-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FSzmbXxzW2IepnERtBGTMUScs1YSIinelS1pI4Sw/Y106XJ316oaI+wjkQddbhkL n/Yn5xeAdiXuuIA6gYJW4Q== 0001019687-06-001315.txt : 20060524 0001019687-06-001315.hdr.sgml : 20060524 20060524162253 ACCESSION NUMBER: 0001019687-06-001315 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20051231 FILED AS OF DATE: 20060524 DATE AS OF CHANGE: 20060524 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FRANKLIN WIRELESS CORP CENTRAL INDEX KEY: 0000722572 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER COMMUNICATIONS EQUIPMENT [3576] IRS NUMBER: 953733534 STATE OF INCORPORATION: CA FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 001-14891 FILM NUMBER: 06864497 BUSINESS ADDRESS: STREET 1: 9853 PACIFIC HEIGHTS BLVD #N CITY: SAN DIEGO STATE: CA ZIP: 92121 BUSINESS PHONE: 858-623-0000 MAIL ADDRESS: STREET 1: 9853 PACIFIC HEIGHTS BLVD #N CITY: SAN DIEGO STATE: CA ZIP: 92121 FORMER COMPANY: FORMER CONFORMED NAME: FRANKLIN TELECOMMUNICATIONS CORP DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: ABM COMPUTER SYSTEMS DATE OF NAME CHANGE: 19870317 FORMER COMPANY: FORMER CONFORMED NAME: AUTOMATED BUSINESS MACHINES INC DATE OF NAME CHANGE: 19830802 10QSB 1 franklin_10qsb-123105.txt FRANKLIN WIRLESS CORP., 10-QSB, 12/31/2005 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-QSB (Mark One) [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended: December 31, 2005 [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT For the transition period from ____________ to _____________ Commission file number 0-11616 FRANKLIN WIRELESS CORP. (Exact name of small business issuer in its charter) California 95-3733534 ---------------------- ---------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 9853 Pacific Heights Suite N, San Diego, California 92121 ------------------------------------------------------ (Address of Principal Executive Offices) (Zip Code) (858) 623-0000 ---------------------- Issuer's Telephone Number, Including Area Code: Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, without par value --------------- Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [ ] NO [X] Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES [ ] NO [X] State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: TITLE OF EACH CLASS OF COMMON STOCK OUTSTANDING AT April 15, 2006 -------------------------- -------------------------- Common Stock, no par value 835,040,550 Transitional Small Business Disclosure format (Check one): YES [ ] NO [X] FRANKLIN WIRELESS CORP. INDEX PART I - FINANCIAL INFORMATION Item 1: Financial Statements (Unaudited) Consolidated Statements of Operations (Unaudited)...................3 Consolidated Balance Sheets (Unaudited).............................4 Consolidated Statements of Cash Flows (Unaudited)...................5 Notes to Consolidated Financial Statements..........................6 Item 2: Management's Discussion and Analysis or Plan of Operation.............11 Item 3: Controls and Procedures...............................................14 PART II - OTHER INFORMATION Item 1: Legal Proceedings.....................................................15 Item 2: Unregistered Sales of Equity Securities and Use of Proceeds...........15 Item 3: Defaults Upon Senior Securities.......................................15 Item 4: Submission of Matters to a Vote of Security Holders...................15 Item 5: Other Information ....................................................15 Item 6: Exhibits..............................................................15 Signatures ...................................................................16 2 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS FRANKLIN WIRELESS CORP. CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) THREE MONTHS ENDED SIX MONTHS ENDED DECEMBER 31, DECEMBER 31, ------------------------------ ------------------------------ 2005 2004 2005 2004 ------------- ------------- ------------- ------------- Net sales $ 80,500 $ 110,810 $ 160,390 $ 116,940 Cost of goods sold 42,700 103,200 60,200 109,200 ------------- ------------- ------------- ------------- Gross profit 37,800 7,610 100,190 7,740 ------------- ------------- ------------- ------------- Operating expenses: Selling, general and administrative 181,638 163,729 285,372 477,120 Research and development -- -- 36,300 -- ------------- ------------- ------------- ------------- Total operating expenses 181,638 163,729 321,672 477,120 ------------- ------------- ------------- ------------- Loss from operations (143,838) (156,119) (221,482) (469,380) ------------- ------------- ------------- ------------- Other income, net 14,814 446 14,512 388 ------------- ------------- ------------- ------------- Net loss before income taxes (129,024) (155,673) (206,970) (468,992) Provision for income taxes 800 800 800 800 ------------- ------------- ------------- ------------- Net loss $ (129,824) $ (156,473) $ (207,770) $ (469,792) ============= ============= ============= ============= Basic loss per share $ (0.0002) $ (0.0002) $ (0.0003) $ (0.0006) Diluted loss per share $ (0.0002) $ (0.0002) $ (0.0003) $ (0.0006) Weighted average common shares outstanding: Basic 812,640,050 773,040,050 804,240,050 773,040,050 Diluted 812,640,050 773,040,050 804,240,050 773,040,050 SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS. 3 FRANKLIN WIRELESS CORP. CONSOLIDATED BALANCE SHEETS (UNAUDITED) DECEMBER 31, JUNE 30, 2005 2005 ------------- ------------- ASSETS CURRENT ASSETS: Cash and cash equivalents $ 207,794 $ 39,542 Accounts receivable 10,250 -- ------------- ------------- Total current assets 218,044 39,542 Property and equipment, net 13,657 14,921 Intangible asset 75,417 97,917 Other assets 2,107 2,107 ------------- ------------- TOTAL ASSETS $ 309,225 $ 154,487 ============= ============= LIABILITIES AND STOCKHOLDERS' DEFICIT CURRENT LIABILITIES Accounts payable $ 31,001 $ 17,926 Accrued liabilities 194,581 150,147 Notes payable to stockholders, current portion 560,000 590,000 ------------- ------------- Total current liabilities 785,582 758,073 Notes payable to stockholders, long-term portion -- -- Other long-term liabilities 3,878 3,878 ------------- ------------- Total liabilities 789,460 761,951 ------------- ------------- Stockholders' deficit: Common stock, no par value, authorized 900,000,000 shares and Preferred stock, no par value, authorized 10,000,000 shares; Common stock issued and outstanding 835,040,050 as of December 31, 2005 and 793,040,050 as of June 30, 2005 and no Preferred stocks issued and outstanding. -- -- Additional paid-in capital 4,119,393 3,784,393 Stock subscription receivable (17,395) (17,395) Accumulated deficit (4,582,233) (4,374,462) ------------- ------------- Total stockholders' deficit (480,235) (607,464) ------------- ------------- TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 309,225 $ 154,487 ============= ============= SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS. 4 FRANKLIN WIRELESS CORP. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) SIX MONTHS ENDED DECEMBER 31, ---------------------- 2005 2004 --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $(207,770) $(469,792) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 25,600 25,600 Increase (decrease) in cash due to change in: Accounts receivable (10,250) 99,390 Other assets -- 5,317 Accounts payable 13,075 -- Accrued liabilities 44,434 29,909 --------- --------- Net cash used in operating activities (134,911) (309,576) --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment (1,837) (3,000) --------- --------- Net cash used in investing activities (1,837) (3,000) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings (payments) from (to) stockholders (30,000) 30,000 Proceeds from issuance of common stock 335,000 120,450 --------- --------- Net cash provided by financing activities 305,000 150,450 --------- --------- Net decrease in cash 168,252 (162,126) Cash and cash equivalents, beginning of year 39,542 209,048 --------- --------- Cash and cash equivalents, end of period $ 207,794 $ 46,922 ========= ========= Supplemental disclosure of cash flow information: Cash paid during the period for: Interest $ -- $ -- Incomes taxes $ 800 $ 800 SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS. 5
FRANKLIN WIRELESS CORP. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - NATURE OF OPERATIONS Franklin Wireless Corp. ("Franklin" or the "Company") designs, builds, and markets broadband high speed data communication products such as 3G wireless modules and modems. Franklin is dedicated to serving the global wireless community by becoming a leading developer/marketer of wireless communications devices and enabling technologies, as well as an applications provider catering to the dynamic needs of its customers, global wireless carriers In addition, service for its technology is provided to vertical application companies. The Company's products are marketed through Original Equipment Manufacturers ("OEMs") and distributors, as well as directly to operators and end users. The Company's customers are located primarily in the United States, Canada, South America, Asia, and parts of Europe in a wide range of industries including cellular operators, government, PC maker, and application integrator. In summary, the Company's products are marketed to cellular operators for end-users as well as computer/handheld computing industry, automotive industry, telemetry, other vertical markets. NOTE 2 - GOING CONCERN MATTERS The accompanying consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles ("GAAP"), which contemplate continuation of the Company as a going concern. The Company incurred a net loss of $207,770 and had negative cash flows from operations of $134,911 during the six months ended December 31, 2005. These factors raise substantial doubt about the Company's ability to continue as a going concern. Recovery of the Company's assets is dependent upon future events, the outcome of which is indeterminable. The Company's attainment of profitable operations is dependent upon its obtaining adequate debt and equity financing and achieving a level of sales adequate to support the Company's cost structure. In addition, realization of a major portion of the assets in the accompanying balance sheet is dependent upon the Company's ability to meet its financing requirements and the success of its plans to sell its products. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classification of liabilities that might be necessary should the Company be unable to continue in existence. Management plans to raise additional equity capital, continue to develop its products, and market the products. NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION AND SEGMENT REPORTING The accompanying consolidated financial statements include the accounts of Franklin and ARG. ARG is a wholly owned subsidiary in South Korea that designs the cellular phone. All inter-company balances and transactions have been eliminated in consolidation. The Company has two reportable segments as defined by SFAS No. 131, Disclosure About Segments of an Enterprise and Related Information. The Company's subsidiary located in South Korea, ARG, was not active and in operation during the six months ended December 31, 2005 and 2004. Furthermore, all of its subsidiary's assets were written off during the fiscal year 2004 as the operation was shut-down during the period. As a result, the Company's consolidated financial statements include $550,000 of debt from ARG financial statements. During the latter part of 2003, the Company discontinued its financial support and operations of ARG but kept the business as an inactive subsidiary for future use. The subsidiary will be used for supporting manufacturing and sourcing new product and business in the future. 6 USE OF ESTIMATES The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from those estimates. REVENUE RECOGNITION The Company recognizes revenue when persuasive evidence of an arrangement exists, the price is fixed or determinable, collection is reasonably assured and delivery of products has occurred or services have been rendered. Accordingly, the Company recognizes revenues from product sales upon shipment of the product to the customers. The Company does not allow the right of return on product sales but warrant the products over one year from the shipment. Allowance for doubtful accounts is estimated based on estimates of losses related to customer receivable balances. Estimates are developed by using standard quantitative measures based on historical losses, adjusting for current economic conditions and, in some cases, evaluating specific customer accounts for risk of loss. The establishment of reserves requires the use of judgment and assumptions regarding the potential for losses on receivable balances. Though the Company considers these balances adequate and proper, changes in economic conditions in specific markets in which the Company operates could have a material effect on reserve balances required. CASH AND CASH EQUIVALENTS For purposes of the statements of cash flows, the Company considers all highly liquid investments purchased with original maturities of three months or less to be cash equivalents. PROPERTY AND EQUIPMENT Property and equipment are stated at cost. The Company provides for depreciation using the straight-line method over the estimated useful lives as follows: Computers and software 5 years Machinery and equipment 5 years Furniture and fixtures 5 years Expenditures for maintenance and repairs are charged to operations as incurred while renewals and betterments are capitalized. Gains or losses on the sale of property and equipment are reflected in the statements of operations. INTANGIBLE ASSETS - LICENSES Licenses are stated at cost and are amortized using the straight-line method over the license periods of five years or life of the license. IMPAIRMENT OF LONG-LIVED ASSETS The Company, in accordance with Statement of Financial Accounting Standards No. 144, "Accounting for Impairment on Disposal of Long-lived Assets", reviews for impairment of long-lived assets and certain identifiable intangibles whenever events or circumstances indicate that the carrying amount of the asset may not be recoverable. An impairment loss would be recognized when estimated future cash flows expected to result from the use of the asset and its eventual disposition is less than its carrying amount. As of December 31, 2005, the Company is not aware of any events or changes in circumstances that would indicate that the long-lived assets are impaired. WARRANTIES The Company does not provide any warranties on its products. However, the manufacturer provides limited warranties up to one year from the date of the sale to the Company's customers. These products are shipped directly from the manufacturer to the customers. As a result, the Company is not required to and does not accrue any warranty expenses. 7 ADVERTISING AND MARKETING COSTS The company expenses the costs of advertising and marketing as incurred. The Company incurred no advertising and marketing expenses during the three and six months ended December 31, 2005 and 2004. INCOME TAXES The Company accounts for income taxes under the asset and liability method of accounting. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is required when it is less likely than not that the Company will be able to realize all or a portion of its deferred tax assets. LOSS PER SHARE The Company reports loss per share in accordance with Statement of Financial Accounting Standards No. 128, "Earnings Per Share". Basic loss per share is computed using the weighted average number of shares outstanding during the year. Diluted earnings per share include the potentially dilutive effect of outstanding common stock options and warrants which are convertible to common shares. CONCENTRATIONS OF CREDIT RISK The Company sells its products throughout the United States and South America and extends credit to its customers and performs ongoing credit evaluations of such customers. The Company evaluates its accounts receivable on a regular basis for collectibility and provides for an allowance for potential credit losses as deemed necessary. NOTE 4 - PROPERTY AND EQUIPMENT Property and equipment at December 31, 2005 and June 30, 2005 consisted of the following: (Unaudited) December 31, June 30, 2005 2005 -------- -------- Computers and software $ 24,062 $ 22,224 Machinery and equipment 3,000 3,000 Furniture and fixtures 8,713 8,713 -------- -------- 35,775 33,937 Less accumulated depreciation (22,118) (19,016) -------- -------- TOTAL $ 13,657 $ 14,921 ======== ======== NOTE 5 - INVESTMENT IN SUBSIDIARY In April 2002, the Company invested $384,615 in its wholly owned subsidiary in South Korea for R&D and manufacturing support. Since August 2003 and as of December 31, 2005 and June 30, 2005, ARG has been inactive. 8 NOTE 6 - INTANGIBLE ASSETS The Company purchased licenses to design phone and data communication products. Below are the details for the licenses. (Unaudited) December 31, June 30, 2005 2005 --------- --------- GSM software license $ 200,000 $ 200,000 Text input methods licenses 25,000 25,000 --------- --------- 225,000 225,000 Less accumulated amortization (149,583) (127,083) --------- --------- Net Balance $ 75,417 $ 97,917 ========= ========= Amortization expense associated with intangible assets was $11,250 for the three months ended December 31, 2005 and 2004 and $22,500 for the six months ended December 31, 2005 and 2004. GSM software license was contracted with a supplier for the Company to design GSM phone and module and was paid in September of 2002. This software license has an approximate life of 5 years based on the life of the GSM software. Text input method license was paid in October of 2002 and has an approximate life of 5 yeas or the life of the text input license. NOTE 7 - OTHER ASSETS Other assets as of December 31, 2005 and June 30, 2005 consisted of facility lease and utility deposits. NOTE 8 - NOTES PAYABLE TO STOCKHOLDERS (Unaudited) December 31, June 30, 2005 2005 --------- --------- Promissory Note $ 10,000 $ 10,000 Promissory Note -- 30,000 Non-interest Bearing Note 550,000 550,000 --------- --------- Total 560,000 590,000 Less current portion (560,000) (590,000) --------- --------- Long-term portion $ -- $ -- ========= ========= The Company issued a non-interest bearing promissory note in the amount of $10,000 to the Company's former chief technology officer on June 30, 2004. This note is due upon demand. During June 2005, the Company issued a promissory note to its stockholder in the amount of $30,000 with no interest. The note is convertible to the Company's common stocks upon issuance at the option of the holder at exercise price on the date of issuance, or $0.005. The note was converted to the Company's common stock at $0.005 on November 11, 2005. On August 20, 2002, the Company's wholly owned subsidiary, ARG, issued a promissory note to a stockholder in the amount of $550,000, bearing interest at 10%, due on March 20, 2004. The Company and the stockholder agreed to change the 9 promissory note to a convertible promissory note during the year ended June 30, 2004. The note is convertible into shares of Common Stock at the option of the holder at a conversion price equal to the fair value of the Company's Common Stock on the date of issuance, or $0.005 per share. As of December 31, 2005, this note was outstanding and had not been converted. NOTE 9 - ACCRUED LIABILITIES Accrued liabilities at December 31, 2005 and June 30, 2005 consisted of the following: (Unaudited) December 31, June 30, 2005 2005 -------- -------- Salaries $129,750 $111,000 Other accrued liabilities 64,831 39,147 -------- -------- TOTAL $194,581 $150,147 ======== ======== NOTE 10 - COMMITMENTS AND CONTINGENCIES OPERATING LEASES The Company leases its administrative facilities under a non-cancelable operating lease that expire on April 30, 2007. In addition to the minimum annual rental commitments, the leases provide for periodic cost of living increases in the base rent and payment by the Company of common area costs. Rent expense related to the operating lease was $6,890 and $19,163 for the three months ended December 31, 2005 and 2004, respectively, and $13,058 and $33,010 for the six months ended December 31, 2005 and 2004, respectively. LITIGATION During June 2005, the Company's landlord filed a suit against the Company alleging that the Company defaulted under the terms and conditions of the Company's lease agreement when the Company failed to pay for its facility lease valued at $18,221. The parties have settled at $9,308, to be paid in twelve equal monthly installments on December 6, 2005. In addition, the Company is involved in certain legal proceedings and claims which arise in the normal course of business. Management does not believe that the outcome of these matters will have any material adverse effect on the Company's consolidated financial condition. SUPPLY AND PURCHASE AGREEMENTS In May 2005, the Company entered into a contract for low cost GSM phone and a worldwide distribution agreement with a design and manufacturing company. The agreement provides for a one-year term and may be extended on a year-to-year basis thereafter. NOTE 11 - EARNINGS PER SHARE Basic earnings per share ("EPS") excludes dilution and is computed by dividing net income or loss attributable to common shareholders by the weighted-average number of common shares outstanding for the period. As of December 31, 2005 and June 30, 2005, the Company did not have any dilutive common stock shares. 10 NOTE 12 - SUBSEQUENT EVENTS REPURCHASE OF SHARES The Company has agreed to repurchase the shares held by Hanjin Jhun, its former Chief Executive Officer, for the price paid by Mr. Jhun, $.005 per share. Mr. Jhun, who resigned during the third quarter of fiscal 2006, holds approximately 20,000,000 shares. The Company plans to repurchase the shares for cash during the fourth quarter of its 2006 fiscal year. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION The following discussion should be read in conjunction with the consolidated financial statements and notes thereto included in Item 1 of this filing and the financial statements and notes thereto and Management's Discussion and Analysis or Plan of Operation contained in the Company's Form 10-KSB for the year ended June 30, 2005. BUSINESS OVERVIEW Franklin Wireless Corp. ("Franklin" or the "Company") designs, builds, and markets broadband high speed data communication products such as 3G wireless modules and modems. Franklin is dedicated to serving the global wireless community by becoming a leading developer/marketer of wireless communications devices and enabling technologies, as well as an applications provider catering to the dynamic needs of its customers, global wireless carriers In addition, service for its technology is provided to vertical application companies. The Company's products are marketed through Original Equipment Manufacturers ("OEMs") and distributors, as well as directly to operators and end users. The Company's customers are located primarily in the United States, Canada, South America, Asia, and parts of Europe in a wide range of industries including cellular operators, government, PC maker, and application integrator. In summary, the Company's products are marketed to cellular operators for end-users as well as computer/handheld computing industry, automotive industry, telemetry, other vertical markets. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The Company believes the following critical accounting policies affect the Company's more significant judgments and estimates used in the preparation of the financial statements. USE OF ESTIMATES The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from those estimates. REVENUE RECOGNITION The Company recognizes revenue when persuasive evidence of an arrangement exists, the price is fixed or determinable, collection is reasonably assured and delivery of products has occurred or services have been rendered. Accordingly, the Company recognizes revenues from product sales upon shipment of the product to the customers. The Company does not allow the right of return on product sales but warrant the products over one year from the shipment. Allowance for doubtful accounts is estimated based on estimates of losses related to customer receivable balances. Estimates are developed by using standard quantitative measures based on historical losses, adjusting for current economic conditions and, in some cases, evaluating specific customer accounts for risk of loss. The establishment of reserves requires the use of judgment and assumptions regarding the potential for losses on receivable balances. Though the Company considers these balances adequate and proper, changes in economic conditions in specific markets in which the Company operates could have a material effect on reserve balances required. 11 IMPAIRMENT OF LONG-LIVED ASSETS The Company, in accordance with Statement of Financial Accounting Standards No. 144, "Accounting for Impairment on Disposal of Long-lived Assets", reviews for impairment of long-lived assets and certain identifiable intangibles whenever events or circumstances indicate that the carrying amount of the asset may not be recoverable. An impairment loss would be recognized when estimated future cash flows expected to result from the use of the asset and its eventual disposition is less than its carrying amount. As of December 31, 2005, the Company is not aware of any events or changes in circumstances that would indicate that the long-lived assets are impaired. INCOME TAXES The Company accounts for income taxes under the asset and liability method of accounting. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is required when it is less likely than not that the Company will be able to realize all or a portion of its deferred tax assets. RESULTS OF OPERATIONS The results of the interim periods are not necessarily indicative of results for the entire fiscal year THREE MONTHS ENDED DECEMBER 31, 2005 COMPARED TO THREE MONTHS ENDED DECEMBER 31, 2004 NET SALES - Net sales decreased by $30,310 or 27.4%, to $80,500 for the three months ended December 31, 2005 from $110,810 for the corresponding period of 2004. The decrease is primarily due to certain products being in the testing phase by certain customers during the 2005 quarter period and as a result, not being available for sale. GROSS PROFIT - Gross profit increased in terms of net sales percentage as the percentage of gross profit, which was 47.0% for the three months ended December 31, 2005, compared to 6.9% for the corresponding period of 2004. The gross profit percentage increase can be attributed to its shift from phone sales to module sales, a more profitable product. SELLING, GENERAL, AND ADMINISTRATIVE - Selling, general, and administrative expenses increased by $17,909, or 10.9%, to $181,638 for the three months ended December 31, 2005 from $163,729 for the corresponding period of 2004. The decrease can be attributed to cost savings from cutting back the general and administrative infrastructure during the three months ended December 31, 2005 compared to the corresponding period of 2004. OTHER INCOME - Other income increased by $14,368, or 3,221.4%, to $14,814, for the three months ended December 31, 2005 from $446 for the corresponding period of 2004. This is primarily due to a settlement of an account payable with a customer in an amount less than what had been accrued. SIX MONTHS ENDED DECEMBER 31, 2005 COMPARED TO SIX MONTHS ENDED DECEMBER 31, 2004 NET SALES - Net sales increased by $43,450, or 37.2%, to $160,390 for the six months ended December 31, 2005 from $116,940 for the corresponding period of 2004. The change is principally due to the shift in the Company's business strategy, from being a product engineering company to a product development/marketing company. GROSS PROFIT - Gross profit increased in terms of net sales percentage as the percentage of gross profit, which was 62.5% for the six months ended December 31, 2005, compared to 6.6% for the corresponding period of 2004. The gross profit percentage increase can be attributed to its shift from being a product engineering and sales company to a product development/marketing company and the module products having higher gross profit margins compared to other products. 12 SELLING, GENERAL, AND ADMINISTRATIVE - Selling, general, and administrative expenses decreased by $191,748, or 40.2%, to $285,372 for the six months ended December 31, 2005 from $477,120 for the corresponding period of 2004. The decrease can be attributed to decreased sales/marketing efforts, a reduced engineering group, accounting charges and cost savings from cutting back the general and administrative infrastructure. RESEARCH AND DEVELOPMENT - Research and development expenses of $36,300, mainly attributable for the design of a phone product, were incurred during the six months ended December 31, 2005. No research and development costs were incurred during the six months ended December 31, 2004 OTHER INCOME - Other income increased by $14,124, or 3642.2%, to $14,512 for the six months ended December 31, 2005 from $388 for the corresponding period of 2004. This is primarily due to a settlement of an account payable with a customer in an amount less than what had been accrued. LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents increased by $168,252, to $207,794 as of December 31, 2005 compared to $39,542 as of June 30, 2005. The increase was primarily from the issuance of equity securities, offset by operating losses. The Company believes that its current negative working capital of $567,538 and anticipated working capital to be generated by future operations will not be sufficient to support the Company's working capital requirements through December 31, 2006. Accordingly, the Company will have to rely on outside financing. OPERATING ACTIVITIES - Net cash used in operating activities amounted to $134,911 and $309,576 for the six months ended December 31, 2005 and 2004, respectively. The decrease from the prior period relates mainly to reduced engineering expense, including payroll expense, by terminating the outside service and focusing on research and development for the Company's own module INVESTING ACTIVITIES - Net cash used in investing activities totaled $1,837 and $3,000 for the six months ended December 31, 2005 and 2004, respectively, consisting of capital expenditures. FINANCING ACTIVITIES - Net cash provided by financing activities for the six months ended December 31, 2005 and 2004 totaled $305,000 and $150,450, respectively, which consisted of proceeds from issuances of common stock. CONTRACTUAL OBLIGATIONS AND OTHER COMMITMENTS The Company's principal future obligations and commitments as of December 31, 2005, include the following: LEASES The Company leases its administrative facilities under a non-cancelable operating lease that expires on April 30, 2007. In addition to the minimum annual rental commitments, the lease provides for periodic cost of living increases in the base rent and payment by the Company of common area costs. Rent expense related to the operating lease was $6,890 and $19,163 for the three months ended December 31, 2005 and 2004, respectively, and $13,058 and $33,010 for the six months ended December 31, 2005 and 2004, respectively. LITIGATION During June 2005, the Company's landlord filed a suit against the Company alleging that the Company defaulted under the terms and conditions of the Company's lease agreement when the Company failed to pay for its facility lease valued at $18,221. The parties have settled at $9,308, to be paid in twelve equal monthly installments commencing on December 6, 2005. In addition, the Company is involved in certain legal proceedings and claims which arise in the normal course of business. Management does not believe that the outcome of these matters will have a material adverse effect on the Company's consolidated financial condition. 13 SUPPLY AND PURCHASE AGREEMENTS In May 2005, the Company entered into a contract for low cost GSM phone and a worldwide distribution agreement with a design and manufacturing company. The agreement provides for a one-year term and may be extended on a year-to-year basis thereafter. ITEM 3. CONTROLS AND PROCEDURES At the end of the period covered by this Form 10-QSB, the Company carried out an evaluation, under the supervision and with the participation of members of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our company's disclosure controls and procedures pursuant to Rule 13a-15(b) of the U.S. Securities Exchange Act of 1934 (the "Exchange Act"). Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2005, our disclosure controls and procedures, related to internal control over financial reporting and the recording of certain equity transactions, were not effective in light of the material weaknesses described below. 1. INADEQUATE FINANCIAL STATEMENT PREPARATION AND REVIEW PROCEDURES - We do not have adequate procedures and controls to ensure that accurate financial statements can be prepared and reviewed on a timely basis, including insufficient a. review and supervision within the accounting and finance departments; b. underlying accurate data to ensure that balances are properly summarized and posted to the general ledger; and c. technical accounting resources. 2. INADEQUATE SEGREGATION OF DUTIES - We do not have adequate procedures and controls in place to ensure proper segregation of duties within the accounting department. As a result, adjustments in the financial statements could occur and not be prevented or detected by our controls in a timely manner. 3. INADEQUATE TECHNICAL ACCOUNTING EXPERTISE - We lacked the necessary depth of personnel with adequate technical accounting expertise to ensure the preparation of interim and annual financial statements in accordance with GAAP. This material weakness represented more than a remote likelihood that a material misstatement of our interim financial statements for the six months ended December 31, 2005 would not have been prevented or detected. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projection of any evaluation of effectiveness to future periods is subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. 14 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS None. ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS. On November 11, 2005, the Company issued 6,000,000 shares of Common Stock upon conversion of a $30,000 promissory note, at a conversion rate of $0.005 per share. Also on November 11, 2005, the Company issued 36,000,000 shares of Common Stock for cash, at a purchase price of $0.0085 per share, or an aggregate of $305,000 to an unaffiliated investor. The Company believes that each of the foregoing transactions was exempt from the registration requirements of the Securities Act of 1933, as amended by reason of Section 4(2) thereof and Regulation D thereunder. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. ITEM 5. OTHER INFORMATION None. ITEM 6. EXHIBITS 31.1 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 15 SIGNATURES Pursuant to the requirements of Section 13 of 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Franklin Wireless Corp. Dated: May 24, 2006 By: /s/ OC Kim -------------------------------------------- OC Kim President and Acting Chief Financial Officer 16 EX-31.1 2 franklin_ex3101.txt CERTIFICATION Exhibit 31.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, OC Kim, President (chief executive officer) of Franklin Wireless Corp., certify that: 1) I have reviewed this quarterly report on Form 10-QSB of Franklin Wireless Corp.; 2) Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report; 4) I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the small business issuer and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report my conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter (the small business issuer's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting; and 5) I have disclosed, based on my most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of the small business issuer's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's internal control over financial reporting. May 24, 2006 /s/ OC KIM ----------------------------------- OC Kim President EX-31.2 3 franklin_3102.txt CERTIFICATION Exhibit 31.2 CERTIFICATION OF ACTING CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, OC Kim, Acting Chief Financial Officer of Franklin Wireless Corp., certify that: 1) I have reviewed this quarterly report on Form 10-QSB of Franklin Wireless Corp.; 2) Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report; 4) I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the small business issuer and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report my conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter (the small business issuer's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting; and 5) I have disclosed, based on my most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of the small business issuer's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's internal control over financial reporting. May 24, 2006 /s/ OC KIM ---------------------------------- OC Kim Acting Chief Financial Officer EX-32.1 4 franklin_ex3201.txt CERTIFICATION Exhibit 32.1 CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Franklin Wireless Corp. (the"Company") on Form 10-QSB for the three months ended December 31, 2005 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, OC Kim, President of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. May 24, 2006 /s/ OC KIM ----------------------------------- OC Kim President A signed copy of this written statement required by section 906 of the Sarbanes-Oxley Act of 2002 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. EX-32.2 5 franklin_ex3202.txt CERTIFICATION Exhibit 32.2 CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Franklin Wireless Corp. (the"Company") on Form 10-QSB for the three months ended December 31, 2005 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, OC Kim, Acting Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. May 24, 2006 /s/ OC KIM ---------------------------------- OC Kim Acting Chief Financial Officer A signed copy of this written statement required by section 906 of the Sarbanes-Oxley Act of 2002 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----