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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2008
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (NO FEE REQUIRED)
FOR THE TRANSITION PERIOD FROM TO .
---------------------- ------------------
COMMISSION FILE NUMBER: 0-11616
FRANKLIN WIRELESS CORP.
(Exact name of Registrant as specified in its charter)
NEVADA 95-3733534
(State or other jurisdiction of incorporation or (I.R.S. Employer
organization) Identification Number)
5440 MOREHOUSE DRIVE, SUITE 1000, 92121
SAN DIEGO, CALIFORNIA (Zip code)
(Address of principal executive offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (858) 623-0000
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Indicated by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ] Smaller reporting company [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]
The Registrant has 13,231,491 shares of common stock outstanding as of February
17, 2009
1
FRANKLIN WIRELESS CORP.
INDEX TO QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2008
PAGE
----
PART I- FINANCIAL INFORMATION
-----------------------------
Item 1: Financial Statements 3
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations 15
Item 3: Quantitative and Qualitative Disclosures About Market Risk 22
Item 4T: Controls and Procedures 22
PART II- OTHER INFORMATION
--------------------------
Item 1: Legal Proceedings 22
Item 1A: Risk Factors 22
Item 2: Unregistered Sales of Equity Securities and Use of Proceeds 25
Item 3: Defaults Upon Senior Securities 25
Item 4: Submission of Matters to a Vote of Security Holders 25
Item 5: Other Information 26
Item 6: Exhibits 26
Signatures 27
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FRANKLIN WIRELESS CORP.
BALANCE SHEETS
-------------------------
(UNAUDITED)
DECEMBER 31, JUNE 30,
2008 2008
----------- -----------
ASSETS
Current Assets:
Cash and cash equivalents $ 7,228,820 $ 6,172,569
Accounts receivable 1,509,802 4,534,069
Prepaid income tax 2,912 355,393
Inventories 33,394 72,162
Prepaid expenses 12,324 23,430
----------- -----------
Total current assets 8,787,252 11,157,623
Property and equipment, net 72,903 68,012
Other assets 15,536 15,411
----------- -----------
TOTAL ASSETS $ 8,875,691 $11,241,046
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 2,023,526 $ 4,047,651
Advanced payment from customers -- 390,000
Accrued liabilities 60,925 875,046
Deferred rent payable 17,432 --
Notes payable to a stockholder -- 334,000
----------- -----------
Total current liabilities 2,101,883 5,646,697
----------- -----------
Stockholders' Equity:
Preferred stock, par value of $0.001 per share,
authorized 10,000,000 shares; No preferred stock
issued and outstanding as of December 31, 2008 and
June 30, 2008 -- --
Common stock, par value of $0.001 per share,
authorized 50,000,000 shares; Common stock of
13,231,491 issued and outstanding as of December
31, 2008 and June 30, 2008 13,232 13,232
Additional paid-in capital 5,016,161 5,016,161
Retained earnings 1,744,415 564,956
----------- -----------
Total stockholders' equity 6,773,808 5,594,349
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
$ 8,875,691 $11,241,046
=========== ===========
See accompanying notes to unaudited financial statements.
3
FRANKLIN WIRELESS CORP.
STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------------------ -------------------------------
2008 2007 2008 2007
-------------- ------------- ------------- ---------------
Net sales $ 4,617,140 $ 7,858,549 $ 10,868,308 $ 16,503,242
Cost of goods sold 3,512,995 5,940,668 7,907,119 12,628,539
-------------- ------------- ------------- ---------------
Gross profit 1,104,145 1,917,881 2,961,189 3,874,703
-------------- ------------- ------------- ---------------
Operating expenses:
Selling, general, and administrative 530,622 874,736 1,617,334 1,459,370
-------------- ------------- ------------- ---------------
Total operating expenses 530,622 874,736 1,617,334 1,459,370
-------------- ------------- ------------- ---------------
Income from operations 573,523 1,043,145 1,343,855 2,415,333
Other income (expense):
Interest income 27,169 38,675 56,369 74,718
Forgiveness of debt 33,400 -- 33,400 --
Other income (expense) 510 18,495 223 18,679
-------------- ------------- ------------- ---------------
Total other income (expense),net 61,079 57,170 89,992 93,397
-------------- ------------- ------------- ---------------
Net income before income taxes 634,602 1,100,315 1,433,847 2,508,730
Provision for income taxes 111,610 30,891 254,388 56,204
-------------- ------------- ------------- ---------------
Net income $ 522,992 $ 1,069,424 $ 1,179,459 $ 2,452,526
============== ============= ============= ===============
Basic earnings per share $ 0.04 $ 0.08 $ 0.09 $ 0.19
Diluted earnings per share $ 0.04 $ 0.08 $ 0.09 $ 0.19
Weighted average common shares
outstanding - basic 13,231,491 13,231,491 13,231,491 13,231,491
Weighted average common shares
outstanding - diluted 13,231,491 13,231,491 13,231,491 13,231,491
See accompanying notes to unaudited financial statements.
4
FRANKLIN WIRELESS CORP.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
--------------------------
SIX MONTHS ENDED
DECEMBER 31,
--------------------------
2008 2007
----------- -----------
CASH FLOWS FROM OPERATIONS ACTIVITIES:
Net income $ 1,179,459 $ 2,452,526
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation 7,966 4,288
Amortization of intangible assets -- 28,546
Bad debt 315 2,200
Forgiveness of debt (33,400) --
Changes in operating assets and liabilities:
Accounts receivable 3,023,952 (531,979)
Inventory 38,768 (9,423)
Prepaid expense 11,106 6,649
Prepaid income tax 352,481 --
Other assets (125) --
Accounts payable (2,024,125) 383,658
Advance payment from customers (390,000) (354,500)
Accrued liabilities (814,121) (53,390)
Deferred rent payable 17,432 --
----------- -----------
Net cash provided by operating activities 1,369,708 1,928,575
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (12,857) (5,405)
----------- -----------
Net cash used in investing activities (12,857) (5,405)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of note payable (300,600) 11,395
----------- -----------
Net cash provided by (used in) financing activities (300,600) 11,395
----------- -----------
Net increase in cash and cash equivalents 1,056,251 1,934,565
Cash and cash equivalents, beginning of period 6,172,569 2,477,593
----------- -----------
Cash and cash equivalents, end of period $ 7,228,820 $ 4,412,158
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ -- $ --
Income taxes $ 939,388 $ 56,204
See accompanying notes to unaudited financial statements.
5
FRANKLIN WIRELESS CORP.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited financial statements of the Company have
been prepared in accordance with accounting principles generally
accepted in the United States ("GAAP") for interim financial
information and are presented in accordance with the requirements of
Form 10-Q. The balance sheet is unaudited as of December 31, 2008 and
audited as of June 30, 2008. The statement of operations is unaudited
for the three months and six months ended December 31, 2008 and 2007.
The statement of cash flows is unaudited for the six months ended
December 31, 2008 and 2007. In the opinion of management, the unaudited
financial statements included herein contain all adjustments, including
normal recurring adjustments, considered necessary to present fairly
the financial position, the results of operations and cash flows of the
Company for the periods presented. These unaudited interim financial
statements should be read in conjunction with the financial statements
and notes thereto for the fiscal year ended June 30, 2008 included in
the Company's Form 10-K, filed on September 26, 2008.
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 2 - BUSINESS OVERVIEW
The Company designs and sells broadband high speed wireless data
communication products such as third generation ("3G") and fourth
generation ("4G") wireless modules and modems. The Company focuses on
wireless broadband USB modems, which provide a flexible way for
wireless subscribers to connect to the wireless broadband network with
any laptop, tablet 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 markets its products through two channels: directly to
wireless operators, and indirectly through strategic partners and
distributors. The Company's customer base extends from the United
States to the Caribbean and South American countries. The Company's
Universal Serial Bus ("USB") modems are certified by Sprint, 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. The Company has strategic marketing relationships with several
of these customers.
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
SEGMENT REPORTING
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," requires public companies to report financial and
descriptive information about their reportable operating segments. The
Company identifies its operating segments based on how management
internally evaluates separate financial information, business
activities and management responsibility. The Company operates in a
single business segment consisting of sale of wireless access products.
6
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 three
months or less to be cash equivalents.
REVENUE RECOGNITION
The Company recognizes revenue from product sales 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. The
Company may maintain an allowance for doubtful accounts for potentially
estimated 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 COST
Most of shipping and handling costs are paid by the customers directly
to the shipping companies. As a result, the Company does not collect
nor incur 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 potential 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
7
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.
VALUATION ON 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 December 31, 2008, the Company is not aware of any events or
changes in circumstances that would indicate that the long-lived assets
are impaired.
WARRANTIES
The Company does not allow the right of return on product sales but
provides a factory warranty for one year from the shipment, which is
covered by its vendor. These products are shipped directly from its
vendor to customers. As a result, the Company does not accrue any
warranty expenses.
INCOME TAXES
The Company adopted the provisions of 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.
Under FIN 48, the impact of an uncertain income tax position on the
income tax return must be recognized at the largest amount that is
more-likely-not to be sustained upon audit by the relevant taxing
authority. An uncertain income tax position will not be recognized if
it has less than a 50% likelihood of being sustained.
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.
Income tax provision from continuing operations for the six months
ended December 31, 2008 and 2007 consists of the following:
8
(UNAUDITED) (UNAUDITED)
----------------- -----------------
DECEMBER 31, 2008 DECEMBER 31, 2007
----------------- -----------------
Current income taxes expense:
Federal $ 201,895 $ 42,256
State 52,493 13,948
----------------- -----------------
254,388 56,204
Deferred income taxes expense (benefits): -- --
----------------- -----------------
PROVISION FOR INCOME TAXES $ 254,388 $ 56,204
================= =================
Deferred income taxes reflect the net effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes.
Significant components of the deferred tax assets at December 31, 2008
and June 30, 2008 consisted of the following:
(UNAUDITED)
----------------- ---------------
DECEMBER 31, 2008 JUNE 30, 2008
----------------- ---------------
Current deferred tax asset(liabilities):
Net operating losses $ 135,622 $ 170,883
Other, net (16,493) 16,493
Non-current deferred tax assets (liabilities):
Net operating losses 1,911,272 2,011,633
Credit -- 30,196
Other, net (13,932) (4,477)
----------------- ---------------
Total deferred tax assets 2,016,469 2,224,728
Less valuation allowance (2,016,469) (2,224,728)
----------------- ---------------
Net deferred tax asset $ -- $ --
================= ===============
The significant component of the deferred tax asset (liability) at
December 31, 2008 and June 30, 2008 was federal net operating loss
carry-forward in the amount of approximately $1,898,000 and $2,034,000,
respectively, based on federal tax rate of 34%. SFAS No. 109 requires a
valuation allowance to be recorded when it is more likely than not that
some or all of the deferred tax assets will not be realized. At
December 31, 2008 and June 30, 2008, management believes that it is
more likely than not that most of the deferred tax assets will not be
realized, and valuation allowances for the full amount of the net
deferred tax asset were established to reduce the deferred tax assets
to zero based on the level of historical taxable income and projections
for future taxable income over the periods in which the deferred tax
assets are deductible.
As of December 31, 2008, the Company has federal net operating loss
carryforwards of approximately $5,584,000, and state net operating loss
carryforwards of approximately $1,676,000, for income tax purposes,
with application of the IRC Section 382 limitation on net operating
losses as result of the Company's ownership change in a prior period.
The Federal and state net operating loss carryforwards will begin to
expire from 2009 to 2026 and 2009 to 2016, respectively.
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.
9
A significant portion of the Company's revenue is derived from a small
number of customers. Three customers accounted for 32.0%, 16.0%, and
14.0% of revenues during the six months ended December 31, 2008, and
had related accounts receivable of $1,268,230, or 84.0% of the total
accounts receivable, at December 31, 2008.
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 six months ended
December 31, 2008 and 2007. For those periods, the Company purchased
approximately $7,698,041 and $12,638,000, respectively, and had related
accounts payable of $1,285,970 and $38,475 at December 31, 2008 and
2007, respectively.
The Company maintains its cash accounts with established commercial
banks. Such cash deposits periodically exceed the Federal Deposit
Insurance Corporation insured limit of $250,000 per each depositor, per
insured bank. As of December 31, 2008, the Company has two deposits
that exceeded the insured limit of $250,000 by approximately $6,652,651
and $76,170, respectively. However, the Company does not anticipate any
loss on excess deposits.
NOTE 4 - BALANCE SHEET DETAILS
ACCOUNT RECEIVABLE
Accounts receivable at December 31, 2008 and June 30, 2008, consisted
of receivables from customers in the amounts of $1,509,802 and
$4,534,069, respectively.
PREPAID EXPENSES
Prepaid expenses at December 31, 2008 and June 30, 2008 consisted of
the following:
(UNAUDITED)
------------- -------------
DECEMBER 31, JUNE 30,
2008 2008
------------- -------------
Prepaid insurance $ 2,000 $ 2,725
Prepaid marketing fee 8,786 11,600
Prepaid professional fee 1,538 --
Prepaid office lease fee -- 9,105
------------- -------------
TOTAL $ 12,324 $ 23,430
============= =============
PREPAID INCOME TAX
Prepaid income tax at December 31, 2008 and June 30, 2008 consisted of
the following:
10
(UNAUDITED)
------------ ------------
DECEMBER 31, JUNE 30,
2008 2008
------------ ------------
Federal $ -- $ 296,535
Sate 2,912 58,858
------------ ------------
TOTAL $ 2,912 $ 355,393
============ ============
PROPERTY AND EQUIPMENT
Property and equipment at December 31, 2008 and June 30, 2008 consisted
of the following:
(UNAUDITED)
--------- --------
DECEMBER 31, JUNE 30,
2008 2008
--------- --------
Computers and software $ 58,248 $ 48,827
Furniture and fixtures 56,330 52,894
--------- --------
114,578 101,721
Less accumulated depreciation (41,675) (33,709)
--------- --------
TOTAL $ 72,903 $ 68,012
========= ========
Depreciation expense associated with property and equipment was $7,966
and $4,288 for the six months ended December 31, 2008 and 2007,
respectively.
OTHER ASSETS
Other assets at December 31, 2008 and June 30, 2008 consisted of the
following:
(UNAUDITED)
--------- ---------
DECEMBER 31, JUNE 30,
2008 2008
--------- ---------
Lease deposit, corporate housing $ 709 $ 709
Lease deposit, administrative office 9,833 14,003
Utility deposit 282 282
Other deposit 417 417
Loan to employee 4,295 --
--------- ---------
TOTAL $ 15,536 $ 15,411
========= =========
ACCRUED LIABILITIES
Accrued liabilities at December 31, 2008, and June 30, 2008, consisted
of the following:
(UNAUDITED)
---------- ----------
DECEMBER 31, JUNE 30,
2008 2008
---------- ----------
Salaries payable $ 27,900 $ 135,000
Income tax payable -- 689,421
Accrued professional fees payable 5,000 31,500
Sales commission payable 8,900 --
Marketing development fund payable 19,125 19,125
---------- ----------
TOTAL $ 60,925 $ 875,046
========== ==========
11
DEFERRED RENT PAYABLE
Deferred Rent Payable at December 31, 2008, and June 30, 2008,
consisted of the following:
(UNAUDITED)
----------- ----------
DECEMBER 31, JUNE 30,
2008 2008
----------- ----------
Deferred rent payable $ 17,432 $ --
----------- ----------
TOTAL $ 17,432 $ --
=========== ==========
Deferred rent payable is the sum of the difference between a monthly
rent payment and the monthly rent expense of an operating lease of the
Company that contains escalated payments in future periods. The rent
expense is the sum of all rent payments over the term of the lease
divided by the number of periods contained in the lease otherwise known
as straight-line amortization. This rent expense amount differs from
the monthly rent payments, which is deferred rent payable.
NOTES PAYABLE TO STOCKHOLDERS
Notes payable at December 31, 2008, and June 30, 2008, consisted of the
following:
(UNAUDITED)
---------- ----------
DECEMBER 31, JUNE 30,
2008 2008
---------- ----------
Non-interest bearing note $ -- $ 334,000
---------- ----------
Total -- 334,000
Less current portion -- (334,000)
========== ==========
TOTAL $ -- $ --
========== ==========
The Company's Korea-based subsidiary, ARG, has been inactive since
August 2003. On October 30, 2007, the Board of Directors approved the
dissolution of ARG, and the Company assumed a note payable of ARG of
$434,000 as a part of the dissolution. The remaining balance of the
note amounted to $334,000 as of June 30, 2008, and the Company paid in
full the note of $300,600, net of a 10% discount of $33,400, for the
three months ended December 31, 2008, and the discount of $33,400 was
presented as a forgiveness of debt.
NOTE 5 - COMMITMENTS AND CONTINGENCIES
OPERATING LEASE
The Company leases its administrative facilities under a non-cancelable
operating lease that expires on August 31, 2011. 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 $53,852 and $31,129 for
the six months ended December 31, 2008 and 2007, respectively.
The Company leases its corporate housing facility under a
non-cancelable operating lease that expires on April 30, 2009 for its
vendor. Rent expense related to the operating lease was $9,322 and
$8,727 for the six months ended December 31, 2008 and 2007,
respectively.
12
The Company leases one automobile under an operating lease that expires
on July 22, 2009. Lease expense was $3,226 and $3,226 for the six
months ended December 31, 2008 and 2007, 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 financial condition.
CO-DEVELOPMENT, CO-OWNERSHIP AND SUPPLY AGREEMENT
The Company's facility is located in San Diego, California.
Manufacturing of the Company's products has been contracted out to
C-Motech Co. Ltd. ("C-Motech"), located in South Korea.
In January 2005, the Company entered into an agreement with C-Motech
for the manufacture of the products. Under the manufacturing and supply
agreement, C-Motech provides the Company with services including all
licenses, component procurement, final assembly, testing, quality
control, fulfillment and after-sale service. The Agreement provides
exclusive rights to market and sell CDMA wireless data products in
countries in North America, the Caribbean, and South America.
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 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, 6500, and 6800 chipset solutions provided or
designed by C-Motech 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. On January 30, 2007, C-Motech also
certified that the Company has the exclusive right to sell CDU-680 EVDO
USB modems directly and indirectly in these territories.
The initial term of the Agreement was for two years, commencing on
January 5, 2005. The agreement automatically renews for successive one
year periods unless either party provides a written notice to terminate
at least sixty days prior to the end of the term. This agreement may be
amended or supplemented by mutual agreement of the parties, as is
necessary to document the addition of any new products. As of February
17, 2009, the agreement is still valid for an additional one year
period.
NOTE 6 - 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.
On January 8, 2008, a 1 for 70 reverse stock split was implemented in
connection with the reincorporation, under which each shareholder
received one share for each 70 shares held. As result of the reverse
stock split, a conversion was made to the weighted average number of
shares outstanding for the fiscal year 2008 that took into
consideration the effect of a reverse split on the total number of
shares outstanding, in order to compare the current weighted average
number of shares outstanding to its historical numbers in a consistent
form of valuation. In order to adjust a weighted average number of
shares outstanding of the Company, the pre-split outstanding shares
were divided by the split ratio.
13
NOTE 7 - RECENT ACCOUNTING PRONOUNCEMENTS
In March 2008, the Financial Accounting Standards Board ("FASB") issued
Statement No. 161, "Disclosures about Derivative Instruments and
Hedging Activities - an amendment of FASB Statement No. 133" ("SFAS
161"). SFAS 161 requires entities that utilize derivative instruments
to provide qualitative disclosures about their objectives and
strategies for using such instruments, as well as any details of
credit-risk-related contingent features contained within derivatives.
SFAS 161 also requires entities to disclose additional information
about the amounts and location of derivatives located within the
financial statements, how the provisions of SFAS 133 have been applied,
and the impact that hedges have on an entity's financial position,
financial performance, and cash flows. SFAS 161 is effective for fiscal
years and interim periods beginning after November 15, 2008, with early
application encouraged. The Company believes that SFAS 161 has no
effect on the Company's financial statements at this time.
In May 2008, the FASB issued SFAS 162, "The Hierarchy of Generally
Accepted Accounting Principles." SFAS 162 sets forth the level of
authority to a given accounting pronouncement or document by category.
Where there might be conflicting guidance between two categories, the
more authoritative category will prevail. SFAS 162 will become
effective 60 days after the SEC approves the PCAOB.'S amendments to AU
Section 411 of the AICPA Professional Standards. The Company believes
that SFAS 162 has no effect on the Company's financial statements at
this time.
In May 2008, the FASB issued SFAS 163, "Accounting for Financial
Guarantee Insurance Contracts-and interpretation of FASB Statement No.
60." SFAS 163 clarifies how SFAS 60 applies to financial guarantee
insurance contracts, including the recognition and measurement of
premium revenue and claims liabilities. This statement also requires
expanded disclosures about financial guarantee insurance contracts.
SFAS 163 is effective for fiscal years beginning on or after December
15, 2008, and interim periods within those years. The Company believes
that SFAS 163 has no effect on the Company's financial statements at
this time.
In June 2008, the FASB issued an exposure draft of a proposed amendment
to SFAS 133. As proposed, this amendment would make several significant
changes to the way in which entities account for hedging activities
involving derivative instruments. The FASB has not yet issued a final
Statement.
In June 2008, the FASB issued FASB Staff Position EITF 03-6-1,
Determining Whether Instruments Granted in Share-Based Payment
Transactions Are Participating Securities ("EITF 03-6-1"). EITF 03-6-1
addresses whether instruments granted in share-based payment
transactions are participating securities prior to vesting, and
therefore need to be included in the computation of earnings per share
under the two-class method as described in SFAS 128, "Earnings per
Share." EITF 03-6-1 is effective for financial statements issued for
fiscal years beginning on or after December 15, 2008 and earlier
adoption is prohibited.
In June 2008, the FASB issued EITF Issue 07-5 Determining whether an
Instrument (or Embedded Feature) is indexed to an Entity's Own Stock
("EITF 07-5"). EITF 07-5 is effective for financial statements issued
for fiscal years beginning after December 15, 2008, and interim periods
within those fiscal years. Early application is not permitted.
Paragraph 11(a) of SFAS 133 - Accounting for Derivatives and Hedging
Activities, specifies that a contract that would otherwise meet the
definition of a derivative but is both (a) indexed to the Company's own
stock and (b) classified in stockholders' equity in the statement of
financial position would not be considered a derivative financial
instrument. EITF 07-5 provides a new two-step model to be applied in
determining whether a financial instrument or an embedded feature is
indexed to an issuer's own stock and thus able to qualify for the SFAS
No. 133 paragraph 11(a) scope exception. The Company believes that EITF
07-5 has no effect on the Company's financial statements at this time.
In October 2008, the FASB issued Staff Position No. FAS 157-3,
"Determining the Fair Value of a Financial Asset When the Market for
That Asset is Not Active" (FSP 157-3). FSP 157-3 clarifies the
application of SFAS 157. The Company believes that FSP 157-3 has no
effect on the Company's financial statements at this time.
There are no other accounting standards issued as of February 17, 2009
that are expected to have a material impact on the Company's financial
statements.
14
NOTE 8 - RELATED PARTY TRANSACTIONS
The Company purchased CDMA wireless data products in the amount of
$7,698,041, or 97.8% of total purchases, from C-Motech Co. Ltd., for
the six months ended December 31, 2008 and had related accounts payable
of $1,285,970 as of December 31, 2008. C-Motech owns 3,370,356 shares,
or 25.5%, of the Company's outstanding 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
None.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the financial
statements and notes thereto included in Item 1 of this filing and the financial
statements and notes thereto and Management's Discussion and Analysis or results
of Operations contained in the Company's Form 10-K filed on September 22, 2008,
for the year ended June 30, 2008.
BUSINESS OVERVIEW
Franklin Wireless Corp. designs and sells broadband high speed wireless data
communication products such as third generation ("3G") and fourth generation
("4G") wireless modules and modems. The Company focuses on wireless broadband
USB modems, which provide a flexible way for wireless subscribers to connect to
the wireless broadband network with any laptop, tablet 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"), High-Speed
Packet Access technology ("HSPA technology") of Wideband Code Division Multiple
Access ("WCDMA), and Worldwide Interoperability for Microwave Access ("WIMAX")
based on the IEEE 802.16 standard, which 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.
Since the Company launched CDMA Revision A USB modem CDU-680, CDMA Revision 0
CDU-650 USB modem, and CDMA Revision 0 CDX-650 Express Card modem in 2007, the
Company has continued to add new features and functionality to its products to
enhance value and ease of use that its products provide to customers and end
users. In 2008, the Company launched the CGU-628A HSDPA USB modem and CGU-720A
HSUPA, which provide a flexible way for users to connect to high-speed downlink
and uplink packet access networks, the CDM-650 Stand-alone Revision 0 USB modem,
which provides internet connection in remote locations without cable or DSL
services, and the CMU-300 WIMAX plus CDMA USB modem.
The Company markets its products through two channels: directly to wireless
operators, and indirectly through strategic partners and distributors. The
Company's global customer base extends from the United States to the Caribbean
and South American countries. The Company's Universal Serial Bus ("USB") modems
are certified by Sprint, 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. The Company has strategic marketing relationships with
several of these customers.
15
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.
ESTIMATES
The preparation of financial statements requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
periods. Actual results could differ from those estimates. Significant estimates
include useful lives of intangible and long-lived assets.
REVENUE RECOGNITION
The Company recognizes revenue from product sales 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. The
Company may maintain an allowance for doubtful accounts for potentially
estimated 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 COST
Most of shipping and handling costs are paid by the customers directly to the
shipping companies. As a result, the Company does not collect nor incur shipping
and handling costs.
VALUATION ON 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 December 31, 2008, the Company is not aware of any events or changes in
circumstances that would indicate that the long-lived assets are impaired.
16
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 adopted the provisions of 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. Under FIN 48, the impact of an
uncertain income tax position on the income tax return must be recognized at the
largest amount that is more-likely-not to be sustained upon audit by the
relevant taxing authority. An uncertain income tax position will not be
recognized if it has less than a 50% likelihood of being sustained.
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.
Income tax provision from continuing operations for the six months ended
December 31, 2008 and 2007 consists of the following:
(UNAUDITED) (UNAUDITED)
-------------- -------------
DECEMBER 31, DECEMBER 31,
2008 2007
-------------- -------------
Current income taxes expense:
Federal $ 201,895 $ 42,256
State 52,493 13,948
-------------- -------------
254,388 56,204
Deferred income taxes expense (benefits): -- --
-------------- -------------
PROVISION FOR INCOME TAXES $ 254,388 $ 56,204
============== =============
Deferred income taxes reflect the net effects of temporary differences between
the carrying amounts of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. Significant components of the
deferred tax assets at December 31, 2008 and June 30, 2008 consisted of the
following:
17
(UNAUDITED)
----------- -----------
DECEMBER 31, JUNE 30,
2008 2008
----------- -----------
Current deferred tax asset(liabilities):
Net operating losses $ 135,622 $ 170,883
Other, net (16,493) 16,493
Non-current deferred tax assets (liabilities):
Net operating losses 1,911,272 2,011,633
Credit -- 30,196
Other, net (13,932) (4,477)
----------- -----------
Total deferred tax assets 2,016,469 2,224,728
Less valuation allowance (2,016,469) (2,224,728)
----------- -----------
Net deferred tax asset $ -- $ --
=========== ===========
The significant component of the deferred tax asset (liability) at December 31,
2008 and June 30, 2008 was federal net operating loss carry-forward in the
amount of approximately $1,898,000 and $2,034,000, respectively, based on a
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 December 31, 2008 and June 30, 2008, management
believes that it is more likely than not that most of the deferred tax assets
will not be realized, and valuation allowances for the full amount of the net
deferred tax asset were established to reduce the deferred tax assets to zero
based on the level of historical taxable income and projections for future
taxable income over the periods in which the deferred tax assets are deductible.
As of December 31, 2008, the Company has federal net operating loss
carryforwards of approximately $5,584,000, and state net operating loss
carryforwards of approximately $1,676,000, for income tax purposes, with
application of IRC Section 382 limitation on net operating losses as result of
the Company's ownership change in a prior period. The Federal and state net
operating loss carryforwards will begin to expire from 2009 to 2026 and 2009 to
2016, respectively.
RESULTS OF OPERATIONS
The following table sets forth, for the three and six months ended December 31,
2008 and 2007, selected statements of operations data expressed as a percentage
of sales:
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
-------------- ---------------
2008 2007 2008 2007
----- ----- ----- -----
Net Sales 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 76.1% 75.6% 72.8% 76.5%
----- ----- ----- -----
Gross profit 23.9% 24.4% 27.2% 23.5%
----- ----- ----- -----
Operating expenses:
Selling, general and administrative expenses 11.5% 11.1% 14.8% 8.9%
----- ----- ----- -----
Total operating expenses 11.5% 11.1% 14.8% 8.9%
----- ----- ----- -----
Income from operations 12.4% 13.3% 12.4% 14.6%
Other income (expense), net 1.3% 0.7% 0.8% 0.6%
----- ----- ----- -----
Net income before income taxes 13.7% 14.0% 13.2% 15.2%
Provision for income taxes 2.4% 0.4% 2.3% 0.3%
----- ----- ----- -----
Net income 11.3% 13.6% 10.9% 14.9%
===== ===== ===== =====
18
The results of the interim periods are not necessarily indicative of results for
the entire fiscal year.
THREE MONTHS ENDED DECEMBER 31, 2008
COMPARED TO THREE MONTHS ENDED DECEMBER 31, 2007
NET SALES
Net sales decreased by $3,241,409, or 41.2%, to $4,617,140 for the
three months ended December 31, 2008 from $7,858,549 for the
corresponding period of 2007. The overall decrease in sales was
primarily due to a mix of decreased sales and sales price for the
Company's "EV-DO technology" products, and increased market
competition. The decrease in sales volume in Caribbean and South
American countries was approximately $4,646,000, or 69.4%, for the
three months ended December 31, 2008 compared to the corresponding
period of 2007.
GROSS PROFIT
Gross profit decreased by $813,736, or 42.4%, to $1,104,145 for the
three months ended December 31, 2008 from $1,917,881 for the
corresponding period of 2007. The decrease was primarily due to the
change in net sales as discussed above. The gross profit in terms of
net sales percentage was 23.9% for the three months ended December 31,
2008 compared to 24.4% for the corresponding period of 2007.
SELLING, GENERAL, AND ADMINISTRATIVE
Selling, general, and administrative expenses decreased by $344,114, or
39.3%, to $530,622 or 11.5% of net sales for the three months ended
December 31, 2008 from $874,736 or 11.1% of net sales for the
corresponding period of 2007. The decrease was the net effect of a
decrease of approximately $409,000 in marketing expenses, and an
increase of approximately $40,000 in salary and related expenses.
OTHER INCOME (EXPENSE), NET
Other income increased by $3,909, or 6.8%, to $61,079 for the three
months ended December 31, 2008 from $57,170 for the corresponding
period of 2007.
SIX MONTHS ENDED DECEMBER 31, 2008
COMPARED TO SIX MONTHS ENDED DECEMBER 31, 2007
NET SALES
Net sales decreased by $5,634,934, or 34.1%, to $10,868,308 for the six
months ended December 31, 2008 from $16,503,242 for the corresponding
period of 2007. The overall decrease in sales was primarily due to a
mix of decreased sales and sales price for the Company's "EV-DO
technology" products, and intensively increased market competition. The
decreases in sales volume in the United States as well as in Caribbean
and South American countries were approximately $1,465,000, or 23.8%,
and $4,167,000, or 40.3%, respectively for the six months ended
December 31, 2008 compared to the corresponding period of 2007.
GROSS PROFIT
19
Gross profit decreased by $913,513, or 23.6%, to $2,961,189 for the six
months ended December 31, 2008 from $3,874,702 for the corresponding
period of 2007. The decrease was primarily due to the change in net
sales as discussed above. The gross profit in terms of net sales
percentage was 27.2% for the six months ended December 31, 2008
compared to 23.5% for the corresponding period of 2007. The percentage
increase was primarily due to the discontinued sales to a carrier
customer in the United Sates, which had a lower gross profit margin in
terms of net sales percentage of 18.8%, for the six months ended
December 31, 2008, whereas the customer accounted for 28.0% of net
sales for the corresponding period of 2007.
SELLING, GENERAL, AND ADMINISTRATIVE
Selling, general, and administrative expenses increased by $157,964, or
10.8%, to $1,617,334 or 14.9% of net sales for the six months ended
December 31, 2008 from $1,459,370, or 8.8% of net sales, for the
corresponding period of 2007. The increase was the net effect of an
increase of approximately $278,000 in salary and related expenses, a
decrease of approximately $82,000 in marketing expenses, and a decrease
of approximately $29,000 in amortization expense for the six months
ended December 31, 2008.
OTHER INCOME (EXPENSE), NET
Other income decreased by $3,405, or 3.6%, to $89,992 for the six
months ended December 31, 2008 from $93,397 for the corresponding
period of 2008. The overall decrease was the net effect of a decrease
of approximately $18,000 in interest income due to a decreased
commercial interest rate and an increase of approximately $15,000 in
other income for the six months ended December 31, 2008.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents increased by $1,056,251 to $7,228,820 as of December
31, 2008 compared to $6,172,569 as of June 30, 2008. The increase was primarily
from the net income of $1,179,459.
OPERATING ACTIVITIES
Net cash provided by operating activities was $1,369,708 and $1,928,575
for the six months ended December 31, 2008, and 2007, respectively. The
decrease from the prior period is primarily due to the decrease in net
income.
INVESTING ACTIVITIES
Net cash used in investing activities was $12,857 and $5,405 for the
six months ended December 31, 2008, and 2007, respectively, consisting
of capital expenditures.
FINANCING ACTIVITIES
Net cash used by financing activities was $300,600, which was the net
amount of the note paid in full to a stockholder, after a 10% discount
of $33,400 represented as a forgiveness of debt, for the six months
ended December 31, 2008. Net cash provided by financing activities was
$11,395, which consisted of receipt of a stock subscription receivable,
for the six months ended December 31, 2007.
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 December 31, 2008,
include the following:
20
OPERATING LEASE
The Company leases its administrative facilities under a non-cancelable
operating lease that expires on August 31, 2011. 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 $53,852 and $31,129 for
the six months ended December 31, 2008 and 2007, respectively.
The Company leases its corporate housing facility under a
non-cancelable operating lease that expires on April 30, 2009 for its
vendors. Rent expense related to the operating lease was $9,322 and
$8,727 for the six months ended December 31, 2008 and 2007,
respectively.
The Company leases one automobile under an operating lease that expires
on July 22, 2009. Lease expense was $3,226 and $3,226 for the six
months ended December 31, 2008 and 2007, 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 financial condition.
CO-DEVELOPMENT, CO-OWNERSHIP AND SUPPLY AGREEMENT
The Company's facility is located in San Diego, California.
Manufacturing of the Company's products has been contracted out to
C-Motech Co. Ltd. ("C-Motech"), located in South Korea.
In January 2005, the Company entered into an agreement with C-Motech
for the manufacture of the products. Under the manufacturing and supply
agreement, C-Motech provides the Company with services including all
licenses, component procurement, final assembly, testing, quality
control, fulfillment and after-sale service. The Agreement provides
exclusive rights to market and sell CDMA wireless data products in
countries in North America, the Caribbean, and South America.
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 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, 6500, and 6800 chipset solutions provided or
designed by C-Motech 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. On January 30, 2007, C-Motech also
certified that the Company has the exclusive right to sell CDU-680 EVDO
USB modems directly and indirectly in these territories.
The initial term of the Agreement was for two years, commencing on
January 5, 2005. The agreement automatically renews for successive one
year periods unless either party provides a written notice to terminate
at least sixty days prior to the end of the term. This agreement may be
amended or supplemented by mutual agreement of the parties, as is
necessary to document the addition of any new products. As of February
17, 2009, the agreement is still valid for an additional one year
period.
21
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
As the Company is a "smaller reporting company," this Item is inapplicable.
ITEM 4. CONTROLS AND PROCEDURES.
The Company maintains disclosure controls and procedures as defined under the
Securities Exchange Act of 1934. They are designed to help ensure that material
information is: (1) gathered and communicated to its management, including its
principal executive and financial officers, in a manner that allows for timely
decisions regarding required disclosures; and (2) recorded, processed,
summarized, reported and filed with the SEC as required under the Securities
Exchange Act of 1934 and within the time periods specified by the SEC.
The Company's management, with the participation of its Chief Executive Officer
and Chief Financial Officer, evaluated the effectiveness of the design and
operation of its disclosure controls and procedures as of June 30, 2008. Based
on such evaluation, the Company's Chief Executive officer and Chief Financial
Officer concluded that its disclosure controls and procedures were effective as
of December 31, 2008.
There were no changes in the Company's internal control over financial reporting
during its most recent fiscal quarter that have materially affected, or are
reasonably likely to materially affect, its internal control over financial
reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The Company is not currently involved in any material legal proceedings. The
Company is, from time to time, involved in routine legal proceedings and claims
arising in the ordinary course of business.
ITEM 1A: RISK FACTORS.
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 in this
Quarterly Report or in any material accompanying this report. The following
summary of risk factors does not purport to be a complete explanation of the
risks involved in the Company's business.
THE COMPANY HAS EXPERIENCED LOSSES IN THE PAST. The Company has experienced
significant operating losses and negative cash flows from operating activities
in the past, including the fiscal year ended June 30, 2006. 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 RELIES ON A SINGLE SOURCE FOR THE MANUFACTURE OF ITS PRODUCTS. The
Company relies solely on C-Motech Co., Ltd., a company located in South Korea,
to design, manufacture and supply its products, which exposes the Company to a
number of risks and uncertainties outside its control. The Company's agreement
with C-Motech is renewable annually, and it cannot be certain it will be renewed
each year. Thus, the Company relies solely on C-Motech to manufacture and
deliver all its products. If the Company was unable to purchase products from
C-Motech for any reason, it would be forced to seek an alternative source of
supply, which may not be available. Any significant changes in C-Motech, 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.
22
THE COMPANY OPERATES IN AN INTENSIVELY COMPETITIVE MARKET. The wireless
broadband data access market is highly competitive, and it may be unable to
compete effectively. Many of its competitors or potential competitors have
significantly greater financial, technical and marketing resources than it 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 reductions and smaller customer orders. The
failure to compete effectively could seriously impair its business.
THE COMPANY OPERATES IN THE HIGH-RISK TELECOM SECTOR. The Company is in a
volatile industry. In addition, its revenue model is evolving and relies
substantially on the assumption that the Company will be able to successfully
complete the development and sales of its products and services in the
marketplace. The Company's prospects must be considered in the light of the
risks, uncertainties, expenses and difficulties frequently encountered by
companies in the early stages of development and marketing. In order to be
successful in the market, the Company must, among other things:
o Complete development and introduction of functional and attractive
products and services;
o Attract and maintain customer loyalty;
o Establish and increase awareness of its brand;
o Provide desirable products and services to customers at attractive
prices;
o Establish and maintain strategic relationships with 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 these goals, and
its failure to achieve them could adversely affect its business, results of
operations, and financial condition. Moreover, there can be no assurance that
the Company will be able to obtain additional funding if its financial resources
are depleted. The Company expects that revenues and operating results will
fluctuate in the future. If the Company's efforts are unsuccessful or other
unexpected events occur, purchasers of its 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 is 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 its products.
THE COMPANY DEPENDS ON COLLABORATIVE ARRANGEMENTS. The development and
commercialization of its 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 LOSS OF ANY OF THE COMPANY'S MATERIAL CUSTOMERS COULD ADVERSLY 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. For
the six months ended December 31, 2008, three customers accounted for 32.0%,
16.0%, and 14.0% of revenues. If any of these customers reduce their business
with the Company or suffer from business failure, its revenues and profitability
could decline, perhaps materially.
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THE COMPANY'S PRODUCT DELIVERIES ARE SUBJECT TO LONG LEAD TIMES. Due to its
limited capital resources, it is experiencing long-lead times to ship products
to its customers, often in excess of 45 days. This could cause it to lose
customers, who may be able to secure faster delivery times from its competitors,
and require it 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. It must implement an aggressive sales and marketing campaign to
solicit customers and strategic partners. Any delay could seriously affect its
ability to establish and effectively exploit an early-to-market-strategy.
AS BUSINESS EXPANDS INTERNATIONALLY, THE COMPANY 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 America, the Caribbean and South America, it may not be
able to grow its international operations, and its ability to increase its
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 it has received, and in
the future may receive, claims from third parties alleging that the Company, 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 It may be liable for substantial damages, liabilities and
litigation costs, including attorneys' fees;
o It 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 It may have to license the third party intellectual property,
incurring royalty fees that may or may not be on commercially
reasonable terms. In addition, there is no assurance that it will
be able to successfully negotiate and obtain such a license from
the third party;
o It 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 Its relationships with customers may be adversely affected; and
o It may be required to indemnify its customers for certain costs
and damages they incur in such a claim.
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In the event of an unfavorable outcome in such a claim and its 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 it 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 it 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 it 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 ITS
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 it has obtained all the necessary Federal
Communications Commission and other required approvals for the products it
currently sells, it 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 MAY NEED ADDITIONAL FINANCING DUE TO LIMITED RESOURCES. The
Company's financial resources are limited, and the amount of funding that is
required to develop and commercialize its products and technologies is highly
uncertain. Adequate funds may not be available when needed or on terms
satisfactory to us. Lack of funds may cause the Company to delay, reduce and/or
abandon certain or all aspects of its development and commercialization
programs. If it seeks 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 its Common Stock.
There can be no assurance that additional financing will be available on terms
favorable to it or at all. If adequate funds are not available or are not
available on acceptable terms, it may not be able to fund its expansion, take
advantage of desirable acquisition opportunities, develop or enhance services or
products or respond to competitive pressures. Such inability could have a
materially adverse effect on its business, results of operations and financial
conditions.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
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ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS.
31.1 Certification of Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification of Acting Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
32.2 Certification 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 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 17, 2009
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