Franklin Wireless Corp. Form 10-Q Summary
Reporting period: The supplied filing is a Form 10-Q for the quarter and nine months ended March 31, 2020, filed May 15, 2020. The request metadata identifies “2019 Q3,” which does not match the filing period.
Business context
Franklin Wireless provides mobile hotspots, routers, modems, and hardware and software supporting machine-to-machine and Internet of Things applications. Products are sold primarily to wireless operators, strategic partners, and distributors. The company owns 66.3% of Franklin Technology Inc. in South Korea, which provides research and development services.
Financial performance and position
| Metric | Three months ended March 31, 2020 | Three months ended March 31, 2019 | Nine months ended March 31, 2020 | Nine months ended March 31, 2019 |
|---|---|---|---|---|
| Net sales | $15.5 million | $9.0 million | $37.7 million | $31.5 million |
| Gross profit | $3.0 million | $1.6 million | $7.6 million | $5.0 million |
| Gross margin | 19.5% | 17.8% | 20.3% | 16.0% |
| Operating income (loss) | $1.2 million | $(0.4) million | $2.3 million | $(1.0) million |
| Net income (loss) | $1.1 million | $(0.2) million | $2.1 million | $(0.7) million |
| Net income attributable to parent | $1.0 million | $(0.2) million | $1.8 million | $(0.5) million |
| EPS attributable to parent | $0.09 | $(0.01) | $0.17 | $(0.05) |
- Revenue increased 73.4% in the quarter and 19.7% year to date, driven primarily by higher U.S. and Canadian demand, a newly launched product, and orders from a new carrier customer.
- Operating expenses declined 8.1% for the quarter and 11.2% year to date, primarily due to lower shipping and handling costs following revised vendor shipping terms. Research and development expense increased to $2.8 million year to date from $2.2 million.
- Cash provided by operating activities was $1.9 million for the nine months ended March 31, 2020, compared with cash used of $0.7 million in the prior-year period. The 2020 amount reflected higher accounts payable and earnings, partly offset by a $7.1 million increase in accounts receivable.
- Cash and cash equivalents were $7.6 million at March 31, 2020. Cash and certificates of deposit totaled $13.0 million, compared with $11.8 million at June 30, 2019.
- Accounts receivable increased to $11.2 million from $4.1 million at June 30, 2019; management recorded no allowance for doubtful accounts.
- Total assets were $30.3 million and total stockholders’ equity was $17.3 million at March 31, 2020.
- The filing reports no conventional borrowings or debt. Lease liabilities totaled $1.28 million, including $0.39 million current and $0.88 million non-current.
Material changes versus the prior comparable period
- U.S. and Canadian sales rose 73.6% in the quarter and 19.6% year to date. Approximately 99% of sales came from the United States and Canada in both 2020 periods.
- Management attributed increased demand partly to remote work and remote schooling during the COVID-19 pandemic. A new carrier customer represented 35% of quarterly sales and 32% of year-to-date sales.
- Gross margin improved by 1.7 percentage points in the quarter and 4.3 percentage points year to date, mainly due to the newly launched product and lower-cost product development service revenue.
- EMEA revenue declined to zero from $63,347 in the quarter and from $224,427 year to date because African carrier orders were discontinued.
- The company increased its ownership of the subsidiary from 64.2% to 66.3% by purchasing 43,333 shares for $75,000.
- The company adopted ASC 842 lease accounting on July 1, 2019, recording approximately $1.5 million of right-of-use assets and lease liabilities. Management stated that adoption did not affect net income or cash flows.
Outlook, risks, contingencies, and unusual items
- Management stated that it had sufficient capital to fund existing operations and obligations for at least one year from the filing date. No formal revenue or earnings guidance was provided.
- Management expects COVID-19 could increase demand for wireless connectivity products, but stated that the overall impact could not reasonably be estimated. Potential risks include workforce disruption, supply-chain delays, and interruptions at third-party manufacturers.
- One Asian manufacturer supplied the majority of wireless data products during the nine months. Manufacturing delays, capacity constraints, or quality problems could delay shipments or cause customer cancellations.
- The two largest customers represented 42% and 32% of year-to-date sales and 53% and 25% of accounts receivable at March 31, 2020, creating significant customer concentration risk.
- Anydata had an approximately $3.1 million remaining purchase commitment, while the company had approximately $2.0 million of related product purchase commitments with Quanta. Management stated that a loss contingency was reasonably possible but not estimable.
- The company had paid $100,000 for the right to call on inventory and recorded an additional $49,580 prepaid expense related to pricing adjustments. Management indicated a reasonable possibility of loss, with the amount not estimable.
- Change-of-control agreements provide for payments of $5 million to the president and $2 million to the chief operating officer if specified change-of-control events occur. The agreements were extended through September 30, 2021.
- Management reported effective disclosure controls and no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Confirm the applicable reporting period, because the supplied filing is for March 31, 2020 rather than “2019 Q3.”
- Assess the sustainability of the sharp revenue increase, particularly the contribution from one new carrier customer and pandemic-related demand.
- Monitor collections and working-capital exposure given the substantial increase in accounts receivable and customer concentration.
- Evaluate supply-chain dependence on the primary Asian manufacturer and the unresolved Anydata and Quanta commitments.
- Review the effect of COVID-19 on subsequent demand, production, logistics, and customer orders; the filing does not provide a quantified estimate.
- Consider lease obligations, change-of-control payments, and the company’s limited geographic and product concentration when assessing liquidity and contingent obligations.