Franklin Wireless Corp. Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended December 31, 2014. The unaudited consolidated statements cover Franklin Wireless Corp., its 51.8%-owned subsidiary, and a 48.2% non-controlling interest. The company designs, manufactures, and sells 3G and 4G wireless modules, USB modems, and related broadband products globally.
Financial Performance and Position
| Metric | Three Months Ended December 31, 2014 | Six Months Ended December 31, 2014 |
|---|---|---|
| Net sales | $12.5 million | $26.1 million |
| Gross profit | $2.5 million | $4.8 million |
| Gross margin | 19.9% | 18.4% |
| Income from operations | $522 thousand | $655 thousand |
| Net income | $574 thousand | $828 thousand |
| Net income attributable to parent | $424 thousand | $708 thousand |
| EPS attributable to parent | $0.04 basic and diluted | $0.07 basic and diluted |
| Operating cash flow | Not separately provided | $3.9 million |
- Cash and cash equivalents were $11.9 million at December 31, 2014, compared with $8.2 million at June 30, 2014.
- Total current assets were $19.9 million and current liabilities were $7.9 million, implying substantial working-capital liquidity.
- Total debt consisted primarily of $148 thousand of short-term bank borrowings, with no financing cash flows during the six months.
- Total stockholders’ equity was $16.3 million at December 31, 2014, compared with $15.6 million at June 30, 2014.
- Net cash increased by $3.7 million during the six months, ending at $11.9 million. Investing cash use was $111 thousand, primarily for capitalized development costs.
Material Changes Versus Prior Comparable Period
- Second-quarter sales increased 65.4% to $12.5 million from $7.6 million; six-month sales increased 191.4% to $26.1 million from $9.0 million.
- Growth was concentrated in the United States, where six-month sales increased 288.1% to $19.7 million, primarily following the launch of two new products. United States sales represented 75.6% of six-month revenue.
- Six-month sales also increased in Asia and EMEA, while Caribbean and South American sales declined due largely to order timing and customer concentration.
- Gross margin declined to 19.9% from 29.2% for the quarter and to 18.4% from 24.6% for the six-month period. Management attributed the decline to customer and product mix, competitive pricing, and variable product costs.
- Quarterly operating expenses decreased 8.8% to $2.0 million, while six-month operating expenses increased 10.4% to $4.1 million. Higher research and development and shipping costs were partly offset by lower commissions and share-based compensation.
- The company generated six-month operating cash flow of $3.9 million versus $387 thousand in the prior year, primarily reflecting customer advance payments, lower accounts receivable, and improved operating results.
- The prior-year six-month period reported a parent-company net loss of $967 thousand; the current period produced parent-company net income of $708 thousand.
Outlook, Risks, Contingencies, and Unusual Items
- Management stated that available capital is expected to fund existing operations and obligations through at least December 31, 2015, based on current projections. 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 relationships, and the ability to meet customer demand.
- Customer concentration is significant: two customers represented 63% and 12% of six-month sales and 61% and 11% of accounts receivable at December 31, 2014.
- Two Asian suppliers represented 81% of six-month product purchases. Delays, capacity constraints, or quality problems could disrupt shipments, reduce revenue, or lead to order cancellations.
- The company had $1.6 million of advance payments from customers at December 31, 2014, compared with $320 thousand at June 30, 2014; the resulting cash benefit may not recur.
- Franklin is involved in patent litigation brought by Novatel Wireless. The matter remained in discovery, and any loss could not be reasonably estimated.
- The company is pursuing claims against C-Motech concerning an uncompleted repurchase of 1,566,672 shares, representing approximately 15% of outstanding common stock. C-Motech’s Korean bankruptcy proceeding resulted in a stay of the U.S. litigation, and the outcome is uncertain.
- The company recorded $378 thousand of other income for the six-month period, primarily from reversals of previously accrued marketing-related expenses, and recognized $332 thousand of gain on debt extinguishment in operating cash-flow adjustments.
- Gross intangible assets were $1.6 million net at December 31, 2014, with $654 thousand of amortization recorded during the six months. No impairment was recognized.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting. No material changes to previously disclosed risk factors were identified.
Important Investor Verification Items
- Verify whether the sharp revenue growth, particularly from two new U.S. products, is sustainable and whether customer order timing caused unusual period-to-period volatility.
- Assess the effect of declining gross margins and competitive pricing on future profitability.
- Review customer concentration, receivable collectability, and the sustainability of customer advance payments.
- Evaluate dependence on two Asian suppliers and potential supply-chain, quality, or product-obsolescence risks.
- Monitor the Novatel patent litigation and the C-Motech stock repurchase dispute, including potential financial or share-ownership consequences.
- Confirm the maturity and repayment status of the $148 thousand bank borrowing, which was extended to March 2015.
- Review the company’s ability to maintain liquidity through December 31, 2015 if revenue, margins, or customer demand weaken.