Franklin Wireless Corp. 10-Q Summary
Business Context and Reporting Period
This is a Quarterly Report (Form 10-Q) for Franklin Wireless Corp. for the period ended September 30, 2009. The company designs and sells broadband high-speed wireless data communication products, primarily USB modems utilizing 3G and 4G technologies. It operates in a single segment with geographic revenue streams from the United States and the Caribbean/South America. As of November 16, 2009, there were 13,781,491 shares of common stock outstanding.
Key Financial Metrics
| Metric | Q3 2009 | Q3 2008 |
|---|---|---|
| Net Sales | $5,124,937 | $6,251,168 |
| Gross Profit | $771,860 | $1,857,044 |
| Gross Margin | 15.1% | 29.7% |
| Operating Income | $195,366 | $770,332 |
| Net Income | $134,421 | $656,467 |
| Earnings Per Share (Diluted) | $0.01 | $0.05 |
| Cash and Equivalents (End of Period) | $6,663,355 | $7,010,264 |
| Operating Cash Flow | $415,807 | $847,750 |
| Total Current Liabilities | $4,362,551 | N/A |
| Related Party Payables | $4,068,520 | N/A |
Material Changes vs. Prior Period
- Revenue Decline: Net sales decreased 18.0% to $5.12 million. This was driven by a 66.5% drop in sales to Caribbean and South American markets ($1.21M vs $3.60M) due to reduced purchasing power and currency issues. This was partially offset by a 47.8% increase in U.S. sales ($3.92M vs $2.65M) driven by demand for the new CMU-300 WIMAX plus CDMA USB Modem.
- Margin Compression: Gross margin fell significantly from 29.7% to 15.1%. Management attributes this to a shift in sales mix toward U.S. carrier customers, which carry a lower gross profit margin (approx. 7.5%) compared to previous international sales.
- Expense Reduction: Selling, general, and administrative (SG&A) expenses dropped 47.0% to $576,494, primarily due to a $516,525 reduction in sales commissions resulting from lower overall sales volume.
- Inventory Management: Inventories decreased by $1.53 million (from $2.62M to $1.09M), contributing positively to operating cash flow.
Outlook, Risks, and Unusual Items
- Supplier Termination: The company's primary manufacturing and supply agreement with C-Motech Co. Ltd. (a related party owning 25.5% of the company) was terminated by the supplier on November 2, 2009, effective December 31, 2009. The company relies on this single supplier for 100% of its product purchases.
- Acquisition: On October 1, 2009, the company acquired approximately 50.6% of Diffon Corporation, a South Korean entity, via a stock exchange and cash purchase ($833,333). Operations of Diffon will be included in future periods.
- Executive Compensation: Change of Control Agreements were signed with three key executives (President, COO, VP-Engineering) in September 2009, totaling potential lump-sum payments of $8 million upon a change of control.
- Liquidity: The company maintains a strong cash position of $6.66 million with no long-term debt reported on the balance sheet. However, it holds significant accounts payable to its related party supplier ($4.07M).
Investor Verification Checklist
- Supply Chain Continuity: Verify the status of new manufacturing arrangements following the termination of the C-Motech agreement effective December 31, 2009.
- Related Party Exposure: Assess the risk associated with the $4.07 million payable to C-Motech, a major shareholder, and the potential impact of the terminated agreement on future product availability.
- Geographic Concentration: Monitor the volatility of sales in the Caribbean and South America, which dropped significantly, versus the growth in the U.S. market.
- Acquisition Integration: Review the financial impact and integration progress of the Diffon Corporation acquisition in subsequent filings.
- Margin Sustainability: Evaluate whether the lower gross margins associated with U.S. carrier sales are sustainable or if pricing power can be improved.