Franklin Wireless Corp. — Form 10-Q Summary
Business Context and Reporting Period
Franklin Wireless provides wireless access products, including mobile hotspots, routers, modems, and machine-to-machine/Internet of Things connectivity solutions. The company owns 51.8% of Franklin Technology Inc. in South Korea, which provides research and development services. This filing covers the quarter and six months ended December 31, 2016, compared with the corresponding 2015 periods. The filing is dated February 14, 2017.
Key Financial Metrics
| Metric | Three Months Ended Dec. 31, 2016 | Six Months Ended Dec. 31, 2016 |
|---|---|---|
| Net sales | $14.4 million | $27.1 million |
| Gross profit / margin | $2.9 million / 20.2% | $5.2 million / 19.1% |
| Operating income / margin | $0.6 million / 4.4% | $1.0 million / 3.7% |
| Net income | $0.5 million | $0.7 million |
| Net income attributable to parent | $0.5 million | $0.8 million |
| Diluted EPS | $0.05 | $0.07 |
| Operating cash flow | Not separately provided | $(1.3) million |
At December 31, 2016, cash and cash equivalents were $11.7 million, total current assets were $28.1 million, and total current liabilities were $12.6 million. The current ratio was approximately 2.2x. Accounts receivable were $13.7 million and inventory was $2.2 million. Total liabilities were $12.6 million; the filing does not identify outstanding debt, and no debt balance is presented in the balance sheet.
Investing cash outflows were $0.2 million, primarily for capitalized product development and intangible assets. Financing cash inflows were $0.1 million from stock-option exercises. Cash declined by $1.5 million during the six months, to $11.7 million.
Material Changes Versus the Prior Comparable Period
- Quarterly sales declined 28.8% to $14.4 million; six-month sales declined 15.7% to $27.1 million.
- The quarterly decline primarily reflected the timing of carrier orders and a 96.6% decrease in EMEA sales. Six-month EMEA sales decreased 95.5%, partly offset by 4.2% growth in U.S. sales from a new carrier product launch.
- Gross margin improved from 15.7% to 20.2% for the quarter and from 16.0% to 19.1% for the six-month period, due primarily to customer and product mix, pricing, and product-cost variations.
- Operating expenses increased 10.7% for the quarter and 6.0% for the six-month period, driven by higher shipping costs and research and development headcount.
- Quarterly operating income declined 43.6% to $0.6 million, while six-month operating income declined 17.0% to $1.0 million.
- Six-month net income attributable to the parent increased 24.0% to $0.8 million, despite lower sales, aided by improved gross margin and higher other income. Quarterly parent-attributable income declined 14.9% to $0.5 million.
- Other income included $0.1 million for the six-month period, compared with a loss in the prior-year period, primarily from government product-development funding received by FTI and favorable currency movements.
- Operating cash flow shifted from $3.9 million provided in the prior-year six-month period to $1.3 million used, mainly because of higher accounts receivable and lower accounts payable.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management stated that cash and available capital are expected to fund existing operations and obligations through at least December 31, 2017, based on current plans and estimates. No formal revenue or earnings guidance was provided.
- Future performance depends on retaining existing customers, demand for wireless data products, acceptance of new products, new customer contracts, and the company’s ability to meet customer demand.
- Customer concentration is significant: two customers represented 63% and 35% of six-month sales and 62% and 36% of accounts receivable at December 31, 2016.
- One Asian manufacturer supplied 99% of product purchases during the six-month period and was owed $11.2 million at period-end, creating concentration and supply-chain risk.
- Inventory demand is described as highly unpredictable; the company maintained an $88,907 reserve for obsolete or slow-moving inventory.
- The company reported no material changes to previously disclosed risk factors, no off-balance-sheet arrangements, and no impairment of goodwill or long-lived assets.
- Pending litigation involving claims against customers was not expected by management to have a material effect. Prior patent litigation involving Novatel/NIS had been settled and dismissed.
- Change-of-control agreements require potential payments of $5 million to the president and $2 million to the chief operating officer, subject to specified triggering events; both agreements were extended through September 21, 2017.
- Disclosure controls and procedures were assessed as effective, with no material changes to internal control over financial reporting.
Important Facts for Investors to Verify
- Whether the substantial decline in EMEA sales reflects temporary order timing or a more persistent loss of demand.
- The sustainability of improved gross margins amid customer concentration and competitive pricing.
- Collection timing and credit exposure related to the $13.7 million accounts receivable balance.
- Dependence on the primary Asian manufacturer and the related $11.2 million payable balance.
- Whether negative operating cash flow continues as working-capital balances change.
- The potential financial impact of change-of-control obligations, pending legal matters, and future product-development spending.
- The effect of adopting pending accounting standards, particularly revenue recognition, inventory, leases, and stock compensation standards.