Franklin Wireless Corp. Form 10-Q Summary
Business Context and Reporting Period
Franklin Wireless provides wireless connectivity products, including mobile hotspots, routers, trackers, embedded modules, modems and gateways supporting 5G/4G, M2M and IoT applications. The company sells primarily to wireless operators, strategic partners and distributors. Its majority-owned subsidiary, Franklin Technology Inc., provides product design and development services from South Korea.
This filing covers the three months ended September 30, 2021, Franklin’s fiscal first quarter. The financial statements are unaudited and presented under U.S. GAAP.
Key Financial Metrics
| Metric | Q1 FY2022 | Q1 FY2021 | Change |
|---|---|---|---|
| Net sales | $3.3 million | $62.6 million | Down 94.7% |
| Gross profit | $0.5 million | $11.7 million | Down 95.8% |
| Gross margin | 14.7% | 18.7% | Down 4.0 percentage points |
| Operating expenses | $2.1 million | $2.5 million | Down 16.0% |
| Operating income (loss) | $(1.6) million | $9.2 million | Turned to loss |
| Net income (loss) | $(1.1) million | $7.2 million | Turned to loss |
| Net loss attributable to parent | $(1.1) million | $6.9 million | Turned to loss |
| Basic and diluted EPS | $(0.10) | $0.65 basic; $0.64 diluted | Declined |
| Net cash from operating activities | $(6.4) million | $9.2 million | Decreased $15.5 million |
Cash and cash equivalents were $39.3 million at September 30, 2021, compared with $45.8 million at June 30, 2021. Certificates of deposit totaled $5.4 million, resulting in cash and short-term investments of $44.7 million. Management stated that available capital should fund existing operations and obligations for at least one year from the filing date.
Total assets were $50.5 million and total liabilities were $5.4 million at September 30, 2021. Stockholders’ equity was $45.1 million. The company reported no debt other than operating lease liabilities of $691,603, consisting of $299,721 current and $391,882 non-current liabilities. Future minimum operating lease payments totaled $724,343 before $32,740 of imputed interest.
Accounts receivable declined to $1.6 million from $2.5 million at June 30, 2021. Inventory declined to $0.7 million from $1.0 million. Accounts payable declined to $3.6 million from $9.7 million, contributing substantially to the operating cash outflow. The company maintained no allowance for doubtful accounts or inventory obsolescence reserve.
Material Changes Versus the Prior Comparable Period
- Revenue fell sharply because demand from two major carrier customers normalized after unusually high pandemic-related demand in the prior-year quarter and the launch of a new product was delayed.
- North American sales declined 94.9% to $3.2 million. Asia sales increased to $0.2 million, primarily from Franklin Technology material sales and product development services.
- Gross margin decreased to 14.7%, partly because Franklin Technology material sales carried higher costs.
- Operating expenses decreased by $0.4 million, primarily because of lower shipping and handling costs and lower bad debt expense. Research and development expense increased modestly to $1.0 million.
- Other income increased to $132,524, including $84,746 of governmental subsidy income related to product development funding received by Franklin Technology.
- Operating cash flow changed from a $9.2 million inflow to a $6.4 million outflow, primarily due to the reduction in accounts payable of $6.2 million.
- Financing cash inflow was only $21,595 from stock-option exercises, compared with $6.0 million from treasury-stock sales in the prior-year quarter.
Guidance, Outlook, Risks, Contingencies and Unusual Items
The filing does not provide quantitative revenue or earnings guidance. Management expects revenue performance to depend on retaining existing customers, demand for wireless data products, acceptance of new products, new customer relationships and the ability to meet customer demand. Management stated that it believes liquidity is sufficient for at least the next twelve months, but noted that failure to achieve its business plan or obtain additional funding could require curtailment of operations or other actions outside the ordinary course.
The most significant unusual item is the Verizon Ellipsis Jetpack recall. Verizon and the U.S. Consumer Product Safety Commission announced a voluntary recall involving approximately 2.5 million devices because of alleged lithium-ion battery overheating risks. Franklin stated that it had been unable to reproduce the reported failures and was continuing its investigation. Discussions regarding recall costs, effects on manufacturing partners and the future relationship with Verizon were ongoing. The company could not estimate the potential financial impact, number of returned units, damages or potential litigation costs, and no agreement for future products with Verizon had been reached.
Shareholder litigation alleges that Franklin failed to timely disclose information relating to the recall. A separate action alleges that the chief executive officer received prohibited short-swing profits under Section 16(b). Franklin stated that it believes the allegations lack factual support and intends to defend both matters vigorously.
The company also reported a possible loss contingency involving Anydata and a related product purchase commitment with Quanta; the potential loss was described as reasonably possible but not estimable. Franklin commenced litigation against Anydata and its principal officers in January 2021.
Additional risks include reliance on two customers, two Asian manufacturers that represented 99% of product purchases during the quarter, supply-chain disruption, COVID-19 impacts, potential future tariffs of 10% to 25%, customer indemnification obligations and concentration of cash deposits above FDIC-insured limits. The company disclosed no material changes to previously reported risk factors and no off-balance-sheet arrangements.
Investor Verification Checklist
- Verify the recovery and timing of demand from the two major carrier customers and the effect of the delayed product launch.
- Monitor the Verizon recall investigation, any settlement or indemnification agreement, returned units, litigation developments and effects on future Verizon sales.
- Review quarterly operating cash flow and whether the sharp reduction in accounts payable creates recurring liquidity pressure.
- Assess customer concentration: two customers represented 64% and 16% of quarterly sales.
- Assess manufacturing concentration and supply-chain exposure: two Asian manufacturers represented 99% of quarterly product purchases.
- Track the Anydata and Quanta contingency, shareholder litigation and short-swing-profit litigation for potential financial exposure.
- Confirm cash and certificate-of-deposit balances, lease obligations and management’s assertion that liquidity is adequate for at least twelve months.