UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
AMENDMENT NO.1 TO
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR FISCAL YEAR ENDED JUNE 30, 2008
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______________ TO ___________________.
COMMISSION FILE NUMBER: 0-11616
FRANKLIN WIRELESS CORP.
(Exact name of Registrant as specified in its charter)
NEVADA 95-3733534
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
5440 MOREHOUSE DRIVE, SUITE 1000, 92121
SAN DIEGO, CALIFORNIA (Zip code)
(Address of principal executive offices)
Registrant's Telephone Number, including area code: (858) 623-0000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK, PAR
VALUE $.001 PER SHARE
Indicate by check mark if the Registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes [ ] No [X]
Indicate by check mark if the Registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X]
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ] Smaller reporting company [X]
Indicate by check mark whether the Registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
The aggregate market value of the voting common stock held by non-affiliates of
the Registrant, based on the closing price of the Registrant's common stock on
September 22, 2008, as reported by The OTC Bulletin Board, was approximately
$12,166,670. For the purpose of this calculation, shares owned by officers,
directors (and their affiliates) and 5% or greater stockholders have been
excluded.
The Registrant has 13,231,491 shares of common stock outstanding as of September
22, 2008
EXPLANATORY NOTE
On February 17, 2009 Franklin Wireless Corp. received a letter from the
Securities and Exchange Commission (the "SEC") regarding our Form 10-K for the
year ended June 30, 2008. We have responded to the SEC's comments to our Form
10-K (the "ORIGINAL REPORT") in this Amendment No. 1 (the "AMENDMENT"). The
purpose of the Amendment is to disclose the restatement of our financial
statements for the fiscal year ended June 30, 2008 and to make appropriate
changes to the Management's Discussion and Analysis of Financial Condition and
Results of Operation. As a result of the restatement, the following adjustments
were made to our financial statements and our Management's Discussion and
Analysis of Financial Condition and Results of Operation for the fiscal year
ended June 30, 2008:
1. The subsection entitled "Cash and Cash Equivalents" in the section entitled
"Summary of Significant Accounting Policies" in the Management's Discussion and
Analysis of Financial Condition and Results of Operations (Item 7 of Amendment
No. 1) has been revised to disclose that we classify only highly liquid
investments with original maturities of three months or less to be cash
equivalents, consistent with Paragraph 8 of SFAS No. 95. A similar change was
made to Note 3 of Notes to Financial Statements.
2. The subsection entitled "Advertising and Marketing Costs" in the section
entitled "Summary of Significant Accounting Policies" in the Management's
Discussion and Analysis of Financial Condition and Results of Operations has
been revised to separately state sales commission expenses and marketing
development fund arrangements. A similar change was made to Note 3 of Notes to
Financial Statements.
3. The subsection entitled "Income Taxes" in the section entitled "Summary of
Significant Accounting Policies" in the Management's Discussion and Analysis of
Financial Condition and Results of Operations has been revised to describe our
policies with respect to provision for income taxes. Corresponding changes have
been made to Note 14 of Notes to Financial Statements.
4. The table in Note 14 of Notes to Financial Statements, summarizing the
components of our income tax expense, has been revised to report separately the
benefits of operating loss carryforwards, pursuant to Paragraph 45e of SFAS No.
109.
5. A table has been added to Note 14 of the Notes to Financial Statements to
provide the disclosure required by Paragraph 47 of SFAS No. 109.
The disclosures in this Amendment continue to speak as of the date of the
Original Report, and do not reflect events occurring after the filing of the
Original Report, except as specifically noted. Accordingly, this Amendment
should be read in conjunction with our other filings made with the Securities
and Exchange Commission subsequent to the filing of the Original Report,
including any amendments to those filings. The filing of this Amendment shall
not be deemed to be an admission that the Original Report, when made, included
any untrue statement of a material fact or omitted to state a material fact
necessary to make a statement not misleading.
2
PART I
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION.
The following discussion and analysis of our financial condition and
results of operations should be read in conjunction with our financial
statements and related notes included elsewhere in this report. We are not
obligated to publicly update this information, whether as a result of new
information, future events or otherwise, except to the extent we are required to
do so in connection with our obligation to file reports with the SEC. For a
discussion of the important risks to our business and future operating
performance, see the discussion under the caption "Item 1A. Risk Factors" and
under the caption "Factors That May Influence Future Results of Operations"
below. In the lights of these risks, uncertainties and assumptions, the
forward-looking events discussed in this report might not occur.
BUSIENSS OVERVIEW
We design and sell broadband high speed wireless data communication
products. Our products include third generation ("3G") and fourth generation
("4G") wireless modules and modems. Our products are designed to operate on a
majority of wireless networks in the world, provide mobile subscribers with
secure and convenient high speed access to wireless data communications networks
using laptops, handheld and desktop computers, and enable our customers to send
and receive email with large file attachments, play interactive games, and
receive, send, and download high resolution picture, video and music contents.
We market our products primarily to wireless operators either directly
or indirectly through strategic partners and distributors located in countries
in North America, the Caribbean and South America. Most of our sales to wireless
operators are made through the use of our indirect strategic partners and
selected sales distributors. Our global customer base extends from the United
States to the Caribbean and South American countries. Our Universal Serial Bus
("USB") modems are certified by Sprint, Alltel, Cellular South, NTELOS,
Cincinnati Bell, Mobi PCS, Qwest and ACS in the United States, by IUSACELL in
Mexico, by Telefonica and Movilnet in Venezuela, by Centennial in Puerto Rico,
by Alegro in Ecuador and by TSTT in Trinidad and Tobago. We have strategic
marketing relationships with several of these customers.
In order to maintain and enhance our strong sales relationships, we are
expanding our sales and technical team as well as access to additional
distribution channels. We are also engaged in a variety of marketing activities,
such as co-marketing with our vendor, trade show support, and products marketing
development support. In the United States, we are continuing to expand our
strategic relationships with leading wireless operators and industry leaders
through increased marketing activities in order to drive our market reach and
sales by combining our expertise in wireless technologies with their global
subscriber bases.
FACTORS THAT MAY INFLUENCE FUTURE RESULTS OF OPERATIONS
We believe that our revenue growth will be influenced largely by (1)
successful maintenance of our existing customers, (2) the rate of increase in
demand for wireless data products, (3) customer acceptance of our new products,
(4) new customer relationships and contracts, and (4) our ability to meet
customers' demands.
We have an agreement with C-Motech for the manufacturing of our
products. Under our manufacturing agreements, C-Motech is responsible for
design, development, testing, certification, and completion of these products.
We believe that our cost of goods sold will depend on our ability to negotiate
with C-Motech based on our capability in market development in light of
increased competition.
We have entered into and expect to continue to enter into new customer
relationships and contracts for the supply of our products, and this may require
significant demands on our resources, resulting in increased operating, selling,
and marketing expenses associated with such new customer development.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The preparation of financial statements in conformity with accounting
principles generally accepted in the Untied States of America requires
management to make estimates and judgments that affect the reported amounts on
those financial statements. Note 2 to the financial statements (included in this
Annual Report on Form 10-K) describes the significant accounting policies and
methods used in the preparation of the financial statements. On an ongoing
3
basis, we evaluate those estimates including, but not limited to, those related
to our intangible assets and long-lived assets. We base those estimates on
historical experience and on various other assumptions we believe 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. Actual results may differ from these
estimates under different conditions or if our assumptions change.
We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our financial
statements:
ESTIMATES
The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenue and expenses during the reporting periods. Actual results could
differ from those estimates. Significant estimates include useful lives
of intangible and long-lived assets.
REVENUE RECOGNITION
We recognize revenue from product sales when persuasive evidence of an
arrangement exists, the price is fixed or determinable, collection is
reasonably assured and delivery of products has occurred or services
have been rendered. Accordingly, we recognize revenues from product
sales upon shipment of the product to the customers. We do not allow
the right of return on product sales but provide a factory warranty for
one year from the shipment, which is covered by our vendor.
CASH AND CASH EQUIVALENTS
We consider all highly liquid investments purchased with original
maturities of three months or less to be cash equivalents.
SHIPPING AND HANDLING COSTS
Most of shipping and handling costs are paid by the customers directly
to the shipping companies. We do not collect and incur shipping and
handling costs to be capitalized.
INVENTORIES
Our inventories are made up of finished goods and are stated at the
lower of cost or market, cost being determined on a first-in, first-out
basis. We assess the inventory carrying value and reduce it, if
necessary, to its net realizable value based on customer orders on hand
and internal demand forecasts using management's best estimates given
information currently available. Our customer demand is highly
unpredictable, and can fluctuate significantly caused by factors beyond
our control. We may maintain an allowance for inventories for
potentially excess and obsolete inventories and inventories that are
carried at costs that are higher than their estimated net realizable
values.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. We provide for depreciation
using the straight-line method over the estimated useful lives as
follows:
Computers and software 5 years
Machinery and equipment 5 years
Furniture and fixtures 7 years
Expenditures for maintenance and repairs are charged to operations as
incurred while renewals and betterments are capitalized. Gains or
losses on the sale of property and equipment are reflected in the
statements of operations.
4
INTANGIBLE ASSETS - LICENSES AND CERTIFICATIONS
Licenses are stated at cost and are amortized using the straight-line
method over the license periods of five years or life of the license.
Certifications are stated at cost and are amortized using the
straight-line method over the certification periods of three years or
life of the certifications
VALUATION ON INTANGIBLE AND LONG-LIVED ASSETS
In accordance with Statement of Financial Accounting Standards No. 144,
"Accounting for Impairment on Disposal of Long-lived Assets", we review
for impairment of long-lived assets and certain identifiable
intangibles whenever events or circumstances indicate that the carrying
amount of assets may not be recoverable. We consider the carrying value
of assets may not be recoverable based upon our review of the following
events or changes in circumstances: the asset's ability to continue to
generate income from operations and positive cash flow in future
periods; loss of legal ownership or title to the assets; significant
changes in our strategic business objectives and utilization of the
asset; or significant negative industry or economic trends. An
impairment loss would be recognized when estimated future cash flows
expected to result from the use of the asset is less than its carrying
amount.
For the year ended June 30, 2008, we wrote off intangible assets of
CDU-550 test certifications in the amount of $171,280, resulting in a
total loss of $73,171, as these certifications were deemed impaired due
to their inability to continue to generate income from operations and
positive cash flow in future periods.
WARRANTIES
We do not allow the right of return on product sales but provide a
factory warranty for one year from the shipment, which is covered by
our vendor. These products are shipped directly from our vendor to our
customers. As a result, we do not accrue any warranty expenses.
RESEARCH AND DEVELOPMENT COSTS
We have an agreement with C-Motech for the manufacturing of our
products, including services of component procurement, design,
development, final assembly, testing, quality control, fulfillment and
delivery of these products. As a result, we do not accrue any
significant research and development costs, primarily made up of
developmental activities relating to our products.
ADVERTISING AND MARKETING COSTS
We expense the costs of advertising and marketing as incurred. We
incurred $232,969 and $63,112 of advertising and marketing expenses for
the years ended June 30, 2008 and 2007, respectively. The increase was
primarily due to the net effect of the increase in marketing
development fund arrangements of $218,000 and the decrease in other
advertising and promotion expenses of approximately $48,000 for the
year ended June 30, 2008, compared to the corresponding period of 2007.
The costs of $218,000 incurred by us for the marketing development fund
arrangements were included within advertising and marketing costs in
accordance with Financial Accounting Standards Board, or FASB, Emerging
Issues Task Force, or EIFT, Issue No. 01-9, ACCOUNTING FOR
CONSIDERATION GIVEN BY A VENDOR TO A CUSTOMER (INCLUDING A RESELLER OF
THE VENDOR'S PRODUCT), or EITF No. 01-9, which provides guidance on the
application of generally accepted accounting principles to selected
recognition issues on PAYMENTS FROM A VENDOR TO A CUSTOMER.
SALES COMMISSION COSTS
We expense the costs of sales commission as incurred. We incurred
$1,137,156 and $239,410 of sales commission expenses for the years
Ended June 30, 2008 and 2007, respectively.
5
INCOME TAXES
We adopted the provisions of FASB interpretation ("FIN") No. 48,
"Accounting for Uncertainty in Income Taxes -- an interpretation of
FASB statement No. 109," which prescribes a recognition threshold and
measurement process for recording in the financial statements,
uncertain tax positions taken or expected to be taken in a tax return.
Under FIN 48, the impact of an uncertain income tax position on the
income tax return must be recognized at the largest amount that is
more-likely-not to be sustained upon audit by the relevant taxing
authority. An uncertain income tax position will not be recognized if
it has less than a 50% likelihood of being sustained.
We recognize federal and state tax liabilities or assets based on our
estimate of taxes payable to or refundable by tax authorities in the
current fiscal year. We also recognize federal and state tax
liabilities or assets based on our estimate of future tax consequences
attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. A
valuation allowance is required when it is more likely than not that we
will not be able to realize all or a portion of our deferred tax
assets.
Income tax provision from continuing operations for the years ended
June 30, 2008 and 2007 consists of the following:
YEAR ENDED JUNE 30,
---------------------
2008 2007
-------- --------
Current income taxes expense:
Federal $433,067 $ 26,409
State 156,382 8,781
-------- --------
589,449 35,190
Deferred income taxes expense (benefits): -- --
-------- --------
Provision for income taxes $589,449 $ 35,190
======== ========
The provisions for income taxes reconcile to the amount computed by
Applying effective federal statutory income tax rate to income before
Provision for income taxes as follows:
YEAR ENDED JUNE 30,
--------------------------------------------
2008 % 2007 %
----------- ------ ----------- ------
Federal tax provision, at statutory rate $ 1,532,163 34.0 $ 453,998 34.0
State tax, net of fed tax benefit 329,327 7.3 118,358 8.8
Nondeductible expenses 5,957 0.1 5,217 0.4
Credit (23,291) (0.5) -- --
Valuation allowance (1,213,017) (26.9) (546,519) (40.9)
Others (41,690) (0.9) 4,136 0.3
----------- ------ ----------- ------
Provision for income taxes $ 589,449 13.1 $ 35,190 2.6
=========== ====== =========== ======
Deferred income taxes reflect the net effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes.
Significant components of our deferred tax assets are as follows:
YEAR ENDED JUNE 30
--------------------------
2008 2007
----------- -----------
Current deferred tax asset (liabilities):
Net operating losses $ 170,883 $ --
Other, net 16,493 151,868
Non-current deferred tax assets (liabilities):
Net operating losses 2,011,633 3,285,042
Credit -- 30,996
Other, net (4,477) (60,357)
----------- -----------
Total deferred tax assets 2,194,532 3,407,549
Less valuation allowance (2,194,532) (3,407,549)
----------- -----------
Net deferred tax asset $ -- $ --
=========== ===========
6
The significant component of the deferred tax asset (liability) at June
30, 2008 and 2007 was federal net operating loss carry-forward in the
amount of approximately $2,034,000 and $2,934,000, respectively, based
on federal tax rate of 34%.
SFAS No. 109 requires a valuation allowance to be recorded when it is
more likely than not that some or all of the deferred tax assets will
not be realized. At June 30, 2008 and 2007, we established a full
valuation allowance on our net deferred tax assets based on the
available evidences, both positive and negative, to determine whether
valuation allowance is needed. Based on our losses before income taxes
in the past years before the fiscal year of 2007 and our estimated
losses in the future three years, management believed that it was more
likely than not that most of the deferred tax assets will not be
realized. Valuation allowances for the full amount of the net deferred
tax asset were established to reduce the deferred tax assets to zero
based on the level of historical taxable income and projections for
future taxable income over the period of three years. At June 30, 2008,
the established valuation allowance for the net deferred tax asset was
decreased by $1,213,017.
As of June 30, 2008, we have federal net operating loss carryforwards
of approximately $5,983,000 and state net operating loss carryforwards
of approximately $1,676,000 for income tax purposes after application
of IRC Section 382 limitation on net operating losses as result of the
Company's ownership change in prior period. The Federal and state net
operating loss carryforwards will begin to expire from 2009 to 2026 and
2009 to 2016, respectively.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In July 2006, the FASB issued FASB interpretation ("FIN") No. 48,
"Accounting for Uncertainty in Income Taxes -- an interpretation of FASB
statement No. 109," which prescribes a recognition threshold and measurement
process for recording, in the financial statements, uncertain tax positions
taken or expected to be taken in a tax return. In addition, FIN 48 provides
guidance on the derecognizing, classification, accounting in interim periods and
disclosure requirements for uncertain tax positions. We have currently adopted
and evaluated the impact, if any, that FIN 48 will have on our financial
statements. FIN 48 is not expected to have a material impact on our financial
statements.
In September 2006, the FASB issued Statement of Financial Accounting
Standards ("SFAS") No. 157, "FAIR VALUE MEASUREMENTS". This standard provides
guidance for using fair value to measure assets and liabilities. The standard
also responds to investors' requests for expanded information about the extent
to which companies measure assets and liabilities at fair value, the information
used to measure fair value, and the effect of fair value measurements on
earnings. The standard applies whenever other standards require (or permit)
assets or liabilities to be measured at fair value, but does not expand the use
of fair value in any new circumstances. SFAS No. 157 is effective for financial
statements issued for fiscal years beginning after November 15, 2007, and
interim periods within those fiscal years. There are numerous previously issued
statements dealing with fair values that are amended by SFAS No. 157. SFAS No.
157 is not expected to have a material impact on our financial statements.
In February 2007, the FASB issued SFAS No. 159, "THE FAIR VALUE OPTION
FOR FINANCIAL ASSETS AND FINANCIAL LIABILITIES--INCLUDING AN AMENDMENT OF FASB
STATEMENT NO. 115". SFAS No. 159 permits companies to choose to measure certain
financial instruments and other items at fair value. Most of the provisions in
SFAS 159 are elective; however the amendment to SFAS 115, ACCOUNTING FOR CERTAIN
INVESTMENTS IN DEBT AND EQUITY SECURITIES, applies to all entities with
available-for-sale securities. The fair value option established by SFAS 159
permits all entities to choose to measure eligible items at fair value at
specified election dates. The standard requires that unrealized gains and losses
are reported in earnings for items measured using the fair value option at each
subsequent reporting date. SFAS No. 159 is effective for the Company beginning
in the first quarter of fiscal year 2009. SFAS No. 159 and the amendments to
SFAS 115 are not expected to have a material impact on our financial statements.
In June 2007, the FASB ratified Emerging Issues Task Force ("EITF")
07-3, Accounting for Nonrefundable Advance Payments for Goods or Services
Received for Use in Future Research and Development Activities ("EITF 07-3").
EITF 07-3 requires that nonrefundable advance payments for goods or services
that will be used or rendered for future research and development activities be
deferred and capitalized and recognized as an expense as the goods are delivered
or the related services are performed. EITF 07-3 is effective, on a prospective
basis, for fiscal years beginning after December 15, 2007. EITF 07-3 is not
expected to have a material impact on our financial statements.
7
In December 2007, the FASB issued Statement No. 141 (revised), Business
Combinations ("SFAS No. 141(R)"). The standard changes the accounting for
business combinations including the measurement of acquirer shares issued in
consideration for a business combination, the recognition of contingent
consideration, the accounting for pre-acquisition gain and loss contingencies,
the recognition of capitalized in-process research and development, the
accounting for acquisition-related restructuring cost accruals, the treatment of
acquisition related transaction costs and the recognition of changes in the
acquirer's income tax valuation allowance. SFAS No. 141(R) is effective for
fiscal years beginning after December 15, 2008, with early adoption prohibited.
SFAS No. 141(R) is not expected to have a material impact on our financial
statements.
In December 2007, the FASB issued Statement No. 160, Noncontrolling
Interests in Consolidated Financial Statements, an amendment of ARB No. 51
("SFAS No. 160"). The standard changes the accounting for noncontrolling
(minority) interests in consolidated financial statements including the
requirements to classify noncontrolling interests as a component of consolidated
stockholders' equity, and the elimination of "minority interest" accounting in
results of operations with earnings attributable to noncontrolling interests
reported as part of consolidated earnings. Additionally, SFAS No. 160 revises
the accounting for both increases and decreases in a parent's controlling
ownership interest. SFAS No. 160 is effective for fiscal years beginning after
December 15, 2008, with early adoption prohibited. SFAS No. 160 is not expected
to have a material impact on our financial statements.
There are no other accounting standards issued as of September 22, 2008 that are
expected to have a material impact on our consolidated financial statements.
RESULT OF OPERATIONS
The following table sets forth, for the years ended June 30, 2008, 2007
and 2006 (fiscal 2008, fiscal 2007, and fiscal 2006), our statements of
operations data expressed as a percentage of sales:
YEAR ENDED JUNE 30,
---------------------------
2008 2007 2006
------- ----- -----
(as a percentage of sales)
Net Sales 100.0% 100.0% 100.0%
Cost of goods sold 77.8% 74.0% 67.6%
------- ----- -----
Gross profit 22.2% 26.0% 32.4%
------- ----- -----
Operating expenses:
Selling, general and administrative expenses 9.5% 13.3% 58.0%
Research and development 0.0% 0.0% 3.6%
------- ----- -----
Total operating expenses 9.5% 13.3% 61.6%
------- ----- -----
Income (loss) from operations 12.7% 12.7% (29.2%)
------- ----- -----
Other income (expense), net 0.3% 0.2% 1.6%
Net income (loss) before income taxes 13.0% 12.9% (27.6%)
------- ----- -----
Provision for income taxes (1.7%) (0.4%) (0.1%)
------- ----- -----
Net income (loss) 11.3% 12.5% (27.7%)
======= ===== =====
YEAR ENDED JUNE 30, 2008 COMPARED TO YEAR ENDED JUNE 30, 2007
NET SALES - Net sales increased by $24,338,209, or 234.4%, to
$34,723,299 for the year ended June 30, 2008 from $10,385,090 for the
corresponding period of 2007. The increase was primarily due to an
increase in demand for our CDMA USB modem products in the Caribbean and
South American countries. Our sales of CDMA USB modem products in the
Caribbean and South American countries increased by $19,562,558, or
337.9 %, to $25,352,232 for the year ended June 30, 2008 from
$5,789,674 for the corresponding period of 2007. Our sales of CDMA USB
modem products in North America also increased by $5,088,786, or
118.9%, to $9,367,836 for the year ended June 30, 2008, from $4,279,050
for the corresponding period of 2007. The overall net sales are
expected to continue to depend primarily on, among other thing, the
geographic region of our sales efforts and demand by our customers.
8
GROSS PROFIT - Gross profit margin increased by $4,998,924, or 185.5%,
to $7,694,284 for the year ended June 30, 2008 from $2,695,360 for the
corresponding period of 2007. The increase was primarily due to the
increased sales volume of our CDMA USB modem products in the United
States, the Caribbean, and South American countries. Our sales of CDMA
USB modem products increased by $5,088,786, or 118.9%, in the Untied
States and by $19,562,558, or 337.9 %, in the Caribbean and South
American countries for the year ended June 30, 2008, compared to the
corresponding period of 2007. Gross profit in terms of net sales
percentage as the percentage of gross profit was 22.2% for the year
ended June 30, 2008, compared to 26.0% for the corresponding period of
2007. The gross profit decrease in terms of net sales percentage was
primarily due to the increased sales of lower margin as a result of the
competitive pricing pressures on our sales prices.
SELLING, GENERAL, AND ADMINISTRATIVE - Selling, general, and
administrative expenses increased by $1,917,644, or 138.7%, to
$3,300,070 for the year ended June 30, 2008 from $1,382,426 for the
corresponding period of 2007. The increase was primarily due to the
increase in sales and marketing effort for the year ended June 30,
2008, resulting in not only increased sales and marketing expenses but
also increased salary and related expenditures, as our sales-force
increased. For the year ended June 30, 2008, we had an increase in
sales commission expenses of $897,746, an increase in other sales and
marketing expenses of $169,857, an increase in travel expenses of
$69,264, and an increase in payroll expenses of $559,735, compared to
the corresponding period of 2007.
OTHER INCOME (EXPENSE), NET - The net amount of other income increased
by $89,795, or 401.7%, to $112,149 for the year ended June 30, 2008
from $22,354 for the corresponding period of 2007. The increase was
primarily due to increased interest income of $135,094, resulting from
the increase in our average cash, for the year ended June 30, 2008. For
the year ended June 30, 2008, we had an increase in interest income of
$96,579, an increase in other income of $46,474, and an increase in the
loss of $54,004 from the write-off of intangible assets, compared to
the corresponding period of 2007.
YEAR ENDED JUNE 30, 2007 COMPARED TO YEAR ENDED JUNE 30, 2006
NET SALES - Net sales increased by $9,382,137, or 935.5%, to
$10,385,090 for the year ended June 30, 2007 from $1,002,953 for the
corresponding period of 2006. The primary increase was due to sales of
our CDMA USB modem products to a new carrier customer in North America,
in the amount of $4,279,050 for the year ended June 30, 2007, as well
as a strong increase in demand for our CDMA EV-DO data products in the
Caribbean and South American countries. Our sales of CDMA EV-DO data
products in the Caribbean and South American countries were $5,789,674
for the year ended June 30, 2007, compared to $753,130 for the
corresponding period of 2006, an increase of $5,036,544, or 668.8%.
GROSS PROFIT - Gross profit margin increased by $2,370,562, or 729.9%,
to $2,695,360 for the year ended June 30, 2007 from $324,798 for the
corresponding period of 2006. Gross profit in terms of net sales
percentage as the percentage of gross profit was 26.0% for the year
ended June 30, 2007, compared to 32.4% for the corresponding period of
2006. The gross profit decrease in terms of net sales percentage was
due to one-time commission revenue recognized as a non-refundable
brokerage fee in the amount of $57,280, and sales of products that were
provided by our vendors at no cost as part of initial seed stock
incentive in the amount of $48,860 for the year ended June 30, 2006.
SELLING, GENERAL, AND ADMINISTRATIVE - Selling, general, and
administrative expenses increased by $800,507, or 137.6%, to $1,382,426
for the year ended June 30, 2007 from $581,919 for the corresponding
period of 2006. The increase was primarily a result of an increase in
sales and marketing efforts, which included hiring new personnel to
expand our marketing and customer support functions, which increased
salary and related expenses. For the year ended June 30, 2007, we had
an increase in sales commission expense of $239,410, an increase in
marketing expense of $54,850, an increase in travel expense of $71,425,
and an increase in payroll expense of $291,475, compared to the
corresponding period of 2006.
9
RESEARCH AND DEVELOPMENT - Research and development expenses decreased
by $36,300, or 100.0%, to nil for the year ended June 30, 2007 from
$36,300 for the corresponding period of 2006. We incurred research and
development expense for design of Global Standard for Mobile
Communications, or GSM, cellular phones, for the year ended June 30,
2006. For the year ended June 30, 2007, we did not incur research and
development expense, as we discontinued GSM products and have
contracted out our research and development of CDMA USB modem products
to C-Motech Co. Ltd, a designer and original equipment manufacturer
("OEMs") of our wireless broadband modems and modules located in South
Korea.
OTHER INCOME (EXPENSE), NET - The net of other income (expense)
increased by $5,723 or 34.41%, to income of $22,354 for the year ended
June 30, 2007 from income of $16,631 for the corresponding period of
2006. The increase was due to increase in interest income of $38,515,
offset by a loss of $19,934 from write-off of fixed assets and
intangible assets for the year ended June 30, 2007.
LIQUIDITY AND CAPITAL RESOURCES
Our principal liquidity requirements are for working capital and
capital expenditures. We fund our liquidity requirements with cash on hand, cash
flow from operations, and issuance of equity securities.
OPERATING ACTIVITIES - Net cash provided by operating activities
increased by $2,089,502 to $3,835,893 for fiscal 2008 from $1,746,391
for fiscal 2007. The $3,835,893 in net cash provided by operating
activities for fiscal 2008 was primarily due to our net income of
$3,916,913. Net cash provided by operating activities for fiscal 2007
was $1,746,391, and net cash used in operating activities for fiscal
2006 was $205,239. The increase in net cash provided by operating
activities for fiscal 2007 was primarily due to net income of
$1,300,097 and increase in advance cash collections of $354,500 from
customers as compared to fiscal 2006.
INVESTING ACTIVITIES - Net cash used in investing activities for fiscal
2008, fiscal 2007 and fiscal 2006 was $52,312, $137,185 and $60,916
respectively, primarily consisting of capital expenditures. The net
cash used in investing activities for fiscal 2008 was primarily due to
purchases of long-lived assets. The net cash used in investing
activities for fiscal 2007 was primarily due to purchases of CDMA
Development Group certifications in the amount of $115,780.
FINANCING ACTIVITIES - Net cash used in financing activities for fiscal
2008 was $88,605, primarily due to repayment of a loan in the amount of
$100,000, offset by $11,395 received from a stock subscription. Net
cash provided by financing activities for fiscal 2007 was $300,000,
primarily due to proceeds of $400,000 from the issuance of Common
Stock, offset by repayment of a loan in the amount of $100,000. Net
cash provided by financing activities in fiscal 2006 was $795,000,
primarily due to proceeds of $905,000 from the issuance of Common
Stock, offset by repayment of borrowings to shareholders and a line of
credit in the amount of $110,000.
CONTRACTUAL OBLIGATIONS AND OTHER COMMITMENTS
The following table summarizes our contractual obligations and
commitments as of June 30, 2008, and the effect such obligations could have on
our liquidity and cash flow in future periods:
PAYMENTS DUE BY JUNE 30,
LEASE 2009 2010 2011 2012 TOTAL
------------------------------ -------- -------- -------- -------- --------
Administrative office facility $ 91,050 $109,260 $109,260 $ 18,210 $327,780
Corporate housing facility 4,701 -- -- -- 4,701
-------- -------- -------- -------- --------
TOTAL OBLIGATION $ 95,751 $109,260 $109,260 $ 18,210 $332,481
======== ======== ======== ======== ========
10
LEASES
We lease our administrative facilities under a non-cancelable operating
lease that expires on August 31, 2011. In addition to the minimum
annual rental commitments, the lease provides for periodic cost of
living increases in the base rent and payment of common area costs.
Rent expense related to the operating lease was $62,848 and $59,420 for
the years ended June 30, 2008 and 2007, respectively.
We lease a corporate housing facility for our vendors under a
non-cancelable operating lease that expires on October 2, 2008. Rent
expense related to the operating lease was $17,829 and $2,770 for the
years ended June 30, 2008 and 2007, respectively.
We lease one automobile under an operating lease that expires on July
22, 2009. The related lease expense was $6,452 and $6,795 for the years
ended June 30, 2008 and 2007, respectively.
OFF-BALANCE SHEET ARRANGEMENT
Our facility is located in San Diego, California. Manufacturing of our
products has been contracted out to C-Motech Co. Ltd. ("C-Motech"), located in
South Korea.
In January 2005, we entered into an agreement with C-Motech for the
manufacture of the products. Under the manufacturing and supply agreement,
C-Motech provides us with services including all licenses, component
procurement, final assembly, testing, quality control, fulfillment and
after-sale service. The Agreement provides exclusive rights to market and sell
our CDMA wireless data products in countries in North America, the Caribbean,
and South America. Furthermore, the Agreement provides that we are responsible
for marketing, sales, field testing, and certifications of these products to
wireless service operators and other commercial buyers within a designated
territory, and C-Motech is responsible for design, development, testing,
certification, and completion of these products. Under the Agreement, products
include all access devices designed with Qualcomm's MSM 5100, 5500, 6500, and
6800 chipset solutions provided or designed by C-Motech or both companies. Both
companies own the rights to the products: USB modems, Card Bus, PCI Bus and
Module designed with MSM 5500 dual band products. On January 30, 2007, C-Motech
also certified that we have the exclusive right to sell CDU-680 EVDO USB modems
directly and indirectly in these territories.
The initial term of the Agreement was for two years, commencing on
January 5, 2005. The agreement automatically renews for successive one year
periods, unless either party provides written notice to terminate at least sixty
days prior to the end of the term. This agreement may be amended or supplemented
by mutual agreement of the parties, as is necessary to document the addition of
any new products.
FUTURE LIQUIDITY AND CAPITAL REQUIREMENTS
For the next twelve months, we expect to incur approximately $1.0
million to $2.0 million for capital expenditures and the acquisition of
additional certifications, excluding non-cash acquisitions.
We believe we will be able to fund our future cash requirements for
operations from our cash available, operating cash flows and issuance of equity
securities. We believe these sources of funds will be sufficient to continue our
operations and planned capital expenditures. However, we may be required to
raise additional debt or equity capital if we are unable to generate sufficient
cash flow from operation to fund the continued expansion of our sales and to
satisfy the related working capital requirements for next twelve months. Our
ability to satisfy such obligations also depends upon our future performance,
which in turn is subject to general economic conditions and regional risks, and
to financial, business and other factors affecting our operations, including
factors beyond our control. See Item 1A, "Risk Factors." included in this
report.
If we are unable to generate sufficient cash flow from operations to
meet our obligations and commitments, we will be required to refinance or
restructure our indebtedness or raise additional debt or equity capital.
Additionally, we may be required to sell material assets or operations or delay
or forego expansion opportunities. We might not be able to affect these
alternative strategies on satisfactory terms, if at all.
11
PART II
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements and the supplementary financial information
required by this Item and included in this report are listed in the Index to
Financial Statements beginning on page F-1.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
(a) See Index to Financial Statements
(b) Exhibits
The following Exhibits are files as part of, or incorporated by
reference into, this Report on Form 10-K:
Exhibit
No. Description
------- -------------------------------------------------------------
2.1 Articles of Merger and Agreement and Plan of Reorganization,
filed January 2, 2008 with the Nevada Secretary of State. (1)
3.1 Restated Articles of Incorporation of Franklin Wireless
Corp. (1)
3.2 Bylaws of Franklin Wireless Corp. (1)
10.1 Co-Development, Co-Ownership and Supply Agreement, dated
January 5, 2005 between the Company and C-Motech Co., Ltd. (2)
10.2 Lease, dated May 1, 2008, between the Company and RDLFA, LLC,
a California Limited Liability Company (previously filed)
14.1 Code of Ethics (previously filed).
31.1 Certificate of Chief Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
31.2 Certificate of Acting Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certificate of Chief Executive Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
32.2 Certificate of Acting Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
-------------------------
(1) Incorporated by reference from Report on Form 10-QSB for the
----------------------------------------------------------------
quarterly period ended March 31, 2008, filed on May 14, 2008
------------------------------------------------------------
(2) Incorporated by reference from Annual Report on Form 10-KSB for the
-----------------------------------------------------------------------
year ended June 30, 2005, filed on May 23, 2006
-----------------------------------------------
12
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this Amendment to be signed on its
behalf by the undersigned, thereunto duly authorized.
Franklin Wireless Corp.
By: /s/ OC Kim
-----------------------------
OC Kim, President
Dated: April 2, 2009
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
(1) Principal Executive, Financial and Accounting Officer
/s/ OC KIM President, Acting Chief Financial
-------------------- Officer and a Director April 2, 2009
OC Kim
(3) Directors
/s/ GARY NELSON Chairman of the Board of Directors April 2, 2009
--------------------
Gary Nelson
/s/ JAE MAN LEE Director April 2, 2009
--------------------
Jae Man Lee
13
FRANKLIN WIRELESS CORP.
INDEX TO FINANCIAL STATEMENTS
PAGE NO.
--------
Index to Financial Statements F-1
Report of Independent Registered Public Accounting Firm F-2
Balance Sheets at June 30, 2008 and June 30, 2007 F-3
Statements of Operations for the years ended June 30, 2008, 2007, and 2006 F-4
Statements of Stockholders' Equity (Deficiency) for the years ended
June 30, 2008, 2007 and 2006 F-5
Statements of Cash Flows for the years ended June 30, 2008, 2007, and 2006 F-6
Notes to Financial Statements F-7
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Franklin Wireless Corp.
San Diego, California
We have audited the accompanying balance sheets of Franklin Wireless Corp. as of
June 30, 2008 and 2007 and the related statements of operations, changes in
stockholders' equity (deficiency), and cash flows for the years ended June 30,
2008, 2007 and 2006. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audit included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purposes of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
The disclosures to the financial statements for the year ended June 30, 2008 in
Notes 3 and 14 have been amended.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Franklin Wireless Corp. as of
June 30, 2008 and 2007, and the results of its operations and cash flows for the
years ended June 30, 2008, 2007 and 2006 in conformity with accounting
principles generally accepted in the United States of America.
Choi, Kim & Park, LLP
Los Angeles, California
September 22, 2008, except for Paragraphs 4, 14, 15, and 16 of Note 3, and
Paragraphs 3 through 7 of Note 14, as to which the date is April 1, 2009
F-2
FRANKLIN WIRELESS CORP.
BALANCE SHEETS
FISCAL YEARS ENDED JUNE 30,
-------------------------
2008 2007
----------- -----------
(Consolidated)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 6,172,569 $ 2,477,593
Accounts receivable 4,534,069 44,915
Inventories 72,162 10,830
Prepaid income tax 355,393 --
Prepaid expenses 23,430 6,649
----------- -----------
Total current assets 11,157,623 2,539,987
Property and equipment, net 68,012 26,218
Intangible assets, net -- 130,264
Other assets 15,411 5,161
----------- -----------
TOTAL ASSETS $11,241,046 $ 2,701,630
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 4,047,651 $ 68,064
Advanced payment from customers 390,000 354,500
Accrued liabilities 875,046 179,025
Notes payable to a stockholder 334,000 434,000
----------- -----------
Total current liabilities 5,646,697 1,035,589
=========== ===========
STOCKHOLDERS' EQUITY:
Preferred stock, par value of $0.001 per share, authorized
10,000,000 shares; No preferred stock issued and outstanding
as of June 30, 2008 and 2007 -- --
Common stock, par value of $0.001 per share, authorized
50,000,000 shares; Common stock of 13,231,491 issued and
outstanding as of June 30, 2008 and 2007 13,232 13,232
Additional paid-in capital 5,016,161 5,016,161
Stock subscription receivable -- (11,395)
Retained earnings (accumulated deficit) 564,956 (3,351,957)
----------- -----------
Total stockholders' equity 5,594,349 1,666,041
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $11,241,046 $ 2,701,630
=========== ===========
See accompanying notes to financial statements.
F-3
FRANKLIN WIRELESS CORP.
STATEMENTS OF OPERATIONS
--------------------------------------------
FISCAL YEARS ENDED JUNE 30,
--------------------------------------------
2008 2007 2006
------------ ------------ ------------
(Consolidated) (Consolidated)
Net sales $ 34,723,299 $ 10,385,090 $ 1,002,953
Cost of goods sold 27,029,015 7,689,730 678,155
------------ ------------ ------------
Gross profit 7,694,284 2,695,360 324,798
------------ ------------ ------------
Operating expenses:
Research and development -- -- 36,300
Selling, general, and administrative 3,300,071 1,382,426 581,919
------------ ------------ ------------
Total operating expenses 3,300,071 1,382,426 618,219
------------ ------------ ------------
Income (loss) from operations 4,394,213 1,312,934 (293,421)
Other income (expense):
Interest expense -- -- (559)
Interest income 135,094 38,515 2,359
Loss on disposal of property and -- (767) --
equipment
Loss on write-off of intangible assets (73,171) (19,167) --
Other income (expense), net 50,226 3,772 14,831
------------ ------------ ------------
Total other income (expense), net 112,149 22,353 16,631
------------ ------------ ------------
Net income (loss) before income taxes 4,506,362 1,335,287 (276,790)
Provision for income taxes 589,449 35,190 800
------------ ------------ ------------
Net income (loss) $ 3,916,913 $ 1,300,097 $ (277,590)
============ ============ ============
Basic earnings (loss) per share $ 0.30 $ 0.10 $ (0.02)
Diluted earnings (loss) per share $ 0.30 $ 0.10 $ (0.02)
Weighted average common shares outstanding - basic 13,231,491 12,824,643 11,685,382
Weighted average common shares outstanding - diluted 13,231,491 12,824,643 11,685,382
See accompanying notes to financial statements.
F-4
FRANKLIN WIRELESS CORP.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
COMMON STOCKS
-------------------------
TOTAL
ADDITIONAL STOCKHOLDERS'
PAID-IN ACCUMULATED STOCK SUB EQUITY
SHARES AMOUNT CAPITAL DEFICIT -SCRIPTION (DEFICIENCY)
----------- ----------- ----------- ----------- ----------- -----------
Balance - June 30, 2006 12,602,911 $ 12,603 $ 4,616,790 $(4,652,054) $ (17,395) $ (40,056)
Issuance of common stock 628,580 629 399,371 -- -- 400,000
Payment of stock subscription -- -- -- -- 6,000 6,000
receivables
Net income -- -- -- 1,300,097 -- 1,300,097
----------- ----------- ----------- ----------- ----------- -----------
Balance - June 30, 2007 13,231,491 13,232 5,016,161 (3,351,957) (11,395) 1,666,041
Receipt of stock subscription
receivables -- -- -- -- 11,395 11,395
Net income -- -- -- 3,916,913 -- 3,916,913
----------- ----------- ----------- ----------- ----------- -----------
Balance - June 30, 2008 13,231,491 $ 13,232 $ 5,016,161 $ 564,956 $ -- $ 5,594,349
=========== =========== =========== =========== =========== ===========
See accompanying notes to financial statements.
F-5
FRANKLIN WIRELESS CORP.
STATEMENTS OF CASH FLOWS
-----------------------------------------
FISCAL YEARS ENDED JUNE 30,
-----------------------------------------
2008 2007 2006
----------- ----------- -----------
(Consolidated) (Consolidated)
CASH FLOWS FROM OPERATIONS ACTIVITIES:
Net income (loss) $ 3,916,913 $ 1,300,097 $ (277,590)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Loss on disposal of property and equipment -- 767 --
Loss on impairment of intangible assets 73,171 19,167 --
Depreciation 10,518 7,135 7,622
Amortization of intangible assets 57,093 70,544 49,222
Bad debt 2,200
Increase (decrease) in cash due to change in:
Accounts receivable (4,491,354) (43,165) (1,750)
Inventory (61,332) (10,830) --
Prepaid expense (16,781) (6,649) --
Prepaid income tax (355,393)
Other assets (10,250) (709) (2,346)
Accounts payable 3,979,587 67,478 (17,340)
Accrued liabilities 696,021 (11,944) 40,821
Advanced payment from customers 35,500 354,500 --
Other liabilities -- -- (3,878)
----------- ----------- -----------
Net cash provided by (used in) operating activities 3,835,893 1,746,391 (205,239)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (52,312) (21,405) (5,416)
Purchases of intangible assets -- (115,780) (55,500)
----------- ----------- -----------
Net cash used in investing activities (52,312) (137,185) (60,916)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment to stockholders -- -- (10,000)
Cash payment for common stock repurchase -- -- (100,000)
Payment of note payable (100,000) (100,000) --
Proceeds from issuance of common stock -- 400,000 905,000
Receipt of stock subscription receivable 11,395 -- --
----------- ----------- -----------
Net cash provided by financing activities (88,605) 300,000 795,000
----------- ----------- -----------
Net increase in cash and cash equivalents 3,694,976 1,909,206 528,845
Cash and cash equivalents, beginning of year 2,477,593 568,387 39,542
----------- ----------- -----------
Cash and cash equivalents, end of year $ 6,172,569 $ 2,477,593 $ 568,387
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ -- $ -- $ 559
Income taxes $ 259,842 $ 800 $ 800
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITY:
Common stock conversion from note payable $ -- $ -- $ (40,000)
See accompanying notes to financial statements.
F-6
FRANKLIN WIRELESS CORP.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2008 AND 2007
NOTE 1 - BUSINESS OVERVIEW
We design and sell broadband high speed wireless data communication
products such as 3G wireless modules and modems. We focus on wireless broadband
USB modems, which provide a flexible way for wireless subscribers to connect to
the wireless broadband network with any laptop, tablet PC or desktop USB port
without a PC card slot. The broadband wireless data communication products are
positioned at the convergence of wireless communications, mobile computing and
the Internet, each of which we believe represents a growing market.
Our products are based on Evolution Data Optimized technology ("EV-DO
technology") of Code Division Multiple Access ("CDMA") and High-Speed Packet
Access technology ("HSPA technology") of Wideband Code Division Multiple Access
("WCDMA"), which are wireless radio broadband data standards adopted by many
CDMA and WCDMA mobile service providers, and enable end users to send and
receive email with large file attachments, play interactive games, receive, send
and download high resolution picture, video, and music contents.
We market our products through two channels: directly to wireless
operators, and indirectly through strategic partners and distributors. Our
global customer base extends from the United States to the Caribbean and South
American countries. Our Universal Serial Bus ("USB") modems are certified by
Sprint, Alltel, Cellular South, NTELOS, Cincinnati Bell, Mobi PCS, Qwest and ACS
in the United States, by IUSACELL in Mexico, by Telefonica and Movilnet in
Venezuela, by Centennial in Puerto Rico, by Alegro in Ecuador and by TSTT in
Trinidad and Tobago. We have strategic marketing relationships with several of
these customers.
Since we launched three new products, CDMA Revision A USB modem
CDU-680, CDMA Revision 0 CDU-650 USB modem, and CDMA Revision 0 CDX-650 Express
card modem in 2007, we have continued to add new features and functionality to
our products to enhance value and ease of use that our products provide to our
customers and end users. In 2008, we additionally launched the CGU-628 HSDPA USB
modem, which provides a flexible way for users to connect to high-speed downlink
packet access network, and the CDM-650 Stand-alone Revision 0 USB modem, which
provides internet connection for users who are in remote locations where there
are not cable or DSL services.
For the years ended June 30, 2008, 2007, and 2006, the revenue
recognized from sales of our products was $34,723,299, $10,385,090, and
$1,002,953, respectively.
NOTE 2 - DISCONTINUED OPERATIONS
On October 30, 2007, the Board of Directors approved the dissolution of
its only subsidiary, ARG, which has been inactive since August 2003. As a part
of the dissolution, we assumed a note payable of $434,000, a note payable.
During the year ended June 30, 2008, we repaid $100,000 on this note, and the
remaining balance amounted to $334,000 at June 30, 2008. The subsidiary did not
have revenue, expense, asset or component of stockholders' equity as of June 30,
2008 and June 30, 2007, and for the years ended June 30, 2008 and 2007.
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
SEGMENT REPORTING
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," requires public companies to report financial and
descriptive information about their reportable operating segments. We
identify our operating segments based on how management internally
evaluates separate financial information, business activities and
management responsibility. We operate in a single business segment
consisting of sale of wireless access products.
ESTIMATES
The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenue and expenses during the reporting periods. Actual results could
differ from those estimates. Significant estimates include useful lives
of intangible and long-lived assets.
F-7
REVENUE RECOGNITION
We recognize revenue from products sales when persuasive evidence of an
arrangement exists, the price is fixed or determinable, collection is
reasonably assured and delivery of products has occurred or services
have been rendered. Accordingly, we recognize revenues from product
sales upon shipment of the product to the customers. We do not allow
the right of return on product sales but provide a factory warranty for
one year from the shipment, which is covered by our vendor.
CASH AND CASH EQUIVALENTS
We consider all highly liquid investments purchased with original
maturities of three months or less to be cash equivalents.
SHIPPING AND HANDLING COST
Most of shipping and handling costs are paid by the customers directly
to the shipping companies. We do not collect and incur shipping and
handling costs to be capitalized.
INVENTORIES
Our inventories are made up of finished goods and are stated at the
lower of cost or market, cost being determined on a first-in, first-out
basis. We assess the inventory carrying value and reduce it, if
necessary, to its net realizable value based on customer orders on
hand, and internal demand forecasts using management's best estimates
given information currently available. Our customer demand is highly
unpredictable, and can fluctuate significantly caused by factors beyond
our control. We may maintain an allowance for inventories for
potentially excess and obsolete inventories and inventories that are
carried at costs that are higher than their estimated net realizable
values.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. We provide for depreciation
using the straight-line method over the estimated useful lives as
follows:
Computers and software 5 years
Machinery and equipment 5 years
Furniture and fixtures 7 years
Expenditures for maintenance and repairs are charged to operations as
incurred while renewals and betterments are capitalized. Gains or
losses on the sale of property and equipment are reflected in the
statements of operations.
INTANGIBLE ASSETS - LICENSES AND CERTIFICATIONS
Licenses are stated at cost and are amortized using the straight-line
method over the license periods of five years or life of the licenses.
Certifications are stated at cost and are amortized using the
straight-line method over the certification periods of three years or
life of the certifications.
VALUATION ON INTANGIBLE AND LONG-LIVED ASSETS
In accordance with Statement of Financial Accounting Standards No. 144,
"Accounting for Impairment on Disposal of Long-lived Assets", we review
for impairment of long-lived assets and certain identifiable
intangibles whenever events or circumstances indicate that the carrying
amount of assets may not be recoverable. We consider the carrying value
of assets may not be recoverable based upon our review of the following
events or changes in circumstances: the asset's ability to continue to
generate income from operations and positive cash flow in future
periods; loss of legal ownership or title to the assets; significant
changes in our strategic business objectives and utilization of the
asset; or significant negative industry or economic trends. An
impairment loss would be recognized when estimated future cash flows
expected to result from the use of the asset is less than its carrying
amount.
F-8
For the year ended June 30, 2008, we wrote off intangible assets of CDG
test certifications in the amount of $171,280, resulting in a total
loss of $73,171, as these certifications were deemed impaired due to
their inability to continue to generate income from operations and
positive cash flow in future periods.
WARRANTIES
We do not allow the right of return on product sales but provides a
factory warranty for one year from the shipment, which is covered by
our vendor. These products are shipped directly from our vendor to our
customers. As a result, we do not accrue any warranty expenses.
RESEARCH AND DEVELOPMENT COSTS
We have an agreement with C-Motech for the manufacturing of our
products, including services of component procurement, design,
development, final assembly, testing, quality control, fulfillment and
delivery of these products. As a result, we do not accrue any
significant research and development costs, primarily made up of
developmental activities relating to our products.
ADVERTISING AND MARKETING COSTS
We expense the costs of advertising and marketing as incurred. We
incurred $232,969 and $63,112 of advertising and marketing expenses for
the years ended June 30, 2008 and 2007, respectively. The increase was
primarily due to the net effect of the increase in marketing
development fund arrangements of $218,000 and the decrease in other
advertising and promotion expenses of approximately $48,000 for the
year ended June 30, 2008, compared to the corresponding period of 2007.
The costs of $218,000 incurred by us for the marketing development fund
arrangements were included within advertising and marketing costs in
accordance with Financial Accounting Standards Board, or FASB, Emerging
Issues Task Force, or EIFT, Issue No. 01-9, ACCOUNTING FOR
CONSIDERATION GIVEN BY A VENDOR TO A CUSTOMER (INCLUDING A RESELLER OF
THE VENDOR'S PRODUCT), or EITF No. 01-9, which provides guidance on the
application of generally accepted accounting principles to selected
recognition issues on PAYMENTS FROM A VENDOR TO A CUSTOMER.
SALES COMMISSION COSTS
We expense the costs of sales commission as incurred. We incurred
$1,137,156 and $239,410 of sales commission expenses for the years
Ended June 30, 2008 and 2007, respectively.
INCOME TAXES
We adopted the provisions of FASB interpretation ("FIN") No. 48,
"Accounting for Uncertainty in Income Taxes -- an interpretation of
FASB statement No. 109," which prescribes a recognition threshold and
measurement process for recording in the financial statements,
uncertain tax positions taken or expected to be taken in a tax return.
Under FIN 48, the impact of an uncertain income tax position on the
income tax return must be recognized at the largest amount that is
more-likely-not to be sustained upon audit by the relevant taxing
authority. An uncertain income tax position will not be recognized if
it has less than a 50% likelihood of being sustained.
We recognize federal and state tax liabilities or assets based on our
estimate of taxes payable to or refundable by tax authorities in the
current fiscal year. We also recognize federal and state tax
liabilities or assets based on our estimate of future tax consequences
attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. A
valuation allowance is required when it is more likely than not that we
will not be able to realize all or a portion of our deferred tax
assets.
F-9
The significant component of the deferred tax asset (liability) at June
30, 2008 and 2007 was federal net operating loss carry-forward in the
amount of approximately $2,034,000 and $2,934,000, respectively, based
on federal tax rate of 34%. SFAS No. 109 requires a valuation allowance
to be recorded when it is more likely than not that some or all of the
deferred tax assets will not be realized. At June 30, 2008 and 2007,
management believes that it is more likely than not that most of the
deferred tax assets will not be realized, and valuation allowances for
the full amount of the net deferred tax asset were established to
reduce the deferred tax assets to zero based on the level of historical
taxable income and projections for future taxable income over the
periods in which the deferred tax assets are deductible. As of June 30,
2008, we have federal net operating loss carryforwards of approximately
$5,983,000 and state net operating loss carryforwards of approximately
$1,676,000 for income tax purposes with application of IRC Section 382
limitation on net operating losses as result of the Company's ownership
change in prior period. The Federal and state net operating loss
carryforwards will begin to expire from 2009 to 2026 and 2009 to 2016,
respectively.
EARNINGS PER SHARE
We report earnings per share in accordance with Statement of Financial
Accounting Standards No. 128, "Earnings Per Share". Basic earning per
share is computed using the weighted average number of shares
outstanding during the fiscal year. Diluted earnings per share include
the potentially dilutive effect of outstanding common stock options and
warrants which are convertible to common shares.
On January 8, 2008, a 1 for 70 reverse stock split was implemented in
connection with the reincorporation, under which each shareholder
received one share for each 70 shares held. As result of the reverse
stock split, a conversion was made to the weighted average number of
shares outstanding for the fiscal years of 2008, 2007 and 2006 that
took into consideration the effect of a reverse split on the total
number of shares outstanding, in order to compare the current weighted
average number of shares outstanding to its historical numbers in a
consistent form of valuation. In order to adjust a weighted average
number of shares outstanding of the Company, the pre-split outstanding
shares were divided by the split ratio.
CONCENTRATIONS OF CREDIT RISK
We extend credit to our customers and perform ongoing credit
evaluations of such customers. We evaluate our accounts receivable on a
regular basis for collectability and provides for an allowance for
potential credit losses as deemed necessary.
Substantially all of our revenues are derived from sales of wireless
data products. Any significant decline in market acceptance of our
products or in the financial condition of our existing customers could
impair our ability to operate effectively.
A significant portion of our revenue is derived from a small number of
customers. Three customers accounted for 37.0%, 34.3%, and 13.3% of
total revenues for the year ended June 30, 2008, and had related
account receivables in the amount of $611,820, $3,250,000, and $0, or
13.5%, 71.7% and 0% of total account receivables at June 30, 2008,
respectively. For the year ended June 30, 2007, two customers accounted
for 41.2% and 38.6% of revenues and had related accounts receivable in
the amount of $12,025 and $1,800, or 26.8% and 4.0% of total accounts
receivable at June 30, 2007, respectively.
We purchase our wireless products from one design and manufacturing
company located in South Korea. If this company were to experience
delays, capacity constraints or quality control problems, product
shipments to our customers could be delayed, or our customers could
consequently elect to cancel the underlying product purchase order,
which would negatively impact our revenue. We purchased wireless data
products in the amount of $27,090,347 and $7,565,040 for the years
ended June 30, 2008 and 2007, respectively, and had related accounts
payable of $3,697,893 and $3,875 at June 30, 2008 and 2007,
respectively. However, there were no significant delays, capacity
constraints, or quality control problems that negatively impacted the
Company's revenue during those fiscal years.
F-10
We maintain our cash accounts with established commercial banks. Such
cash deposits periodically exceed the Federal Deposit Insurance
Corporation insured limit of $100,000 for each account. However, we do
not anticipate any loss on excess deposits.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In July 2006, the FASB issued FASB interpretation ("FIN") No. 48,
"Accounting for Uncertainty in Income Taxes -- an interpretation of
FASB statement No. 109," which prescribes a recognition threshold and
measurement process for recording in the financial statements,
uncertain tax positions taken or expected to be taken in a tax return.
In addition, FIN 48 provides guidance on the derecognizing,
classification, accounting in interim periods and disclosure
requirements for uncertain tax positions. We have currently adopted and
evaluated the impact, if any, that FIN 48 will have on our financial
statements. FIN 48 is not expected to have a material impact on our
financial statements.
In September 2006, the FASB issued Statement of Financial Accounting
Standards ("SFAS") No. 157, "FAIR VALUE MEASUREMENTS". This standard
provides guidance for using fair value to measure assets and
liabilities. The standard also responds to investors' requests for
expanded information about the extent to which companies measure assets
and liabilities at fair value, the information used to measure fair
value, and the effect of fair value measurements on earnings. The
standard applies whenever other standards require (or permit) assets or
liabilities to be measured at fair value, but does not expand the use
of fair value in any new circumstances. SFAS No. 157 is effective for
financial statements issued for fiscal years beginning after November
15, 2007, and interim periods within those fiscal years. There are
numerous previously issued statements dealing with fair values that are
amended by SFAS No. 157. SFAS No. 157 is not expected to have a
material impact on our financial statements.
In February 2007, the FASB issued SFAS No. 159, THE FAIR VALUE OPTION
FOR FINANCIAL ASSETS AND FINANCIAL LIABILITIES--INCLUDING AN AMENDMENT
OF FASB STATEMENT NO. 115. SFAS No. 159 permits companies to choose to
measure certain financial instruments and other items at fair value.
Most of the provisions in SFAS 159 are elective; however the amendment
to SFAS 115, ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY
SECURITIES, applies to all entities with available-for-sale securities.
The fair value option established by SFAS 159 permits all entities to
choose to measure eligible items at fair value at specified election
dates. The standard requires that unrealized gains and losses are
reported in earnings for items measured using the fair value option at
each subsequent reporting date. SFAS No. 159 is effective for the
Company beginning in the first quarter of fiscal year 2009. SFAS No.
159 and the amendments to SFAS 115 are not expected to have a material
impact on our financial statements.
In June 2007, the FASB ratified Emerging Issues Task Force ("EITF")
07-3, Accounting for Nonrefundable Advance Payments for Goods or
Services Received for Use in Future Research and Development Activities
("EITF 07-3"). EITF 07-3 requires that nonrefundable advance payments
for goods or services that will be used or rendered for future research
and development activities be deferred and capitalized and recognized
as an expense as the goods are delivered or the related services are
performed. EITF 07-3 is effective, on a prospective basis, for fiscal
years beginning after December 15, 2007. EITF 07-3 is not expected to
have a material impact on our financial statements.
In December 2007, the FASB issued Statement No. 141 (revised), Business
Combinations ("SFAS No. 141(R)"). The standard changes the accounting
for business combinations including the measurement of acquirer shares
issued in consideration for a business combination, the recognition of
contingent consideration, the accounting for pre-acquisition gain and
loss contingencies, the recognition of capitalized in-process research
and development, the accounting for acquisition-related restructuring
cost accruals, the treatment of acquisition related transaction costs
and the recognition of changes in the acquirer's income tax valuation
allowance. SFAS No. 141(R) is effective for fiscal years beginning
after December 15, 2008, with early adoption prohibited. SFAS No.
141(R) is not expected to have a material impact on our financial
statements.
F-11
In December 2007, the FASB issued Statement No. 160, Noncontrolling
Interests in Consolidated Financial Statements, an amendment of ARB No.
51 ("SFAS No. 160"). The standard changes the accounting for
noncontrolling (minority) interests in consolidated financial
statements including the requirements to classify noncontrolling
interests as a component of consolidated stockholders' equity, and the
elimination of "minority interest" accounting in results of operations
with earnings attributable to noncontrolling interests reported as part
of consolidated earnings. Additionally, SFAS No. 160 revises the
accounting for both increases and decreases in a parent's controlling
ownership interest. SFAS No. 160 is effective for fiscal years
beginning after December 15, 2008, with early adoption prohibited. SFAS
No. 160 is not expected to have a material impact on our financial
statements.
There are no other accounting standards issued as of September 22, 2008
that are expected to have a material impact on our consolidated
financial statements.
NOTE 4 - ACCOUNTS RECEIVABLE
Accounts receivable at June 30, 2008 and 2007 consisted of receivables
from customers in the amounts of $4,534,069 and $44,915, respectively.
The increase was primarily due to a single customer, representing 72%
of the total accounts receivable, whose purchase order was shipped on
June 30, 2008.
NOTE 5 - PREPAID EXPENSES
Prepaid expenses at June 30 consisted of the following:
2008 2007
------- -------
Prepaid insurance $ 2,725 $ 244
Prepaid marketing fee 11,600 --
Prepaid office lease fee 9,105 6,405
------- -------
TOTAL $23,430 $ 6,649
======= =======
NOTE 6 - PREPAID INCOME TAX
Prepaid income tax at June 30 consisted of the following:
2008 2007
-------- -------
Prepaid income tax expense
Federal $296,535 $ --
State 58,858 --
-------- -------
TOTAL $355,393 $ --
======== =======
NOTE 7 - PROPERTY AND EQUIPMENT
Property and equipment at June 30 consisted of the following:
2008 2007
--------- ---------
Computers and software $ 48,827 $ 38,084
Furniture and fixtures 52,894 11,325
--------- ---------
101,721 49,409
Less accumulated depreciation (33,709) (23,191)
--------- ---------
TOTAL $ 68,012 $ 26,218
========= =========
F-12
NOTE 8 - INTANGIBLE ASSETS
Intangible assets at June 30 consisted of the following:
2008 2007
--------- ---------
CDG Certifications $ -- $ 171,280
Less accumulated amortization -- (41,016)
--------- ---------
TOTAL $ -- $ 130,264
========= =========
CDG test certifications are required to launch and market new CDMA
wireless data products with carriers in the countries located in North America,
the Caribbean, and South America. Certifications are issued as being a qualifier
of CDG1 (CDMA Development Group Stage 1), CDG 2 and CDG 3. The estimated life of
CDG test certifications are three years, based on the life of the CDMA wireless
data product. Certifications have a life of three years or the life of the CDG
test.
As of June 30, 2008, we wrote off certifications in the amount of
$171,280 as these certifications were deemed impaired due to their inability to
continue to generate income from operations and positive cash flow in future
periods.
NOTE 9 - OTHER ASSETS
Security deposits at June 30 consisted of the following:
2008 2007
------- -------
Lease deposit, corporate housing 709 709
Lease deposit, administrative office 14,003 4,170
Utility deposit 282 282
Other deposit 417 --
------- -------
TOTAL $15,411 $ 5,161
======= =======
NOTE 10 - NOTES PAYABLE TO STOCKHOLDERS
Notes payable as of June 30, 2008 and 2007 consisted of the following:
2008 2007
--------- ---------
Non-interest bearing note $ 334,000 $ 434,000
--------- ---------
Total 334,000 434,000
Less current portion (334,000) (434,000)
--------- ---------
TOTAL $ -- $ --
========= =========
Our Korea-based subsidiary, ARG, has been inactive since August 2003.
On October 30, 2007, the Board of Directors approved the dissolution of ARG. As
a part of the dissolution, we assumed a note payable of ARG of $434,000. During
the year ended June 30, 2008, we repaid $100,000, and the remaining balance of
the note amounted to $334,000 at June 30, 2008.
NOTE 11 - ACCRUED LIABILITIES
Accrued liabilities at June 30 consisted of the following:
2008 2007
-------- --------
Salaries payable $135,000 $ 94,418
Accrued professional fees payable 31,500 50,217
Tax payable 689,421 34,390
Other accrued liabilities 19,125 --
-------- --------
TOTAL $875,046 $179,025
======== ========
The increase in accrued liabilities for the year ended June 30, 2008
was primarily due to an increase in tax payable, which was estimated federal and
state income tax at $685,000 for the fourth quarter of the fiscal 2008.
F-13
NOTE 12 - COMMITMENTS AND CONTINGENCIES
LEASES
We lease our administrative facilities under a non-cancelable operating
lease that expires on August 31, 2011. In addition to the minimum
annual rental commitments, the lease provides for periodic cost of
living increases in the base rent and payment of common area costs.
Rent expense related to the operating lease was $62,848 and $59,420 for
the years ended June 30, 2008 and 2007, respectively.
We lease a corporate housing facility for our vendors under a
non-cancelable operating lease that expires on October 2, 2008. Rent
expense related to the operating lease was $17,829 and $2,770 for the
years ended June 30, 2008 and 2007, respectively.
We lease one automobile under an operating lease that expires on July
22, 2009. The related lease expense was $6,452 and $6,795 for the years
ended June 30, 2008 and 2007, respectively.
Future minimum lease payments under operating leases as of June 30,
2008 are as follows:
PAYMENTS DUE BY JUNE 30,
LEASE 2009 2010 2011 2012 TOTAL
------------------------------ -------- -------- -------- -------- --------
Administrative office facility $ 91,050 $109,260 $109,260 $ 18,210 $327,780
Corporate housing facility 4,701 -- -- -- 4,701
-------- -------- -------- -------- --------
TOTAL OBLIGATION $ 95,751 $109,260 $109,260 $ 18,210 $332,481
======== ======== ======== ======== ========
LITIGATION
We are from time to time involved in certain legal proceedings and
claims arising in the ordinary course of business. Management believes
that there is no legal proceeding that has a material adverse effect on
our financial condition for the year ended June 30, 2008. There is no
legal proceeding that is pending or terminated for the 4th quarter of
the fiscal year of 2008.
CO-DEVELOPMENT, CO-OWNERSHIP AND SUPPLY AGREEMENT
Our facility is located in San Diego, California. Manufacturing of our
products has been contracted out to C-Motech Co. Ltd. ("C-Motech"),
located in South Korea.
F-14
In January 2005, we entered into an agreement with C-Motech for the
manufacture of the products. Under the manufacturing and supply
agreement, C-Motech provides us with services including all licenses,
component procurement, final assembly, testing, quality control,
fulfillment and after-sale service. The Agreement provides exclusive
rights to market and sell our CDMA wireless data products in countries
in North America, the Caribbean, and South America. Furthermore, the
Agreement provides that we are responsible for marketing, sales, field
testing, and certifications of these products to wireless service
operators and other commercial buyers within a designated territory,
and C-Motech is responsible for design, development, testing,
certification, and completion of these products. Under the Agreement,
products include all access devices designed with Qualcomm's MSM 5100,
5500, 6500, and 6800 chipset solutions provided or designed by C-Motech
or both companies. Both companies own the rights to the products: USB
modems, Card Bus, PCI Bus and Module designed with MSM 5500 dual band
products. On January 30, 2007, C-Motech also certified that we have the
exclusive right to sell CDU-680 EVDO USB modems directly and indirectly
in these territories.
The initial term of the Agreement was for two years, commencing on
January 5, 2005. The agreement automatically renews for successive with
automatic renewable of additional one year periods unless either party
provides a written notice to terminate at least sixty days prior to the
end of the term. This agreement may be amended or supplemented by
mutual agreement of the parties, as is necessary to document the
addition of any new products.
OFFICER EMPLOYMENT AGREEMENT
On September 8, 2006, we entered into a renewable two-year employment
agreement with our president. The annual salary for the officer is
$150,000.
NOTE 13 - STOCKHOLDERS' EQUITY
COMMON STOCK
We authorized 50,000,000 shares of Common Stock, par value of $0.001
per share, and Common Stock of 13,231,491 was issued and outstanding as
of June 30, 2008 and 2007. We authorized 10,000,000 shares of Preferred
Stock, par value of $0.001 per share, and no Preferred Stock was issued
or outstanding as of June 30, 2008 and 2007. No dividends have been
declared or paid during fiscal years 2008 and 2007.
STOCK ISSUANCES & REPURCHASES
For the years ended June 30, 2008, 2007 and 2006, we completed the
following common stock transactions:
o November 11, 2005
o We converted our $30,000 note payable to the shareholder to Common
Stock. As a result, we issued 6,000,000 shares to a stockholder at
$0.005 per share. The Common Stock share price approximated its
fair market value at the date of the conversion and, as a result,
no compensation expense was required or booked during the year
ended June 30, 2006.
o We issued 36,000,000 shares to unaffiliated investors at $0.0085
per share in the amount of $305,000. The Common Stock share price
approximated its fair market value at the date of the issuance
and, as a result, no compensation expense was required or booked
during the year ended June 30, 2006.
o May 15, 2006 - We purchased 20,000,000 shares of our Common Stock from
our former Chief Executive Officer and board member, Hajin Jhun, at
$0.005 per share, or the price purchased by Mr. Jhun. The purchased
share price approximated its fair market value at the date of the
purchase and, as a result, no compensation expense was required or
booked for the year ended June 30, 2006.
F-15
o June 27, 2006
o We issued 1,000,000 shares to a stockholder holding a $10,000 note
payable. These shares were converted at $0.01 per share for
$10,000. The converted share price approximated its fair market
value at the date of the conversion and, as a result, no
compensation expense was required or booked for the year ended
June 30, 2006.
o We issued 66,000,000 shares to an unaffiliated investor
approximately at $0.0091 per share in the gross proceeds of
$600,000.00. The Common Stock share price approximated its fair
market value at the date of the issuance and a result, no
compensation expense was required or booked for the year ended
June 30, 2006.
o October 18, 2006 - We issued 15,000,000 shares of our Common Stock to
an unaffiliated investor for $0.0091 per share, total valued at
$136,364. The Common stock share price approximated its fair market
value at the date of the issuance and, as a result, no compensation
expense was required or booked for the year ended June 30, 2007.
o On April 27, 2007 - We issued an additional 29,000,000 shares of our
Common Stock to the unaffiliated investor for $0.0091 per share, total
valued at $263,636. The common stock share price approximated its fair
market value at the date of the issuance and, as a result, no
compensation expense was required or booked for the year ended June 30,
2007.
o On January 8, 2008, the reverse stock split was implemented in
connection with the reincorporation, under which the shareholders will
receive one share of Franklin-Nevada for each 70 shares held in
Franklin-California. As result of the reverse stock split, the
50,000,000 shares of Common stock, par value of $0.001 per share, were
authorized, and the 13,231,491 shares were issued and outstanding as of
June 30, 2008.
We believe the foregoing issuances of Common Stock were exempt from the
registration requirements of the Securities Act of 1933, as amended, by reason
of Section 4(2) thereof.
NOTE 14 - INCOME TAXES
We adopted the provisions of FASB interpretation ("FIN") No. 48,
"Accounting for Uncertainty in Income Taxes -- an interpretation of
FASB statement No. 109," which prescribes a recognition threshold and
measurement process for recording in the financial statements,
uncertain tax positions taken or expected to be taken in a tax return.
Under FIN 48, the impact of an uncertain income tax position on the
income tax return must be recognized at the largest amount that is
more-likely-not to be sustained upon audit by the relevant taxing
authority. An uncertain income tax position will not be recognized if
it has less than a 50% likelihood of being sustained.
We recognize federal and state tax liabilities or assets based on our
estimate of taxes payable to or refundable by tax authorities in the
current fiscal year. We also recognize federal and state tax
liabilities or assets based on our estimate of future tax consequences
attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. A
valuation allowance is required when it is more likely than not that we
will not be able to realize all or a portion of our deferred tax
assets.
Income tax provision from continuing operations for the years ended
June 30, 2008 and 2007 consists of the following:
F-16
YEAR ENDED JUNE 30,
---------------------
2008 2007
-------- --------
Current income taxes expense:
Federal $433,067 $ 26,409
State 156,382 8,781
-------- --------
589,449 35,190
Deferred income taxes expense (benefits): -- --
-------- --------
Provision for income taxes $589,449 $ 35,190
======== ========
The provisions for income taxes reconcile to the amount computed
by applying effective federal statutory income tax rate to income
before provision for income taxes as follows:
YEAR ENDED JUNE 30,
----------------------------------------------
2008 % 2007 %
----------- ------ ----------- ------
Federal tax provision, at statutory rate $ 1,532,163 34.0 $ 453,998 34.0
State tax, net of fed tax benefit 329,327 7.3 118,358 8.8
Nondeductible expenses 5,957 0.1 5,217 0.4
Credit (23,291) (0.5) -- --
Valuation allowance (1,213,017) (26.9) (546,519) (40.9)
Others (41,690) (0.9) 4,136 0.3
----------- ------ ----------- ------
Provision for income taxes $ 589,449 13.1 $ 35,190 2.6
=========== ====== =========== ======
Deferred income taxes reflect the net effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes.
Significant components of our deferred tax assets are as follows:
YEAR ENDED JUNE 30
-----------------------
2008 2007
----------- -----------
Current deferred tax asset (liabilities):
Net operating losses $ 170,883 $ --
Other, net 16,493 151,868
Non-current deferred tax assets (liabilities):
Net operating losses 2,011,633 3,285,042
Credit -- 30,996
Other, net (4,477) (60,357)
----------- -----------
Total deferred tax assets 2,194,532 3,407,549
Less valuation allowance (2,194,532) (3,407,549)
----------- -----------
Net deferred tax asset $ -- $ --
=========== ===========
The significant component of the deferred tax asset (liability) at June
30, 2008 and 2007 was federal net operating loss carry-forward in the
amount of approximately $2,034,000 and $2,934,000, respectively, based
on federal tax rate of 34%.
SFAS No. 109 requires a valuation allowance to be recorded when it is
more likely than not that some or all of the deferred tax assets will
not be realized. At June 30, 2008 and 2007, we established a full
valuation allowance on our net deferred tax assets based on the
available evidences, both positive and negative, to determine whether
valuation allowance is needed. Based on our losses before income taxes
in the past years before the fiscal year of 2007 and our estimated
losses in the future three years, management believed that it was more
likely than not that most of the deferred tax assets will not be
realized. Valuation allowances for the full amount of the net deferred
tax asset were established to reduce the deferred tax assets to zero
based on the level of historical taxable income and projections for
future taxable income over the period of three years. At June 30, 2008,
the established valuation allowance for the net deferred tax asset was
decreased by $1,213,017.
F-17
As of June 30, 2008, we have federal net operating loss carryforwards
of approximately $5,983,000 and state net operating loss carryforwards
of approximately $1,676,000 for income tax purposes after application
of IRC Section 382 limitation on net operating losses as result of the
Company's ownership change in prior period. The Federal and state net
operating loss carryforwards will begin to expire from 2009 to 2026 and
2009 to 2016, respectively.
NOTE 15 - RELATED PARTY TRANSACTIONS
We purchased CDMA wireless data products in the amount of $27,090,347,
or 100.0% of total purchases, from C-Motech Co. Ltd., for the year ended June
30, 2008 and had related accounts payable of $3,697,893 as of June 30, 2008. We
also had account receivable of $151,750 in connection with marketing development
fund as of June 30, 2008. C-Motech owns 3,370,356 shares, or 25.5%, of our
Common Stock and Jaeman Lee, Chief Executive Officer of C-Motech Co. Ltd., has
served as a director of the Company since. September 2006. Jaeman Lee must
abstain from voting on any matters where the interests or benefits of C-Motech
conflict or appear to conflict with our interests or benefits.
NOTE 16 - SUBSEQUENT EVENTS
We plan to adopt an incentive stock ("ISO") option and nonstatutory
stock option ("NSO") for key employees and directors of the Company, to
encourage a proprietary interest in the Company, to encourage such key employees
to remain in the employ of the Company, and to attract new employees with
outstanding qualifications.
The option plans will be administered by the Board of the Company in
order to obtain required approvals and qualifications as planned. However, as of
September 22, 2008, the Stock Option Plan has not been adopted.
F-18