Franklin Wireless Corp. Form 10-K Summary
Reporting period: Fiscal year ended June 30, 2020, compared with fiscal 2019. The supplied metadata references “2019 Q4,” but the filing is an annual report for fiscal 2020.
Business Context
Franklin Wireless provides wireless access products, including 5G/4G mobile hotspots, routers, gateways, tracking devices, connected-car products and related IoT/M2M software. Products are sold primarily to wireless operators, strategic partners and distributors. The company consolidates Franklin Technology Inc., a South Korean research and development subsidiary, in which it held a 66.3% interest at June 30, 2020.
The company reports one operating segment. United States sales represented 99.7% of fiscal 2020 revenue; EMEA sales were zero and Asia sales represented 0.3%.
Financial Highlights
| Metric | FY2020 | FY2019 | Change |
|---|---|---|---|
| Net sales | $75.1 million | $36.5 million | Up 105.9% |
| Gross profit | $14.5 million | $5.7 million | Up 153.1% |
| Gross margin | 19.3% | 15.7% | Up 3.6 percentage points |
| Operating expenses | $7.4 million | $7.8 million | Down 5.1% |
| Income from operations | $7.1 million | $(2.1) million | Improved |
| Net income | $5.9 million | $(1.5) million | Returned to profitability |
| Net income attributable to parent | $5.6 million | $(1.3) million | Improved |
| EPS, basic and diluted | $0.52 | $(0.12) | Improved |
| Operating cash flow | $22.0 million | $0.8 million | Increased substantially |
Revenue growth was driven by increased demand for wireless connectivity during the COVID-19 remote-work and remote-learning period, high-volume school-district orders, a newly launched product and orders from a new carrier customer. The two largest customers accounted for 46% and 36% of fiscal 2020 sales, respectively.
Gross margin benefited from the higher-selling-price newly launched product and lower-cost product-development service revenue. SG&A declined to $3.7 million, while research and development increased to $3.7 million.
Liquidity, Cash Flow and Debt
- Cash and cash equivalents were $28.2 million at June 30, 2020, compared with $6.4 million at June 30, 2019.
- Certificates of deposit were $5.4 million, resulting in cash and short-term investments of $33.5 million.
- Accounts receivable increased to $16.0 million from $4.1 million, and inventories increased to $11.8 million from $1.1 million.
- Accounts payable increased to $42.1 million from $5.7 million, primarily because of increased hotspot production and supplier purchases.
- Operating cash flow was supported substantially by the $36.4 million increase in accounts payable and was partially offset by increases in receivables and inventory.
- Investing cash outflow was $0.8 million, including capitalized product development, intangible assets, property and equipment, and the purchase of additional subsidiary shares.
- Financing cash inflow was $0.5 million, consisting primarily of a $487,300 Payroll Protection Program loan and $33,128 from stock-option exercises.
- Total liabilities were $44.3 million, including the PPP loan of $487,300 and lease liabilities of $1.2 million. The filing does not disclose conventional bank debt beyond the PPP loan.
Material Changes Versus Prior Period
- Net sales more than doubled, with U.S. revenue increasing from $36.2 million to $74.8 million.
- EMEA revenue declined to zero following discontinued African carrier orders.
- The company moved from an operating loss of $2.1 million to operating income of $7.1 million.
- Net income attributable to the parent improved from a $1.3 million loss to $5.6 million of income.
- Gross margin expanded from 15.7% to 19.3%.
- SG&A decreased primarily because of lower payroll and shipping costs, while research and development spending increased.
- The company adopted ASC 842 lease accounting on July 1, 2019, recording right-of-use assets and lease liabilities of approximately $1.5 million.
- The company increased its ownership of FTI from 64.2% to 66.3% through a $75,000 purchase of subsidiary shares.
Outlook, Risks and Unusual Items
Management stated that it may require more than $5 million over the next twelve months for capital expenditures, software licenses, and testing and certification of new products. Management expects to fund operations through available cash, operating cash flow, bank lines and potentially equity securities, but additional debt or equity may be required if operating cash flow is insufficient.
COVID-19 increased demand for connectivity products but also created risks involving supply-chain disruption, third-party manufacturing capacity, shipping delays and volatility in future demand. The longer-term financial impact was not reasonably estimable in the filing.
- Customer concentration is substantial: the two largest customers represented 82% of fiscal 2020 sales and 93% of year-end accounts receivable.
- Two Asian manufacturers represented 94% of fiscal 2020 purchases, creating supplier, capacity, quality and delivery risk.
- Product deliveries often require lead times exceeding 45 days, increasing working-capital requirements and fulfillment risk.
- Anydata-related purchase commitments remain a potential loss contingency. The company paid $100,000 for the right to call on inventory and recorded a $49,580 prepaid amount; the possible loss was not estimable at June 30, 2020.
- The company faces risks from competition, rapid technology changes, intellectual-property claims, regulatory approvals, international operations and potential tariffs of 10% to 25% if current exemptions change.
- Change-of-control agreements provide potential payments of $5 million to the president and $2 million to the chief operating officer.
- On September 9, 2020, after fiscal year-end, the company issued 923,078 shares at $6.50 per share for aggregate proceeds of approximately $6.0 million.
Important Facts to Verify
- Whether the pandemic-related surge in school and remote-work orders is recurring or represents temporary demand.
- Collection of the $16.0 million accounts receivable balance, particularly amounts owed by the two largest customers.
- Whether the $42.1 million accounts payable balance and elevated inventory can normalize without supplier or liquidity pressure.
- Customer contract renewals, order volumes and concentration following the fiscal 2020 contribution of 82% of sales from two customers.
- Supply continuity, pricing and capacity at the two manufacturers responsible for 94% of purchases.
- Resolution and potential financial exposure related to the Anydata and Quanta purchase commitments.
- Use of the $6.0 million post-year-end equity financing and any resulting dilution.
- Future capital requirements exceeding $5 million and whether additional debt or equity financing will be needed.
- The filing’s audit opinion covers the consolidated financial statements; the company’s internal-control report was not subject to external auditor attestation because of its smaller-reporting-company status.