Franklin Wireless Corp. 10-Q Summary
Business Context and Reporting Period
This is a Quarterly Report on Form 10-Q for Franklin Wireless Corp. for the period ended December 31, 2010. The Company designs, manufactures, and sells broadband high-speed wireless data communication products, primarily 3G and 4G USB modems. It operates as a smaller reporting company with one reportable segment. As of February 14, 2011, there were 11,977,808 shares of common stock outstanding.
Key Financial Metrics
| Metric | Three Months Ended Dec 31, 2010 | Six Months Ended Dec 31, 2010 |
|---|---|---|
| Net Sales | $15,582,793 | $32,145,635 |
| Gross Profit | $6,099,767 (39.1% margin) | $10,989,586 (34.2% margin) |
| Net Income | $2,031,277 | $3,158,096 |
| Earnings Per Share (Diluted) | $0.17 | $0.25 |
| Cash and Equivalents | $15,809,635 (as of Dec 31, 2010) | |
| Total Debt | $0 (All borrowings paid off by Sept 2010) | |
| Operating Cash Flow (6mo) | $(261,815) used |
Material Changes vs. Prior Period
- Revenue Volatility: Net sales for the three months ended Dec 31, 2010, decreased 38.1% compared to the prior year due to intense competition in the U.S. dual-mode USB modem market. However, for the six-month period, sales increased 6.1% year-over-year, driven by strong growth in the Caribbean and South America regions (up 636.5%).
- Margin Expansion: Gross profit margins improved significantly, rising from 11.5% to 39.1% for the quarter and from 12.1% to 34.2% for the six-month period. This was primarily due to a higher proportion of products supplied by the Company's subsidiary, Franklin Technology Inc. (FTI), rather than third-party suppliers.
- Expense Growth: Selling, general, and administrative (SG&A) expenses increased 71.2% for the quarter and 167.7% for the six months, attributed to FTI consolidation, increased headcount, amortization of intangible assets, and higher shipping costs.
- Debt Elimination: The Company paid off all short-term and long-term borrowings during the period, resulting in zero debt on the balance sheet as of December 31, 2010.
Outlook, Risks, and Unusual Items
- Legal Proceedings: The Company is facing two patent infringement lawsuits. One filed by MSTG, Inc. in 2009 regarding devices purchased from a supplier (no material adverse effect expected). A second, filed by Novatel Wireless, Inc. in December 2010, alleges infringement of mobile data hot spots and modems; the Company intends to vigorously defend itself, but loss amounts cannot be estimated.
- Related Party Transactions: The Company entered into a stock repurchase agreement with C-Motech. As of the filing date, 1,803,684 shares were repurchased for non-cash consideration of $1,873,065, recorded as a payable. An amendment extended the deadline for the remaining share repurchase to March 31, 2011.
- Change of Control Obligations: The Company has agreements with three key executives providing for lump-sum payments totaling $8 million ($5M, $2M, and $1M) in the event of a change of control.
- Forward-Looking Statements: Management notes that future results depend on maintaining existing customers, demand for wireless data products, and the ability to meet customer demands. Actual results may differ due to risks outlined in the 10-K.
Investor Verification Checklist
- Customer Concentration: Verify the stability of the two largest customers, who accounted for 70% of consolidated revenue in the first six months of 2010.
- Legal Exposure: Monitor the status of the Novatel Wireless patent infringement lawsuit filed in December 2010.
- Related Party Settlement: Confirm the completion of the remaining share repurchase and cash settlement with C-Motech by March 31, 2011.
- Geographic Mix: Assess the sustainability of the revenue surge in the Caribbean and South America, which is noted to fluctuate significantly due to a small number of customers.
- Working Capital: Review the increase in accounts receivable ($1.49M increase in six months) and its impact on operating cash flow.