Franklin Wireless Corp. Form 10-Q Summary
Reporting period: Three and nine months ended March 31, 2012. The requested metadata identifies “2011 Q3,” but the filing is for the quarter ended March 31, 2012. Financial statements are unaudited.
Business Context
Franklin designs, manufactures and sells 3G and 4G wireless data communication products, including USB modems, wireless modules and related products using CDMA, HSPA, WiMAX and LTE technologies. Products are sold directly to wireless operators and through strategic partners and distributors, primarily in the United States, the Caribbean, South America and Asia. The Company has one reportable segment: wireless access products.
Key Financial Metrics
| Metric | Three months ended March 31, 2012 | Three months ended March 31, 2011 | Nine months ended March 31, 2012 | Nine months ended March 31, 2011 |
|---|---|---|---|---|
| Net sales | $2.619 million | $9.440 million | $8.755 million | $41.586 million |
| Gross profit | $0.343 million | $2.655 million | $1.366 million | $13.262 million |
| Gross margin | 13.1% | 28.1% | 15.6% | 31.9% |
| Operating income (loss) | $(1.116) million | $0.716 million | $(3.061) million | $6.257 million |
| Net income (loss) | $(0.635) million | $1.523 million | $(1.575) million | $4.681 million |
| Basic EPS | $(0.05) | $0.13 | $(0.13) | $0.41 |
- Cash and cash equivalents were $12.606 million at March 31, 2012, compared with $11.358 million at June 30, 2011.
- Total assets were $21.853 million and total liabilities were $4.365 million at March 31, 2012.
- Current assets were $15.896 million versus current liabilities of $4.179 million. Accounts receivable declined to $2.296 million from $6.916 million at June 30, 2011, and inventories declined to $0.161 million from $0.935 million.
- Short-term borrowings totaled $139,134, consisting of a bank loan bearing 8.90% interest and extended to September 7, 2012. No long-term borrowings were reported.
- Net cash provided by operating activities was $2.009 million for the nine months ended March 31, 2012, compared with $0.796 million of cash used in the prior-year period.
- Investing activities used $1.386 million, primarily for $1.321 million of capitalized product development costs. Financing activities provided $0.579 million, primarily from the subsidiary FTI’s issuance of stock to new investors.
Material Changes Versus the Prior Comparable Period
- Nine-month sales fell 78.9%, primarily because United States sales declined 78.8% and Caribbean and South American sales declined 99.2%. Asia sales increased 545.4%, but from a substantially smaller base.
- Management attributed the United States decline to increased competition, pressure on product volume and pricing, and delays in new-product launches caused by extended design, testing and certification schedules.
- Gross margin declined by 16.3 percentage points for the nine-month period, which management attributed primarily to customer and product mix.
- SG&A declined 36.8% for the nine-month period to $4.427 million, reflecting lower commissions, share-based compensation, expensed research and development, marketing and shipping costs.
- The prior-year periods benefited from unusual other income, including $1.581 million related to a payment from C-Motech and a $0.212 million gain on the sale of property and equipment. These items did not recur in 2012.
- Cash generation improved despite the net loss, largely because of collections of accounts receivable and reductions in inventory. This benefit may not be recurring.
- Capitalized product development costs increased to $1.165 million at March 31, 2012 from $0.127 million at June 30, 2011. Total net intangible assets increased to $2.978 million from $2.275 million.
Guidance, Outlook, Risks and Unusual Items
- The filing provides no specific quantitative revenue, earnings or margin guidance. Management expects future revenue to depend on retaining existing customers, wireless data demand, acceptance of new products, new customer relationships and the ability to meet customer demand.
- Management states that cash on hand, operating cash flows, bank credit lines and potential equity issuance are expected to fund requirements for the next twelve months, but the filing also notes ongoing product-development investment and losses.
- Customer concentration is significant: four customers accounted for 32%, 17%, 16% and 10% of nine-month 2012 sales. Two Asian manufacturers supplied approximately 90% of purchases, creating supplier concentration and potential shipment, quality and capacity risks.
- Product demand is described as highly unpredictable. Inventory is recorded without a reserve at March 31, 2012, although management acknowledges potential obsolescence and excess-inventory risks.
- The Company has not completed the proposed repurchase of 1,566,672 shares from C-Motech, representing approximately 13% of outstanding common stock. Franklin has alleged that C-Motech breached its obligations and has been unable to complete the transaction; the outcome is uncertain.
- Pending legal matters include patent-infringement claims involving Novatel Wireless and Brandywine Communications Technologies, and a fiduciary-duty action against officers and directors. The Company does not believe these matters will have a material effect, but the Novatel loss cannot currently be reasonably estimated and the fiduciary-duty complaint does not specify damages.
- Change-of-control agreements could require aggregate payments of up to $8 million to three executives. The agreements were extended and expire in 2014 or 2015.
- The Company recorded a $0.762 million income-tax benefit for the nine months ended March 31, 2012 and has no valuation allowance against deferred tax assets. Management notes that continued taxable losses could require a valuation allowance in the future.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting. No off-balance-sheet arrangements were reported.
Important Facts for Investors to Verify
- Whether delayed product launches and competitive pressure are temporary or indicate a sustained decline in demand and pricing.
- The recoverability of capitalized product development costs and deferred tax assets given the Company’s losses and reduced sales.
- The collectability of receivables and the absence of an allowance for doubtful accounts despite customer concentration.
- The status and potential financial impact of the unresolved C-Motech share repurchase obligation.
- The potential exposure from the pending patent and fiduciary-duty litigation.
- Whether operating cash flow remains positive after the working-capital benefits realized during the current nine-month period.
- The Company’s ability to fund operations, product development and the $139,134 bank borrowing maturity using available liquidity and future operating cash flow.