Franklin Wireless Corp. Form 10-Q Summary
Business Context and Reporting Period
Franklin Wireless designs, manufactures and sells 3G and 4G wireless data products, including USB modems, modules and related technologies. Products are sold primarily to wireless operators, strategic partners and distributors in the United States, the Caribbean, South America, EMEA and Asia. The filing covers the three and six months ended December 31, 2013, the Company’s fiscal second quarter and first six months of fiscal 2014. The financial statements are unaudited and prepared under U.S. GAAP.
Key Financial Metrics
| Metric | Three Months Ended Dec. 31, 2013 | Six Months Ended Dec. 31, 2013 |
|---|---|---|
| Net sales | $7.55 million | $8.96 million |
| Gross profit | $2.21 million | $2.21 million |
| Gross margin | 29.2% | 24.6% |
| Operating income (loss) | $0.05 million | $(1.55) million |
| Net income (loss) | $0.22 million | $(0.95) million |
| Net income (loss) attributable to parent | $0.13 million | $(0.97) million |
| EPS attributable to parent | $0.02 | $(0.09) |
| Operating cash flow | Not separately provided | $0.39 million |
Cash and cash equivalents were $10.19 million at December 31, 2013, compared with $10.43 million at June 30, 2013. Total current assets were $16.26 million and current liabilities were $6.53 million. Total debt consisted primarily of $139,134 of short-term bank borrowings, bearing 10.55% interest after extension and due in March 2014. Total assets were $22.13 million and total stockholders’ equity was $15.60 million.
Six-month investing cash outflow was $0.53 million, including $0.52 million of capitalized product development costs. Financing cash flow was zero. Cash decreased by $0.24 million during the six months, ending at $10.19 million.
Material Changes Versus the Prior Comparable Period
- Second-quarter sales increased 41.1% to $7.55 million from $5.36 million, driven by South American sales, a new African carrier customer and higher Asian product and component sales. U.S. sales declined 21.0% because of lower USB modem demand.
- Six-month sales declined 51.5% to $8.96 million from $18.49 million. U.S. sales fell 70.1%, reflecting lower demand, discontinuation of a chipset and the absence of repeat purchases from a large customer.
- Second-quarter gross margin improved to 29.2% from 16.2%, primarily because of a high-margin South American sale and changes in customer and product mix. Six-month gross margin increased to 24.6% from 21.9%.
- Second-quarter operating results improved from a $1.27 million loss to $0.05 million of operating income. Six-month operating results shifted from approximately break-even to a $1.55 million operating loss because of the substantial sales decline.
- Second-quarter parent-company results improved from a $0.72 million loss to $0.13 million of income. For the six-month period, parent-company results declined from $0.02 million of income to a $0.97 million loss.
- Operating cash flow fell to $0.39 million from $6.17 million, largely because the prior-year period benefited from a much larger reduction in accounts receivable.
- Operating expenses declined 7.4% for the six-month period, mainly due to lower shipping, employee compensation and third-party product-development costs.
Outlook, Commentary, Risks and Unusual Items
Management stated that it believes available capital is sufficient to fund existing operations and obligations through at least December 31, 2014. No quantitative revenue or earnings guidance was provided. Management identified existing-customer retention, demand for wireless data products, customer acceptance of new products, new customer relationships and the ability to meet customer demand as key drivers of future results.
- Revenue is concentrated: five customers represented 21%, 18%, 14%, 13% and 12% of six-month sales. The filing also states that order timing in South America and the Caribbean can fluctuate significantly.
- Two Asian manufacturers supplied approximately 77% of purchases during the six months, creating supplier concentration and potential shipment, capacity and quality risks.
- The Company has no allowance for doubtful accounts or inventory reserves; demand is described as highly unpredictable, creating potential collection and obsolescence risk.
- Other income included a $0.16 million second-quarter benefit, primarily from reversal of previously accrued marketing-related expenses that expired.
- The Company is pursuing litigation against C-Motech concerning an uncompleted repurchase of 1,566,672 shares, representing approximately 15% of outstanding common stock. The shares remain registered to C-Motech, and the outcome and timing are uncertain.
- Novatel Wireless patent litigation remained in discovery. The Company stated that any potential loss could not be reasonably estimated.
- Change-of-control agreements could require aggregate payments of up to $8 million to three executives, subject to qualifying events.
- Deferred tax assets totaled approximately $1.96 million on a non-current basis and $0.04 million on a current basis. Management recorded no valuation allowance but stated one may be required if future taxable losses occur.
- Management reported effective disclosure controls and no material changes to internal control over financial reporting. No material changes to previously disclosed risk factors were identified.
Important Facts for Investors to Verify
- Whether the sharp six-month sales decline, particularly in the United States, is temporary or reflects sustained loss of demand, customers or product relevance.
- Whether the elevated second-quarter gross margin is repeatable, given its dependence on a high-margin South American sale and changing product mix.
- The status and financial implications of the C-Motech share-repurchase litigation and the related 15% stock ownership.
- The status of the Novatel patent litigation and any potential exposure not currently estimable.
- Whether cash generation remains adequate as operating cash flow has weakened materially and product-development spending continues.
- The recoverability of deferred tax assets and the absence of inventory and doubtful-account reserves.
- Customer and supplier concentration, including dependence on two Asian manufacturers and a small number of customers.