Franklin Wireless Corp. Form 10-Q Summary
Reporting period: Quarterly and nine-month periods ended March 31, 2023, compared with March 31, 2022. The request metadata identifies “2022 Q3,” but the filing is for the third quarter of fiscal 2023. Financial statements are unaudited.
Business Context
Franklin Wireless provides 4G LTE and 5G wireless solutions, including mobile hotspots, routers, customer-premises equipment and trackers, together with software subscription services. The company markets products primarily to wireless operators, strategic partners and distributors. Franklin owns 66.3% of Franklin Technology Inc., a South Korean research and development subsidiary.
The company has one reportable segment: sales of wireless access products. Revenue is concentrated in North America and is primarily generated from sales of hotspot router products transferred at a point in time.
Financial Highlights
| Metric | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | Nine Months Ended March 31, 2023 | Nine Months Ended March 31, 2022 |
|---|---|---|---|---|
| Net sales | $11.9 million | $6.7 million | $28.9 million | $11.9 million |
| Gross profit | $2.0 million | $1.4 million | $4.6 million | $2.2 million |
| Gross margin | 17.3% | 20.3% | 15.8% | 18.7% |
| Operating loss | $0.5 million | $1.1 million | $2.5 million | $4.5 million |
| Net income (loss) | $0.2 million | $(0.8) million | $(1.3) million | $(3.0) million |
| Net income (loss) attributable to parent | $0.2 million | $(0.8) million | $(1.3) million | $(3.1) million |
| Basic and diluted EPS | $0.02 | $(0.07) | $(0.11) | $(0.26) |
Cash flow and liquidity: Net cash used in operating activities was $7.0 million for the nine months ended March 31, 2023, compared with $7.3 million in the prior-year period. Operating cash use was driven principally by a $5.9 million increase in accounts receivable and a $1.7 million increase in inventories.
Net cash used in investing activities was $1.7 million, including $1.6 million of capitalized product development costs. Financing activities provided $0.1 million from stock-option exercises. Cash and cash equivalents declined to $17.6 million from $26.3 million at June 30, 2022. Including short-term investments, reported liquidity was $34.0 million at March 31, 2023.
Balance sheet: Total assets were $52.4 million and total stockholders’ equity was $41.9 million at March 31, 2023. Current liabilities were $10.4 million. The filing does not report outstanding borrowings or conventional debt; liabilities principally consisted of accounts payable, accrued liabilities, unearned revenue and lease liabilities. Current lease liabilities were $0.2 million, with total future operating lease payments of $0.2 million.
Material Changes Versus the Prior Comparable Period
- Quarterly sales increased 77.2% to $11.9 million, primarily because of demand for a newly launched wireless product from a major carrier customer.
- Nine-month sales increased 144.2% to $28.9 million. North American sales increased 158.3%, reflecting approximately $7.8 million of revenue from two newly launched products and approximately $12.6 million of increased demand from an existing major carrier customer.
- Gross profit increased in dollars, but gross margin declined to 17.3% for the quarter and 15.8% for the nine-month period, versus 20.3% and 18.7%, respectively. Management attributed the decline to competitive pricing and higher production costs for launched products.
- The quarterly operating loss narrowed to $0.5 million from $1.1 million, and the company recorded quarterly net income attributable to the parent of $0.2 million versus a $0.8 million loss.
- The nine-month operating loss narrowed to $2.5 million from $4.5 million, but the company remained unprofitable for the nine-month period.
- Accounts receivable increased to $7.2 million from $1.3 million at June 30, 2022, while inventories increased to $5.9 million from $4.2 million.
- Interest income, investment gains and forgiveness of liabilities increased other income, partly offset by foreign-currency losses at FTI.
- Capitalized product development spending increased to $1.6 million from $0.5 million in the prior-year nine-month period.
Guidance, Outlook, Risks and Unusual Items
Management stated that cash, short-term investments and current projections are expected to fund operations and obligations for at least one year from the filing date. No formal revenue, earnings or margin guidance was provided.
Future results are expected to depend on retention of existing customers, demand for wireless data products, acceptance of new products, new customer relationships and the company’s ability to meet customer demand. Management cautioned that failure to achieve its business plan or obtain additional funding, if needed, could require curtailment of operations.
- Customer concentration is significant: two customers represented 64% and 27% of nine-month sales. One customer represented 85% of accounts receivable at March 31, 2023.
- Three Asian manufacturers represented 99% of product purchases during the nine-month period, creating supplier concentration and potential shipment, capacity and quality risks.
- Inventory included a $0.6 million reserve for obsolete or slow-moving products. Demand is described as highly unpredictable.
- The company remains exposed to foreign-currency fluctuations, competitive pricing and increased production costs.
- The Verizon Jetpack recall and related shareholder and derivative litigation remain disclosed. No liability was recorded because management believes potential losses are not probable and reasonably estimable.
- The Anydata dispute remains unresolved, and management stated that a potential loss is reasonably possible but not estimable.
- A patent infringement action filed by Aperture Net was dismissed by mutual agreement on March 27, 2023.
- Change-of-control agreements provide potential payments of $5.0 million to the president and $2.0 million to the chief operating officer. The president’s amended employment agreement also provides for specified severance payments and a $125,000 quarterly incentive bonus during the remaining term.
- Products are currently believed to be exempt from U.S. import tariffs; management estimates potential tariffs of 10% to 25% of purchase price if that changes.
- Disclosure controls and procedures were concluded to be effective as of March 31, 2023, with no material changes in internal control over financial reporting.
Investor Verification Items
- Verify the sustainability of the substantial sales increase and the extent to which revenue depends on newly launched products and major carrier customers.
- Assess whether lower gross margins and higher production costs could persist as sales scale.
- Monitor collection of the $7.2 million accounts receivable balance, including the concentration with one customer.
- Evaluate inventory turnover, the $0.6 million reserve and the risk of additional obsolescence charges.
- Reconcile continuing operating cash outflows with reported profitability and the company’s $34.0 million cash and short-term investment position.
- Review the status and potential exposure of the recall-related, shareholder, derivative and Anydata litigation.
- Consider supplier concentration, foreign-exchange exposure and the potential effect of tariffs on future margins.
- Confirm the financial impact of executive severance, incentive and change-of-control obligations.