FRANKLIN WIRELESS CORP annual report, FY2023

Franklin Wireless Corp. — Form 10-K Summary

Reporting period: Fiscal year ended June 30, 2023, filed September 28, 2023. The requested period is identified as “2022 Q4,” but the supplied filing is an annual report for fiscal 2023, not a quarterly filing.

Business Context

Franklin Wireless provides 5G and 4G LTE mobile hotspots, routers, fixed wireless equipment, tracking devices, and related software services, including mobile device management and SD-WAN solutions. The company consolidates Franklin Technology Inc., a South Korean research and development subsidiary, in which it owns 66.3%; non-controlling interests own 33.7%. The company has one reportable segment: wireless access products.

North America generated 99.6% of fiscal 2023 sales.
The majority of products were manufactured by independent Asian suppliers.
The two largest customers represented approximately 61% and 31% of fiscal 2023 consolidated sales.

Financial Performance and Key Metrics

Metric	FY2023	FY2022	Change
Net sales	$45.95 million	$24.00 million	+91.5%
Gross profit	$7.02 million	$3.82 million	+84.0%
Gross margin	15.3%	15.9%	Down 0.6 percentage points
Operating expenses	$9.37 million	$8.79 million	+6.6%
Loss from operations	$2.35 million	$4.97 million	Improved
Net loss	$2.94 million	$3.67 million	Improved
Net loss attributable to parent	$2.86 million	$3.76 million	Improved
Loss per diluted share	$0.24	$0.32	Improved
Net cash used in operating activities	$1.88 million	$7.41 million	Use declined

Operating margin was approximately negative 5.1%, compared with negative 20.7% in fiscal 2022.
Net margin was approximately negative 6.4%, compared with negative 15.3% in fiscal 2022.
SG&A increased to $5.45 million, primarily due to higher payroll, stock-based compensation, and legal expenses.
Research and development expense declined to $3.92 million from $4.28 million.
Other expense, net, was $1.48 million, including a $2.4 million legal contingency charge, partially offset by interest income, gains from forgiven liabilities, and investment gains.

Liquidity, Cash Flow, Debt, and Balance Sheet

Cash and cash equivalents were $12.24 million at June 30, 2023, compared with $26.28 million at June 30, 2022.
Short-term investments increased to $26.73 million from $16.34 million. Cash plus short-term investments totaled $38.97 million.
Total current assets were $51.86 million, compared with current liabilities of $16.51 million.
Accounts receivable increased sharply to $8.95 million from $1.32 million, reflecting the higher sales volume and creating a significant working-capital use.
Inventory declined to $3.74 million from $4.20 million; inventory reserves were $585,274.
Total liabilities were $16.51 million, consisting primarily of accounts payable and accrued obligations. The filing does not report outstanding borrowings or conventional debt.
Investing cash outflows were $12.11 million, including $10.39 million of short-term investment purchases and $1.63 million of capitalized product development costs.
Management stated that available capital was sufficient to fund existing operations and obligations through at least June 30, 2024, but indicated that more than $5 million could be required over the next twelve months for capital expenditures, software licenses, and product testing and certification.

Material Changes Versus the Prior Comparable Period

Sales nearly doubled, primarily because a major carrier launched two new products contributing approximately $14 million of new revenue and increased purchases of existing products by approximately $11 million.
Sales became more concentrated in North America and among two customers.
Gross margin declined modestly because of competitive pricing and higher production costs for newly launched products.
Operating losses narrowed substantially because revenue growth exceeded the increase in operating expenses.
Net loss improved despite the $2.4 million legal contingency charge.
Operating cash burn improved, but the increase in accounts receivable substantially absorbed cash.
Capitalized product development spending increased to $1.63 million from $658,544.
Outstanding stock options declined to 647,001 from 766,001, while stock-based compensation expense increased to $710,870 from $545,841.

Guidance, Outlook, Risks, and Unusual Items

The filing provides no formal revenue or earnings guidance. Management expects results to depend on retaining existing customers, demand for wireless data products, acceptance of new products, new customer contracts, manufacturing capacity, product quality, and control of operating costs.

Management reported declining demand for remote education, work-from-home applications, and mobile device management services in the post-pandemic market and stated that it is enhancing software offerings in response.
Customer concentration is material: the two largest customers accounted for approximately 92% of fiscal 2023 sales and approximately 96% of year-end accounts receivable combined.
Three Asian suppliers accounted for 99.6% of fiscal 2023 product purchases, creating supplier, manufacturing, capacity, quality, and logistics risk.
The company faces risks from rapidly changing wireless technology, certification requirements, product defects, cybersecurity issues, competition, intellectual property claims, tariffs, foreign currency movements, and international operations.
A $2.4 million settlement related to shareholder litigation concerning the Verizon Jetpack recall was accrued and remained subject to federal court approval as of the filing date.
Additional derivative and short-swing-profit litigation remained outstanding; no liability was recorded because management believed losses were not probable and reasonably estimable.
The Verizon Jetpack recall involved approximately 2.5 million devices. The company stated that it had not identified the cause of the alleged failures and could not estimate any future financial impact.
Change-of-control agreements provide for payments of $5 million to the president and $2 million to the chief operating officer. The president’s employment amendment also provides for specified severance payments and quarterly incentive bonuses.
The company stated that it had no off-balance-sheet arrangements and that management considered internal control over financial reporting effective as of June 30, 2023.

Investor Verification Checklist

Verify the sustainability of the fiscal 2023 sales increase and the expected order volume from the major carrier customers.
Assess collectability and timing of the $8.95 million accounts receivable balance, particularly balances concentrated among the two largest customers.
Review gross-margin trends, product pricing, manufacturing costs, and the effect of new-product mix.
Confirm the status and ultimate cash payment of the $2.4 million Verizon-related settlement.
Evaluate potential exposure from unresolved recall-related, derivative, intellectual-property, and short-swing-profit litigation.
Review dependence on three Asian suppliers and the potential effect of tariffs, shipping delays, quality issues, or capacity constraints.
Assess whether projected capital, development, testing, and certification needs exceeding $5 million can be funded without additional debt or equity financing.
Confirm the treatment and collectability of the $10 million loan to the South Korean subsidiary, including its 2% interest rate, five-year term, and collateral provisions.