Franklin Towers Enterprises 10Q 2010 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarter ended June 30, 2010

¨ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____ to _____

Commission File Number: 0-52150

FRANKLIN TOWERS ENTERPRISES, INC.

(Exact name of small business issuer as specified in its charter)

Nevada	20-4069588
(State of incorporation)	(IRS Employer ID Number)

88 Julong Road

Lidu Economic Development Zone

Fulin, Chongqing, China

(Address of principal executive offices)

011-86-2372183330

(Issuer's telephone number)

(Former name, former address and former fiscal year, if changed since last report)

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer ¨	Accelerated filer ¨
Non-accelerated filer ¨	Smaller reporting company x
(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

Indicate the number of shares outstanding as of August 23, 2010: 123,484,043

TABLE OF CONTENTS

PART I
Item 1. Financial Statements	3
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. Forward-Looking Statements	4
Item 3. Quantitative and Qualitative Disclosures About Market Risk.	17
Item 4. Controls and Procedures.	18
PART II OTHER INFORMATION
Item 1. Legal Proceedings.	18
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.	19
Item 3. Defaults Upon Senior Securities.	19
Item 4. Removed and Reserved	19
Item 5. Other Information.	19
Item 6. Exhibits	19

PART I

Item 1. Financial Statements

FRANKLIN TOWERS ENTERPRISES, INC. AND SUBSIDIARY

INDEX TO FINANCIAL STATEMENTS

	Page

Condensed Consolidated Balance Sheets as of June 30, 2010 (Unaudited) and December 31, 2009	F-1

Condensed Consolidated Statements of Losses and Comprehensive Losses for the three and six months ended June 30, 2010 and 2009 (Unaudited)	F-2

Condensed Consolidated Statement of Stockholders’ Deficit for the six months ended June 30, 2010 (Unaudited) and the year ended December 31, 2009	F-3

Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2010 and 2009 (Unaudited)	F-4

Notes to Condensed Consolidated Financial Statements (Unaudited)	F-5 - F-24

FRANKLIN TOWERS ENTERPRISES, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS

	June 30,			December 31,
	2010			2009
	(Unaudited)			(Restated)
ASSETS
Current Assets:
Cash and cash equivalents	$	566,851		$	2,788,581
Accounts receivable - net of allowance for doubtful accounts of $35,552 and $20,631 as of June 30, 2010 and December 31, 2009 respectively		445,463			20,630
Inventories		844,526			1,441,685
Prepaid costs and expenses		359,197			135,314
Other receivables		1,441,114			21,232
Restricted cash relating to bank acceptance payable		737,788			-
Total Current Assets		4,394,939			4,407,442
Property and Equipment, net		728,651			796,144

Other Assets:
Deposits		-			996,200
Total Other Assets		-			996,200
TOTAL ASSETS	$	5,123,590		$	6,199,786

LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Bank acceptance payable to related party	$	1,475,000		$	-
Convertible notes payable		2,792,175			2,792,175
Loans payable - short term		20,000			2,217,500
Accounts payable and accrued expenses		3,938,381			3,260,596
Customer prepaid		337,500			536,344
Loans payable - related parties		21,257			19,391
Total Current Liabilities		8,584,313			8,826,006

TOTAL LIABILITIES		8,584,313			8,826,006
Stockholders' Deficit:
Preferred stock, $0.001 par value; 5,000,000 shares authorized, 0 shares issued and outstanding as of June 30, 2010 and December 31, 2009		-			-
Common stock, $.0001 par value; 1,250,000,000 shares authorized, 123,484,043 shares issued and outstanding as of June 30, 2010 and December 31, 2009, respectively		12,348			12,348
Additional paid-in capital		18,345,012			18,345,012
Accumulated deficit		(22,135,814	)		(21,296,442	)
Accumulated other comprehensive income		317,731			312,862
Total Stockholders' Deficit		(3,460,723	)		(2,626,220	)
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT	$	5,123,590		$	6,199,786

The accompanying notes are an integral part of these condensed consolidated financial statements.

F-1

FRANKLIN TOWERS ENTERPRISES, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF LOSSES AND COMPREHENSIVE LOSSES

(UNAUDITED)

	Three Months Ended June 30,						Six Months Ended June 30,
	2010			2009			2010			2009
				(Restated)						(Restated)
Net Sales	$	1,110,585		$	2,485,527		$	1,823,096		$	2,883,898
Cost of Sales		1,202,532			2,280,552			1,803,460			2,651,038
Gross Profit (Loss)		(91,947	)		204,975			19,636			232,860
Operating Expenses:
Professional fees		13,431			17,365			30,455			33,994
Depreciation and amortization		10,084			10,088			20,195			19,713
Selling, general and administrative expenses		110,235			128,050			251,540			248,412
Total Operating Expenses		133,750			155,503			302,190			302,119
Loss From Operations		(225,697	)		49,472			(282,554	)		(69,259	)
Other Income (Expenses):
Subsidy income		-			440,664			173,611			706,122
Interest income		1,419			356			2,221			6,813
Interest expense		(368,817	)		(506,483	)		(732,650	)		(916,409	)
Total Other (Expense)		(367,398	)		(65,463	)		(556,818	)		(203,474	)
Loss Before Income Tax		(593,095	)		(15,991	)		(839,372	)		(272,733	)
Provision for Income Tax		-			-			-			-
Net Loss	$	(593,095	)	$	(15,991	)	$	(839,372	)	$	(272,733	)
Net Loss per Share - Basic and Diluted	$	(0.00	)	$	(0.00	)	$	(0.01	)	$	(0.00	)

Weighted Average Shares Outstanding - Basic and Diluted		123,484,043			123,484,043			123,484,043			123,484,043

Comprehensive Loss:
Net loss	$	(593,095	)	$	(15,991	)	$	(839,372	)	$	(272,733	)
Foreign currency translation adjustment		4,871			2			4,869			(2,974	)
Comprehensive Loss	$	(588,224	)	$	(15,989	)	$	(834,503	)	$	(275,707	)

The accompanying notes are an integral part of these condensed consolidated financial statements.

F-2

FRANKLIN TOWERS ENTERPRISES, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT

FOR THE SIX MONTHS ENDED JUNE 30, 2010 (UNAUDITED) AND THE YEAR ENDED DECEMBER 31, 2009

	Preferred Stock				Common Stock				Additional					Accumulated Other
	Shares		Amount		Shares		Amount		Paid - in Capital		Accumulated Deficit			Comprehensive Income			Total
Balance - December 31, 2008 (Restated)		-	$	-		123,484,043	$	12,348	$	18,345,012	$	(20,022,170	)	$	316,294		$	(1,348,516	)
Net loss for the year ended December 31, 2009 (Restated)		-		-		-		-		-		(1,274,272	)		-			(1,274,272	)
Foreign currency translation adjustment		-		-		-		-		-		-			(3,432	)		(3,432	)
Balance - December 31, 2009 (Restated)		-		-		123,484,043		12,348		18,345,012		(21,296,442	)		312,862			(2,626,220	)
Net loss for the six months ended June 30, 2010 (Unaudited)		-		-		-		-		-		(839,372	)		-			(839,372	)
Foreign currency translation adjustment (Unaudited)		-		-		-		-		-		-			4,869			4,869
Balance - June 30, 2010 (Unaudited)		-	$	-		123,484,043	$	12,348	$	18,345,012	$	(22,135,814	)	$	317,731		$	(3,460,723	)

The accompanying notes are an integral part of these condensed consolidated financial statements.

F-3

FRANKLIN TOWERS ENTERPRISES, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

	Six Months Ended June 30,
	2010			2009
	(Unaudited)			(Restated)
Cash Flows from Operating Activities:
Net Loss	$	(839,372	)	$	(272,733	)
Adjustments to Reconcile Net Loss to Net
Cash Provided by (Used in) Operating Activities:
Interest earned on restricted cash		(288	)		-
Depreciation expense		52,729			46,112
Provision for doubtful accounts		14,680			8,172
Accrued convertible notes interest and penalties		544,474			544,475
Changes in operating assets and liabilities:
Increase in accounts receivable		(439,754	)		(191,227	)
Decrease in inventories		597,159			810,084
(Increase) decrease in prepaid costs and expenses		(223,883	)		373,343
Increase in accounts payable and accrued liabilities		133,311			16,982
(Decrease) increase in customer prepaid		(198,844	)		1,016,660
Net Cash (Used in) Provided by Operating Activities		(359,788	)		2,351,868
Cash Flows from Investing Activities:
Capital expenditures		-			(5,272	)
Proceeds from sale of property		19,704			-
Acquisition deposits paid		-			(512,400	)
Advance made by Company to related parties		(682,382	)		(3,554,977	)
Net Cash (Used in) Investing Activities		(662,678	)		(4,072,649	)
Cash Flows from Financing Activities:
Proceeds of short term loan later offset in lieu of return of acquisition deposit		995,625			-
(Repayment) proceeds of short term loans		(2,197,500	)		2,023,058
Deposit made by Company into restricted cash account to secure bank acceptances payable		(737,500	)		(4,611,600	)
Advance from related party to fund bank acceptances payable		737,500			4,611,600
Advance from other related party		1,866			-
Net Cash (Used in) Provided by Financing Activities		(1,200,009	)		2,023,058
Effect of Exchange Rate Changes on Cash and Cash Equivalents		745			(3,189	)
Net (Decrease) Increase in Cash and Cash Equivalents		(2,221,730	)		299,088
Cash and Cash Equivalents - Beginning of Period		2,788,581			61,867
Cash and Cash Equivalents - End of Period	$	566,851		$	360,955

Supplemental Cash Flow Information:
Interest paid	$	186,874		$	370,632
Income taxes paid	$	-		$	-

Noncash Investing and Financing Activities
Loans payable - short term authorized by lender as offset for acquisition deposit (Note 9)	$	995,625		$	-

The accompanying notes are an integral part of these condensed consolidated financial statements.

F-4

FRANKLIN TOWERS ENTERPRISES, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 1 – DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

Organization

Franklin Towers Enterprises, Inc. (“Franklin”) was incorporated on March 23, 2006 under the laws of the State of Nevada.

On June 19, 2007, Franklin entered into a Share Purchase Agreement with the shareholders of Chongqing Qiluo Textile Co. Ltd. (“Qiluo”), a limited liability company organized under the laws of the People’s Republic of China, whereby Franklin agreed to acquire 100% of the issued and outstanding registered capital of Qiluo for consideration of 5,000,000 shares of Franklin’s Series A Convertible Preferred Stock (convertible into 52,880,000 shares of common stock) (see Note 11). Upon consummation of such purchase, Qiluo became a wholly-owned subsidiary of Franklin.

The acquisition was accounted for as a “reverse acquisition”, since the stockholders of Qiluo owned a majority of Franklin’s common stock immediately following the transaction. The combination of the two companies was recorded as a recapitalization of Qiluo pursuant to which Qiluo was treated as the continuing entity although Franklin was the legal acquirer. Accordingly, the Company’s historical financial statements were those of Qiluo.

Qiluo was incorporated on December 15, 2006, named “Chongqing Qiluo Industry Ltd.” under the laws of the People’s Republic of China with the purpose of engaging in the manufacture and sale of silk and silk products. Qiluo renamed to “Chongqing Qiluo Textile Co., Ltd.” On May 30, 2008, Qiluo renamed to “Chongqing Fuling Qiluo Wintus Silk Co., Ltd”. On November 4, 2009, the Company renamed to current name “Chongqing Fuling Qiluo Cocoon Silk Company, Ltd.”.

After the acquisition, Franklin focused on the production and sale of silk and silk products. The Company started its test production at the end of June 2007 and commenced operations from the third quarter of 2007.

All references to common stock, share and per share amounts have been retroactively restated to reflect the reverse acquisition as if the transaction had taken place as of the beginning of the earliest period presented.

Going Concern

The Company started its test production at the end of June 2007 and commenced its manufacturing operations during the third quarter of 2007. The Company has incurred a net loss of $839,372 and $272,733, for the six months ended June 30, 2010 and 2009, respectively. The Company has an accumulated deficit of $22,135,814 at June 30, 2010. Substantial portions of the losses are attributable to common stock issued for consulting services, amortization of debt discount, deferred finance costs and beneficial conversion feature, and accrued interest and penalties in connection with the default of the Convertible Notes. The Company had a working capital deficiency of $4,189,374 and $4,418,564 as of June 30, 2010 and December 31, 2009, respectively.

Furthermore, as of July 12, 2008, the Company was in default on its Convertible Notes payments due July 12, 2008. The Notes provide that, at the option of the holder, an event of default shall make all sums of principal and interest then remaining unpaid and all other amounts payable immediately due and payable upon demand. As of June 30, 2010, the unpaid convertible notes payable balance is $2,792,175; unpaid accrued interest is $623,957; and unpaid accrued liquidated damages penalty and default penalty are $2,093,570.

F-5

In an effort to restructure the Notes and related accrued interest and liquidated damages due, the Company circulated an Outline of Proposed Restructuring (the “Term Sheet’) dated April 14, 2010 to the noteholders which was agreed to and signed by 9 of 11 noteholders. The 9 noteholders who signed the Term Sheet constituted $2,300,000 of the original $3,300,000 total principal balance of the convertible Notes. Although the Term Sheet provided that the parties reserved the right to approve all the terms of the definitive documents, definitive documents have not yet been prepared. Accordingly, the Company has not as yet recognized any reduction of the balance of the respective Notes and related liabilities and consequent gain from this proposed restructuring. Also, the Company has continued to accrue interest expense and liquidated damages penalties in accordance with the terms of the original Notes.

These factors raise substantial doubt concerning the Company’s ability to continue as a going concern.

There can be no assurance that funds will be generated during the next twelve months or thereafter from the Company’s current operations, or that funds will be available from external sources such as debt or equity financings or other potential sources. The lack of additional capital could force the Company to curtail or cease operations and would, therefore, have a material adverse effect on its business. Furthermore, there can be no assurance that any such required funds, if available, will be available on attractive terms or that they will not have a significant dilutive effect on the Company's existing stockholders.

During 2008, the Company received proceeds from a significant shareholder in the amount of $1,722,656 as a repayment of nonreciprocal funds transferred to this shareholder during 2007. The Company also received proceeds of short term loans totaling $351,206 and $955,209 during 2009 and 2008, respectively.

In May 2010, the Fulin Municipal Government revoked the Company’s right to operate the Zhengzhong assets. The loan of RMB 6,750,000 ($995,625) that the Company received from Chongqing Fulin State-Owned-Assets Management Co. (“Fulin Asset Management”) during the first quarter 2010, was offset against deposits receivable from Zhengzhong in the same aggregate amount based on Fulin Asset Management’s authorization to do so.

The Company has undertaken further steps as part of a plan to improve operations. The Company planned to reduce its cost of goods sold by purchasing more of its main raw material – cocoon directly from farmers in the local neighboring area and to reduce its overhead cost by fully utilizing its current manufacture facilities. From the Spring of 2008, the Company began purchasing its main raw material directly from farmers through the planned acquisition of “Zhengzhong” (see Note 9), thereby helped the Company to reduce its raw material - cocoon cost and increase its operating gross margin rate to 15.66% in March 31, 2010 as compared to 7.00% for the three months ended March 31, 2009. However, the Fulin Municipal Government revoked the Company’s right to operate the “Zhengzhong” assets in May 2010. The Company now has to purchase cocoon from third parties with increased prices. This will have a material impact on the profitability of the Company. The Company had a negative gross margin due to 32% increase in cocoon price during the second quarter of 2010. The Company is currently in negotiation with the Fulin Government for the return of the rights related to the Zhengzhong cocoon station operations. However, there can be no assurance that the Company will be able to re-obtain the rights.

There can be no assurance that any additional financings will be available to the Company on satisfactory terms and conditions, if at all. In the event we are unable to continue as a going concern, we may elect or be required to seek protection from our creditors by filing a voluntary petition in bankruptcy or may be subject to an involuntary petition in bankruptcy.

The accompanying condensed consolidated financial statements do not include any adjustments related to the recoverability or classification of asset-carrying amounts or the amounts and classifications of liabilities that may result should the Company be unable to continue as a going concern.

F-6

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of presentation

The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“US GAAP”).

Principles of Consolidation

The accompanying condensed consolidated financial statements include the accounts of Franklin (Parent) and its wholly owned subsidiary Qiluo. All significant intercompany accounts and transactions have been eliminated in consolidation.

Use of Estimates

The preparation of financial statements in conformity with US GAAP 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 dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.

Fair Value of Financial Instruments

The Company’s financial instruments consist of cash and cash equivalents, accounts receivable, net, other receivable, accounts payable and accrued liabilities, short term loans and convertible notes. The fair value of these financial instruments approximate their carrying amounts reported in the consolidated balance sheets due to the short term maturity of these instruments or by comparison to other instruments with similar terms.

Foreign Currency Translation

The functional currency of Franklin is the United States dollar. The functional currency of Qiluo is the Chinese Renminbi (“RMB”). The reporting currency of the Company is the United States dollar.

The assets and liabilities of Qiluo were translated into United States dollars at period-end exchange rates ($0.14750 and $0.14650 at June 30, 2010 and December 31, 2009, respectively). The revenues and expenses were translated into United States dollars at average exchange rates for the periods. Resulting translation adjustments are recorded as a component of accumulated other comprehensive income within stockholders’ equity.

Transaction gains or losses arising from exchange rate fluctuation on transactions denominated in a currency other than the functional currency are included in the consolidated results of operations. There were no material foreign currency transaction gains or losses for the six months ended June 30, 2010 and 2009.

Cash and Cash Equivalents

Cash and cash equivalents consist of cash on hand, cash on deposit with banks, and highly liquid debt investments with a maturity of three months or less when purchased.

Inventory

Inventory is stated at the lower of cost (first-in, first-out method) or market.

F-7

Property, Plant and Equipment, Net

Property, plant and equipment is stated at cost less accumulated depreciation. Depreciation is calculated on a straight-line basis over the estimated useful lives of the respective assets.

Intangible and Other Long-Lived Assets, Net

Intangible and other long-lived assets are stated at cost, less accumulated amortization and impairments.

The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may no longer be recoverable. When these events occur, the Company measures impairment by comparing the carrying value of the long-lived assets to the estimated undiscounted future cash flows expected to result from the use of the assets and their eventual disposition. If the sum of the expected undiscounted cash flow is less than the carrying amount of the assets, the Company would recognize an impairment loss based on the fair value of the assets.

Revenue Recognition

Sales of products are recorded when title passes to the customer, which is generally at time of shipment. The Company performs ongoing credit evaluations of its customers’ financial condition, but generally does not require collateral to support customer receivables. The credit risk is controlled through credit approvals, limits and monitoring procedures. The Company establishes an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends and other factors. Accounts receivable are charged against the allowance for doubtful accounts once all collection efforts have been exhausted. The Company does not routinely permit customers to return product.

Stock-Based Compensation

Stock-based compensation is accounted for at fair value in accordance with Accounting Standards Codification (“ASC”) 718, “Compensation- Stock Compensation”.

In addition to requiring supplemental disclosures, FASB ASC 718, Compensation – Stock Compensation, addresses the accounting for share-based payment transactions in which a company receives goods or services in exchange for (a) equity instruments of the company or (b) liabilities that are based on the fair value of the company’s equity instruments or that may be settled by the issuance of such equity instruments. FASB ASC 718 focuses primarily on accounting for transactions in which a company obtains employee services in share-based payment transactions.

References to the issuances of restricted stock refer to stock of a public company issued in private placement transactions to individuals who are eligible to sell all or some of their shares of restricted Common Stock pursuant to Rule 144, promulgated under the Securities Act of 1933 (“Rule 144”), subject to certain limitations. In general, pursuant to Rule 144, a stockholder who is not an affiliate and has satisfied a six-month holding period may sell all of his restricted stock without restriction, provided that the Company has current information publicly available. Rule 144 also permits, under certain circumstances, the sale of restricted stock, without any limitations, by a non-affiliate of the Company that has satisfied a one-year holding period.

Advertising

Advertising costs are expensed as incurred. The Company did not incur significant advertising costs for the six months ended June 30, 2010 and 2009.

F-8

Shipping and Handling Costs

Shipping and handling costs, primarily related to outbound freight, are reported in the consolidated statements of operations as a component of selling, general and administrative expenses.

Research and Development

Research and development costs related to both present and future products are expensed as incurred. The Company did not incur significant research and development costs for the six months ended June 30, 2010 and 2009.

Segment Information

ASC 280-10 (formerly, SFAS No. 131, “Disclosure About Segments of and Enterprise and Related Information”), requires entity-wide disclosures about the products and services an entity provides, the material countries in which it holds assets and reports revenues, and its major customers. The Company operates as a single segment and will evaluate additional segment disclosure requirements as it expands its operations.

Income Taxes

The Company accounts for income taxes using the asset and liability method described in ASC 740-10 (formerly, SFAS No. 109, “Accounting For Income Taxes”), the objective of which is to establish deferred tax assets and liabilities for the temporary differences between the financial reporting and the tax bases of the Company’s assets and liabilities at enacted tax rates expected to be in effect when such amounts are realized or settled. A valuation allowance related to deferred tax assets is recorded when it is more likely than not that some portion or all of the deferred tax assets will not be realized.

No provision has been made for corporation income taxes due to losses incurred during the periods presented. In addition, no future tax benefit has been calculated. According to the tax regulations of China, the amount of loss that will carry over to the next tax period should be assessed and approved by the tax regulation agency. The maximum carry over period is five years.

Net Loss Per Common Share

The Company has adopted ASC 260-10 (formerly, SFAS No. 128, “Earnings per Share” (“EPS”)), which requires presentation of basic and diluted EPS on the face of the income statement for all entities with complex capital structures and requires a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation.

Basic loss per share is computed by dividing net loss by the weighted average number of common shares outstanding during the period.

Diluted loss per share is computed similarly to basic loss per share except that it includes the potential dilution that could occur if dilutive securities were converted. Diluted loss per common share is the same as basic loss per share for the periods presented, as the effect of the inclusion of potentially dilutive securities ($2,792,175 convertible debt convertible into 11,168,700 and 11,168,700 shares and warrants exercisable into 30,360,000 and 30,360,000 shares, for the six months ended June 30, 2010 and 2009, respectively), was anti-dilutive.

Statement of Cash Flows

In accordance with ASC Topic 230, “Statement of Cash Flows,” cash flows from the Company’s operations are calculated based upon the local currencies using the average translation rates. As a result, amounts related to assets and liabilities reported on the consolidated statements of cash flows will not necessarily agree with changes in the corresponding balances on the consolidated balance sheets.

F-9

Reclassifications

Certain reclassifications have been made to prior year’s consolidated financial statements and notes thereto for comparative purposes to conform with current year’s presentation. These reclassifications have no effect on previously reported results of operations.

Recently Adopted Accounting Standards

In February 2010, the Company adopted an amendment to previously adopted accounting guidance on subsequent events disclosure, which established standards of accounting for and disclosure of events or transactions that occur after the balance sheet date but before financial statements are issued or available to be issued. Under the amended guidance, the Company is no longer required to disclose the date through which subsequent events have been evaluated. The adoption of this requirement did not have a material impact on the Company’s financial condition or results of operations.

Recently Issued Accounting Standards

In January 2010, the Financial Accounting Standards Board issued guidance which expands the required disclosures about fair value measurements. This guidance requires disclosures about transfers of investments between levels in the fair value hierarchy and disclosures relating to the reconciliation of fair value measurements using significant unobservable inputs (level 3 investments). This guidance is effective for the Company as of January 1, 2011. The adoption of this guidance will not have a material impact on the Company’s financial condition or results of operations.

Certain other accounting pronouncements have been issued by the FASB and other standard setting organizations which are not yet effective and have not yet been adopted by the Company. The impact on the Company’s consolidated financial position and results of operations from adoption of these standards is not expected to be material.

NOTE 3 – INTERIM FINANCIAL STATEMENTS

The unaudited condensed consolidated financial statements as of June 30, 2010 and for the three and six months ended June 30, 2010 and 2009 have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with instructions to Form 10 - Q. In the opinion of management, the unaudited condensed consolidated financial statements have been prepared on the same basis as the annual consolidated financial statements and reflect all adjustments, which include only normal recurring adjustments, necessary to present fairly the financial position as of June 30, 2010 and the results of operations and cash flows for the three and six month period ended June 30, 2010 and 2009. The financial data and other information disclosed in these notes to the interim financial statements related to these periods are unaudited. The results for the three and six month period ended June 30, 2010 is not necessarily indicative of the results to be expected for any subsequent quarter of the entire year ending December 31, 2010. The balance sheet at December 31, 2009 has been derived from the audited consolidated financial statements at that date.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to the Securities and Exchange Commission’s rules and regulations. These unaudited condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements and notes thereto for the year ended December 31, 2009 included in our Form 10 –K filed April 15, 2010.

F-10

NOTE 4 - INVENTORIES

Inventories at June 30, 2010 and December 31, 2009 consist of the following:

	June 30,			December 31,
	2010			2009
	(Unaudited)
Finished Goods	$	127,228		$	486,334
Processed cocoons		553,995			772,211
Raw Materials		152,828			154,971
Work in Process		64,469			28,169
Reserve for obsolete inventory		(53,994	)		-
Total	$	844,526		$	1,441,685

Finished goods consist of those silks and by products available for sale. The valuation allowance for inventory loss at June 30, 2010 and December 31, 2009 was $53,994 and $0, respectively.

NOTE 5 – PREPAID COSTS AND EXPENSES

Prepaid costs and expenses at June 30, 2010 and December 31, 2009 consist of:

	June 30, 2010		December 31, 2009
	(Unaudited)

Advances to personnel for future overhead costs	$	143,531	$	14,245
Advances to vendors for future overhead costs		215,666		118,339
Other		-		2,730
Total	$	359,197	$	135,314

NOTE 6 – OTHER RECEIVABLES

Other receivables at June 30, 2010 and December 31, 2009 consist of:

	June 30, 2010		December 31, 2009
	(Unaudited)

Chongqing Guojing Silk Company, Ltd.	$	1,416,988	$	-
Chongqing Aikekaer Paint Co., Ltd.		21,377		21,232
Chongqing First Capital Investment Co., Ltd.		2,749		-
Total	$	1,441,114	$	21,232

As of June 30, 2010, the net amount that Qiluo loaned to Chongqing Guojing Silk Company, Ltd. (“Guojing Silk”), an entity that has pledged its assets as collateral for the Company’s bank borrowing (see Note 7 and 10) was $1,416,988. The receivable bears interest at 10% per annum and is due by December 31, 2010. Guojing Silk is controlled by the brother-in-law of Mr. Kuang, indirect majority stockholder and chief executive officer of the Company.

The receivables from Chonqing Aikekaer Paint Co., Ltd. and Chongqing First Capital Investment Co., Ltd. are interest free and due on demand.

F-11

NOTE 7 - RESTRICTED CASH RELATING TO BANK ACCEPTANCE PAYABLE

On May 13, 2010, Qiluo borrowed $737,500 (5,000,000 RMB) from Guojing Silk and simultaneously delivered a bank acceptance (from Chongqing Shan Xia Bank) for $1,475,000 (10,000,000 RMB) to Guojing Silk due by November 13, 2010. The Company deposited $737,500 into the Shan Xia Bank to secure the payment of the bank acceptance. The use of the $737,500 deposit is not permitted while the bank acceptance is outstanding. Accordingly, $737,500 together with interest income of $288 was reported under the caption “restricted cash relating to bank acceptance payable” in the current assets and $1,475,000 was reported under the caption of “bank acceptance payable” in the current liabilities, respectively. The purpose of this arrangement is to encourage and nurture the Company’s relationship with Chongqing Shan Xia Bank.

NOTE 8 - PROPERTY AND EQUIPMENT

Property and equipment at June 30, 2010 and December 31, 2009 is summarized as follows:

Fixed Assets	Estimated Useful Life		June 30, 2010		December 31, 2009
			(Unaudited)
Production Equipment		10	$	731,118	$	726,161
Auxiliary Equipment		10		6,991		6,944
Office Equipment		3-5		27,075		26,891
Automobile		5		125,375		124,525
Furniture and Fixtures		5-7		36,856		36,606
Construction in progress				93,032		112,106
				1,020,447		1,033,233
Less: Accumulated Depreciation				291,796		237,089
			$	728,651	$	796,144

Depreciation expense was $52,729 and $46,112 for the six months ended June 30, 2010 and 2009, respectively, of which $32,534 and $26,399 was included in cost of sales.

In January 2010, the Company returned unusable materials (included in construction in progress at December 31, 2009) at their cost of $19,704.

NOTE 9 - DEPOSITS

Deposits at June 30, 2010 and December 31, 2009 consist of:

	June 30, 2010			December 31, 2009
	(Unaudited)
Down payment in connection with Letter Agreement dated November 26, 2007 to acquire cocoon purchase stations, warehouse, and certain other assets from Zhengzhong Silkworm Industrial Development Co. Ltd., a state owned entity ("Zhengzhong")	$	411,270		$	411,270
Deposit paid in connection with agreement dated March 19, 2008 to use cocoon purchase stations and warehouse at no cost from March 19, 2008 to March 18, 2009		7,329			7,329
Additional payments relating to acquisition of Zhengzhong assets		549,393			549,393
Offset of loan from Chongqing Fulin State-Owned Assets Management (see Note 10) against amount due from Zhengzhong		(995,625	)		-
Foreign currency translation adjustment		27,633			28,208
Total	$	-		$	996,200

F-12

The Letter Agreement dated November 26, 2007 and subsequent amendments provided that the total purchase price of the Zhengzhong assets was 10,374,800 RMB ($1,519,908). If the Company is unable to pay the remaining 3,574,800 RMB ($523,708) due, the Company’s total payments of 6,750,000 RMB ($996,250) may be forfeited and not recovered (partially or in full). In February 2009, the due date of the remaining 3,574,800 RMB ($523,708) due was extended to September 2009. In May 2010, the Fulin Municipal Government revoked the Company’s right to operate the Zhengzhong assets. The loan of RMB 6,750,000 ($995,625) that the Company received from Chongqing Fulin State-Owned-Assets Management Co. (“Fulin Asset Management”) during the first quarter 2010, was offset against deposits receivable from Zhengzhong in the same aggregate amount based on Fulin Asset Management’s authorization to do so.

The Company is currently in negotiation with the Fulin Government for the return of the rights related to the Zhengzhong cocoon station operations. However, there can be no assurance that the Company will be able to re-obtain the rights.

NOTE 10 - LOANS PAYABLE – SHORT TERM

Loans payable consist of:	June 30, 2010			December 31, 2009
	((Unaudited)

Qiluo loans payable to Chongqing Shan Xia Bank
30,000,000 RMB, interest at 10% per annum, due January 19, 2010	$	-		$	4,395,000
Less: used by Mr. Chen, Wensheng, 3,000,000 RMB		-			(439,500	)
Less: used by Mr. Zhong, Songbai, 2,000,000 RMB		-			(293,000	)
Less: used by Guojing Silk, 10,000,000 RMB		-			(1,465,000	)

25,000,000 RMB, interest at 7.965% per annum, due January 29, 2011		3,687,500			-

5,000,000 RMB, interest at 7.965% per annum, due February 9, 2011		737,500			-
Less: used by Mr. Chen, Wensheng, 3,000,000 RMB		(442,500	)		-
Less: used by Mr. Zhong, Songbai, 2,000,000 RMB		(295,000	)		-
Less: used by Guojing Silk, 20,000,000 RMB		(2,950,000	)		-
Less: used by Mr. Jingshi Kuang, 5,000,000 RMB		(737,500	)		-
Qiluo loans payable to Chongqing Shan Xia Bank, net		-			2,197,500

Franklin loans payable to two individuals
interest at 8% per annum, due April 24, 2008 (past due)		20,000			20,000
Total	$	20,000		$	2,217,500

On January 20, 2009, Qiluo jointly with Chongqing Guojing Silk Company, Ltd. (“Guojing Silk”), Mr. Wensheng Chen and Mr. Songbai Zhong, obtained a short term credit line in the amount of 30,000,000 RMB ($4,395,000 translated at the December 31, 2009 exchange rate) from Chongqing Shan Xia Bank. The loan is collateralized with the assets of Guojing Silk and real estate property of Mr. Wensheng Chen and Mr. Songbai Zhong. From this jointly acquired credit line, Qiluo received 15,000,000 RMB ($2,197,500), Guojing Silk received 10,000,000 RMB ($1,465,000), Mr. Chen received 3,000,000 RMB ($439,500), and Mr. Zhong received 2,000,000 RMB ($293,000). Guojing Silk is controlled by the brother-in-law of Mr. Kuang, indirect majority stockholder and chief executive officer of the Company.

On January 22, 2010, the Company jointly with Chongqing Guojing Silk Company, Ltd., Mr. Wensheng Chen and Mr. Songbai Zhong, returned RMB 30,000,000 ($4,395,000) to Shanxia Bank.

F-13

Pursuant to a Loan Agreement that provides for a 40,000,000 RMB ($5,900,000) Line of Credit that expires November 26, 2011 (30,000,000 RMB - $4,425,000 for working capital; and 10,000,000 RMB - $1,475,000 acceptance financing/requiring 50% collateral security) on January 29, 2010, the Company jointly with Chongqing Guojing Silk Company, Ltd., Mr. Wensheng Chen, Mr. Songbai Zhong and Mr. Jingshi Kuang, obtained a short term secured loan of RMB 25,000,000 ($3,675,000) from Shanxia Bank. The loan bears interest at 7.965% per annum payable monthly. The loan provides for a 50% penalty increase in the interest rate on a daily basis while the Company is in default on payment of principal. It also provides for a 100% penalty increase in interest rate if the loan proceeds are not used for the purpose stated in the loan. The maturity date of this loan is January 29, 2011, and it is secured by the assets of Guojing Silk and real estate of Mr. Wenshen Chen, Mr. Songbai Song and Mr. Jingshi Kuang.

On February 9, 2010, the Company jointly with Chongqing Guojing Silk Company, Ltd., Mr. Wensheng Chen Mr. Songbai Zhong and Mr. Jingshi Kuang, obtained a short term loan of RMB 5,000,000 ($737,500) for working capital. The loan bears interest at 7.965% per annum payable monthly. The loan provides for a 50% penalty increase in the interest rate on a daily basis while the Company is in default on payment of principal. It also provides for a 100% penalty increase in interest rate if the loan proceeds are not used for the purpose stated in the loan. The maturity date of this loan is February 9, 2011, and it is secured by the assets of Guojing Silk and real estate of Mr. Wenshen Chen, Mr. Songbai Song and Mr. Jingshi Kuang.

During the second quarter 2010, the Company reached agreement with Guojing, in principle, to transfer $1,475,000 (10,000,000 RMB), its remaining allocated portion of the short term loan, effective July 1, 2010 to Guojing. The purpose of making the transfer was due to significant reductions in the Company’s business caused by a recession in the Silk industry. According to the terms of the Loan Agreement, the Company remains primarily responsible to the lender for the loans taken under the Line of Credit, which aggregated 30,000,000 RMB ($4,425,000), no matter how the proceeds of the loans have been allocated among the Company and the other parties/guarantors of the loan.

During the first quarter 2010, the Company received a RMB 6,750,000 ($988,875) loan from Chongqing Fulin State-Owned-Assets Management Co. The loan is interest free and due by December 31, 2010. In May 2010, the Fulin Municipal Government revoked the Company’s right to operate the Zhengzhong assets. The loan of RMB 6,750,000 ($995,625) was offset against deposits receivable from Zhengzhong in the same aggregate amount based on Fulin Asset Management’s authorization to do so in the second quarter of 2010.

As of June 30, 2010 and December 31, 2009, the accrued interest payable for short term loans totaled $33,535 and $22,634, respectively, which was included in accounts payable and accrued expenses.

NOTE 11 – LOANS PAYABLE – RELATED PARTIES

	June 30, 2010		December 31, 2009
	(Unaudited)
Loans payable – related parties consist of:

Franklin loan payable to former chief executive officer, interest at 8% per annum, due on demand	$	12,233	$	12,233
Franklin loan payable to former chief executive officer, non-interest bearing, due on demand		7,158		7,158
Due to Xin Shengxiang, non-interest bearing, due on demand		1,866		-
Total	$	21,257	$	19,391

The accrued interest payable to related party was $3,762 and $3,272 as of June 30, 2010 and December 31, 2009, respectively.

F-14

NOTE 12 - CONVERTIBLE NOTES PAYABLE

	June 30,			December 31,
Convertible notes payable, net consist of:	2010			2009
	(Unaudited)

Convertible notes - initial face amount	$	3,300,000		$	3,300,000
Less unamortized debt discounts:
Discount on relative fair value of warrants		(2,903,247	)		(2,903,247	)
Discount on beneficial conversion feature		(396,753	)		(396,753	)
Less accumulated amortization		3,300,000			3,300,000
Unamortized debt discounts		-			-
Repayment of convertible notes		(507,825	)		(507,825	)
Convertible notes payable, net	$	2,792,175		$	2,792,175

On September 12 and September 20, 2007, the Company entered into Subscription Agreements (the "Subscription Agreements") with 11 investors ("Purchasers"), for the purchase and sale of $3,300,000 of Secured Convertible Promissory Notes of the Company (the “Notes”) for the aggregate purchase price of $3,300,000 (the “Note Financing”). The Company received net proceeds from the issuance of the Notes of $2,622,425 after finance costs of $382,500 and other expenses of $295,075. Pursuant to the terms of the Subscription Agreements, the Company also issued to the Purchasers warrants to purchase up to 26,400,000 shares of common stock of the Company, subject to adjustments for certain issuances and transactions.

The Notes bear interest at the rate of 10% per annum, payable in either (a) cash or (b) absent an event of default, in shares of the Company’s common stock at the lesser of (i) $0.25 per share or (ii) 75% of the average of the closing bid prices of the Company’s common stock for the 5 trading days preceding the payment date. Said payments commenced on March 12, 2008 and all accrued but unpaid interest and any other amounts due thereon was due and payable on September 12, 2009, or earlier upon acceleration following an event of default, as defined in the Notes.

All principal and accrued interest on the Notes is convertible into shares of the Company’s common stock at the election of the Purchasers at any time at the conversion price of $0.25 per share, subject to adjustment for certain issuances, transactions or events that would result in “full ratchet” protection to the holders.

The Notes contained default events which, if triggered and not timely cured (if curable), would result in a default interest rate of 15% per annum. The Notes also contain full ratchet anti-dilution provisions with respect to certain securities issuances, including the issuances of stock for less than $.25 per share. In addition, the Company has to pay the Purchasers an additional amount of principal plus accrued interest if the Company is no longer listed on the Bulletin Board or sells substantially all of its assets.

As part of the financing, the Company also issued to the Purchasers an aggregate of 13,200,000 Class A Common Stock Purchase Warrants and 13,200,000 Class B Common Stock Purchase Warrants. The Class A Warrants are exercisable at a price of $0.50 per share at any time until the fifth anniversary from the date the Registration Statement is declared effective by the Securities and Exchange Commission (“the Expiration Date”) and the Class B Warrants are exercisable at a price of $1.00 per share at any time until the Expiration Date. The warrants include a cashless exercise provision which was triggered after March 12, 2008 as well as “full ratchet” anti-dilution provisions with respect to certain securities issuances.

Absent a waiver from a Purchaser, conversion of the Notes, or exercise of the Warrants, is subject to the restriction that such conversion or exercise does not result in the Purchaser beneficially owning at any one time more than 4.99% of the Company’s outstanding shares of common stock.

F-15

Payment of the Notes along with the Company’s other obligations to the Purchasers is secured by all the assets of the Company and of its wholly-owned subsidiary, Qiluo. Such obligations are also secured by a guaranty and pledge of the 17,100,000 shares of the Company’s common stock held by Xinshengxiang Industrial Development Co., Ltd., a significant shareholder of the Company. In connection with the transaction, the Company agreed to prepare and file with the Securities and Exchange Commission within 60 days following the closing a registration statement on Form SB-2 for the purpose of registering for resale all of the shares of common stock underlying the Notes. If the Company failed to file such registration statement within such time, or if the registration statement was not declared effective within 120 days from September 12, 2007, the Company must pay monthly liquidated damages in cash equal to 2% of the principal amount of the Notes. The Purchasers were also granted standard piggyback registration rights along with certain demand registration rights. The Company filed a registration statement on December 26, 2007. The registration statement has not yet been declared effective (see Note 18).

In connection with the convertible debt, the Company recorded deferred finance costs of $4,466,334, of which $382,500 was recorded as an asset and $4,083,834 was recorded as a component of stockholders’ equity. Such deferred finance costs were being amortized over the life of the related debt. The Company also recorded a deferred debt discount in the amount of $3,300,000 to reflect the beneficial conversion feature of the convertible debt and the fair value of the warrants. The beneficial conversion feature was recorded pursuant to ASC 470-20-30 (formerly, EITF 00-27), “Application of EITF No. 98-5, Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios, to Certain Convertible Instruments”. In accordance with ASC 470-20-30, the Company evaluated the value of the beneficial conversion feature and recorded the amount of $396,753 as a reduction to the carrying amount of the convertible debt and as an addition to paid-in capital. Additionally, the relative fair value of the warrants of $2,903,247 was calculated and recorded as a further reduction to the carrying amount of the convertible debt and as an addition to paid-in capital.

The Company commenced the repayment of the convertible notes and interest on March 12, 2008 and paid $26,375 in cash to three of the Purchasers, which represented accrued interest of $12,500 and repayment of principal of $13,875 due on the convertible promissory notes. Also, the Company issued a total of 32,354,043 shares to seven of the Purchasers during the six months ended June 30, 2008, which represented accrued interest of $174,912 and repayment of principal of $493,950. The Company did not make any repayments during the six months ended December 31, 2008 due to its financing difficulties. The Company has been in default to all eleven investors (see Note 19) since then. Consequently, the Company wrote off the remaining $56,797 unamortized deferred finance costs, $1,078,882 unamortized debt discounts (warrants and beneficial conversion feature) and $1,335,144 unamortized deferred finance costs included in the equity section at December 31, 2008 and recognized additional interest expense of $2,470,823 during the year ended December 31, 2008.

Among other things, the Term Sheet provides for the reduction of the balance of the Notes ($2,792,175 at June 30, 2010) to $2,500,000 and the waiver of the related accrued interest ($623,957 at June 30, 2010) and penalties ($2,093,570 at June 30, 2010). The restated Notes are to bear interest at 6%, payable monthly in cash or, at the option of the Company, in registered common stock valued at a 20% discount to the market price. The principal of the restated Notes are to be repaid in 21 monthly installments commencing 3 months following the amendment, payable in cash or, at the option of the Company, in registered common stock valued at a 20% discount to the market price. Also, the Term Sheet provides for the reduction of the exercise price of the 13,200,000 Class A Common Stock Purchase Warrants from $0.50 per share to $0.10 per share. If effectuated, the gain from the restructuring will be reduced by any increase in the fair value of the warrants.

F-16

NOTE 13 - STOCKHOLDERS’ EQUITY AND SHARE PURCHASE AGREEMENT

On June 19, 2007, Franklin entered into a Share Purchase Agreement (the “Share Purchase Agreement”) with the following persons: Chongqing Qiluo Textile Co. Ltd., a limited liability company organized under the laws of the People’s Republic of China (“Qiluo”); Xinshengxiang Industrial Development Co., Ltd., a limited liability company organized under the laws of the People’s Republic of China (“Xinshengxiang”); Mr. Dingliang Kuang (“Dingliang”); and Ms. Yue Kuang (“Yue,” and together with Xinshengxiang and Dingliang, the "Qiluo Shareholders"). Pursuant to the Share Purchase Agreement, Franklin agreed to acquire Qiluo at a closing held simultaneously therewith by purchasing from the Qiluo Shareholders all of their respective shares of Qiluo’s registered capital, which represent 100% of the issued and outstanding registered capital stock of Qiluo. Upon the consummation of such purchase, Qiluo became a wholly-owned subsidiary of Franklin. In consideration therefore, Franklin agreed to issue to the Qiluo Shareholders an aggregate of 5,000,000 shares of Franklin’s Series A Convertible Preferred Stock (convertible into 52,880,000 shares of common stock), which were allocated between the Qiluo Shareholders as follows: 4,750,000 shares to Xinshengxiang; 125,000 shares to Dingliang; and 125,000 shares to Yue. Each share of Series A Convertible Preferred Stock was convertible, at the option of the holder thereof, into 10.576 shares of Franklin's common stock.

In connection with the foregoing transaction, on June 19, 2007, Kelly Fan, the former President, Chief Executive Officer, Treasurer, and Director of Franklin, transferred without consideration to the Qiluo Shareholders 18,000,000 shares of the common stock of Franklin which were issued and outstanding and held by Ms. Fan. Such shares were allocated between the Qiluo Shareholders as follows: 17,100,000 shares to Xinshengxiang Industrial Development Co., Ltd.; 450,000 shares to Dingliang Kuang; and 450,000 shares to Yue Kuang. Excluding the 18,000,000 shares of common stock, there were 12,250,000 shares of common stock outstanding in the preexisting public entity prior to the Share Purchase Agreement that remained outstanding in the newly constituted company.

As a result of the foregoing transactions: (a) Xinshengxiang held approximately 81% of the total combined voting power of all classes of Franklin’s capital stock entitled to vote; (b) Diangliang Kuang is the principal owner and manager of Xinshengxiang and thus has voting, investment, and dispositive control over the shares of Franklin’s capital stock owned by Xinshengxiang. Accordingly, Mr. Kuang is also deemed to be the indirect beneficial owner of the shares of Franklin’s capital stock owned by Xinshengxiang. Mr. Kuang thus directly and indirectly (by Xinshengxiang) held approximately 83% of the total combined voting power of all classes of Franklin’s capital stock entitled to vote; and (c) Yue Kuang, who is the sister of Diangliang Kuang, directly held approximately 2% of the total combined voting power of all classes of Franklin’s capital stock who is entitled to vote.

In September 2007, the Company agreed to issue an aggregate of 8,000,000 shares of its common stock valued at $9,200,000 to Bonsai Venture Partner, Ltd., a British Virgin Islands Limited company, in consideration for consulting services rendered. These issuances were offered and sold in reliance upon exemptions from registration pursuant to Section 4(2) under the Securities Act and the Rule 506 promulgated there under. The shares issued in consideration for services rendered were valued at $9,200,000, based on the price of our stock on the date of issuance.

The Company issued a total of 32,354,043 shares to seven of the Purchasers as repayment of loan and loan interest during the six months ended June 30, 2008, pursuant to the terms of the Notes (see Note 12). The issuing price was calculated at 75% of the average of the closing bid prices of the Company’s common stock for the 5 days preceding the payment date.

NOTE 14 - PREFERRED STOCK

On June 18, 2007, the Company designated a series of Preferred Stock known as the “Series A Convertible Preferred Stock” (the “Series A Preferred Stock”) by filing a Certificate of Designation with the Secretary of State of Nevada. The number of shares constituting such Series A Preferred Stock was designated to be 5,000,000 shares, par value $0.001 per share. Pursuant to the Certificate of Designation, the principal rights, preferences, powers, limitations and restrictions of the Series A Preferred Stock are as follows:

F-17

Each share of Series A Preferred Stock is convertible, at the option of the holder thereof, without payment of additional consideration, into 10.576 shares of the Company’s common stock. Holders of Series A Preferred Stock shall be entitled to vote, together with holders of common stock as a single class, on all matters upon which stockholders of the Company are entitled to vote, with each share of Series A Preferred Stock having one vote. The Series A Preferred Stock shall rank senior to the common stock. In the event of any liquidation, dissolution or winding up of the Company, the holders of Series A Preferred Stock shall be entitled to receive, prior and in preference to any distribution of any of the assets of the Company to the holders of the common stock of the Company and any other issue of stock, should there be any, by reason of their ownership thereof, an amount per share equal to $0.01 per each share of Series A Preferred Stock owned by such shareholder plus any declared and unpaid dividends on the Series A Preferred Stock.

On December 10, 2007, the Company issued an aggregate of 52,880,000 shares of common stock to complete the conversion of the 5,000,000 shares of Series A Preferred Stock then outstanding.

NOTE 15 - WARRANTS

A summary of the status of the Company’s warrants is presented below:

	Date of Issuance	Number of Warrants		Weighted Average Exercise Price
Outstanding - January 1, 2007			-	$	-
Issued, Class A Warrants	9/12/2007		13,200,000		0.50
Issued, Class B Warrants	9/12/2007		13,200,000		1.00
Issued, Finder's Fees Warrants	9/12/2007		3,960,000		0.25
Outstanding - June 30, 2010 (Unaudited), December 31, 2009 and 2008			30,360,000	$	0.68

Warrants outstanding and exercisable by price range as of June 30, 2010 are:

Warrants Outstanding								Warrants Exercisable
Exercise Price		Number Outstanding		Weighted Average Remaining Contractual Life in Years *		Weighted Average Exercise Price		Number Exercisable		Weighted Average Exercise Price
$	0.25		3,960,000		5.00	$	0.25		3,960,000	$	0.25
$	0.50		13,200,000		5.00		0.50		13,200,000		0.50
$	1.00		13,200,000		5.00		1.00		13,200,000		1.00
			30,360,000			$	0.68		30,360,000	$	0.68

* Warrants expire 5 years after effective date of registration statement. The registration statement filed on December 26, 2007 is not effective as of June 30, 2010.

The significant assumptions used to determine the fair values of the warrants, using a Black-Scholes option pricing model, were as follows:

Significant assumptions:
Risk-free interest rate at grant date	4.11	%
Expected stock price volatility	93.95	%
Expected dividend payout	-
Expected option life-years	5

F-18

NOTE 16 - RELATED PARTY TRANSACTION

Chongqing Guojing Silk Company, Ltd. (“Guojing Silk”), is controlled by the brother-in-law of Mr. Kuang, indirect majority stockholder and chief executive officer of the Company. On January 20, 2009, Qiluo jointly with Chongqing Guojing Silk Company, Ltd. (“Guojing Silk”), Mr. Wensheng Chen and Mr. Songbai Zhong, obtained a short term credit line in the amount of 30,000,000 RMB ($4,395,000) from Chongqing Shan Xia Bank. The loan was collateralized with the assets of Guojing Silk and real estate property of Mr. Wensheng Chen and Mr. Songbai Zhong. From this jointly acquired credit line, Qiluo received 15,000,000 RMB ($2,197,500), Guojing Silk received 10,000,000 RMB ($1,465,000), Mr. Chen received 3,000,000 RMB ($439,500), and Mr. Zhong received 2,000,000 RMB ($293,000).

In March 2009, Qiluo borrowed 31,500,000 RMB ($4,611,600) from Chongqing Guojing Silk Company, Ltd. (“Guojing Silk”) and simultaneously delivered a bank acceptance (from Shan Xia Bank) for the same amount to Guojing Silk. Under the related agreement with Shan Xia Bank, use of the 31,500,000 RMB was not permitted while the bank acceptance was outstanding. Qiluo returned the 31,500,000 RMB in September 2009.

During the nine months ended September 30, 2008, the Company received funds from and advanced funds to Guojing Silk for working capital purposes. As of September 30, 2009, the excess advanced payments to Guojing Silk amounted to $498,312 (3,401,450 RMB), which was reported under the caption of “Other receivable”. During the fourth quarter of 2009, Guojing Silk repaid this receivable. As of December 31, 2009, receivable from Guojing was $0.

On March 25, 2009, Xin Shengxiang Industrial Development Co., Ltd, (“Xinshengxiang”), a major shareholder of the Company borrowed 4,000,000 RMB from Jin Cheng Small Loans Company, Ltd. (Jincheng”) and advanced the funds to the Company. The short term loan was due by November 24, 2009 and bore interest at 21.24% per annum. This loan was paid in full as of December 31, 2009.

On September 29, 2009, Mr. Dingliang Kuang (“Mr. Kuang”), the Chief Executive Officer and a major shareholder of the Company, borrowed 6,000,000 RMB from Jincheng and advanced the funds to the Company. The short term loan was due by October 28, 2009 and bore interest at 19.44% per annum. This loan was paid in full as of December 31, 2009.

On January 22, 2010, the Company jointly with Chongqing Guojing Silk Company, Ltd., Mr. Wensheng Chen and Mr. Songbai Zhong, returned RMB 30,000,000 ($4,395,000) to Shanxia Bank.

On January 29, 2010, the Company jointly with Chongqing Guojing Silk Company, Ltd., Mr. Wensheng Chen, Mr. Songbai Zhong and Mr. Jingshi Kuang, obtained a short term loan of RMB 25,000,000 ($3,662,500) from Shanxia Bank. The loan bears interest at 7.965% per annum payable monthly. The maturity date of this loan is January 29, 2011.

On February 9, 2010, the Company jointly with Chongqing Guojing Silk Company, Ltd., Mr. Wensheng Chen, Mr. Songbai Zhong and Mr. Jingshi Kuang, obtained a short term loan of RMB 5,000,000 ($732,500) for working capital. The loan bears interest at 7.965% per annum payable monthly. The maturity date of this loan is February 9, 2011.

F-19

NOTE 17 - CONCENTRATION OF CREDIT RISK

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash and cash equivalents and accounts receivable.

Qiluo maintains cash balances in various banks in the People’s Republic of China. Currently, no deposit insurance system has been set up in the People’s Republic of China. Therefore, the Company will bear a risk if any of these banks become insolvent. Qiluo’s uninsured cash balance was $566,516 and $2,788,581 as of June 30, 2010 and December 31, 2009.

NOTE 18 - COMMITMENTS AND CONTINGENCIES

Lease agreement

On January 28, 2007, Qiluo signed a twenty (20) years lease with Xinshengxiang, a related party (see Note 16), for the use of a factory building located in Fulin, Chongqing. The lease commenced on March 1, 2007 and provides for annual rental payments of RMB 200,000 ($29,500 translated at the June 30, 2010 exchange rate) plus other occupancy costs.

Future minimum rentals under this lease are as follows:

Year Ending June 30 ,	Future Minimum Rent Payments
2011	$	29,500
2012		29,500
2013		29,500
2014		29,500
2015		29,500
Thereafter		336,791

Total	$	484,291

Rent expense incurred under the lease during the six months ended June 30, 2010 and 2009 charged to Selling, General and Administrative Expenses was $$16,848 and $14,645, respectively.

Registration Rights Arrangement

In connection with the convertible notes payable (see Note 12), the Company agreed to prepare and file with the Securities and Exchange Commission within 60 days following the closing a registration statement for the purpose of registering for resale all of the shares of common stock underlying the Notes. If the Company fails to file such registration statement within such time, or if the registration statement is not declared effective within 120 days from September 12, 2007, the Company is to pay monthly liquidated damages in cash equal to 2% of the principal amount of the Notes. The Company filed a registration statement on December 26, 2007; the registration statement has not yet been declared effective. Accordingly, the Company has accrued liquidated damages of $1,814,353 and $1,479,241 at June 30, 2010 and December 31, 2009, respectively.

Lack of Insurance

The Company currently has no insurance in force for its office facilities and operations and it cannot be certain that it can cover the risks associated with such lack of insurance or that it will be able to obtain and/or maintain insurance to cover these risks at economically feasible premiums.

F-20

Country Risk

As the Company's principal operations are conducted in the People’s Republic of China (the “PRC”), the Company is subject to special considerations and significant risks not typically associated with companies in North America and Western Europe. These risks include, among others, risks associated with the political, economic and legal environments and foreign currency exchange limitations encountered in the PRC. The Company's results of operations may be adversely affected by changes in the political and social conditions in the PRC, and by changes in governmental policies with respect to laws and regulations, among other things.

In addition, all of the Company's transactions undertaken in the PRC are denominated in Renminbi, which must be converted into other currencies before remittance out of the PRC may be considered. Both the conversion of Renminbi into foreign currencies and the remittance of foreign currencies abroad require the approval of the PRC government.

NOTE 19 – LEGAL PROCEEDING

On July 28, 2008, Professional Offshore Opportunity Fund Ltd. (the “Plaintiff”) obtained a default judgment against the Company. On April 21, 2008, the Plaintiff initiated the action in the United States District Court Southern District of New York, on a claim of breach of contract and non payment on a secured convertible promissory note dated September 12, 2007, made by the Company in favor of the Plaintiff, in the principal amount of $500,000. The Plaintiff claimed approximately $671,000 in total relief, which amount includes a 15% principal charge of $75,000, accrued interest of $48,125, and liquidated damages of $37,000.

NOTE 20 – DEFAULT ON CONVERTIBLE NOTES PAYABLE

As of June 12, 2008, the Company was in default to six (6) Purchasers on convertible notes payments due June 12, 2008 and earlier. As of July 12, 2008, the Company was in default to all eleven (11) Purchasers on convertible notes payments due July 12, 2008. The Notes provide that, at the option of the holder, an event of default shall make all sums of principal and interest then remaining unpaid and all other amounts payable immediately due and payable upon demand. As of June 30, 2010, the unpaid convertible notes payable balance is $2,792,175; unpaid accrued interest is $623,957; and unpaid accrued liquidated damages penalty and default penalty are $2,093,570.

F-21

NOTE 21 – RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS

The consolidated balance sheet at December 31, 2009 (which was previously included in the Company’s Form 10-K filed with the SEC on April 15, 2010) and the condensed consolidated statements of losses and comprehensive losses and condensed consolidated statements of cash flows for the three and six months ended June 30, 2009 (which were previously included in the Company’s Form 10-Q filed with SEC on August 18, 2009) have been restated herein in order to correct errors relating to (1) the accrual of post-default interest on the convertible Notes and (2) the amortization of deferred finance costs and debt discounts relating to the defaulted convertible Notes. (See Notes 12 and 20).

In the Form 10-K filed April 15, 2010 and in earlier post-default SEC filings commencing with the quarterly period ended September 30, 2008, the Company accrued interest on the defaulted convertible Notes at a default rate of 25% (rather than the specified default rate of 15%).

In the Form 10-Q filed August 18, 2009, the condensed consolidated statements of losses and comprehensive losses and condensed consolidated statements of cash flows for the three and six months ended June 30, 2009 included amortization of deferred finance costs of $19,034 and $50,662, respectively, amortization of fair value of warrants and beneficial conversion feature of $380,763 and $773,038 and amortization of deferred finance cost – consulting of $ $471,204 and $956,655 relating to the defaulted notes payable. Since the Company had defaulted on the notes in July 2008, thus making the obligations immediately due and payable on demand, the Company should have accelerated the amortization of the remaining unamortized deferred finance costs and debt discounts at such time and ceased any amortization thereafter.

The effect of the restatement adjustments on the consolidated balance sheet at December 31, 2009 follows:

	As Previously Reported			Adjustments			As Restated

Total Assets	$	6,199,786		$	-		$	6,199,786

Accounts payable and accrued expenses	$	3,679,424	(1)		(418,828	)	$	3,260,596
Other current liabilities		5,565,410			-			5,565,410
Total Current Liabilities and Total Liabilities		9,244,834			(418,828	)		8,826,006

Common stock		12,348			-			12,348
Additional paid in capital		18,345,012			-			18,345,012
Accumulated deficit		(21,715,270	) (1)		418,828			(21,296,442	)
Accumulated other comprehensive income		312,862			-			312,862
Total stockholder's deficit		(3,045,048	)		418,828			(2,626,220	)
Total Liabilities and Stockholders' Deficit	$	6,199,786		$	-		$	6,199,786

(1) to adjust default interest payable at December 31, 2009 based on 15% rate (rather than 25% rate).

The effect of the restatement adjustments on the condensed consolidated statement of loss and comprehensive loss for the three months ended June 30, 2009 follows:

F-22

��	As Previously Reported			Adjustments		As Restated

Income From Operations	$	49,472		$	-	$	49,472
Other Income (Expense):
Subsidy income		440,664			-		440,664
Interest income		356			-		356
Interest expense		(1,447,289	) (1)		69,805		(506,483	)
			(2)		871,001
Total Other (Expense)		(1,006,269	)		940,806		(65,463	)
Net Loss	$	(956,797	)	$	940,806	$	(15,991	)
Net Loss Per Share - Basic and Diluted	$	(0.01	)	$	0.01	$	(0.00	)
Comprehensive Loss:
Net loss	$	(956,797	)	$	940,806	$	(15,991	)
Foreign currency translation adjustment		2			-		2
Comprehensive Loss:	$	(956,795	)	$	940,806	$	(15,989	)

(1) to adjust three months ended June 30, 2009 accrued default interest to proper rate of 15% (rather than 25%).

(2) to adjust amortization of unamortized deferred finance costs and debt discounts wrote off at December 31, 2008.

The effect of the restatement adjustments on the condensed consolidated statement of loss and comprehensive loss for the six months ended June 30, 2009 follows:

	As Previously Reported			Adjustments		As Restated

Loss From Operations	$	(69,259	)	$	-	$	(69,259	)
Other Income (Expense):
Subsidy income		706,122			-		706,122
Interest income		6,813			-		6,813
Interest expense		(2,836,374	) (1)		139,609		(916,409	)
			(2)		1,780,356		-
Total Other (Expense)		(2,123,439	)		1,919,965		(203,474	)
Net Loss	$	(2,192,698	)	$	1,919,965	$	(272,733	)
Net Loss Per Share - Basic and Diluted	$	(0.02	)	$	0.02	$	(0.00	)
Comprehensive Loss:
Net loss	$	(2,192,698	)	$	1,919,965	$	(272,733	)
Foreign currency translation adjustment		(2,974	)		-		(2,974	)
Comprehensive Loss:	$	(2,195,672	)	$	1,919,965	$	(275,707	)

(1) to adjust six months ended June 30, 2009 accrued default interest to proper rate of 15% (rather than 25%).

(2) to adjust amortization of unamortized deferred finance costs and debt discounts wrote off at December 31, 2008.

The effect of the restatement adjustments on the condensed consolidated statement of cash flows for the six months ended June 30, 2009 follows:

F-23

	As Previously Reported			Adjustments			As Restated
Cash Flows from Operating Activities:
Net Loss	$	(2,192,698	) (1)	$	139,609		$	(272,733	)
Adjustments to Reconcile Net Loss to Net			(2)		1,780,356
Cash Provided by (Used in) Operating Activities:
Depreciation expense		46,112						46,112
Provision for doubtful accounts		8,172						8,172
Amortization of deferred finance costs		50,662	(2)		(50,662	)		-
Amortization of debt discount - fair value of warrants and beneficial conversion feature		773,038	(2)		(773,038	)		-
Amortization of deferred finance costs - consulting		956,655	(2)		(956,655	)		-
Accrued convertible notes interest and penalties		684,084	(1)		(139,609	)		544,475
Changes in operating assets and liabilities:								-
(Increase) in accounts receivable		(191,227	)					(191,227	)
Decrease in inventories		810,084						810,084
Decrease in prepaid costs and expenses		373,343						373,343
Increase in accounts payable and accrued liabilities		16,983						16,982
Increase in customer prepaid		1,016,660						1,016,660
Net Cash Provided by Operating Activities	$	2,351,868		$	-		$	2,351,868

(1) to adjust accrued default interest to 15% (rather than 25%).

(2) to adjust amortization of unamortized deferred finance costs and debt discounts wrote off at December 31, 2008.

NOTE 22 – SUBSEQUENT EVENT

As of August 20, 2010, the Company has not made any interest payment and scheduled repayment in accordance with the Term Sheet.

F-24

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Management’s Discussion and Analysis of Financial Condition and Results of Operation

Forward-Looking Statements

The following discussion should be read in conjunction with our financial statements, which are included elsewhere in this Form 10-Q and the Form 10-K filed on April 15, 2010. Although Qiluo is a subsidiary of Franklin, the acquisition of Qiluo by Franklin that was consummated on June 19, 2007 has been treated as a reverse merger of Qiluo. This means that Qiluo is the continuing entity for financial reporting purposes.

We and our representatives may, from time to time, make written or verbal forward-looking statements, including statements contained in our filings with the United States Securities and Exchange Commission and in our reports to shareholders. Generally, the inclusion of the words “believe”, “expect”, “intend”, “estimate”, “anticipate”, “will”, and similar expressions or the converse thereof, identify statements that constitute “forward-looking statements”.

These forward-looking statements are subject to uncertainties and other factors that could cause actual results to differ materially from such statements as a result of a number of risks and uncertainties including: (a) those risks and uncertainties related to general economic conditions, (b) whether we are able to manage our planned growth efficiently and operate profitable operations, (c) whether we are able to generate sufficient revenues or obtain financing to sustain and grow our operations, and (d) whether we are able to successfully fulfill our primary requirements for cash.

Plan of Operation

In an effort to obtain a stable raw material supply and to maximize both output and quality of our silk production through Qiluo, we are contemplating the acquisition of various other silk worm farms. On November 26, 2007, we entered into a letter of intent with Chongqing Fulin Municipal Government to acquire certain assets from Zhengzhong Silkworm Industrial Development Co., Ltd., a state owned entity, pursuant to which we intend to acquire the assets of cocoon purchase stations from Zhengzhong and exclusive right of those purchase stations to purchase cocoons produced from approximately 15,000 acres of mulberry farms in the local area.

The Letter Agreement dated November 26, 2007 and subsequent amendments provided that the total purchase price of the Zhengzhong assets was 10,374,800 RMB ($1,519,908). If the Company is unable to pay the remaining 3,574,800 RMB ($523,708 translated at the September 30, 2009 exchange rate) due, the Company’s total payments of 6,800,000 RMB ($996,200) may be forfeited and not recovered (partially or in full). In February 2009, the due date of the remaining 3,574,800 RMB ($523,708) due was extended to September 2009. In May 2010, the Fulin Municipal Government revoked the Company’s right to operate the Zhengzhong assets. The loan of RMB 6,750,000 ($995,625), the Company received from Chongqing Fulin State-Owned-Assets Management Co. (“Fulin Asset Management”) during the first quarter 2010, was offset against deposits receivable from Zhengzhong in the same aggregate amount based on Fulin Asset Management’s authorization to do so.

Furthermore, in an effort to expand silk production and subsequent processing ability, on November 28, 2007, we entered into a binding letter agreement with Chongqing Wintus, pursuant to which we intend to acquire certain assets of Wintus, including the stock of their seven wholly owned Chinese subsidiaries. The business of Wintus is focused on the production of raw silk and the subsequent processing and sales of various silk products. As consideration for the assets, we agreed to pay a combination of cash and stock, in amounts to be mutually agreed upon after we have completed our due diligence investigation of Wintus’ and its assets. As of the date of this filing, the Company has not taken any further steps for this planned acquisition. We will not be able to complete this acquisition until we secure additional funds.

Should our initiatives to maximize both output and quality of silk production move forward, additional funds may be required. However, there can be no assurance that additional capital will be available to us. Although we may seek to raise additional funds, we have no specific plans, understandings or agreements with respect to such an offering, and we have given no contemplation with respect to the securities to be offered or any other issue with respect to any offering. We may have to issue debt or equity or enter into a strategic arrangement with a third party.

Results of Operations

Three Months Ended June 30, 2010 as compared to Three Months Ended June 30, 2009

Comparison of Sales for the Three Months Ended June 30, 2010 and 2009

	Three Months Ended June 30,
Sales in US dollars	2010		2009

Silk	$	1,021,773	$	1,511,403
Cocoons		-		723,927
By products and others		88,812		250,197
Total sales	$	1,110,585	$	2,485,527

Net Sales

Our net sales decreased $1,374,942, or 55% to $1,110,585 in the three months ended June 30, 2010 from $2,485,527 in the comparable period of 2009. The Company sold 30.91 tons of silk during the three months ended June 30, 2010, a decreased of 41.57 tons, or 57%, compared to 72.48 tons during the same period of 2009. The revenue from sale of silk was $1,021,773 in the three months ended June 30, 2010, a decreased of $489,630,or 32% compared to $1,511,403 for the three months ended June 30, 2009.

The cocoon is the raw material for production of silk. There were no cocoon sales in the three months ended June 30, 2010 due to the fact that Fulin Municipal Government revoked the Company’s right to operate the “Zhengzhong” cocoon station (see plan of operation) during the second quarter of 2010.

Gross Profit

Comparison of Gross Profit for the Three Months Ended June 30, 2010 and 2009

	Three Months Ended June 30,
	2010			2009

Net sales	$	1,110,585		$	2,485,527
Cost of sales		(1,202,532	)		(2,280,552	)
Gross profit	$	(91,947	)	$	204,975
Gross profit margin rate		-8.28	%		8.25	%

The Company had a negative gross profit for the three months ended June 30, 2010. It resulted from the revoking of the Company’s right to operate the “Zhengzhong” cocoon station (see plan of operation) by the Fuling Municipal Government during the second quarter of 2010. Consequently, the Company purchased cocoon from third parties instead of the Zhengzhong cocoon station at a higher price. The average cocoon purchase price increased 32% to $9,294 per ton during the three months ended June 30, 2010 from $7,054 per ton at the beginning of 2010.

(Loss) from Operations

Comparison of (Loss) from Operations for the Three Months Ended June 30, 2010 and 2009

	Three Months Ended June 30,
	2010			2009

Gross (loss) profit	$	(91,947	)	$	204,975

Professional fees		13,431			17,365
Depreciation and amortization		10,084			10,088
Other general and administrative expenses		110,235			128,050
Total operating expenses		133,750			155,503
(Loss) income from operations	$	(225,697	)	$	49,472

Loss from operations for the three months ended June 30, 2010 was $225,697, compared to income from operations of $49,472 for the comparable period of 2009.

Other Expenses, Net

Comparison of Other Expenses, net for the Three Months Ended June 30, 2010 and 2009

	Three Months Ended June 30,
	2010			2009

Subsidy income	$	-		$	440,664
Interest income		1,419			356
Interest expense		(368,817	)		(506,483	)
Other Expenses, net	$	(367,398	)	$	(65,463	)

Total other expenses, net were $367,398 for the three months ended June 30, 2010, an increase of $301,935 compared to $65,463 for the three months ended June 30, 2009. The Company had no government subsidy income in the three months ended June 30, 2010, compared to $440,664 subsidy income in the comparable period of 2009. The government subsidies were in connection with the purchase of cocoons and as an incentive for technology innovation. Part of these subsidies were passed through to the farmers who produced the cocoons when we purchased the cocoons from farmers.

Interest expenses included interest paid for short term loans and accrued loan interest expense and default penalties in connection with the defaulted convertible notes. Interest expense totaled $368,817 in the three months ended June 30, 2010, decreased in $137,666, or 23% compared to $506,483 in the comparable period of 2009. The decrease in interest expense was a result from the reduced short term loan principal in current period.

Six Months Ended June 30, 2010 as compared to Three Months Ended June 30, 2009

Comparison of Sales for the Six Months Ended June 30, 2010 and 2009

	Six Months Ended June 30,
Sales in US dollars	2010		2009

Silk	$	1,653,608	$	1,769,364
Cocoons		-		757,492
By products and others		169,488		357,042
Total sales	$	1,823,096	$	2,883,898

Net Sales

Our net sales decreased $1,060,802, or 37% to $1,823,096 in the six months ended June 30, 2010 from $2,883,898 in the comparable period of 2009. The Company sold 50.51 tons of silk during the six months ended June 30, 2010, a decreased of 34.73 tons, or 41%, compared to 85.24 tons during the same period of 2009. The revenue from sale of silk was $1,653,608 in the six months ended June 30, 2010, a decreased of $115,756 or 7% compared to $1,769,364 for the six months ended June 30, 2009.

Gross Profit

Comparison of Gross Profit for the Six Months Ended June 30, 2010 and 2009

	Six Months Ended June 30,
	2010			2009

Net sales	$	1,823,096		$	2,883,898
Cost of sales		(1,803,460	)		(2,651,038	)
Gross profit	$	19,636		$	232,860
Gross profit margin rate		1.08	%		8.07	%

The gross profit decreased by $213,224, or 92% to $19,636 in the six months ended June 30, 2010 from $232,860 in the six months ended June 30, 2010. The decrease in gross profit resulted from the revoking of the Company’s right to operate the “Zhengzhong” cocoon station (see plan of operation) by the Fuling Municipal Government during the second quarter of 2010. Consequently, the Company purchased cocoon from third parties instead of the Zhengzhong cocoon station at a higher price. The average cocoon purchase price increased 32% to $9,294 per ton during the three months ended June 30, 2010 from $7,054 per ton at the beginning of 2010.

(Loss) from Operations

Comparison of (Loss) from Operations for the Six Months Ended June 30, 2010 and 2009

	Six Months Ended June 30,
	2010			2009

Gross profit	$	19,636		$	232,860

Professional fees		30,455			33,994
Depreciation and amortization		20,195			19,713
Other general and administrative expenses		251,540			248,412
Total operating expenses		302,190			302,119
(Loss) from operations	$	(282,554	)	$	(69,259	)

Loss from operations for the six months ended June 30, 2010 was $282,554, compared to $69,259 in the comparable period of 2009. The loss was mainly attributable to the reduced gross profit that resulted from higher cocoon costs.

Other Expenses, Net

Comparison of Other Expenses, net for the Six Months Ended June 30, 2010 and 2009

	Six Months Ended June 30,
	2010			2009

Subsidy income	$	173,611		$	706,122
Interest income		2,221			6,813
Interest expense		(732,650	)		(916,409	)
Other Expenses, net	$	(556,818	)	$	(203,474	)

Total other expenses, net were $556,818 for the six months ended June 30, 2010, an increase of $353,344 compared to $203,474 for the six months ended June 30, 2009. The Company had $173,611 government subsidy income in the six months ended June 30, 2010, which decreased by $532,511, compared to $706,122 subsidy income in the comparable period of 2009. The government subsidies were in connection with the purchase of cocoons and as an incentive for technology innovation. Part of these subsidies were passed through to the farmers who produced the cocoons when we purchased the cocoons from farmers.

Interest expenses included interest paid for short term loans and accrued loan interest expense and default penalties in connection with the defaulted convertible notes. Interest expense totaled $732,650 in the six months ended June 30, 2010, decreased by $183,759, or 20% compared to $916,409 in the comparable period of 2009. The decrease in interest expense resulted from the reduced short term loan principal in the current period. Interest expense paid for short term loan was $186,874 in the six months ended June 30, 2010, a decrease of $183,758, compared to $370,632 in the comparable period of 2009.

Liquidity and Capital Resources

As of June 30, 2010 and December 31, 2009, we had $566,851 and $2,788,581 in cash, respectively. The cash balance at December 31, 2009 was prepared for repayment of the Shangxia bank loan which was due by January 19, 2010. We believe that such funds will not be sufficient to effectuate our plans with respect to the business over the next twelve months. We will need to seek additional capital for our operations.

The major sources of the Company’s liquidity for its operations were cash generated from operations and short term loans from banks and other entities.

Net cash used in operating activities was $359,212 for the six months ended June 30, 2010, compared to net cash provided by operating activities of $2,351,868 during the six months ended June 30, 2010. This was mainly due to the increased loss and decreased customer prepaid in current period.

Net cash used in investing activities was $1,400,178 and $4,072,649 during the six months ended June 30, 2010 and 2009, respectively. The Company loaned $1,419,882 and $3,554,977 to related parties during six months ended June 30, 2010. The Company received $19,704 from the return of property during the six months ended June 30, 2010. As comparison, during the six months ended June 30, 2009, the Company spent $5,272 on equipment and paid $512,400 in connection with the purchase of Zhengzhong.

The loan of RMB 6,750,000 ($995,625), the Company received from Chongqing Fulin State-Owned-Assets Management Co. (“Fulin Asset Management”) during the six months ended June 30, 2010, was offset against deposits receivable from Zhengzhong in the same aggregate amount based on Fulin Asset Management’s authorization to do so. The Company received $738,790 advances from related parties during the six months ended June 30, 2010. The Company repaid $2,197,500 of short term loans in six months ended June 30, 2010 and received $2,023,058 proceeds of short term loans in the comparable period of 2009.

Short Term Loans Payable

	June 30,			December 31,
Loans payable consist of:	2010			2009
	((Unaudited)
Qiluo loans payable to Chongqing Shan Xia Bank
30,000,000 RMB, interest at 10% per annum, due January 19, 2010	$	-		$	4,395,000
Less: used by Mr. Chen, Wensheng, 3,000,000 RMB		-			(439,500	)
Less: used by Mr. Zhong, Songbai, 2,000,000 RMB		-			(293,000	)
Less: used by Guojing Silk, 10,000,000 RMB		-			(1,465,000	)

25,000,000 RMB, interest at 7.965% per annum, due January 29, 2011		3,687,500			-

5,000,000 RMB, interest at 7.965% per annum, due February 9, 2011		737,500			-
Less: used by Mr. Chen, Wensheng, 3,000,000 RMB		(442,500	)		-
Less: used by Mr. Zhong, Songbai, 2,000,000 RMB		(295,000	)		-
Less: used by Guojing Silk, 10,000,000 RMB		(2,950,000	)		-
Less: used by Mr. Jingshi Kuang, 5,000,000 RMB		(737,500	)		-
Qiluo loans payable to Chongqing Shan Xia Bank, net		-			2,197,500

Franklin loans payable to two individuals
interest at 8% per annum, due April 24, 2008 (past due)		20,000			20,000
Total	$	20,000		$	2,217,500

On January 22, 2010, the Company jointly with Chongqing Guojing Silk Company, Ltd., Mr. Wensheng Chen and Mr. Songbai Zhong, returned RMB 30,000,000 ($4,395,000) to Shanxia Bank.

Pursuant to a Loan Agreement that provides for a 40,000,000 RMB ($5,900,000) Line of Credit that expires November 26, 2011 (30,000,000 RMB - $4,425,000 for working capital; and 10,000,000 RMB - $1,475,000 acceptance financing/requiring 50% collateral security) on January 29, 2010, the Company jointly with Chongqing Guojing Silk Company, Ltd., Mr. Wensheng Chen, Mr. Songbai Zhong and Mr. Jingshi Kuang, obtained a short term secured loan of RMB 25,000,000 ($3,662,500) from Shanxia Bank. The loan bears interest at 7.965% per annum payable monthly. The loan provides for a 50% penalty increase in the interest rate on a daily basis while the Company is in default on payment of principal. It also provides for a 100% penalty increase in interest rate if the loan proceeds are not used for the purpose stated in the loan. The maturity date of this loan is January 29, 2011, and it is secured by the assets of Guojing Silk and real estate of Mr. Wenshen Chen, Mr. Songbai Song and Mr. Jingshi Kuang.

On February 9, 2010, the Company jointly with Chongqing Guojing Silk Company, Ltd., Mr. Wensheng Chen Mr. Songbai Zhong and Mr. Jingshi Kuang, obtained a short term loan of RMB 5,000,000 ($732,500) for working capital. The loan bears interest at 7.965% per annum payable monthly. The loan provides for a 50% penalty increase in the interest rate on a daily basis while the Company is in default on payment of principal. It also provides for a 100% penalty increase in interest rate if the loan proceeds are not used for the purpose stated in the loan. The maturity date of this loan is February 9, 2011, and it is secured by the assets of Guojing Silk and real estate of Mr. Wenshen Chen, Mr. Songbai Song and Mr. Jingshi Kuang.

During the second quarter 2010, the Company reached agreement with Guojing, in principlea, to transfer $1,475,000 (10,000,000 RMB), its remaining allocated portion of the short term loan, effective July 1, 2010 to Guojing. The purpose of making the transfer was due to significant reductions in the Company’s business caused by a recession in the Silk industry. According to the terms of the Loan Agreement, the Company remains primarily responsible to the lender for the loans taken under the Line of Credit, which aggregated 30,000,000 RMB ($4,425,000), no matter how the proceeds of the loans have been allocated among the Company and the other parties/guarantors of the loan.

As of June 30, 2010 and December 31, 2009, the accrued interest payable for short term loans totaled $33,535 and $22,634, respectively, which was included in accounts payable and accrued expenses.

Loans Payable to Related Parties

		June 30,		December 31,
Loans payable – related parties consist of:		2010		2009
	(Unaudited)
Franklin loan payable to former chief executive officer,
interest at 8% per annum, due on demand		$	12,233	$	12,233
Franklin loan payable to former chief executive officer,
non-interest bearing, due on demand			7,158		7,158
Due to Xin Shengxiang, non-interest bearing, due on demand			1,866		-
Total		$	21,257	$	19,391

The accrued interest payable to related party was $3,762 and $3,272 as of June 30, 2010 and December 31, 2009, respectively.

Convertible Notes Payable

	June 30,			December 31,
Convertible notes payable, net consist of:	2010			2009
	(Unaudited)
Convertible notes - initial face amount	$	3,300,000		$	3,300,000
Less unamortized debt discounts:
Discount on relative fair value of warrants		(2,903,247	)		(2,903,247	)
Discount on beneficial conversion feature		(396,753	)		(396,753	)
Less accumulated amortization		3,300,000			3,300,000
Unamortized debt discounts		-			-
Repayment of convertible notes		(507,825	)		(507,825	)
Convertible notes payable, net	$	2,792,175		$	2,792,175

In an effort to restructure the Notes and related accrued interest and liquidated damages due, the Company circulated an Outline of Proposed Restructuring (the “Term Sheet’) dated April 14, 2010 to the note holders which was agreed to and signed by 9 of 11 note holders. The 9 note holders who signed the Term Sheet constituted $2,300,000 of the original $3,300,000 total principal balance of the convertible Notes. Although the Term Sheet provided that the parties reserved the right to approve all the terms of the definitive documents, definitive documents have not yet been prepared. Accordingly, the Company has not as yet recognized any reduction of the balance of the respective Notes and related liabilities and consequent gain from this proposed restructuring. Also, the Company has continued to accrue interest expense and liquidated damages penalties in accordance with the terms of the original Notes.

Among other things, the Term Sheet provides for the reduction of the balance of the Notes ($2,792,175 at June 30, 2010) to $2,500,000 and the waiver of the related accrued interest ($623,957 at June 30, 2010) and penalties ($2,093,570 at June 30, 2010). The restated Notes are to bear interest at 6%, payable monthly in cash or, at the option of the Company, in registered common stock valued at a 20% discount to the market price. The principal of the restated Notes are to be repaid in 21 monthly installments commencing 3 months following the amendment, payable in cash or, at the option of the Company, in registered common stock valued at a 20% discount to the market price. Also, the Term Sheet provides for the reduction of the exercise price of the 13,200,000 class A Common Stock Purchase Warrants from $0.50 per share to $0.10 per share. If effectuated, the gain from the restructuring will be reduced by any increase in the Fair value of the warrants.

Going Concern Consideration

In an effort to restructure the Notes and related accrued interest and liquidated damages due, the Company circulated an Outline of Proposed Restructuring (the “Term Sheet’) dated April 14, 2010 to the note holders which was agreed to and signed by 9 of 11 note holders. The 9 note holders who signed the Term Sheet constituted $2,300,000 of the original $3,300,000 total principal balance of the convertible Notes. Although the Term Sheet provided that the parties reserved the right to approve all the terms of the definitive documents, definitive documents have not yet been prepared. Accordingly, the Company has not as yet recognized any reduction of the balance of the respective Notes and related liabilities and consequent gain from this proposed restructuring. Also, the Company has continued to accrue interest expense and liquidated damages penalties in accordance with the terms of the original Notes.

These factors raise substantial doubt concerning the Company’s ability to continue as a going concern.

In May 2010, the Fulin Municipal Government revoked the Company’s right to operate the Zhengzhong assets. The loan of RMB 6,750,000 ($995,625), the Company received from Chongqing Fulin State-Owned-Assets Management Co. (“Fulin Asset Management”) during the first quarter 2010, was offset against deposits receivable from Zhengzhong in the same aggregate amount based on Fulin Asset Management’s authorization to do so.

The Company has undertaken further steps as part of a plan to improve operations. The Company planned to reduce its cost of goods sold by purchasing more of its main raw material – cocoon, directly from farmers in the local neighboring area and to reduce its overhead cost by fully utilizing its current manufacture facilities. From the Spring of 2008, the Company began purchasing its main raw material directly from farmers through the planned acquisition of “Zhengzhong” (see Note 7), thereby helped the Company to reduce its raw material - cocoon cost and increase its operating gross margin rate to 15.66% in March 31, 2010 as compared to 7.00% for the three months ended March 31, 2009. However, the Fulin Municipal Government revoked the Company’s right to operate the “Zhengzhong” in May 2010. The Company has to purchase cocoon from third parties with increased price. This will have a material impact on the profitability of the Company. The Company had a negative gross margin due to 32% increase in cocoon price during the second quarter of 2010. The Company is currently in negotiation with the Fulin Government for the return of the rights related to the Zhengzhong cocoon station operations. However, there can be no assurance that the Company will be able to re-obtain the right.

Critical Accounting Policies and Estimates

General

The Company’s Condensed Consolidated Financial Statements are prepared in accordance with U.S. generally accepted accounting principles, which require management to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, net revenue and expenses, and the disclosure of contingent assets and liabilities. Management bases its estimates on historical experience and on various other assumptions that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Senior management has discussed the development, selection and disclosure of these estimates with the Board of Directors. Management believes that the accounting estimates employed and the resulting balances are reasonable; however, actual results may differ from these estimates under different assumptions or conditions.

Basis of Presentation

The condensed consolidated financial statements have been prepared on the going concern basis, which assumes the realization of assets and liquidation of liabilities in the normal course of operations. If we were not to continue as a going concern, we would likely not be able to realize on our assets at values comparable to the carrying value or the fair value estimates reflected in the balances set out in the preparation of the consolidated financial statements. There can be no assurances that we will be successful in generating additional cash from equity or other sources to be used for operations. The consolidated financial statements do not include any adjustments relating to the recoverability of assets and classification of assets and liabilities that might be necessary should the Company be unable to continue as a going concern.

Foreign Currency Translation

The assets and liabilities of Qiluo were translated into United States dollars at period-end exchange rates. The revenues and expenses were translated into United States dollars at average exchange rates for the period. Resulting translation adjustments are recorded as a component of accumulated other comprehensive income within stockholders’ equity.

Transaction gains or losses arising from exchange rate fluctuation on transactions denominated in a currency other than the functional currency are included in the consolidated results of operations.

Intangible and Other Long-Lived Assets

Intangible and other long-lived assets are stated at cost, less accumulated amortization and impairments.

Revenue Recognition

Stock-Based Compensation

Stock-based compensation is accounted for at fair value in accordance with Accounting Standards Codification (“ASC”) topic 718-10, Stock Compensation (formerly, SFAS 123(R), “Accounting for Stock-Based Compensation”). No stock options have been granted and none are outstanding.

Income Taxes

The Company accounts for income taxes using the asset and liability method described in ASC 740-10, (formerly, SFAS No. 109, “Accounting For Income Taxes”), the objective of which is to establish deferred tax assets and liabilities for the temporary differences between the financial reporting and the tax bases of the Company’s assets and liabilities at enacted tax rates expected to be in effect when such amounts are realized or settled. A valuation allowance related to deferred tax assets is recorded when it is more likely than not that some portion or all of the deferred tax assets will not be realized.

No provision has been made for corporation income taxes due to the current loss. In addition, no future tax benefit has been calculated. According to the tax regulations of China, the amount of loss that will carry over to the next tax period should be assessed and approved by the tax regulation agency. The maximum carry over period is five years.

Segment Information

ASC 280-10 (formerly, SFAS No. 131), “Disclosure About Segments of and Enterprise and Related Information”, requires entity-wide disclosures about the products and services an entity provides, the material countries in which it holds assets and reports revenues and its major customers. The Company operates as a single segment and will evaluate additional segment disclosure requirements as it expands its operations.

Recently Adopted Accounting Standards

Recently Issued Accounting Standards

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Smaller reporting companies are not required to provide the information required by Item 305.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

We carried out an evaluation, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act (defined below)). Based upon that evaluation, our principal executive officer and principal financial officer concluded that, as of the end of the period covered in this report, our disclosure controls and procedures were effective to ensure that information required to be disclosed in reports filed under the Securities Exchange Act of 1934, as amended (the "Exchange Act") is recorded, processed, summarized and reported within the required time periods and is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

Our management, including our principal executive officer and principal financial officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all error or fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Due to the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. Accordingly, management believes that the financial statements included in this report fairly present in all material respects our financial condition, results of operations and cash flows for the periods presented.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal controls over financial reporting that occurred during the last fiscal quarter covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II OTHER INFORMATION

Item 1. Legal Proceedings.

There are no pending legal proceedings to which the Company is a party or in which any director, officer or affiliate of the Company, any owner of record or beneficially of more than 5% of any class of voting securities of the Company, or security holder is a party adverse to the Company or has a material interest adverse to the Company, and the Company's property is not the subject of any pending legal proceedings, except as follows:

On July 28, 2008, Professional Offshore Opportunity Fund Ltd. (the “Plaintiff”) obtained a default judgment against the Company. On April 21, 2008, the Plaintiff initiated the action in the United States District Court Southern District of New York, on a claim of breach of contract and non payment on a promissory note dated September 12, 2007, made by the Company in favor of the Plaintiff, in the principal amount of $500,000. The Plaintiff claimed approximately $671,000 in total relief, which amount includes a 15% principal charge of $75,000, accrued interest of $48,125, and liquidated damages of $37,000.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

Unregistered Sales of Equity Securities

None

Purchases of equity securities by the issuer and affiliated purchasers

None.

Use of Proceeds

None

Item 3. Defaults Upon Senior Securities.

See Part II – Item 1. above.

Item 4. Removed and Reserved.

Item 5. Other Information.

None

Item 6. Exhibits

Exhibit No.		Description
31.1		Rule 13a-14(a)/15d14(a) Certifications of Dingliang Kuang, the President, Chief Executive Officer, Treasurer and Director (Attached Hereto)

32.1		Section 1350 Certifications of Dingliang Kuang, the President, Chief Executive Officer, Treasurer and Director (Attached Hereto)

SIGNATURES

In accordance with to requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	FRANKLIN TOWERS ENTERPRISES, INC.

Dated: August 23, 2010	By:	/s/ Dingliang Kuang
	Name:	Dingliang Kuang
	Title:	President, Chief Executive Officer, Treasurer and Director
		(Principal Executive, Financial and Accounting Officer)

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Franklin Towers Enterprises (FRTW) Inactive 10-Q2010 Q2 Quarterly report

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