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2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | 12 Months Ended
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Jun. 30, 2013
Accounting Policies [Abstract] |
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | Principles of Consolidation The consolidated financial statements include the accounts of the Company, and a subsidiary with a majority voting interest of 51.8% (48.2% is owned by non-controlling interests) as of June 30, 2013 and 2012. 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 non-controlling 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, 2013 or June 30, 2012. Non-controlling Interest in a Consolidated Subsidiary On July 1, 2011, 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, 2013, the non-controlling interest was $236,500 which represents a $416,045 decrease from $652,545 as of June 30, 2012. The decrease of $416,045 in the non-controlling interest was due to the non-controlling interests in net loss of subsidiary of $862,449 for the year ended June 30, 2013. 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: |  | 2013 |  |  | 2012 |
United States |  | $ | 29,978,319 |  |  | $ | 13,851,066 |
Caribbean and South America |  |  | 1,648,452 |  |  |  | 6,450,174 |
Asia |  |  | 1,123,483 |  |  |  | 3,965,364 |
Totals |  | $ | 32,750,254 |  |  | $ | 24,266,604 |
Long-lived assets, net: |  | June 30, 2013 |  |  | June 30, 2012 |
United States |  | $ | 2,595,094 |  |  | $ | 706,065 |
Asia |  |  | 1,109,876 |  |  |  | 3,237,435 |
Totals |  | $ | 3,704,970 |  |  | $ | 3,943,500 |
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. Research and development expenses are reported separately from selling, general and administrative expenses for the years ended June 30, 2013 and 2012, as presented on the accompanying consolidated statements of comprehensive income (loss). For the year ended June 30, 2012, research and development expenses were previously included in selling, general and administrative expenses and were not reported separately. 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. Non-trade receivables are reported separately from accounts receivable and are shown as other receivables on the consolidated balance sheets as of June 30, 2013 and 2012. Non-trade receivables were previously included in accounts receivable and were not reported separately. This reclassification does not affect previously reported consolidated statements of comprehensive income (loss). 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. Any net warranty related expenditures made by us have not historically been material. 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. 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, in Note 2 to Notes to Financial Statements) 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 our 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, 2013 and June 30, 2012, capitalized product development costs in progress were $32,500 and $1,258,499, respectively, and these amounts are included in intangible assets in our consolidated balance sheets. During the year ended June 30, 2013, we incurred $391,316 in capitalized product development costs and transferred $1,445,220, $139,037 and $33,058 to completed technology, property and equipment and certifications and licenses, respectively. All expenses incurred before technological feasibility is reached are expensed and included in our consolidated statements of comprehensive income (loss). Research and Development Costs Costs associated with research and development are expensed as incurred. Research and development costs were approximately $2,770,000 and $1,590,000 for the years ended June 30, 2013 and 2012, respectively. Advertising and Promotion Costs Costs associated with advertising and promotions are expensed as incurred. Advertising and promotion costs were $52,532 and $72,798 for the years ended June 30, 2013 and 2012, 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. Historically, the Company has not experienced any material net warranty expenditures. 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 comprehensive income (loss), were $245,124 and $226,758 for the years ended June 30, 2013 and 2012, 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, 2013, 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 were 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, 2013 and 2012. Intangible Assets The definite lived intangible assets consisted of the following as of June 30, 2013:
Definite lived intangible assets: |  | Expected Life |  | Average Remaining life |  |  | Gross Intangible Assets |  |  | Accumulated Amortization |  |  | Net Intangible Assets |
Complete technology |  | 3 years |  |  | – |  |  | $ | 490,000 |  |  | $ | 490,000 |  |  | $ | – |
Complete technology |  | 3 years |  |  | – |  |  |  | 1,517,683 |  |  |  | 1,517,683 |  |  |  | – |
Complete technology |  | 3 years |  |  | 1.5 years |  |  |  | 281,714 |  |  |  | 151,264 |  |  |  | 130,450 |
Complete technology |  | 3 years |  |  | 2.0 years |  |  |  | 361,249 |  |  |  | 150,532 |  |  |  | 210,717 |
Complete technology |  | 3 years |  |  | 2.3 years |  |  |  | 174,009 |  |  |  | 43,502 |  |  |  | 130,507 |
Complete technology |  | 3 years |  |  | 2.5 years |  |  |  | 909,962 |  |  |  | 126,384 |  |  |  | 783,578 |
Supply and development agreement |  | 8 years |  |  | 4.3 years |  |  |  | 1,121,000 |  |  |  | 525,469 |  |  |  | 595,531 |
Technology In progress |  | Not Applicable |  |  | – |  |  |  | 32,500 |  |  |  | – |  |  |  | 32,500 |
Software |  | 5 years |  |  | 2.9 years |  |  |  | 169,595 |  |  |  | 75,965 |  |  |  | 93,630 |
Patent |  | 10 years |  |  | 8.7 years |  |  |  | 50,482 |  |  |  | 517 |  |  |  | 49,965 |
Certifications & licenses |  | 3 years |  |  | 2.2 years |  |  |  | 1,379,830 |  |  |  | 332,963 |  |  |  | 1,046,867 |
Total as of June 30, 2013 |  |  |  |  |  |  |  | $ | 6,488,024 |  |  | $ | 3,414,279 |  |  | $ | 3,073,745 |
The definite lived intangible assets consisted of the following as of June 30, 2012:
Definite lived intangible assets: |  | Expected Life |  | Average Remaining life |  |  | Gross Intangible Assets |  |  | Accumulated Amortization |  |  | Net 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 |
Amortization expense recognized during the years ended June 30, 2013 and 2012 was $1,383,722 and $892,482, respectively. The amortization expenses of the definite lived intangible assets for the next five years and thereafter are as follows:
|  |  | FY2014 |  |  | FY2015 |  |  | FY2016 |  |  | FY2017 |  |  | FY2018 |  |  | Thereafter |
| Total |  |  | $ | 1,225,514 |  |  | $ | 1,138,038 |  |  | $ | 500,216 |  |  | $ | 145,173 |  |  | $ | 40,079 |  |  | $ | 24,725 |
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 are not aware of any events or changes in circumstances during the year ended June 30, 2013 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, 2013, net sales to our three largest customers represented 47%, 20%, and 19% of our consolidated net sales, respectively, and 62%, 0%, and 35% of our accounts receivable balance as of June 30, 2013. 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. No other customers accounted for more than ten percent of total net sales for the years ended June 30, 2013 and 2012. For the year ended June 30, 2013, we purchased the majority of our wireless data products from one manufacturing company located in Asia. If the manufacturing 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 the Company’s revenue. For the year ended June 30, 2013, we purchased wireless data products from this supplier in the amount of $19,702,329, or 86.1% of total purchases, and had related accounts payable of $3,372,227 as of June 30, 2013. 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. 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.

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