UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended: December 31, 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.
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(Exact name of small business issuer as specified in its charter)
California 95-3733534
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9823 Pacific Heights Blvd., Suite J, San Diego, California 92121
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(Address of Principal Executive Offices)
(858) 623-0000
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(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 February 1, 2007
----------------------------------- -------------------------------
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
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Item 1: Financial Statements
Consolidated Statements of Operations for the Three Months
and Six Months Ended December 31, 2006 and 2005 (Unaudited).. 3
Consolidated Balance Sheets at December 31, 2006 (Unaudited)
and June 30, 2006 ........................................... 4
Consolidated Statements of Cash Flows for the Six Months
Ended December 31, 2006 and 2005 (Unaudited)................. 5
Notes to Unaudited 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....................................................... 18
Signatures..................................................... 19
Certifications................................................. 20
-2-
FRANKLIN WIRELESS CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
-------------------------------- --------------------------------
2006 2005 2006 2005
-------------- -------------- -------------- --------------
Net sales $ 1,800,622 $ 80,500 $ 2,770,150 $ 160,390
Cost of goods sold 1,318,750 42,700 1,994,600 60,200
-------------- -------------- -------------- --------------
Gross profit 481,872 37,800 775,550 100,190
-------------- -------------- -------------- --------------
Operating expenses:
Selling, general, and administrative 275,450 181,638 474,714 285,372
Research and development - - - 36,300
-------------- -------------- -------------- --------------
Total operating expenses 275,450 181,638 474,714 321,672
-------------- -------------- -------------- --------------
Income (Loss) from operations 206,422 (143,838) 300,836 (221,482)
Other income (expense):
Interest income 6,944 245 12,229 275
Other income 293 14,925 318 14,942
Other expenses - (356) - (705)
-------------- -------------- -------------- --------------
Total other income (expense), net 7,237 14,814 12,547 14,512
-------------- -------------- -------------- --------------
Net income (loss) before income taxes 213,659 (129,024) 313,383 (206,970)
Provision for income taxes - 800 800 800
-------------- -------------- -------------- --------------
Net income (loss) $ 213,659 $ (129,824) $ 312,583 $ (207,770)
============== ============== ============== ==============
Basic earnings (loss) per share $ 0.0002 $ (0.0002) $ 0.0004 $ (0.0003)
Diluted earnings (loss) per share $ 0.0002 $ (0.0002) $ 0.0004 $ (0.0003)
Weighted average common shares
outstanding - basic 894,237,852 816,116,973 888,105,624 804,515,460
Weighted average common shares
outstanding - diluted 894,237,852 816,116,973 888,105,624 804,515,460
See accompanying notes to unaudited consolidated financial statements.
-3-
FRANKLIN WIRELESS CORP.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
DECEMBER 31, JUNE 30,
2006 2006
-------------- --------------
ASSETS
Current assets:
Cash and cash equivalents $ 1,014,689 $ 568,387
Inventory 307,670 -
Accounts receivable 114,135 1,750
-------------- --------------
Total current assets 1,436,494 570,137
Property and equipment, net 12,444 12,715
Intangible assets, net 118,617 104,195
Other assets 4,452 4,452
-------------- --------------
TOTAL ASSETS $ 1,572,007 $ 691,499
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 213,240 $ 585
Accrued liabilities 146,240 190,968
Other current liability 263,636 -
Notes payable to stockholders, current portion 540,000 540,000
-------------- --------------
Total current liabilities 1,163,116 731,553
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STOCKHOLDERS' EQUITY
Common stock, no par value, authorized 900,000,000 shares and
Preferred stock, no par value, authorized 10,000,000 shares;
Common stock issued and outstanding - 897,040,050 and
882,040,050 as of December 31, 2006 and June 30, 2006,
respectively, and no Preferred stock issued and outstanding - -
Additional paid-in capital 4,765,756 4,629,393
Stock subscription receivable (17,394) (17,395)
Accumulated deficit (4,339,471) (4,652,052)
-------------- --------------
Total stockholders' equity (deficit) 408,891 (40,054)
-------------- --------------
Total liabilities and stockholders' equity $ 1,572,007 $ 691,499
============== ==============
See accompanying notes to unaudited consolidated financial statements.
-4-
FRANKLIN WIRELESS CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED
DECEMBER 31,
--------------------------------
2006 2005
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (loss) $ 312,583 $ (207,770)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation 2,844 3,100
Amortization of intangible assets 39,358 22,500
Increase (decrease) in cash due to change in:
Accounts receivable (112,385) (10,250)
Inventory (307,670) -
Accounts payable 212,654 13,075
Accrued liabilities (44,729) 44,434
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Net cash provided (used) by operating activities 102,655 (134,911)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (2,573) -
Purchases of intangible assets (53,780) (1,837)
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Net cash used in investing activities (56,353) (1,837)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Payment received for future stock issuance 263,636 (30,000)
Proceeds from issuance of common stock 136,364 335,000
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Net cash provided by financing activities 400,000 305,000
-------------- --------------
Net increase in cash and cash equivalents 446,302 168,252
Cash and cash equivalents, beginning of period 568,387 39,542
-------------- --------------
Cash and cash equivalents, end of period $ 1,014,689 $ 207,794
============== ==============
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 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 December 31, 2006 and audited
as of June 30, 2006. The consolidated statements of income are unaudited for the
three months and six months ended December 31, 2006 and 2005, and the
consolidated statements of cash flows are unaudited for the six months ended
December 31, 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 and six months ended
December 31, 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 that was used
to design the cellular phone. All inter-company balances and transactions have
been eliminated in consolidation.
The Company has two reportable segments as defined by SFAS No. 131, Disclosure
About Segments of an Enterprise and Related Information. The Company's
subsidiary located in South Korea, ARG, was not active and in operation during
the three months and six months ended December 31, 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.
-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
All outbound shipping and handling costs related to sales are included in
selling, general, and administrative expense. Shipping and handling costs
related to sales was $0 and $0 for the three months ended December 31, 2006 and
2005, respectively, and $0 and $0 for the six months ended December 31, 2006 due
to FOB (free on board) shipping terms.
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.
-7-
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. 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 December 31, 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 was not required to and
does not accrue any warranty expenses during the three months and six months
ended December 31, 2006 and 2005.
ADVERTISING AND MARKETING COSTS
The Company expenses the costs of advertising and marketing as incurred. The
Company incurred $840.09 and $840.09 of advertising expenses and $25,062 and
$30,168 of marketing expenses during the three months and six months ended
December 31, 2006, respectively, and $1,685 and $1,954 of marketing expenses
during the three months and six months ended December 31, 2005 respectively.
-8-
INCOME TAXES
No provision for income taxes for the years ended June 30, 2006 and 2005 was
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.
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 during the three months ended December 31,
2006 to three customers in the total amount of $1,605,000 or 89.05% of total
sales and had related accounts receivables in the total amount of $112,500 or
98.57% of total accounts receivables. The Company had substantial sales during
the six months ended December 31, 2006 to three customers in the total amount of
$2,411,495 or 87% of total sales and had related accounts receivables in the
total amount of $112,500 or 98.57% of total accounts receivables.
The Company purchases its inventories from one vendor. The Company purchased
approximately $1,427,500 and $2,300,000 for the three months and six months
ended December 31, 2006, respectively, and had related accounts payable of $585
and $210,000 as of June 30, 2006 and December 31, 2006.
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 - PROPERTY AND EQUIPMENT
Property and equipment at December 31, 2006 and June 30, 2006 consisted of the
following:
(UNAUDITED)
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DECEMBER 31, JUNE 30,
2006 2006
-------------- --------------
Computers and software $ 32,053 $ 30,640
Furniture and fixtures 9,873 8,713
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$ 41,926 39,353
Less accumulated depreciation (29,482) (26,638)
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TOTAL $ 12,444 $ 12,715
============== ==============
-9-
NOTE 5 - INVESTMENT IN SUBSIDIARY
In April 2002, the Company invested $384,615 in its wholly owned subsidiary in
South Korea for R&D and manufacturing support. Since August 2003 and as of
December 31, 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)
-------------- --------------
DECEMBER 31, 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
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334,280 280,500
Less accumulated amortization (215,663) (176,305)
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TOTAL $ 118,617 $ 104,195
============== ==============
Amortization expense associated with intangible assets was $20,357 and $11,250
for the three months ended December 31, 2006 and 2005, respectively, and $39,358
and $22,500 for the six months ended December 31, 2006 and 2005, respectively,
NOTE 7 - OTHER ASSETS
Other assets as of December 31, 2006 and June 30, 2006 consisted of facility
lease and utility deposits.
NOTE 8 - OTHER CURRENT LIABILITY
The Company received $400,000 in advance from an unaffiliated company for future
common stock share issuance during the six months ended December 31, 2006. On
October 18, 2006, the Company issued 15,000,000 shares of its common stock at
$0.0091 per share approximately, total valued at $136,364. The Company plans to
issue additional 29,000,000 shares of its common stock at $0.0091 per share
approximately, total valued at $263,636, during the three months ended March 31,
2007.
NOTE 9 - NOTES PAYABLE TO STOCKHOLDERS
On August 20, 2002, the Company's wholly owned subsidiary, ARG issued a
promissory note to the Company's stockholder in the amount of $550,000 (which
includes $50,000 of 10% interest) due on March 20, 2004. The Company and the
stockholder agreed to change the promissory note to a convertible promissory
note in the amounts of $550,000 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 and December 31, 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-
NOTE 10 - ACCRUED LIABILITIES
Accrued liabilities at December 31, 2006 and June 30, 2006 consisted of the
following:
(UNAUDITED)
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DECEMBER 31, JUNE 30,
2006 2006
-------------- --------------
Accrued Salaries $ 111,418 $ 131,750
Accrued professional fees 31,217 52,840
Other accrued liabilities 3,605 6,378
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TOTAL $ 146,240 $ 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
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 December 31, 2006, the
Company did not have any dilutive common stock shares.
NOTE 13 - SUBSEQUENT EVENTS
The Company received $400,000 in advance from an unaffiliated company for future
a Common Stock issuance during the six months ended December 31, 2006. On
October 18, 2006, the Company issued 15,000,000 shares of its Common Stock at
$0.0091 per share, for a value of $136,364, to partially complete this
transaction. The Company plans to issue the remaining 29,000,000 shares, also at
$0.0091 per share, with a valuation of $263,636, during the three months ended
March 31, 2007.
On September 11, 2006, the Board of Directors approved an increase in the
authorized shares of Common Stock to 1,200,000,000 shares from 900,000,000
shares, subject to shareholder approval.
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.
-11-
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 OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
The following discussion should be read in conjunction with the consolidated
financial statements and notes thereto included in Item 1 of this filing and the
financial statements and notes thereto, and Management's Discussion and Analysis
or Plan of Operation contained in the Company's Form 10-KSB for the year ended
June 30, 2006.
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, 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.
-12-
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 December 31, 2006, 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.
-13-
RESULTS OF OPERATIONS
The following table sets forth, for the three months and six months ended
December 31, 2006, and 2005, selected
consolidated statements of operations data expressed as a percentage of sales:
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
-------------------------- --------------------------
2006 2005 2006 2005
------------ ------------ ------------ ------------
Net Sales 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 73.2% 53.0% 72.0% 37.5%
------------ ------------ ------------ ------------
Gross profit 26.8% 47.0% 28.0% 62.5%
------------ ------------ ------------ ------------
Operating expenses:
Selling, general and administrative expenses 15.3% 225.6% 17.1% 177.9%
Research and development - - - 22.6%
------------ ------------ ------------ ------------
Total operating expenses 15.3% 225.6% 17.1% 200.5%
------------ ------------ ------------ ------------
Income (Loss) from operations 11.5% (178.6%) 10.9% (138.0%)
Other income (expense), net 0.4% 18.4% 0.4% 9.0%
------------ ------------ ------------ ------------
Net income (loss) before income taxes 11.9% (160.2%) 11.3% (129.0%)
Provision for income taxes - (1.0%) - (0.5%)
------------ ------------ ------------ ------------
Net income (loss) 11.9% (161.2%) 11.3% (129.5%)
============ ============ ============ ============
The results of the interim periods are not necessarily indicative of results for
the entire fiscal year
THREE MONTHS ENDED DECEMBER 31, 2006 COMPARED TO THREE MONTHS ENDED DECEMBER 31,
2005
NET SALES - Net sales increased by $1,720,122 or 2,136.8%, to $1,800,622 for the
three months ended December 31, 2006 from $80,500 for the corresponding period
of 2005. The overall increase is primarily due to increase in sales of modem and
module products, principally due to a substantial increase in demand from
customers in Latin America.
GROSS PROFIT - Gross profit decreased in terms of net sales percentage as the
percentage of gross profit, which was 26.8% for the three months ended December
31, 2006, compared to 47.0% 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 December 31, 2006, while having no cost of sales, which was due to
the service sales, for the corresponding period of 2005.
SELLING, GENERAL, AND ADMINISTRATIVE - Selling, general, and administrative
expenses increased by $93,812, or 51.65%, to $275,450 for the three months ended
December 31, 2006 from $181,638 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.
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OTHER INCOME (EXPENSE), NET -Other income decreased by $7,577 or 51.14%, to
$7,237 for the three months ended December 31, 2006 from $14,814 for the
corresponding period of 2005.
SIX MONTHS ENDED DECEMBER 31, 2006 COMPARED TO SIX MONTHS ENDED DECEMBER 31,
2005
NET SALES - Net sales increased by $2,609,760 or 1,627.1%, to $2,770,150 for the
six months ended December 31, 2006 from $160,390 for the corresponding period of
2005. The change is principally due to the shift in the Company's business
strategy, from being a product engineering company to a product
development/marketing company, and the increased customer demands in Latin
America.
GROSS PROFIT - Gross profit decreased in terms of net sales percentage as the
percentage of gross profit, which was 28.0% for the six months ended December
31, 2006, compared to 62.5% 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 six
months ended December 31, 2006, while having no cost of sales, which was due to
the service sales, for the corresponding period of 2005.
SELLING, GENERAL, AND ADMINISTRATIVE - Selling, general, and administrative
expenses increased by $189,342 or 66.35%, to $474,714 for the six months ended
December 31, 2006 from $285,372 for the corresponding period of 2005. The
increase can be attributed to the increased sales/marketing efforts, increased
accounting charges, and increased cost of travel expenses, payroll, and other
general and administrative infrastructure
OTHER INCOME (EXPENSE), NET - Other income decreased by $1,965 or 13.54%, to
$12,547 for the six months ended December 31, 2006 from $14,512 for the
corresponding period of 2005.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents increased by $446,302, to $1,014,689 as of December
31, 2006 compared to $568,387 as of June 30, 2006. The increase was primarily
due to an advance from a private investor, $263,636, the increase in common
stock of $136,364 that was issued on October 18, 2006, the increase in accounts
payable of $212,654 for purchasing inventory for sales, and the increase
resulting from the net profit of $312,583.
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
$102,655 for the six months ended December 31, 2006. Net cash used by operating
activities amounted to $134,911 for the corresponding period of 2005. 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 $56,353 and
$1,837 for the six months ended December 31, 2006 and 2005, respectively,
consisting of capital expenditures.
FINANCING ACTIVITIES - Net cash provided by financing activities for the six
months ended December 31, 2006 and 2005 totaled $400,000 and $305,000,
respectively, which consisted of proceeds from its future common stock issuance
and issue of common stock.
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CONTRACTUAL OBLIGATIONS AND OTHER COMMITMENTS
The Company's material off-balance sheet contractual commitment is operating
lease obligation. We excluded this item from the balance sheet in accordance
with GAAP. We do 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 our
financial condition or results of operations.
The Company's principal future obligations and commitments as of December 31,
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 it 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 settled at $9,308, to be paid in twelve
equal monthly installments commencing on December 6, 2005. The Company has
paid the full amount, and the action has been dismissed.
In addition, from time to time the Company is involved in certain legal
proceedings and claims that 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 Acting 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 Acting Chief Financial Officer concluded that,
as of December 31, 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.
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2. INADEQUATE SEGREGATION OF DUTIES - We do not have adequate
procedures and controls in place to ensure proper segregation of
duties within the accounting department. As a result, adjustments in
the financial statements could occur and not be prevented or
detected by our controls in a timely manner.
3. INADEQUATE TECHNICAL ACCOUNTING EXPERTISE - We lacked the necessary
depth of personnel with adequate technical accounting expertise to
ensure the preparation of interim and annual financial statements in
accordance with GAAP. This material weakness represented more than a
remote likelihood that a material misstatement of our interim
financial statements for the six months ended December 31, 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.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
The Company received $400,000 in advance from an unaffiliated company for Common
Stock during the six months ended December 31, 2006. On October 18, 2006, the
Company issued 15,000,000 shares of its common stock, at $0.0091 per share with
a valued of $136,364, to partially complete this transaction. The Company plans
to issue the remaining 29,000,000 shares, also at $0.0091 per share, for a total
of $263,636, during the three months ended March 31, 2007.
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
On September 11, 2006, the Board of Directors approved an increase in the
authorized shares of Common Stock to 1,200,000,000 shares from 900,000,000
shares, subject to shareholder approval. Once shareholder approval is obtained,
the Company plans to issue the 29,000,000 shares described above.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
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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: February 7, 2007
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