS' EQUITY
Common stock, without par value, 900,000,000 shares authorized, -- --
and Preferred Stock, without par value, 10,000,000 shares
authorized; Common stock issued and outstanding - 882,040,050 as
of September 30, 2006 and June 30, 2006, and no Preferred stock
issued and outstanding
Additional paid-in capital 4,629,393 4,629,393
Stock subscription receivable (17,395) (17,395)
Accumulated deficit (4,553,129) (4,652,052)
----------- -----------
Total stockholders' equity (deficit) 58,869 (40,054)
----------- -----------
Total liabilities and stockholders' equity $ 1,759,085 $ 691,499
=========== ===========
See accompanying notes to unaudited consolidated financial statements.
4
FRANKLIN WIRELESS CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
----------------------------
THREE MONTHS ENDED
SEPTEMBER 30,
----------------------------
2006 2005
----------- -----------
CASH FLOWS FROM OPERATIONS ACTIVITIES:
Net Income (loss) $ 98,923 $ (77,946)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation 1,436 1,550
Amortization of intangible assets 19,001 11,250
Increase (decrease) in cash due to change in:
Accounts receivable (242,602) (800)
Inventory (197,250)
Intangible assets (53,780) --
Accounts payable 572,946 80,001
Accrued liabilities (4,283) 10,250
----------- -----------
Net cash provided by operating activities 194,391 24,305
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (1,160) --
----------- -----------
Net cash used in investing activities (1,160) --
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment received for future stock issuance 400,000 --
----------- -----------
Net cash provided by financing activities 400,000 --
----------- -----------
Net increase in cash and cash equivalents 593,231 24,305
Cash and cash equivalents, beginning of period 568,387 39,542
----------- -----------
Cash and cash equivalents, end of period $ 1,161,618 $ 63,847
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the year for:
Interest $ -- $ --
Income taxes $ -- $ --
See accompanying notes to unaudited consolidated financial statements.
5
FRANKLIN WIRELESS CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - NATURE OF OPERATIONS
Franklin Wireless Corp. ("Franklin" or the "Company") designs, builds, and
markets broadband high speed data communication products such as 3rd generation
("3G") wireless modules and modems. Franklin is dedicated to serving the global
wireless community by becoming a leading developer/marketer of wireless
communications devices and enabling technologies, as well as an applications
provider catering to the dynamic needs of its customers, global wireless
carriers In addition, service for its technology is provided to vertical
application companies.
The Company's products are marketed through Original Equipment Manufacturers
("OEMs") and distributors, as well as directly to operators and end users. The
Company's customers are located primarily in the United States, Canada, South
America, Asia, and parts of Europe in a wide range of industries including
cellular operators, government, PC maker, and application integrator. In
summary, the Company's products are marketed to cellular operators for end-users
as well as computer/handheld computing industry, automotive industry, telemetry,
other vertical markets.
NOTE 2 - BASIS OF PRESENTATION
The consolidated balance sheet is unaudited as of September 30, 2006 and audited
as of June 30, 2006 and the consolidated statements of income and the
consolidated statements of cash flows are unaudited for the three months ended
September 30, 2006 and 2005. The consolidated financial statements include the
accounts of Franklin and ARG, after eliminating inter-company balances and
transactions. The interim financial statements reflect all adjustments,
consisting only of normal recurring adjustments, which are, in the opinion of
the Company, necessary for a fair presentation of the results for the interim
periods presented. The financial information included in this Form 10-QSB should
be read in conjunction with the Company's consolidated financial statements and
related notes thereto included in the Form 10-KSB for the year ended June 30,
2006. The results of operations for the three months ended September 30, 2006
are not necessarily indicative of the results to be expected for the full year
ending June 30, 2007.
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION AND SEGMENT REPORTING
The accompanying consolidated financial statements include the accounts of
Franklin and ARG. ARG is a wholly owned subsidiary in South Korea. All
inter-company balances and transactions have been eliminated in consolidation.
The Company has two reportable segments as defined by SFAS No. 131, Disclosure
About Segments of an Enterprise and Related Information. The Company's
subsidiary located in South Korea, ARG, was not active and in operation during
the three months ended September 30, 2006 and 2005. Furthermore, all of its
subsidiary's assets were written off during the fiscal year 2004 as the
operation was shut-down during the period. As a result, the Company's
consolidated financial statements include $540,000 of debt from ARG financial
statements. During the latter part of 2003, the Company discontinued its
financial support and operations of ARG but kept the business as an inactive
subsidiary for future use. The subsidiary will be used for supporting
manufacturing and sourcing new product and business in the future.
6
USE OF ESTIMATES
The preparation of financial statements requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
periods. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
For purposes of the statements of cash flows, the Company considers all highly
liquid investments purchased with original maturities of three months or less to
be cash equivalents.
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.
SHIPPING AND HANDLING COSTS
Shipping and handling costs for purchasing are included in selling, general, and
administrative expenses. Shipping and handling costs incurred were $1,549 and $0
for the three months ended September 30, 2006 and 2005, respectively.
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:
7
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. The Company provides for amortization using the
straight-line method over the license periods as follows:
GSM/GPRS license 5 years
Ezi text license 5 years
USB Modem certifications 3 years
IMPAIRMENT OF LONG-LIVED ASSETS
The Company, in accordance with Statement of Financial Accounting Standards No.
144, "Accounting for Impairment on Disposal of Long-lived Assets", reviews for
impairment of long-lived assets and certain identifiable intangibles whenever
events or circumstances indicate that the carrying amount of the asset may not
be recoverable. An impairment loss would be recognized when estimated future
cash flows expected to result from the use of the asset and its eventual
disposition is less than its carrying amount. As of September 30, 2006, the
Company is not aware of any events or changes in circumstances that would
indicate that the long-lived assets are impaired.
WARRANTIES
The Company does not provide any warranties on its products. However, the
manufacturer provides limited warranties up to one year from the date of the
sale to the Company's customers. These products are shipped directly from the
manufacturer to the customers. As a result, the Company is not required to and
has not accrued any warranty expenses during the three months ended September
30, 2006 and 2005.
ADVERTISING AND MARKETING COSTS
The Company expenses the costs of advertising and marketing as incurred. The
Company incurred no advertising and marketing expenses during the three months
ended September 30, 2006 and 2005.
INCOME TAXES
No provision for income taxes for the years ended June 30, 2006 and 2005 is
required, except for minimum state taxes, since the Company incurred losses
during such years. The Company accounts for income taxes under the asset and
liability method of accounting. Under this method, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date. A valuation allowance is required when it is less likely than
not that the Company will be able to realize all or a portion of its deferred
tax assets.
8
The significant component of the deferred tax asset (liability) at September 30,
2006 and June 30, 2006 was net operating loss carry-forward in the amount of
approximately $916,000 and $955,000, respectively, based on statutory tax rate
or effective tax rate of 39%. The Company had available approximately $2,349,626
and $2,449,000 unused net operating loss carry-forwards at September 30, 2006
and June 30, 2006, respectively, that may be applied against future taxable
income. SFAS No. 109 requires a valuation allowance to be recorded when it is
more likely than not that some or all of the deferred tax assets will not be
realized. At September 30, 2006 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.
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.
CONCENTRATIONS OF CREDIT RISK
The Company provides broadband high speed data communication products such as 3G
wireless modules and modems and the Company's products are marketed through
Original Equipment Manufacturers ("OEMs") and distributors, as well as directly
to operators and end users. As a result, the Company's sales and trade
receivables are concentrated principally in the wireless industry.
The Company had substantial sales to three customers in the total amount of
$762,700 or 78.7% of total sales and had related accounts receivables in the
total amount of $160,885 or 65.8% of total accounts receivables during the three
months ended and as of September 30, 2006.
NOTE 4 - PROPERTY AND EQUIPMENT
Property and equipment at September 30, 2006 and June 30, 2006 consisted of the
following:
(UNAUDITED)
------------- -------------
SEPTEMBER 30, JUNE 30,
2006 2006
------------- -------------
Computers and software $ 30,640 $ 30,640
Furniture and fixtures 9,873 8,713
------------- -------------
40,513 39,353
Less accumulated depreciation (28,074) (26,638)
------------- -------------
TOTAL $ 12,439 $ 12,715
============= =============
NOTE 5 - INVESTMENT IN SUBSIDIARY
9
In April 2002, the Company invested $384,615 in its wholly owned subsidiary in
South Korea for R&D and manufacturing support. Since August 2003 and as of
September 30, 2006 and June 30, 2006, ARG has been inactive.
NOTE 6 - INTANGIBLE ASSETS
The Company purchased licenses to design phone and data communication products.
Below are the details for the licenses.
(UNAUDITED)
------------- -------------
SEPTEMBER 30, JUNE 30,
2006 2006
------------- -------------
GSM software license $ 200,000 $ 200,000
Text input methods license 25,000 25,000
Certifications: CDG test license 109,280 55,500
------------- -------------
334,280 280,500
Less accumulated amortization (195,306) (176,305)
------------- -------------
TOTAL $ 138,974 $ 104,195
============= =============
Amortization expense associated with intangible assets was $19,001 and $11,250
for the three months ended September 30, 2006 and 2005, respectively.
NOTE 7 - OTHER ASSETS
Other assets as of September 30, 2006 and June 30, 2006 consisted of facility
lease and utility deposits.
NOTE 8 - OTHER CURRENT LIABILITY
During the three months ended September 30, 2006, the Company received $400,000
as an advance from an unaffiliated company for a future Common Stock issuance.
In consideration for this advance, on October 18, 2006, the Company issued
15,000,000 shares of its Common Stock, at $0.009 per share, for a total of
$135,000. The Company plans to issue an additional 29,000,000 shares of its
Common Stock, also at $0.009 per share, for a total of $265,000, during the
three months ended December 31, 2006, to complete this transaction.
NOTE 9 - NOTES PAYABLE TO STOCKHOLDERS
On August 20, 2002, the Company's wholly owned subsidiary, ARG, issued a
promissory note to a Company stockholder in the amount of $550,000, bearing
interest at 10% per annum, due on March 20, 2004. The Company and the
stockholder agreed to change the promissory note to a convertible promissory
note during the year ended June 30, 2004. The note is convertible to the
Company's Common Stock, at the option of the holder, at a conversion price equal
to the fair value of the Company's common stock on the date of issuance, or
$0.005. As of June 30, 2006, this note was not converted to the Company's common
stock and $10,000 was paid during the year ended June 30, 2006.
10
In accordance with U.S. generally accepted accounting principles, all
non-interest bearing notes must be discounted using the Company's average
borrowing rate. The balance was deemed immaterial and did not record the
discounted amount as of September 30, 2006 and June 30, 2006.
NOTE 10 - ACCRUED LIABILITIES
Accrued liabilities at September 30, 2006 and June 30, 2006 consisted of the
following:
(UNAUDITED)
------------ ------------
SEPTEMBER 30, JUNE 30,
2006 2006
------------ ------------
Accrued Salaries $ 125,617 $ 131,750
Accrued professional fees 56,217 52,840
Other accrued liabilities 4,851 6,378
------------ ------------
TOTAL $ 186,685 $ 190,968
============ ============
NOTE 11 - COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company leases its administrative facilities under a non-cancelable
operating lease that expire on June 30, 2008. In addition to the minimum annual
rental commitments, the leases provide for periodic cost of living increases in
the base rent and payment by the Company of common area costs.
LITIGATION
During June 2005, the Company's landlord filed a suit against the Company
alleging that the Company defaulted under the terms and conditions of the
Company's lease agreement when the Company failed to pay for its facility lease
valued at $18,221. The parties have settled at $9,308, to be paid in twelve
equal monthly installments on December 6, 2005.
In addition, the Company is involved in certain legal proceedings and claims
which arise in the normal course of business. Management does not believe that
the outcome of these matters will have any material adverse effect on the
Company's consolidated financial condition.
NOTE 12 - EARNINGS PER SHARE
Basic earnings per share ("EPS") excludes dilution and is computed by dividing
net income or loss attributable to common shareholders by the weighted-average
number of common shares outstanding for the period. As of September 30, 2006,
the Company did not have any dilutive common stock shares.
NOTE 13 - SUBSEQUENT EVENTS
STOCK ISSUANCE
11
During the three months ended September 30, 2006, the Company received $400,000
as an advance from an unaffiliated company for a future Common Stock issuance.
In consideration for this advance, on October 18, 2006, the Company issued
15,000,000 shares of its Common Stock, at $0.009 per share, for a total of
$135,000. The Company plans to issue an additional 29,000,000 shares of its
Common Stock, also at $0.009 per share, for a total of $265,000, during the
three months ended December 31, 2006, to complete this transaction.
NOTE 14 - RECENT ACCOUNTING PRONOUNCEMENTS
In July 2006, the FASB issued Final Interpretation No. 48 ("FIN No. 48"),
"Accounting for Uncertainty in Income Taxes," an interpretation of SFAS No. 109.
FIN No. 48 clarifies the accounting for income taxes by prescribing the minimum
recognition threshold a tax position is required to meet before being recognized
in the financial statements. FIN No. 48 also provides guidance on derecognition,
measurement, classification, interest and penalties, accounting in interim
periods, disclosure and transition. In addition, FIN No. 48 excludes income
taxes from the scope of SFAS No. 5, "Accounting for Contingencies." FIN No. 48
is effective for fiscal years beginning after December 15, 2006. Differences
between the amounts recognized in the consolidated balance sheets prior to the
adoption of FIN No. 48 and the amounts reported after adoption will be accounted
for as a cumulative-effect adjustment recorded to the beginning balance of
retained earnings. The Company is currently evaluating the effect that the
adoption of FIN No. 48 will have on its results of operations and financial
position.
The Financial Accounting Standards Board ("FASB") issued Statement of Financial
Accounting Standards No. 155, "Accounting for Certain Hybrid Financial
Instruments" ("SFAS No. 155") in February 2006. SFAS No. 155 amends SFAS No. 133
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133")
and SFAS No. 140 "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" ("SFAS No. 140") and addresses the application
of SFAS No. 133 to beneficial interests in securitized financial assets. SFAS
No. 155 establishes a requirement to evaluate interests in securitized financial
assets to identify interests that are freestanding derivatives or that are
hybrid financial instruments that contain an embedded derivative requiring
bifurcation. Additionally, SFAS No. 155 permits fair value measurement for any
hybrid financial instrument that contains an embedded derivative that otherwise
would require bifurcation. SFAS No. 155 is effective for financial instruments
acquired or issued after January 1, 2007. The adoption of SFAS No. 155 is not
expected to have a material effect on the Company's consolidated financial
position and results of operations.
In May 2005, FASB issued Statement of the Financial Accounting Standards No.
154, "Accounting Changes and Error Corrections - a replacement of APB Opinion
No. 20 and FASB Statement No. 3." This Statement requires the retrospective
application to prior periods' financial statements of changes in accounting
principle, unless it is impracticable to determine either the period-specific
effects or the cumulative effect of the change.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion should be read in conjunction with the consolidated
financial statements and notes thereto included in Item 1 of this Report and the
financial statements and notes thereto and Management's Discussion and Analysis
or Plan of Operation contained in the Company's Annual Report on Form 10-KSB for
the year ended June 30, 2006.
12
BUSINESS OVERVIEW
Franklin Wireless Corp. ("Franklin" or the "Company") designs, builds, and
markets broadband high speed data communication products such as 3G wireless
modules and modems. Franklin is dedicated to serving the global wireless
community by becoming a leading developer/marketer of wireless communications
devices and enabling technologies, as well as an applications provider catering
to the dynamic needs of its customers, global wireless carriers In addition,
service for its technology is provided to vertical application companies. .
The Company's products are marketed through Original Equipment Manufacturers
("OEMs") and distributors, as well as directly to operators and end users. The
Company's customers are located primarily in the United States, Canada, South
America, Asia, and parts of Europe in a wide range of industries including
cellular operators, government, PC maker, and application integrator. In
summary, the Company's products are marketed to cellular operators for end-users
as well as computer/handheld computing industry, automotive industry, telemetry,
other vertical markets.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company believes the following critical accounting policies affect the
Company's more significant judgments and estimates used in the preparation of
the financial statements.
USE OF ESTIMATES
The preparation of financial statements requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
periods. Actual results could differ from those estimates.
REVENUE RECOGNITION
The Company recognizes revenue when persuasive evidence of an arrangement
exists, the price is fixed or determinable, collection is reasonably assured and
delivery of products has occurred or services have been rendered. Accordingly,
the Company recognizes revenues from product sales upon shipment of the product
to the customers. The Company does not allow the right of return on product
sales but warrant the products over one year from the shipment. Allowance for
doubtful accounts is estimated based on estimates of losses related to customer
receivable balances. Estimates are developed by using standard quantitative
measures based on historical losses, adjusting for current economic conditions
and, in some cases, evaluating specific customer accounts for risk of loss. The
establishment of reserves requires the use of judgment and assumptions regarding
the potential for losses on receivable balances. Though the Company considers
these balances adequate and proper, changes in economic conditions in specific
markets in which the Company operates could have a material effect on reserve
balances required.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company, in accordance with Statement of Financial Accounting Standards No.
144, "Accounting for Impairment on Disposal of Long-lived Assets", reviews for
impairment of long-lived assets and certain identifiable intangibles whenever
events or circumstances indicate that the carrying amount of the asset may not
be recoverable. An impairment loss would be recognized when estimated future
cash flows expected to result from the use of the asset and its eventual
disposition is less than its carrying amount. As of September 30, 2006, the
Company is not aware of any events or changes in circumstances that would
indicate that the long-lived assets are impaired.
13
INCOME TAXES
The Company accounts for income taxes under the asset and liability method of
accounting. Under this method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date. A valuation
allowance is required when it is less likely than not that the Company will be
able to realize all or a portion of its deferred tax assets.
RESULTS OF OPERATIONS
The following table sets forth, for the three months ended September 30, 2006,
and 2005, selected consolidated statements of operations data expressed as a
percentage of sales:
THREE MONTHS ENDED
SEPTEMBER 30,
--------------------
2006 2005
-------- --------
Net Sales 100.0% 100.0%
Cost of goods sold 69.7% 21.9%
-------- --------
Gross profit 30.3% 78.1%
-------- --------
Operating expenses:
Selling, general and administrative expenses 20.6% 129.9%
Research and development - 45.5%
-------- --------
Total operating expenses 20.6% 175.3%
-------- --------
Income (Loss) from operations 9.7% (97.2%)
Other income (expense), net 0.6% (0.4%)
-------- --------
Net income (loss) before income taxes 10.3% (97.6%)
Provision for income taxes 0.1% -
-------- --------
Net income (loss) 10.2% (97.6%)
======== ========
The results of the interim periods are not necessarily indicative of results for
the entire fiscal year
COMPARISON OF FIRST QUARTER 2006 TO 2005
NET SALES - Net sales increased by $889,638 or 1,113.6%, to $969,528 for the
three months ended September 30, 2006 from $79,890 for the corresponding period
of 2005. The overall increase is primarily due to an increase in sales of modem
and module products, resulting from increased demand.
GROSS PROFIT - Gross profit decreased in terms of net sales percentage as the
percentage of gross profit, which was 30.3% for the three months ended September
30, 2006, compared to 78.1% for the corresponding period of 2005. The gross
profit percentage decrease can be attributed to the increase in cost of goods
sold due to the increase in sales of modem and module products for the three
months ended September 30, 2006, while having no cost of sales, which was due to
the service sales, for the corresponding period of 2005.
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SELLING, GENERAL, AND ADMINISTRATIVE - Selling, general, and administrative
expenses increased by $95,530, or 92.1%, to $199,264 for the three months ended
September 30, 2006 from $103,734 for the corresponding period of 2005. The
increase can be attributed to the increased sales/marketing efforts, increased
cost of travel expenses, payroll, and other general and administrative
infrastructure.
OTHER INCOME (EXPENSE), NET - The Company had income of $5,309 and expense of
$302 during the three months ended September 30, 2006 and 2005, respectively.
The change is due to interest income of $5,284 during the three months ended
September 30, 2006 compared to interest income of $30 for the corresponding
period of 2005.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents increased by $593,231, to $1,161,618 as of September
30, 2006 compared to $568,387 as of June 30, 2006. The increase was primarily
from the advance from a private investor, $400,000, that this was issued in
October 18, 2006 and the increase in account payable for purchasing the
inventory for sales, and the increase due to the net profit.
The Company believes that anticipated working capital to be generated by future
operations will be sufficient to support the Company's working capital
requirements through June 30, 2007.
OPERATING ACTIVITIES - Net cash provided by operating activities amounted to
$194,391 and $24,305 for the three months ended September 30, 2006 and 2005,
respectively. The increase from the prior period relates mainly to increase in
net income and accounts payable for the inventory purchase due to the increase
in sales of module and modem products.
INVESTING ACTIVITIES - Net cash used in investing activities totaled $1,160 and
$0 for the three months ended September 30, 2006 and 2005, respectively,
consisting of capital expenditures.
FINANCING ACTIVITIES - Net cash provided by financing activities for the three
months ended September 30, 2006 and 2005 totaled $400,000 and $0, respectively,
which consisted of proceeds from its future common stock issuance.
CONTRACTUAL OBLIGATIONS AND OTHER COMMITMENTS
The Company's principal future obligations and commitments as of September 30,
2006, include the following:
LEASES
The Company leases its administrative facilities under a non-cancelable
operating lease that expires on June 30, 2008. In addition to the
minimum annual rental commitments, the lease provides for periodic cost
of living increases in the base rent and payment by the Company of
common area costs.
LITIGATION
During June 2005, the Company's landlord filed a suit against the
Company alleging that the Company defaulted under the terms and
conditions of the Company's lease agreement when the Company failed to
pay for its facility lease valued at $18,221. The parties have settled
at $9,308, to be paid in twelve equal monthly installments commencing
on December 6, 2005.
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In addition, the Company is involved in certain legal proceedings and
claims which arise in the normal course of business. Management does
not believe that the outcome of these matters will have a material
adverse effect on the Company's consolidated financial condition.
ITEM 3. CONTROLS AND PROCEDURES
At the end of the period covered by this Form 10-QSB, the Company carried out an
evaluation, under the supervision and with the participation of members of our
management, including our Chief Executive Officer and Chief Financial Officer,
of the effectiveness of the design and operation of our company's disclosure
controls and procedures pursuant to Rule 13a-15(b) of the U.S. Securities
Exchange Act of 1934 (the "Exchange Act"). Based on this evaluation, our Chief
Executive Officer and Chief Financial Officer concluded that, as of September
30, 2006, our disclosure controls and procedures, related to internal control
over financial reporting and the recording of certain equity transactions, were
not effective in light of the material weaknesses described below.
1. INADEQUATE FINANCIAL STATEMENT PREPARATION AND REVIEW PROCEDURES - We
do not have adequate procedures and controls to ensure that accurate
financial statements can be prepared and reviewed on a timely basis,
including insufficient
a. Review and supervision within the accounting and finance departments;
b. Underlying accurate data to ensure that balances are properly
summarized and posted to the general ledger; and c. Technical
accounting resources.
2. INADEQUATE SEGREGATION OF DUTIES - We do not have adequate procedures
and controls in place to ensure proper segregation of duties within the
accounting department. As a result, adjustments in the financial
statements could occur and not be prevented or detected by our controls
in a timely manner.
3. INADEQUATE TECHNICAL ACCOUNTING EXPERTISE - We lacked the necessary
depth of personnel with adequate technical accounting expertise to
ensure the preparation of interim and annual financial statements in
accordance with GAAP. This material weakness represented more than a
remote likelihood that a material misstatement of our interim financial
statements for the three months ended September 30, 2006 would not have
been prevented or detected.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projection of any evaluation of
effectiveness to future periods is subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
During the three months ended September 30, 2006, the Company received $400,000
as a subscription for 44,000,000 shares of Common Stock, at $.009 per share,
from an unaffiliated investor. On October 18, 2006, the Company issued
15,000,000 shares of its common stock pursuant to that subscription. The Company
plans to issue an additional 29,000,000 shares of its common stock, also at
$0.009 per share, during the three months ended December 31, 2006, to complete
this transaction.
The Company believes the issuance of Common Stock was exempt from the
registration requirements of the Securities Act of 1933, as amended, by reason
of Section 4(2) thereof.
The proceeds of the transaction will be utilized for general working capital
purposes.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
31.1 Certificate of Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
31.2 Certificate of Acting Chief Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
32.1 Certificate of Chief Executive Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
32.2 Certificate of Acting Chief Financial Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
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SIGNATURES
Pursuant to the requirements of Section 13 of 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Franklin Wireless Corp.
By: /s/ OC Kim
--------------------------------------------
OC Kim
President and Acting Chief Financial Officer
Dated: November 10, 2006
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