Franklin Wireless Corp. — Form 10-Q Summary
Business Context and Reporting Period
Franklin Wireless designs, manufactures and sells 3G and 4G wireless data communication products, including USB modems and wireless modules, serving wireless operators, distributors and strategic partners in the United States, South America, the Caribbean, EMEA and Asia. The filing covers the three months ended September 30, 2014, the company’s fiscal 2015 first quarter, and compares results with the three months ended September 30, 2013. The financial statements are unaudited.
Key Financial Metrics
| Metric | Q1 FY2015 | Q1 FY2014 | Change |
|---|---|---|---|
| Net sales | $13.616 million | $1.407 million | Up 867.7% |
| Gross profit | $2.316 million | $(0.003) million | Improved |
| Gross margin | 17.0% | (0.2%) | Improved |
| Operating income (loss) | $0.133 million | $(1.604) million | Improved |
| Net income (loss) | $0.254 million | $(1.171) million | Improved |
| Net income attributable to parent | $0.283 million | $(1.094) million | Improved |
| EPS attributable to parent | $0.03 basic and diluted | $(0.11) basic and diluted | Improved |
| Net cash provided by operating activities | $0.606 million | $0.165 million | Up $0.441 million |
Operating expenses increased 36.4% to $2.183 million, primarily because of higher shipping and handling costs and increased research and development headcount. Research and development expense was $0.775 million, compared with $0.679 million. Shipping and handling expense increased to $0.353 million from $0.021 million.
Cash and cash equivalents were $8.767 million at September 30, 2014, compared with $8.241 million at June 30, 2014. Total current assets were $21.348 million and total current liabilities were $10.109 million, implying working capital of approximately $11.239 million. Accounts receivable increased to $9.119 million from $5.623 million, while accounts payable increased to $8.647 million from $5.534 million.
Total debt consisted primarily of short-term bank borrowings of $0.154 million, compared with $0.148 million at June 30, 2014. The borrowing bears interest at 10.55% after an extension and is due in March 2015. Net cash used in investing activities was $0.041 million, including $0.044 million of capitalized product development costs. Net cash provided by financing activities was $0.006 million.
Material Changes Versus the Prior Comparable Period
- Sales growth was driven principally by new product launches in the United States and higher product and component sales generated by the Korean subsidiary, Franklin Technology, Inc.
- United States sales rose to $10.909 million from $1.080 million; Asia sales rose to $2.543 million from $0.026 million. EMEA sales declined to $0.006 million from $0.299 million because of order timing from an African carrier customer.
- Gross margin improved substantially because of customer and product mix, pricing and product-cost variation, and the greater absorption of fixed amortization costs at the higher sales level.
- Other income, net, increased to $0.179 million from a $0.020 million loss, primarily because certain previously accrued marketing-related expenses expired and were reversed.
- Accounts receivable increased by $3.469 million and accounts payable increased by $3.113 million during the quarter, making working-capital movements a significant driver of operating cash flow.
- Accumulated other comprehensive loss increased by $0.045 million, primarily reflecting foreign-currency translation adjustments.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide numerical revenue or earnings guidance. Management expects results to depend on retaining existing customers, demand for wireless data products, acceptance of new products, new customer relationships and the ability to meet customer requirements. Management stated that available capital should fund existing operations and obligations through at least September 30, 2015, based on current plans and estimates; it also cautioned that failure to achieve the business plan or obtain additional funding could require curtailment of operations.
- Customer concentration: Two customers represented 69% and 17% of quarterly sales and 79% and 13% of accounts receivable at September 30, 2014.
- Supplier concentration: One Asian manufacturer represented 77% of purchases during the quarter and had $6.621 million of related accounts payable. Delays, capacity constraints or quality issues could affect shipments and revenue.
- Demand and inventory risk: Customer demand is described as unpredictable, and the company may need future inventory write-downs for obsolescence or excess inventory. No inventory reserve was recorded at September 30, 2014.
- C-Motech dispute: The company is seeking completion of the repurchase of 1,566,672 shares, representing approximately 15% of outstanding common stock. C-Motech entered a Korean bankruptcy proceeding recognized under Chapter 15 in the United States, and the company’s U.S. lawsuit is stayed.
- Patent litigation: Novatel Wireless alleges infringement involving certain wireless products; the matter was in discovery after a claim construction hearing. The company stated that any potential loss could not reasonably be estimated. A separate Concinnitas patent matter was dismissed with prejudice after a settlement and license agreement.
- Change-of-control obligations: Agreements with the president and chief operating officer were extended to September 21, 2017 and provide potential payments of $5 million and $2 million, respectively. The agreement with the vice president of engineering expired September 21, 2014 and was not extended.
- Controls: Management concluded that disclosure controls were effective as of September 30, 2014 and reported no material change in internal control over financial reporting.
Most Important Facts for Investors to Verify
- Whether the sharp sales increase and 17.0% gross margin are sustainable or primarily reflect product launches, order timing and customer mix.
- Collection of the $9.119 million accounts receivable balance and the effect of the large customer concentrations on future cash flow.
- Dependence on the principal Asian supplier and the company’s ability to manage supply-chain, quality and product-obsolescence risks.
- The outcome and financial implications of the C-Motech share repurchase dispute and related bankruptcy proceedings.
- The status and potential exposure of the Novatel patent litigation, for which the filing provides no estimable loss amount.
- Whether operating cash flow remains positive after considering the growth-related increase in receivables and inventory.
- The company’s ability to fund operations through September 30, 2015 without additional financing if operating assumptions change.