Franklin Wireless Corp. Form 10-Q Summary
Business Context and Reporting Period
Franklin Wireless provides mobile hotspots, routers, modems, and hardware and software supporting machine-to-machine and Internet of Things applications. The company owns 51.8% of Franklin Technology Inc. in South Korea, with the remaining 48.2% held by non-controlling interests. This unaudited Form 10-Q covers the three and six months ended December 31, 2017, Franklin Wireless’s fiscal second quarter and first six months of fiscal 2018.
Key Financial Metrics
| Metric | Three Months Ended December 31, 2017 | Six Months Ended December 31, 2017 |
|---|---|---|
| Net sales | $8.35 million | $16.00 million |
| Gross profit | $1.39 million | $2.84 million |
| Gross margin | 16.6% | 17.7% |
| Operating income (loss) | $(0.51) million | $(1.14) million |
| Net income (loss) attributable to parent | $(0.73) million | $(1.17) million |
| Basic loss per share | $(0.07) | $(0.11) |
| Net cash used in operating activities | Not separately provided | $(0.58) million |
At December 31, 2017, cash and cash equivalents were $13.50 million, accounts receivable were $6.72 million, inventory was $1.51 million, and total current assets were $21.95 million. Total liabilities were $7.24 million, consisting entirely of current liabilities; the filing does not show outstanding borrowings or long-term debt. Stockholders’ equity was $18.00 million. The company reported no off-balance-sheet arrangements.
Material Changes Versus the Prior Comparable Period
- Three-month sales declined 41.8% to $8.35 million from $14.35 million; six-month sales declined 40.9% to $16.00 million from $27.06 million.
- The decline was driven primarily by lower demand from two U.S. carrier customers. U.S. sales fell 42.0% for the six-month period and represented 96.3% of total sales.
- Gross margin decreased to 16.6% from 20.2% for the quarter and to 17.7% from 19.1% for the six-month period, reflecting customer and product mix, competitive pricing, and product-cost variation.
- The company shifted from operating income of $0.63 million in the prior-year quarter and $0.99 million in the prior-year six-month period to operating losses of $0.51 million and $1.14 million, respectively.
- Operating expenses decreased 16.3% for the quarter and 4.6% for the six-month period, mainly because of lower shipping and handling costs, partly offset by higher research and development costs and payroll.
- Cash declined by $0.78 million during the six months, compared with a $1.47 million decline in the prior-year period. Accounts receivable and inventory reductions provided cash, while accounts payable decreased by $5.89 million.
Outlook, Risks, Contingencies, and Unusual Items
Management provided no quantified revenue, earnings, or margin guidance. It expects results to depend on retaining existing customers, demand for wireless data products, acceptance of new products, new customer contracts, and the ability to meet customer demand. Management stated that available capital should fund operations and obligations for at least one year from the filing date, but warned that failure to achieve its business plan or obtain additional funding could require curtailing operations.
- Customer concentration is significant: three customers represented 54%, 17%, and 13% of six-month sales. Those customers represented 49%, 31%, and 10% of accounts receivable at December 31, 2017.
- One Asian manufacturer supplied 90% of product purchases during the six months and was owed $6.11 million at December 31, 2017, creating supplier concentration and potential shipment, capacity, and quality risks.
- Demand is described as highly unpredictable. Inventory included a $148,900 reserve for obsolete or slow-moving products.
- The Tax Cuts and Jobs Act caused an approximately $400,000 reduction in deferred tax assets and was included in the income tax provision. The company had not completed its analysis of the deemed-repatriation tax under IRC Section 965 and had recorded no provision; a future adjustment may be required.
- Foreign currency movements reduced other income for the quarter and six-month period compared with the prior year.
- Operating leases include San Diego office rent of $23,115 per month through October 2019 and extended Korean leases through September 2019. Change-of-control agreements provide potential payments of $5 million to the president and $2 million to the chief operating officer.
- Management reported no material changes to previously disclosed risk factors, no material litigation outcome, and effective disclosure controls as of December 31, 2017.
Important Facts for Investors to Verify
- Whether demand from the two major U.S. carrier customers recovers and whether new products and customers offset the decline.
- Customer and supplier concentration, including the collectability of major receivables and dependence on the primary Asian manufacturer.
- Whether gross margins stabilize or continue to be pressured by pricing, mix, and product costs.
- The company’s ability to return to positive operating cash flow while funding product development.
- The final tax impact of the Tax Cuts and Jobs Act, including any IRC Section 965 deemed-repatriation liability.
- Whether the reported $13.50 million cash balance remains sufficient if losses persist or additional funding becomes necessary.