Franklin Wireless Corp. Form 10-Q Summary
Business Context and Reporting Period
This quarterly report covers the three and nine months ended March 31, 2015, compared with the corresponding periods ended March 31, 2014. The supplied metadata identifies “2014 Q3,” but the filing itself is for fiscal 2015 third quarter. Franklin develops and sells wireless access products, including mobile hotspots, routers, modems, and M2M/IoT connectivity solutions. Its majority-owned Korean subsidiary, Franklin Technology Inc. (FTI), provides product design and development services.
Financial Performance and Position
| Metric | Three Months Ended March 31, 2015 | Three Months Ended March 31, 2014 | Nine Months Ended March 31, 2015 | Nine Months Ended March 31, 2014 |
|---|---|---|---|---|
| Net sales | $10.2 million | $10.1 million | $36.3 million | $19.0 million |
| Gross profit | $1.9 million | $1.0 million | $6.7 million | $3.2 million |
| Gross margin | 18.5% | 9.8% | 18.4% | 16.8% |
| Operating income (loss) | $13,339 | $(772,074) | $667,977 | $(2.3 million) |
| Net income (loss) | $285,396 | $(126,193) | $1.1 million | $(1.1 million) |
| Net income (loss) attributable to parent | $17,799 | $(131,180) | $725,427 | $(1.1 million) |
| EPS attributable to parent | $0.00 | $(0.01) | $0.07 | $(0.11) |
For the nine months, cash provided by operating activities was $3.1 million, compared with cash used of $680,779 in the prior-year period. Investing activities used $156,313, primarily for capitalized development costs, intangible assets, and property and equipment. Financing activities provided no cash. Cash and cash equivalents increased to $10.8 million at March 31, 2015 from $8.2 million at June 30, 2014.
Total assets were $23.9 million and total liabilities were $7.5 million at March 31, 2015. Current assets were $19.9 million versus current liabilities of $7.5 million. Debt consisted primarily of $148,295 of short-term bank borrowings, bearing interest at 10.55% after extension and due in March 2016. Stockholders’ equity was $16.4 million, including $633,078 of non-controlling interests.
Material Changes Versus the Prior Comparable Period
- Nine-month sales increased 90.8%, driven principally by U.S. sales, which increased 164.9% following launches of two new products, and higher EMEA sales from order timing by an African carrier customer.
- Third-quarter sales were broadly unchanged, increasing 1.2%. U.S. sales rose 39.8% and EMEA sales rose 143.3%, largely offset by a 99.4% decline in Asia sales and no South America/Caribbean sales.
- Gross margin improved to 18.5% from 9.8% for the quarter and to 18.4% from 16.8% for the nine-month period. Management attributed the improvement to customer and product mix, pricing, and product-cost variations.
- Operating expenses increased 6.0% for the quarter and 9.0% for the nine-month period, reflecting higher shipping and handling costs and increased research and development headcount. Research and development expense was $2.2 million for the nine months.
- The company returned to operating profitability and parent-company profitability. Nine-month results benefited from significantly higher sales and gross profit, while other income declined because prior-period marketing-related accrual reversals were lower.
- Accounts payable increased by $1.4 million from June 30, 2014 and was a major contributor to operating cash flow. Inventory increased to $2.1 million and included a $60,000 reserve for obsolete or slow-moving inventory.
Outlook, Risks, Contingencies, and Unusual Items
Management stated that it believes available capital is sufficient to fund operations and obligations through at least March 31, 2016. No quantitative revenue or earnings guidance was provided. Future performance is expected to depend on retaining existing customers, demand for wireless data products, customer acceptance of new products, new contracts, and the ability to meet customer demand and control costs.
- Customer concentration is significant: two customers represented 62.8% and 12.5% of nine-month sales and 78.9% and 10.8% of accounts receivable at March 31, 2015.
- One Asian manufacturer supplied 77.9% of nine-month product purchases, totaling $22.7 million, and was associated with $6.4 million of accounts payable. Manufacturing delays, quality issues, or capacity constraints could affect shipments and revenue.
- The company relies on a limited product market and faces unpredictable customer demand, potential inventory obsolescence, product end-of-life risk, and fluctuating regional order timing.
- The company is pursuing claims against C-Motech relating to an uncompleted repurchase of 1,566,672 shares, representing approximately 15% of outstanding common stock. C-Motech’s Korean bankruptcy proceeding has stayed the U.S. litigation, and an April 2015 Illinois court order recognized a foreign judgment concerning ownership of the shares.
- Patent litigation remains pending with Novatel Wireless and Nova Intellectual Solutions. A new April 24, 2015 complaint alleges infringement of U.S. Patent No. 7,944,901; the company stated that it had not yet been served and could not estimate any potential loss.
- San Diego and Seoul facility leases expire in August and September 2015, respectively. Change-of-control agreements with the President and Chief Operating Officer could require aggregate payments of $7 million upon a qualifying change of control.
- The company recorded a $249,000 income tax benefit for the quarter and a $39,000 benefit for the nine-month period. Management believes deferred tax assets are realizable but may require a valuation allowance if future taxable losses occur.
- Foreign-currency translation reduced comprehensive income by $334,551 for the nine-month period.
Facts an Investor Should Verify
- Confirm the applicable reporting period: the filing is for the quarter ended March 31, 2015, not 2014 Q3.
- Assess the sustainability of the sharp nine-month sales growth and the improved gross margin, particularly given product mix and order-timing explanations.
- Review customer concentration, the loss or end-of-life of certain carrier products, and the dependence on one principal manufacturer.
- Evaluate operating cash flow quality because the increase was materially supported by higher accounts payable.
- Monitor the C-Motech share-ownership and bankruptcy proceedings, including the potential effect of 15% of outstanding shares.
- Review the pending patent matters and any developments that could create material litigation costs or product restrictions.
- Confirm lease renewals or relocations and the company’s ability to maintain liquidity after March 31, 2016.