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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 MARCH 31, 2009
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 (I.R.S. Employer Identification Number)
incorporation or organization)
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
--------------------------------------------------------------------------------
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 has submitted electronically and
posted on its corporate Web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T during the
preceding 12 months (or for such shorter period that the registrant was required
to submit and post such files). Yes [ ] 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 May 15,
2009
FRANKLIN WIRELESS CORP.
INDEX TO QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2009
PAGE
----
PART I- FINANCIAL INFORMATION
Item 1: Financial Statements 2
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations 15
Item 3: Quantitative and Qualitative Disclosures About Market Risk 23
Item 4T: Controls and Procedures 23
PART II- OTHER INFORMATION
Item 1: Legal Proceedings 24
Item 1A: Risk Factors 24
Item 2: Unregistered Sales of Equity Securities and Use of Proceeds 24
Item 3: Defaults Upon Senior Securities 24
Item 4: Submission of Matters to a Vote of Security Holders 24
Item 5: Other Information 24
Item 6: Exhibits 24
Signatures 25
1
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FRANKLIN WIRELESS CORP.
BALANCE SHEETS
-------------------------
(UNAUDITED)
MARCH 31, JUNE 30,
2009 2008
----------- -----------
ASSETS
Current Assets:
Cash $ 5,243,853 $ 6,172,569
Short-term investments 329,513 --
Accounts receivable 862,423 4,534,069
Prepaid income tax -- 355,393
Inventories 9,196,891 72,162
Advanced payments 81,900 --
Prepaid expenses 3,410 23,430
----------- -----------
Total current assets 15,717,990 11,157,623
Property and equipment, net 112,682 68,012
Other assets 11,241 15,411
----------- -----------
TOTAL ASSETS $15,841,913 $11,241,046
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 8,844,760 $ 4,047,651
Advanced payment from customers 1,600 390,000
Accrued liabilities 139,839 875,046
Deferred rent payable 17,043 --
Notes payable to a stockholder -- 334,000
----------- -----------
Total current liabilities 9,003,242 5,646,697
----------- -----------
Stockholders' Equity:
Preferred stock, par value $0.001 per share, authorized
10,000,000 shares; no preferred stock issued or outstanding as
of March 31, 2009 and June 30, 2008. -- --
Common stock, par value $0.001 per share, authorized
50,000,000 shares; 13,231,491 shares issued and outstanding as
of March 31, 2009 and June 30, 2008 13,232 13,232
Additional paid-in capital 5,016,161 5,016,161
Retained earnings 1,809,278 564,956
----------- -----------
Total stockholders' equity 6,838,671 5,594,349
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
$15,841,913 $11,241,046
=========== ===========
See accompanying notes to unaudited financial statements.
2
FRANKLIN WIRELESS CORP.
STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
---------------------------- ----------------------------
2009 2008 2009 2008
----------- ----------- ----------- -----------
Net sales $ 3,312,551 $ 7,395,200 $14,180,859 $23,898,442
Cost of goods sold 2,522,641 5,619,995 10,429,760 18,248,534
----------- ----------- ----------- -----------
Gross profit 789,910 1,775,205 3,751,099 5,649,908
----------- ----------- ----------- -----------
Operating expenses:
Research and development 30,000 -- 30,000 --
Selling, general, and administrative 502,272 873,869 2,119,606 2,333,239
----------- ----------- ----------- -----------
Total operating expenses 532,272 873,869 2,149,606 2,333,239
----------- ----------- ----------- -----------
Income from operations 257,638 901,336 1,601,493 3,316,669
Other income (expense):
Forgiveness of debt -- -- 33,400 --
Interest income 14,914 33,513 71,283 108,230
Other income (expense) 576 256 799 18,935
----------- ----------- ----------- -----------
Total other income (expense), net 15,490 33,769 105,482 127,165
----------- ----------- ----------- -----------
Net income before income taxes 273,128 935,105 1,706,975 3,443,834
Provision for income taxes 208,265 203,638 462,653 259,842
----------- ----------- ----------- -----------
Net income $ 64,863 $ 731,467 $ 1,244,322 $ 3,183,992
=========== =========== =========== ===========
Basic earnings per share $ 0.01 $ 0.06 $ 0.09 $ 0.24
Diluted earnings per share $ 0.01 $ 0.06 $ 0.09 $ 0.24
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.
3
FRANKLIN WIRELESS CORP.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
------------------------------
NINE MONTHS ENDED
MARCH 31,
-----------------------------
2009 2008
----------- -----------
CASH FLOWS FROM OPERATIONS ACTIVITIES:
Net income $ 1,244,322 $ 3,183,992
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation 14,269 6,901
Amortization of intangible assets -- 42,820
Bad debt 315 2,200
Forgiveness of debt (33,400) --
Changes in operating assets and liabilities:
Accounts receivable 3,671,331 (2,248,330)
Prepaid income taxes 355,393 --
Inventory (9,124,729) (5,868)
Advanced payments (81,900) --
Prepaid expense 20,020 5,992
Other assets 4,170 --
Accounts payable 4,797,109 2,672,046
Advance payment from customers (388,400) (354,500)
Accrued liabilities (735,207) (91,890)
Deferred rent payable 17,043 --
----------- -----------
Net cash provided by (used in) operating activities (239,664) 3,213,363
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (58,939) (49,615)
Short-term investments (329,513) --
----------- -----------
Net cash used in investing activities (388,452) (49,615)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of note payable (300,600) (100,000)
Receipt of stock subscription receivable -- 11,395
----------- -----------
Net cash used in financing activities (300,600) (88,605)
----------- -----------
Net increase (decrease) in cash and cash equivalents (928,716) 3,075,143
Cash and cash equivalents, beginning of period 6,172,569 2,477,593
----------- -----------
Cash and cash equivalents, end of period $ 5,243,853 $ 5,552,736
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ -- $ --
Income taxes $ 693,047 $ 259,842
See accompanying notes to unaudited financial statements.
4
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 March 31, 2009 and
audited as of June 30, 2008. The statement of operations is unaudited
for the three months and nine months ended March 31, 2009 and 2008. The
statement of cash flows is unaudited for the nine months ended March
31, 2009, and 2008. 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 accounting policies used in preparing these financial statements
are the same as those described in the Company's Form 10-K with the
exception of new accounting pronouncements adopted in fiscal year 2009.
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.
5
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.
SHORT-TERM INVESTMENTS
The Company considers all investments purchased with original
maturities greater than three months but less than one year to
be short-term investments.
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.
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.
As of March 31, 2009, the Company's inventories increased
significantly due to a one time large purchase of the CMU-300
WIMAX plus CDMA USB modems that the Company placed based on
the Company's internal demand forecasts using management's
best estimates available.
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
Furniture and fixtures 7 years
6
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 March 31, 2009, 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.
RESEARCH AND DEVELOPMENT EXPENSES
The Company requires all research and development expenses to
be expensed in the period in which they occur. Nonrefundable
advance payment for goods or services that will be used or
rendered for future research and development activities will
be recognized as an expense as the goods are delivered or the
related services are performed in accordance with Emerging
Issues Task Force Issue No. 07-3, "Accounting for
Nonrefundable Advance Payments for Goods or Services Received
for Use in Future Research and Development Activities," or
EITF No. 07-3. The Company will continue to evaluate whether
the goods to be delivered or services to be rendered. If the
Company does not expect the goods to be delivered or services
to be rendered, the capitalized advance payment will be
charged to expense.
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.
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
than 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.
7
The Company recognizes federal and state tax liabilities or
assets based on its estimate of taxes payable to or refundable
by tax authorities in the current fiscal year. The Company
also recognizes federal and state tax liabilities or assets
based on its estimate of 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. A valuation allowance is
required when it is more likely than not that the Company will
not be able to realize all or a portion of our deferred tax
assets.
Income tax provision from continuing operations for the nine
months ended March 31, 2009 and 2008 consists of the
following:
(UNAUDITED) (UNAUDITED)
-------------- --------------
MARCH 31, 2009 MARCH 31, 2008
-------------- --------------
Current income taxes expense:
Federal $329,945 $179,602
State 132,708 80,240
-------- --------
462,653 259,842
Deferred income taxes expense (benefits): -- --
-------- --------
PROVISION FOR INCOME TAXES $462,653 $259,842
======== ========
The provisions for income taxes reconcile to the amount
computed by applying effective federal statutory income tax
rate to income before provision for income taxes as follows:
(UNAUDITED)
NINE MONTHS ENDED MARCH 31,
------------------------------------------------------
2009 % 2008 %
----------- ------- ----------- -------
Federal tax provision, at statutory $ 556,571 34.0 $ 1,170,904 34.0
rate
State tax, net of fed tax benefit 145,687 8.9 281,647 8.2
Nondeductible expenses 3,763 0.2 1,075 --
Valuation allowance (243,368) (14.9) (1,202,041) (34.9)
Others -- -- 8,257 0.2
----------- ------- ----------- -------
Provision for income taxes $ 462,653 28.2 $ 259,842 7.5
=========== ======= =========== =======
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 March 31, 2009 and June 30, 2008
consisted of the following:
8
(UNAUDITED)
-------------- -------------
MARCH 31, 2009 JUNE 30, 2008
-------------- -------------
Current deferred tax asset (liabilities):
Net operating losses $ 135,622 $ 170,883
State tax (44,849) --
Other, net (29,988) 16,493
Non-current deferred tax assets (liabilities):
Net operating losses 1,911,273 2,011,633
Other, net (20,893) (4,477)
----------- -----------
Total deferred tax assets 1,951,165 2,194,532
Less valuation allowance (1,951,165) (2,194,532)
----------- -----------
Net deferred tax asset $ -- $ --
=========== ===========
The significant component of the deferred tax asset
(liability) at March 31, 2009 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 March 31, 2009,
and June 31, 2008, we established a full valuation allowance
on our net deferred tax assets based on the available
evidences, both positive and negative, to determine whether
valuation allowance is needed. Based on our losses before
income taxes in the past years before the fiscal year of 2007
and our estimated losses in the future three years, management
believed that it was more likely than not that most of the
deferred tax assets will not be realized. 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 period of three years.
At March 31, 2009, the established valuation allowance for the
net deferred tax asset was decreased by $243,367. As of March
31, 2009, 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 after application of IRC Section 382
limitation on net operating losses as result of the Company's
ownership change in 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.
A significant portion of the Company's revenue is derived from
a small number of customers. Four customers accounted for
$9,335,380, or 65.8% of total revenues during the nine months
ended March 31, 2009, and had related account receivables of
$675,000, or 78.3% of the total account receivable of
$862,423, at March 31, 2009.
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,
9
capacity constraints, or quality control problems that
negatively impacted the Company's revenue for the nine months
ended March 31, 2009 and 2008. For those periods, the Company
purchased approximately $19,247,678 and $18,254,402,
respectively, and had related accounts payable of $8,825,572
and $2,394,700 at March 31, 2009 and 2008, respectively. In
spite of the decrease in sales for the nine months ended March
31, 2009 compared to the corresponding period of 2008, the
Company's purchases remained similar for those periods due to
a one time large purchase of the CMU-300 WIMAX plus CDMA USB
modem.
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 March 31,
09, the Company has two deposits that exceeded the insured
limit of $250,000 by approximately $4,993,853 and $79,513,
respectively. However, the Company does not anticipate any
loss on excess deposits.
NOTE 4 - BALANCE SHEET DETAILS
SHORT-TERM INVESTMENTS
Short-term investment at March 31, 2009 and June 30, 2008,
consisted of the certificate of deposit of $329,513 with
original maturity of 12 months.
ACCOUNT RECEIVABLE
Accounts receivable at March 31, 2009 and June 30, 2008,
consisted of receivables from customers in the amounts of
$862,423 and $4,534,069, respectively.
PREPAID INCOME TAX
Prepaid income tax at March 31, 2009 and June 30, 2008
consisted of the following:
(UNAUDITED)
----------------- ----------------
MARCH 31, JUNE 30,
2009 2008
----------------- ----------------
Federal $ - $ 296,535
Sate - 58,858
----------------- ----------------
TOTAL $ - $ 355,393
================= ================
INVENTORIES
Inventories at March 31, 2009 and June 30, 2008 consisted of
the following:
(UNAUDITED)
------------------ ----------------
MARCH 31, JUNE 30,
2009 2008
------------------ ----------------
Inventories 9,196,891 $ 72,162
------------------ ----------------
TOTAL 9,196,891 $ 72,162
================== ================
10
At March 31, 2009, the increase in inventories was primarily
due to a one time large purchase of the CMU-300 WIMAX plus
CDMA USB modem that the Company placed based on the Company's
internal demand forecasts using management's best estimates
available.
ADVANCED PAYMENTS
Advanced payments at March 31, 2009 and June 30, 2008
consisted of the following:
(UNAUDITED)
---------------- --------------
MARCH 31, JUNE 30,
2009 2008
---------------- -------------
Advanced payments to vendor $ 11,900 $ -
Nonrefundable advance payment 70,000 -
---------------- -------------
TOTAL $ 81,900 $ -
================ =============
Nonrefundable advance payment of $70,000 for goods or services
that will be used or rendered for future research and
development activities was deferred and capitalized in
accordance with Emerging Issues Task Force Issue No. 07-3,
"Accounting for Nonrefundable Advance Payments for Goods or
Services Received for Use in Future Research and Development
Activities", or EITF No. 07-3. The amount will be recognized
as an expense as the goods are delivered or the related
services are performed. The Company will continue to evaluate
whether the goods to be delivered or services to be rendered.
If the Company does not expect the goods to be delivered or
services to be rendered, the capitalized advance payment will
be charged to expense.
PREPAID EXPENSES
Prepaid expenses at March 31, 2009 and June 30, 2008 consisted
of the following:
(UNAUDITED)
---------------- ---------------
MARCH 31, JUNE 30,
2009 2008
---------------- ---------------
Prepaid insurance $ 1,892 $ 2,725
Prepaid marketing fee 1,480 11,600
Prepaid professional fee 38 -
Prepaid office lease fee - 9,105
---------------- ---------------
TOTAL $ 3,410 $ 23,430
================ ===============
OTHER ASSETS
Other assets at March 31, 2009 and June 30, 2008 consisted of
the following:
(UNAUDITED)
-------------- --------------
MARCH 31, JUNE 30,
2009 2008
-------------- --------------
Lease deposit, corporate housing $ 709 $ 709
Lease deposit, administrative office 9,833 14,003
Utility deposit 282 282
Other deposit 417 417
-------------- --------------
TOTAL $ 11,241 $ 15,411
============== ==============
11
PROPERTY AND EQUIPMENT
Property and equipment at March 31, 2009 and June 30, 2008
consisted of the following:
(UNAUDITED)
------------- --------------
MARCH 31, JUNE 30,
2009 2008
------------- -------------
Computers and software $ 104,330 $ 48,827
Furniture and fixtures 56,330 52,894
------------- -------------
160,660 101,721
Less accumulated depreciation (47,978) (33,709)
------------- -------------
TOTAL $ 112,682 $ 68,012
============= =============
Depreciation expense associated with property and equipment
was $14,269 and $6,901 for the nine months ended March 31,
2009 and 2008, respectively.
ACCRUED LIABILITIES
Accrued liabilities at March 31, 2009, and June 30, 2008,
consisted of the following:
(UNAUDITED)
------------- -----------
MARCH 31, JUNE 30,
2009 2008
------------ -----------
Salaries payable $ - $ 135,000
Income tax payable 99,214 689,421
Accrued professional fees payable 5,000 31,500
Sales commission payable 3,000 -
Marketing development fund payable 32,625 19,125
------------ -----------
TOTAL $ 139,839 $ 875,046
============ ===========
DEFERRED RENT PAYABLE
Deferred Rent Payable at March 31, 2009, and June 30, 2008,
consisted of the following:
(UNAUDITED)
-------------- -----------
MARCH 31, JUNE 30,
2009 2008
-------------- -----------
Deferred rent payable $ 17,043 $ -
-------------- -----------
TOTAL $ 17,043 $ -
============== ===========
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.
12
NOTES PAYABLE TO STOCKHOLDERS
Notes payable at March 31, 2009, and June 30, 2008, consisted
of the following:
(UNAUDITED)
-------------- ------------
MARCH 31, JUNE 30,
2009 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 nine
months ended March 31, 2009, 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, and its principal future obligations and commitments as
of the expiration date are approximately $260,000. 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 $80,778 and $47,221 for the nine months
ended March 31, 2009 and 2008, respectively.
The Company leases its corporate housing facility under a
non-cancelable operating lease that expires on April 30, 2009
for its vendor, and its principal future obligations and
commitments as of the expiration date total $1,567. Rent
expense related to the operating lease was $14,023 and $13,203
for the nine months ended March 31, 2009 and 2008,
respectively.
The Company leases one automobile under an operating lease
that expires on July 22, 2009, and its principal future
obligations and commitments as of the expiration date is
approximately $2,150. Lease expense was $4,839 and $4,839 for
the nine months ended March 31, 2009 and 2008, respectively.
LITIGATION
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 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.
13
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
May 15, 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.
NOTE 7 - RECENT ACCOUNTING PRONOUNCEMENTS
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.
In March 2009, the Company adopted EITF Issue No. 07-3, Accounting for
Nonrefundable Advance Payments for Goods or Services Received for Use
in Future Research and Development Activities ("EITF No. 07-3"). EITF
No. 07-3 requires that nonrefundable advance payments for goods or
services that will be used or rendered for future research and
development activities be deferred and capitalized and recognized as an
expense as the goods are delivered or the related services are
performed. EITF No. 07-3 is effective, on a prospective basis, for
fiscal years beginning after December 15, 2007. The Company believes
that the adoption of EITF No. 07-3 does not have a material impact on
the Company's financial statements at this time.
In April 2009, the FASB issued FSP FAS 115-2 and FAS 124-2,
"Recognition and Presentation of Other-Than-Temporary Impairments"
("FSP FAS 115-2/124-2"). FSP FAS 115-2/124-2 requires entities to
separate any other-than-temporary impairment of a debt security into
two components when there are credit related losses associated with the
impaired debt security for which management asserts that it does not
have the intent to sell the security, and it is more likely than not
that it will not be required to sell the security before recovery of
its cost basis. The amount of the other-than-temporary impairment
related to a credit loss is recognized in earnings, and the amount of
the other-than-temporary impairment related to other factors is
recorded in other comprehensive loss. FSP FAS 115-2/124-2 is effective
for periods ending after June 15, 2009, with early adoption permitted
for periods ending after March 15, 2009. The Company believes that FSP
FAS 115-2/124-2 has no effect on the Company's financial statements at
this time.
14
In April 2009, the FASB issued FSP FAS 157-4, "Determining Fair Value
When Volume and Level of Activity for the Asset or Liability Have
Significantly Decreased and Identifying Transactions that are Not
Orderly" ("FSP FAS 157-4"). Under FSP FAS 157-4, if an entity
determines that there has been a significant decrease in the volume and
level of activity for the asset or the liability in relation to the
normal market activity for the asset or liability (or similar assets or
liabilities), then transactions or quoted prices may not accurately
reflect fair value. In addition, if there is evidence that the
transaction for the asset or liability is not orderly, the entity shall
place little, if any weight on that transaction price as an indicator
of fair value. FSP FAS 157-4 is effective for periods ending after June
15, 2009, with early adoption permitted for periods ending after March
15, 2009. The Company believes that FSP FAS 157-4has no effect on the
Company's financial statements at this time.
In April 2009, the FASB issued FSP FAS 107-1 and APB 28-1, "Interim
Disclosures about Fair Value of Financial Instruments" ("FSP FAS 107-1
and APB 28-1"). FSP FAS 107-1 and APB 28-1 require disclosures about
fair value of financial instruments in interim and annual financial
statements. FSP FAS 107-1 and APB 28-1 are effective for periods ending
after June 15, 2009, with early adoption permitted for periods ending
after March 15, 2009. The Company believes that FSP FAS 107-1 and APB
28-1 have no effect on the Company's financial statements at this time.
There are no other accounting standards issued as of May 15, 2009 that
are expected to have a material impact on the Company's financial
statements.
NOTE 8 - RELATED PARTY TRANSACTIONS
The Company purchased CDMA wireless data products in the amount of
$19,247,678, or 98.5% of total purchases, from C-Motech Co. Ltd., for
the nine months ended March 31, 2009 and had related accounts payable
of $8,825,572 as of March 31, 2009. 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 26, 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.
15
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.
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.
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.
SHORT-TERM INVESTMENTS
The Company considers all investments purchased with original
maturities greater than three months but less than one year to
be short-term investments.
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
16
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.
RESEARCH AND DEVELOPMENT EXPENSES
The Company requires all research and development expenses to
be expensed in the period in which they occur. Nonrefundable
advance payment for goods or services that will be used or
rendered for future research and development activities will
be recognized as an expense as the goods are delivered or the
related services are performed in accordance with Emerging
Issues Task Force Issue No. 07-3, "Accounting for
Nonrefundable Advance Payments for Goods or Services Received
for Use in Future Research and Development Activities", or
EITF No. 07-3. The Company will continue to evaluate whether
the goods to be delivered or services to be rendered. If the
Company does not expect the goods to be delivered or services
to be rendered, the capitalized advance payment will be
charged to expense.
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 March 31, 2009, 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
than 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.
17
The Company recognizes federal and state tax liabilities or
assets based on its estimate of taxes payable to or refundable
by tax authorities in the current fiscal year. The Company
also recognizes federal and state tax liabilities or assets
based on its estimate of 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. A valuation allowance is
required when it is more likely than not that the Company will
not be able to realize all or a portion of our deferred tax
assets.
Income tax provision from continuing operations for the nine
months ended March 31, 2009 and 2008 consists of the
following:
(UNAUDITED) (UNAUDITED)
-------------- --------------
MARCH 31, 2009 MARCH 31, 2008
-------------- --------------
Current income taxes expense:
Federal $329,945 $179,602
State 132,708 80,240
-------- --------
462,653 259,842
Deferred income taxes expense (benefits): -- --
-------- --------
PROVISION FOR INCOME TAXES $462,653 $259,842
======== ========
The provisions for income taxes reconcile to the amount
computed by applying effective federal statutory income tax
rate to income before provision for income taxes as follows:
(UNAUDITED)
NINE MONTHS ENDED MARCH 31,
--------------------------------------------------------------
2009 % 2008 %
-------------- ----------- ---------------- ---------
Federal tax provision, at statutory $ 556,571 34.0 $ 1,170,904 34.0
rate
State tax, net of fed tax benefit 145,687 8.9 281,647 8.2
Nondeductible expenses 3,763 0.2 1,075 -
Valuation allowance (243,368) (14.9) (1,202,041) (34.9)
Others - - 8,257 0.2
-------------- ----------- ---------------- ---------
Provision for income taxes $ 462,653 28.2 $ 259,842 7.5
============== =========== ================ =========
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 March 31, 2009 and June 30, 2008
consisted of the following:
18
(UNAUDITED)
-------------- -------------
MARCH 31, 2009 JUNE 30, 2008
-------------- -------------
Current deferred tax asset (liabilities):
Net operating losses $ 135,622 $ 170,883
State tax (44,849) --
Other, net (29,988) 16,493
Non-current deferred tax assets (liabilities):
Net operating losses 1,911,273 2,011,633
Other, net (20,893) (4,477)
----------- -----------
Total deferred tax assets 1,951,165 2,194,532
Less valuation allowance (1,951,165) (2,194,532)
----------- -----------
Net deferred tax asset $ -- $ --
=========== ===========
The significant component of the deferred tax asset
(liability) at March 31, 2009 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 March 31, 2009,
and June 31, 2008, we established a full valuation allowance
on our net deferred tax assets based on the available
evidences, both positive and negative, to determine whether
valuation allowance is needed. Based on our losses before
income taxes in the past years before the fiscal year of 2007
and our estimated losses in the future three years, management
believed that it was more likely than not that most of the
deferred tax assets will not be realized. 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 period of three years.
At March 31, 2009, the established valuation allowance for the
net deferred tax asset was decreased by $243,367. As of March
31, 2009, 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 after application of IRC Section 382
limitation on net operating losses as result of the Company's
ownership change in 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 nine months ended
March 31, 2009 and 2008, selected statements of operations data
expressed as a percentage of sales:
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
--------------------------- -------------------------
2009 2008 2009 2008
------------ ---------- ------------ ----------
Net Sales 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 76.2% 76.0% 73.5% 76.4%
------------ ---------- ------------ ---------
Gross profit 23.8% 24.0% 26.5% 23.6%
------------ ---------- ------------ ---------
Operating expenses:
Research and development expenses 0.9% 0.3%
Selling, general and administrative expenses 15.1% 11.8% 14.9% 9.7%
------------ ---------- ------------ ---------
Total operating expenses 16.0% 11.8% 15.2% 9.7%
------------ ---------- ------------ ---------
Income from operations 7.8% 12.2% 11.3% 13.9%
Other income (expense), net 0.5% 0.5% 0.7% 0.5%
------------ ---------- ------------ ---------
Net income before income taxes 8.3% 12.7% 12.0% 14.4%
Provision for income taxes 6.3% 2.8% 3.3% 1.1%
------------ ---------- ------------ ---------
Net income 2.0% 9.9% 8.7% 13.3%
============ ========== ============ =========
19
The results of the interim periods are not necessarily indicative of
results for the entire fiscal year.
THREE MONTHS ENDED MARCH 31, 2009
COMPARED TO THREE MONTHS ENDED MARCH 31, 2008
NET SALES
Net sales decreased by $4,082,649, or 55.2%, to $3,312,551 for
the three months ended March 31, 2008 from $7,395,200 for the
corresponding period of 2008. The overall decrease in sales
was primarily due to a mix of decrease in sales and sales
price for the Company's "EV-DO technology" products in
Caribbean and South American countries, caused by a decline in
purchasing power of customers and their currencies. The
decrease in sales volume in Caribbean and South American
countries was approximately $4,588,000, or 77.2%, for the
three months ended March 31, 2009 compared to the
corresponding period of 2008. On the other hand, for those
periods, net sales in the United States increased by
approximately $500,000, or 34.9%, as a result of the Company's
continuous efforts to extend its business.
GROSS PROFIT
Gross profit decreased by $985,295, or 55.5%, to $789,910 for
the three months ended March 31, 2009 from $1,775,205 for the
corresponding period of 2008. The decrease was primarily due
to the change in net sales as discussed above. The gross
profit in terms of net sales percentage was 23.8% for the
three months ended March 31, 2009 compared to 24.0% for the
corresponding period of 2008.
RESEARCH AND DEVELOPMENT
Research and development expenses increased by $30,000, or
100.0%, to $30,000 for the three months ended March 31, 2009
from $0 for the corresponding period of 2008. This increase in
expenses reflected to maintain or increase the Company's
investment in research and development to continue to provide
innovative products and services.
SELLING, GENERAL, AND ADMINISTRATIVE
Selling, general, and administrative expenses decreased by
$371,597, or 42.5%, to $502,272 for the three months ended
March 31, 2009 from $873,869 for the corresponding period of
2008. The decrease was primarily due to approximately $365,000
decrease in marketing expenses for the three months ended
March 31, 2009 compared to the corresponding period. Selling,
general and administrative expenses as a percentage of revenue
are expected to fluctuate in and future quarters depending on
the amount of net sales recognized.
OTHER INCOME (EXPENSE), NET
The net of other income (expense) decreased by $18,279, or
54.1%, to $15,490 for the three months ended March 31, 2009
from $33,769 for the corresponding period of 2008. The overall
decrease is primarily due to $18,599 decrease in interest
income caused by the advanced payment of $1 million paid to
C-Motech for the three months ended March 31, 2009.
20
NINE MONTHS ENDED MARCH 31, 2009
COMPARED TO NINE MONTHS ENDED MARCH 31, 2008
NET SALES
Net sales decreased by $9,717,583, or 40.7%, to $14,180,859
for the nine months ended March 31, 2009 from $23,898,442 for
the corresponding period of 2008. The overall decrease in
sales was primarily due to a mix of decrease in sales and
sales price for the Company's "EV-DO technology" products in
Caribbean and South American countries, caused by a decline in
purchasing power of customers and their currencies. The
decrease in sales volume in Caribbean and South American
countries was approximately $8,759,000, or 53.8%, for the nine
months ended March 31, 2009 compared to the corresponding
period of 2008.
GROSS PROFIT
Gross profit decreased by $1,898,809, or 33.6%, to $3,751,099
for the nine months ended March 31, 2009 from $5,649,908 for
the corresponding period of 2008. The decrease was primarily
due to the change in net sales as discussed above. The gross
profit in terms of net sales percentage was 26.5% for the nine
months ended March 31, 2009 compared to 23.6% for the
corresponding period of 2008.
RESEARCH AND DEVELOPMENT
Research and development expenses increased by $30,000, or
100.0%, to $30,000 for the nine months ended March 31, 2009
from $0 for the corresponding period of 2008. This increase in
expenses reflected to maintain or increase the Company's
investment in research and development to continue to provide
innovative products and services.
SELLING, GENERAL, AND ADMINISTRATIVE
Selling, general, and administrative expenses decreased by
$213,633, or 9.2%, to $2,119,606 for the nine months ended
March 31, 2009 from $2,333,239 for the corresponding period of
2008. The decrease was the net effect of $447,690 decrease in
marketing expenses, and $249,509 increase in salary and
related expenses. The increase in salary and related expenses
reflected the increased Company's investment in reinforcement
of its sales team to continue to expand business and provide
high-grade customer service. Selling, general, and
administrative expenses as a percentage of revenue are
expected to fluctuate in and future quarters depending on the
amount of net sales recognized.
OTHER INCOME (EXPENSE), NET
The net of other income (expense) decreased by $21,683, or
17.1%, to $105,482 for the nine months ended March 31, 2009
from $127,165 for the corresponding period of 2008. The
decrease was the net effect of $36,948 decrease in interest
income caused by the advanced payment of $1 million paid to
C-Motech, and $33,400 increase in forgiveness of debt for the
nine months ended March 31, 2009.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents decreased by $928,716 to $5,243,853 as of
March 31, 2009 compared to $6,172,569 as of June 30, 2008. The decrease
was primarily due to a $1,939,670 decrease in net income, $329,513 used
in short-term investment, and $300,600 used in payment of the note
payable.
21
OPERATING ACTIVITIES
Net cash used in operating activities was $239,664 for the
nine months ended March 31, 2009, and net cash provided by
operating activities was $3,123,363 for the nine months ended
March 31, 2008. The decrease from the prior period is
primarily due to the increase in inventory and decrease in net
income.
INVESTING ACTIVITIES
Net cash used in investing activities was $388,452 and $49,615
for the nine months ended March 31, 2009, and 2008,
respectively, consisting of capital expenditures.
FINANCING ACTIVITIES
Net cash used in financing activities was $300,600, which was
the net amount of the note paid in full to a stockholder after
10% discount of $33,400 represented as a forgiveness of debt,
for the nine months ended March 31, 2009. Net cash used in
financing activities was $88,605, which was the net amount of
the note paid and a receipt of stock subscription receivable,
for the nine months ended March 31, 2008.
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 March 31, 2009, include the following:
OPERATING LEASE
The Company leases its administrative facilities under a
non-cancelable operating lease that expires on August 31,
2011, and its principal future obligations and commitments as
of the expiration date are approximately $260,000. 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 $80,778 and $47,221 for the nine months
ended March 31, 2009 and 2008, respectively.
The Company leases its corporate housing facility under a
non-cancelable operating lease that expires on April 30, 2009
for its vendor, and its principal future obligations and
commitments as of the expiration date are $1,567. Rent expense
related to the operating lease was $14,023 and $13,203 for the
nine months ended March 31, 2009 and 2008, respectively.
The Company leases one automobile under an operating lease
that expires on July 22, 2009, and its principal future
obligations and commitments as of the expiration date is
approximately $2,150. Lease expense was $4,839 and $4,839 for
the nine months ended March 31, 2009 and 2008, respectively.
LITIGATION
From time to time 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.
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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
May 15, 2009, the agreement is still valid for an additional
one year period.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
As the Company is a "smaller reporting company," this Item is
inapplicable.
ITEM 4T. 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 March 31, 2009.
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.
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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.
Our Annual Report on Form 10-K for the fiscal year ended June 30, 2008
filed with the SEC on September 26, 2008(the "ANNUAL REPORT"), includes
a detailed discussion of our risk factors under the heading "PART I,
ITEM 1A -- RISK FACTORS." You should carefully consider the risk
factors discussed in our Annual Report and the additional risk factor
described below, as well as the other information in this quarterly
report. Any of these risks could cause our business, financial
condition, results of operations and future growth prospects to suffer.
THE SUBSTANTIAL LEVEL OF INVENTORY MAINTAINED BY THE COMPANY COULD
INCREASE ITS LOSSES IF THE INVENTORY IS NOT SOLD FOR ANY REASON. As of
March 31, 2009, the Company's inventories increased significantly due
to a one time large purchase of the CMU-300 WIMAX plus CDMA USB modems.
Although the purchase was based on the Company's internal demand
forecasts using management's best estimates available, there could be
unsold inventories resulting from a number of reasons, including a
potential inability on the part of customers to finance purchases of
the Company's products and reduced demand by the ultimate end-users of
the Company's products.
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.
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 Section 13 of 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Franklin Wireless Corp.
By: /s/ OC Kim
-----------------------------
OC Kim
President and Acting Chief Financial Officer
Dated: May 15, 2009
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