Franklin Wireless Corp. Form 10-Q Summary
Business Context and Reporting Period
Franklin Wireless provides 5G and 4G LTE wireless products, including mobile hotspots, routers, trackers and related software services. The company consolidates Franklin Technology Inc., its 66.3%-owned South Korean research and development subsidiary. This Form 10-Q covers the three months ended September 30, 2023, Franklin’s fiscal first quarter. The financial statements are unaudited.
Key Financial Metrics
| Metric | Q1 FY2024 | Q1 FY2023 |
|---|---|---|
| Net sales | $9.66 million | $8.11 million |
| Gross profit | $1.51 million | $1.59 million |
| Gross margin | 15.7% | 19.7% |
| Operating expenses | $2.10 million | $2.21 million |
| Loss from operations | $(0.58) million | $(0.62) million |
| Net loss | $(0.34) million | $(1.43) million |
| Net loss attributable to parent | $(0.26) million | $(1.13) million |
| Loss per share | $(0.02) | $(0.10) |
| Net cash used in operating activities | $(5.22) million | $(1.01) million |
Cash and cash equivalents were $6.84 million at September 30, 2023, compared with $12.24 million at June 30, 2023. Short-term investments were $26.80 million, resulting in total cash and short-term investments of $33.65 million. Accounts receivable increased to $9.92 million from $8.95 million, while inventory declined to $2.26 million from $3.74 million.
Total assets were $50.90 million and total liabilities were $10.85 million at quarter-end. The filing reports no outstanding debt or borrowings. Current liabilities included $7.15 million of accounts payable and a $2.40 million accrued legal contingency expense. Stockholders’ equity was $40.06 million.
Material Changes Versus the Prior Comparable Period
- Sales increased 19.1%, primarily because of demand from one major North American carrier for a new wireless product. All reported quarterly sales were generated in North America.
- Gross margin declined to 15.7% from 19.7%. Management attributed the decline to higher amortization of completed capitalized product development costs and lower revenue from higher-margin device management services.
- Operating expenses declined 5.1% to $2.10 million, including lower research and development spending.
- Net loss attributable to the parent improved substantially, primarily because foreign-currency results and interest income were more favorable than in the prior-year quarter.
- Operating cash use increased to $5.22 million, principally because accounts payable declined by $5.80 million and accounts receivable increased by $0.98 million. Cash therefore declined by $5.40 million during the quarter.
- Two customers represented 91% of quarterly sales and 98% of accounts receivable at September 30, 2023. One Asian manufacturer represented 99.8% of product purchases and was owed $6.92 million in accounts payable.
Guidance, Outlook, Risks and Unusual Items
Management did not provide quantitative revenue or earnings guidance. It expects results to depend on retaining existing customers, demand for wireless data products, acceptance of new products, new customer contracts and its ability to meet customer requirements. Management stated that available capital is sufficient to fund operations and obligations for at least twelve months from the filing date, but noted that failure to achieve its business plan or obtain additional funding could require curtailment of operations.
- The company’s customer and supplier concentrations create significant exposure to order changes, customer credit issues, manufacturing delays, capacity constraints and quality problems.
- A $2.4 million shareholder-litigation settlement related to the Verizon Jetpack recall remained accrued pending court action on preliminary approval. The company has not recorded a liability for potential Verizon recall litigation or related derivative actions because management believes any liability is not probable and reasonably estimable.
- On October 19, 2023, a jury returned a $2.0 million verdict in favor of the company against CEO O.C. Kim in short-swing-profit litigation. Mr. Kim indicated that he intends to appeal.
- The company’s San Diego office lease expires in December 2023; South Korean office and housing leases extend into 2024.
- Products are currently believed to be exempt from applicable import tariffs, but management states that tariffs of 10% to 25% could materially affect sales and operating results if imposed.
- The company adopted the current expected credit loss standard on July 1, 2023 and recorded no reserve for doubtful accounts or unfunded commitments.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting. No material subsequent events requiring financial-statement disclosure were identified through November 14, 2023.
Important Facts for Investors to Verify
- Whether the new North American carrier demand is recurring and whether customer concentration decreases.
- Whether gross-margin pressure from product-development amortization and lower-margin product mix persists.
- The sustainability of cash resources given $5.22 million of quarterly operating cash use and the decline in accounts payable.
- The status and ultimate cash cost of the $2.4 million shareholder settlement and the potential Verizon recall and derivative litigation exposure.
- The outcome of the CEO’s appeal of the $2.0 million short-swing-profit verdict.
- Exposure to the single Asian manufacturer and the company’s ability to manage inventory, supply continuity and potential product obsolescence.