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2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 12 Months Ended
Jun. 30, 2012
Accounting Policies [Abstract]  
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Principles of Consolidation

 

The consolidated financial statements include the accounts of the Company, a wholly-owned subsidiary, and a subsidiary with a majority voting interest of 51.8% (48.2% is owned by non-controlling interests) and 51.5% (48.5% is owned by non-controlling interests) as of June 30, 2012 and June 30, 2011, respectively, and 50.6% (49.4% was owned by non-controlling interests) prior to January, 2011. In the preparation of consolidated financial statements of the Company, intercompany transactions and balances are eliminated and net earnings are reduced by the portion of the net earnings of subsidiaries applicable to non-controlling interests.

 

As consolidated financial statements are based on the assumption that they represent the financial position and operating results of a single economic entity, the retained earnings or deficit of a subsidiary at the date of acquisition, October 1, 2009, by the parent are excluded from consolidated retained earnings. When a subsidiary is consolidated the consolidated financial statements include the subsidiary’s revenues, expenses, gains, and losses only from the date the subsidiary is initially consolidated, and the noncontrolling interest is reported in the consolidated statement of financial position within equity, separately from the parent’s equity. There are no shares of the Company held by the subsidiaries as of June 30, 2012 or June 30, 2011.

 

Non-controlling Interest in a Consolidated Subsidiary

 

On January 10, 2011, we purchased 20,000 shares of our Korea-based subsidiary, Franklin Technology Inc. (“FTI”) common stock for $26,654. On July 1, 2011 (the “Effective Date”), we entered into a Convertible Bond Purchase Agreement with FTI. Under this agreement, we purchased a convertible bond from FTI with an original principal amount of $500,000 that bears interest at a rate of 5% per annum (with interest payable semi-annually) and matures on July 1, 2016. Pursuant to the terms of this agreement, upon conversion, the bond will convert into FTI Common Stock at a price of approximately $0.55 per share. On August 11, 2011, we converted the full amount of the bond of $500,000 into 916,666 shares of FTI Common Stock at a price of approximately $0.55. Concurrent with the bond conversion, FTI raised $542,603 by issuing 853,328 shares of its common stock to new investors at a price of approximately $0.64 per share. As a result of these transactions, FTI’s total outstanding shares increased by 1,769,994 shares to 1,988,660 shares. In addition, we own 1,029,332 shares, or 51.8% of the outstanding capital stock of FTI, with 48.2% owned by non-controlling interests.

 

As of June 30, 2012, the non-controlling interest was $652,545 which represents a $248,329 decrease from $900,874 as of June 30, 2011. The decrease of $248,329 in the non-controlling interest was due to the non-controlling interests in net loss of subsidiary of $790,932 for the year ended June 30, 2012, which was partially offset by the $542,603 that FTI raised by issuing 853,328 shares of its common stock to new investors, which took place during the first quarter of our fiscal year 2012.

 

Segment Reporting

 

Accounting Standards Codification (“ASC”) Topic 280, “Segment Reporting,” 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 have one reportable segment, consisting of the sale of wireless access products.

 

We generate revenues from three geographic areas, consisting of the United States, the Caribbean and South America and Asia. The following enterprise wide disclosure is prepared on a basis consistent with the preparation of the consolidated financial statements.  The following table contains certain financial information by geographic area:

 

    Fiscal Year Ended June 30,  
Net sales:   2012     2011  
United States   $ 13,851,066     $ 34,799,764  
Caribbean and South America     6,450,174       11,343,521  
Asia     3,965,364       371,211  
Totals   $ 24,266,604     $ 46,514,496  
 
Long-lived assets, net:		   June 30, 2012     June 30, 2011  
United States   $ 706,065     $ 93,434  
Asia     3,237,435       2,622,043  
Totals   $ 3,943,500     $ 2,715,477  

  

Fair Value of Financial Instruments

 

The carrying amounts of financial instruments such as assets, cash equivalents, accounts receivable, accounts payable and debt approximate the related fair values due to the short-term maturities of these instruments. We invest our excess cash into financial instruments which are readily convertible into cash, such as money market funds (See Note 3).

 

Estimates

 

The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America 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 revenues and expenses during the reporting period. Actual results could materially differ from those estimates.

 

Allowance for Doubtful Accounts

 

We do not maintain an allowance for doubtful accounts.   This is based upon our review of our collection history as well as the current balances associated with all significant customers and associated invoices. We did incur a loss of $149,880 during the year ended June 30, 2012 that resulted from the write-off of uncollectible accounts receivable.  This was a one-time transaction associated with amounts owed to FTI for research and development services provided to a former customer, which took place prior to our acquisition of FTI in October, 2009.  FTI filed a lawsuit in order to collect this amount, but the lawsuit was dismissed in December 2011, and FTI wrote-off this amount as bad debt expense. Following the acquisition date, FTI no longer provides research and development services to customers other than Franklin Wireless. 

  

Reclassifications

 

Certain reclassifications have been made to prior period amounts to conform to the current period presentation. This reclassification relates to amortization expense associated with capitalized product development previously reported as selling, general and administrative expense that has been reclassified to cost of goods sold for all periods presented. The amortization expense included in cost of goods sold for the years ended June 30, 2012 and 2011 is $716,180 and $714,082, respectively. This reclassification does not affect previously reported net sales, net income (loss), earnings per share, or any portion of our consolidated balance sheets or consolidated statements of cash flow for any period presented.

 

Revenue Recognition

 

We recognize revenue in accordance with ASC 605, “Revenue Recognition,” 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 products to customers or when the products are received by the customers in accordance with the shipping or delivery terms. We provide a factory warranty for one year from the shipment date, which is covered by our vendors pursuant to purchase agreements.

 

Cost of Goods Sold

 

All costs associated with our contract manufacturers, as well as distribution, fulfillment and repair services are included in our cost of goods sold. Cost of goods sold also includes amortization expense associated with capitalized product development costs associated with complete technology.

 

Goodwill

 

Intangible assets, consisting of goodwill, are accounted for in accordance with ASC Topic 350, Intangibles – Goodwill and Other (formerly SFAS No. 142, Goodwill and Other Intangibles) which does not permit the amortization of goodwill. Rather, these items must be tested for impairment annually and when events occur or circumstances change that would indicate the carrying amount may be impaired. Goodwill is recorded as the excess of purchase price over the fair value of the identifiable net assets acquired.

 

Our valuation methodology for assessing impairment, using both the discounted cash flows approach and the market approach, requires management to make judgments and assumptions based on historical experience and projections of future operating performance. Our annual impairment review performed on June 30, 2012 did not indicate that goodwill was impaired.

 

Capitalized Product Development Costs

 

Accounting Standards Codification (“ASC”) Topic 350, “Intangibles – Goodwill and Other” includes software that is part of a product or process to be sold to a customer and shall be accounted for under Subtopic 985-20.  Our products contain embedded software internally developed by FTI which is an integral part of these products because it allows the various components of the products to communicate with each other and the products are clearly unable to function without this coding.

 

The costs of product development that are capitalized once technological feasibility is determined (noted as Technology in progress in the Intangible Assets table) include payroll, employee benefits, and other headcount-related expenses associated with product development. We determine that technological feasibility for our products is reached after all high-risk development issues have been resolved. Once the products are available for general release to its customers, we cease capitalizing the product development costs and any additional costs, if any, are expensed. The capitalized product development costs are amortized on a product-by-product basis using the greater of straight-line amortization or the ratio of the current gross revenues to the current and anticipated future gross revenues. The amortization begins when the products are available for general release to the Company’s customers.

 

As of June 30, 2012 and June 30, 2011, capitalized product development costs in progress were $1,258,500 and $127,304, respectively, and these amounts are included in intangible assets in our consolidated balance sheets. During the year ended June 30, 2012, we incurred $1,412,910 in capitalized product development costs and transferred $281,714 to complete technology following the completion of certain product development efforts. All expenses incurred before technological feasibility is reached are expensed and included in our consolidated statements of operations.

 

 Research and Development Costs

 

Costs associated with research and development are expensed as incurred. Research and development costs were approximately $1,360,000 and $2,450,000 for the years ended June 30, 2012 and June 30, 2011, respectively.

 

Advertising and Promotion Costs

 

Costs associated with advertising and promotions are expensed as incurred.  Advertising and promotion costs were $72,798 and $94,879 for the years ended June 30, 2012 and 2011, respectively.

 

Warranties

 

We provide a factory warranty for one year which is covered by our vendors and manufacturers under purchase agreements between the Company and the vendors. In general, these products are shipped directly from our vendors to our customers. As a result, we do not have warranty exposure and do not accrue any warranty expenses.

 

Shipping and Handling Costs

 

Costs associated with product shipping and handling are expensed as incurred.  Shipping and handling costs, which are included in selling, general and administrative expenses on the statement of operations, were $226,758 and $232,880 for the years ended June 30, 2012 and 2011, respectively.

 

Cash and Cash Equivalents

 

For purposes of the consolidated statements of cash flow, we consider all highly liquid investments purchased with original maturities of three months or less to be cash equivalents.

 

Inventories

 

Our inventories consist 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 the control of the Company. We may write down our inventory value for potential obsolescence and excess inventory.  However, as of June 30, 2012, we believe our inventory needs no such reserves and have recorded no inventory reserves.

 

Property and Equipment

 

Property and equipment are recorded at cost. Significant additions or improvements extending useful lives of assets are capitalized. Maintenance and repairs are charged to expense as incurred. Depreciation is computed using the straight-line method over the estimated useful lives as follows:

 

Machinery 6 years
Office equipment 5 years
Molds 3 years
Vehicles 5 years
Computers and software 5 years
Furniture and fixtures 7 years
Facilities 5 years

 

Goodwill and Intangible Assets

 

Goodwill and certain intangible assets are recorded in connection with the FTI acquisition and are accounted for in accordance with ASC 805, “Business Combinations.”  Goodwill represents the excess of the purchase price over the fair value of the tangible and intangible net assets acquired.  Intangible assets are recorded at their fair value at the date of acquisition. Goodwill and other intangible assets are accounted for in accordance with ASC 350, “Goodwill and Other Intangible Assets.”  Goodwill is tested for impairment at least annually and any related impairment losses are recognized in earnings when identified. No impairment was noted as of June 30, 2012 and 2011.

  

 Intangible Assets

 

The definite lived intangible assets consisted of the following as of June 30, 2012:

                           
        Average   Gross           Net
Definite lived intangible assets:   Expected Life   Remaining
life		   Intangible
Assets		    

Accumulated

Amortization

    

Intangible

Assets

Complete technology    3 years   0.3 years   $ 490,000   $ 449,167   $ 40,833
Complete technology    3 years   0.8 years     1,517,683     1,098,830     418,853
Complete technology    3 years   2.5 years     281,714     46,952     234,762
Supply and development agreement      8 years   5.3 years     1,121,000     385,344     735,656

Technology

In progress

   Not Applicable   –     1,258,499     –     1,258,499
Software   5 years   3.3 years     163,607     44,033     119,574
Patent   10 years   9.7 years     11,944     289     11,655
Certifications & licenses   3 years   2.9 years     701,622     5,942     695,680
Total  as of June 30, 2012    $ 5,546,069   $ 2,030,557   $ 3,515,512
                               

  

 The definite lived intangible assets consisted of the following as of June 30, 2011:

 

                           
        Average   Gross           Net
Definite lived intangible assets:   Expected Life   Remaining
life		   Intangible
Assets		     Accumulated
Amortization		     Intangtible
Assets
Complete technology    3 years   1.3 years   $ 490,000   $ 285,833   $ 204,167
Complete technology    3 years   1.8 years     1,517,683     592,936     924,747
Supply and development agreement      8 years   6.3 years     1,121,000     245,219     875,781

Technology

In progress

   Not Applicable   –     127,304     –     127,304
Software   5 years   4.3 years     155,004     14,027     140,977
Patent   10 years   9.8 years     2,441     60     2,381
Total  as of June 30, 2011     $ 3,413,432   $ 1,138,075   $ 2,275,357
                               

  

Amortization expense recognized during the years ended June 30, 2012 and 2011 was $892,482 and $868,295, respectively. The amortization expenses of the definite lived intangible assets for the next five years and thereafter is as follows:

 

      FY2013     FY2014     FY2015     FY2016     FY2017     Thereafter  
  Total     $ 1,306,234     $ 921,319     $ 868,425     $ 237,500     $ 141,319     $ 40,715  
                                                     

  

Long-lived Assets

 

In accordance with ASC 360, “Property, Plant, and Equipment,” 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 are less than its carrying amount.

 

We tested the long-lived assets for impairment as of June 30, 2012 by comparing the discounted cash flows of the assets to their carrying values and concluded that, as of this date, no impairment existed.  We are not aware of any events or changes in circumstances following this date that would indicate that the long-lived assets are impaired.

  

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 provide for an allowance for potential credit losses as deemed necessary.  No reserve was required or recorded for any of the periods presented.

 

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. For the year ended June 30, 2012, net sales to our two largest customers accounted for 39% and 19% of our consolidated net sales and 47% and 35% of our accounts receivable balance as of June 30, 2012. In the same period in 2011, net sales to our two largest customers accounted for 59% and 12% of net sales and 80% and 0% of our accounts receivable balance as of June 30, 2011. No other customers accounted for more than ten percent of total net sales for the years ended June 30, 2012 and 2011.

 

For the year ended June 30, 2012, we purchased the majority of our wireless data products from two manufacturing companies located in Asia. If any of these manufacturing companies 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 the Company's revenue.  For the year ended June 30, 2012, we purchased wireless data products from these suppliers in the amount of $13,765,478, or 63.2%% of total purchases, and had related accounts payable of $7,576,976 as of June 30, 2012. For the year ended June 30, 2011, we purchased wireless data products from these suppliers in the amount of $31,157,229, or 98.6% of total purchases, and had related accounts payable of $2,176,785 as of June 30, 2011.

 

We maintain our cash accounts with established commercial banks.  Such cash deposits may exceed the Federal Deposit Insurance Corporation insured limit of $250,000 for each account.  However, we do not anticipate any losses on excess deposits.

 

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

 

In June 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2011-05, Presentation of Comprehensive Income, which eliminates the option of presenting the components of other comprehensive income (OCI) as part of the statement of changes in stockholders’ equity. The ASU instead permits an entity to present the total of comprehensive income, the components of net income, and the components of OCI either in a single continuous statement of comprehensive income or in two separate but consecutive statements. With either format, the entity is required to present each component of net income along with total net income, each component of OCI along with the total for OCI, and a total amount for comprehensive income. Also, the ASU requires entities to present, for either format, reclassification adjustments for items that are reclassified from OCI to net income in the statement(s) where the components of net income and the components of OCI are presented. This ASU is to be applied retrospectively. For public entities, the ASU is effective for interim and annual periods beginning after December 15, 2011. Early adoption is permitted, since compliance with the amendments is already permitted. We have adopted this guidance and note that it does not have any material impact on our consolidated financial statements.

  

 In September 2011, the FASB issued ASU 2011-08, Testing Goodwill for Impairment, which permits entities to determine first whether it is necessary to apply the traditional two-step goodwill impairment test, based on qualitative factors. An entity also has the option to bypass the qualitative assessment for any reporting unit in any period and proceed directly to the first step of the two-step goodwill impairment test; an entity may resume performing the qualitative assessment in any subsequent period. Also under the amendments, an entity is no longer permitted to carry forward its detailed calculation of a reporting unit’s fair value from a prior year. The ASU also includes examples of events and circumstances for an entity to consider in evaluating whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, which supersede the previous examples of events and circumstances that an entity should consider when testing goodwill for impairment between annual tests. An entity having a reporting unit with a zero or negative carrying amount will also consider the revised list of factors in determining whether to perform the second step of the impairment test. The ASU is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted, including for annual and interim goodwill impairment tests performed as of a date before September 15, 2011, if an entity’s financial statements for the most recent annual or interim period have not yet been issued. We have adopted this guidance and note that it does not have any material impact on our consolidated financial statements.