Franklin Wireless Corp. Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended March 31, 2024, with comparative periods ended March 31, 2023. The financial statements are unaudited and prepared under U.S. GAAP. Franklin Wireless provides 4G/5G wireless access products, including mobile hotspots, routers, fixed wireless routers and trackers, as well as related software services. Its majority-owned South Korean subsidiary, Franklin Technology Inc., provides product design and development.
Financial Performance and Position
| Metric | Three months ended March 31, 2024 | Three months ended March 31, 2023 | Nine months ended March 31, 2024 | Nine months ended March 31, 2023 |
|---|---|---|---|---|
| Net sales | $6.2 million | $11.9 million | $24.7 million | $28.9 million |
| Gross profit | $0.5 million | $2.0 million | $2.9 million | $4.6 million |
| Gross margin | 8.4% | 17.3% | 11.6% | 15.8% |
| Operating loss | $1.6 million | $0.5 million | $3.7 million | $2.5 million |
| Net income (loss) | $(1.3) million | $0.2 million | $(2.3) million | $(1.3) million |
| Net loss attributable to parent | $(1.2) million | $0.2 million | $(2.2) million | $(1.3) million |
| Loss per share | $(0.10) | $0.02 | $(0.19) | $(0.11) |
- Cash and cash equivalents were $7.0 million at March 31, 2024, compared with $12.2 million at June 30, 2023. Short-term investments were $24.7 million, producing combined cash and short-term investments of $31.7 million.
- Total assets were $50.0 million and total liabilities were $11.8 million at March 31, 2024. Stockholders’ equity was $38.2 million.
- The filing reports no conventional debt. Lease liabilities totaled $1.6 million, including $0.2 million current and $1.3 million non-current.
- Accounts receivable increased to $10.3 million from $8.9 million at June 30, 2023, while inventories declined to $1.1 million from $3.7 million.
- Net cash used in operating activities was $7.0 million for the nine months ended March 31, 2024, broadly consistent with $7.0 million used in the prior-year period.
- Investing activities provided $1.8 million, primarily from sales of short-term investments. Financing activities provided $1,045.
Material Changes Versus the Prior Comparable Period
- Third-quarter sales declined 47.9%, primarily because the Company had no sales to a major carrier that represented approximately 52% of the prior-year quarter’s sales. This was partly offset by approximately $1.7 million of additional sales to another major carrier.
- Nine-month sales declined 14.7%, reflecting approximately $4 million of lower demand from the two largest carrier customers and lower Asian demand for a newly launched product.
- Gross margin fell to 8.4% in the quarter and 11.6% year to date, driven by competitive pricing, production costs, product mix and amortization of completed product-development costs.
- Operating expenses declined 17.6% in the quarter and 6.7% year to date, primarily from lower stock-based compensation and research and development costs. Year-to-date savings were partly offset by higher lease expense and legal fees.
- Foreign-currency transaction losses increased in the quarter, while year-to-date interest income and unrealized investment gains increased. The prior-year periods included gains from forgiveness of liabilities that did not recur in 2024.
- Cash decreased by $5.2 million during the nine months, primarily reflecting operating cash usage, partially offset by the sale of short-term investments.
Outlook, Risks, Contingencies and Unusual Items
- Management stated that cash, short-term investments and other resources are expected to fund existing operations and obligations for at least one year from the filing date. No quantitative revenue or earnings guidance was provided.
- Management identified customer retention, demand for wireless data products, acceptance of new products, new customer relationships and the ability to meet customer demand as key drivers of future results.
- Customer concentration is significant: two customers represented 62% and 28% of nine-month sales, respectively, and 45% and 54% of accounts receivable at March 31, 2024.
- Two Asian manufacturers supplied approximately 99.5% of the Company’s wireless data products purchased during the nine months. Delays, quality issues or capacity constraints could adversely affect shipments and revenue.
- The Company recorded a $2.4 million accrued legal contingency related to the Ali shareholder litigation. Following the reporting date, preliminary settlement approval was granted and the Company paid $2.4 million on May 6, 2024.
- Derivative shareholder litigation related to the Verizon Jetpack recall remains pending. The Company reported no liability because management believes potential liability is not probable and reasonably estimable.
- The Verizon Jetpack recall could result in future litigation or other costs, but the Company stated that it cannot estimate the financial impact and has not recreated the alleged device failures.
- A disputed invoice from the former San Diego landlord resulted in $142,978 of additional rent expense recorded in the quarter ended December 31, 2023, partially offset by a $24,656 deposit credit.
- Potential tariffs of 10% to 25% could apply to imported products if the current exemption changes. The Company also faces foreign-currency exposure, supplier concentration, customer concentration, product-obsolescence risk and potential customer indemnification obligations.
- The Company adopted the current expected credit loss standard on July 1, 2023 and recorded no reserve for doubtful accounts as of March 31, 2024.
Key Facts Investors Should Verify
- Whether sales recover from the major carrier customer that contributed to the significant third-quarter decline.
- Whether the Company can restore gross margins despite competitive pricing, production costs and product-development amortization.
- The sustainability of operating cash usage of approximately $7.0 million for the first nine months and the adequacy of the $31.7 million liquidity balance.
- The ultimate cost and resolution of the Verizon recall-related shareholder and derivative litigation, including any amounts beyond the $2.4 million settlement already paid.
- Customer concentration, accounts-receivable collectability and dependence on two Asian manufacturers.
- Future demand for new 5G products, product-development spending and the risk of inventory obsolescence.
- Potential tariff exposure, foreign-exchange losses and the financial effect of ongoing lease and executive-contract obligations.