Business Context and Reporting Period
Franklin Wireless Corp. provides wireless access products, including mobile hotspots, routers, modems, embedded modules, gateways, and M2M/IoT hardware and software. The company operates one reportable segment and owns 51.8% of Franklin Technology Inc. in South Korea. Products are sold primarily to wireless operators, strategic partners, and distributors.
The filing is a Form 10-K for the fiscal year ended June 30, 2015, compared with fiscal 2014. The requested period metadata indicates “2014 Q4,” but the source filing is an annual report rather than a quarterly filing.
Financial Performance and Position
| Metric | FY2015 | FY2014 | Change |
|---|---|---|---|
| Net sales | $46.34 million | $30.95 million | Up 49.7% |
| Gross profit | $8.40 million | $4.38 million | Up 91.8% |
| Gross margin | 18.1% | 14.1% | Up 4.0 percentage points |
| Operating income (loss) | $0.51 million | $(2.91) million | Improved |
| Net income (loss) | $1.05 million | $(0.96) million | Improved |
| Net income attributable to parent | $0.76 million | $(0.97) million | Improved |
| Basic EPS | $0.07 | $(0.09) | Improved |
| Operating cash flow | $4.19 million | $(1.71) million | Improved |
| Cash and equivalents | $11.82 million | $8.24 million | Up $3.58 million |
Operating expenses were $7.89 million, or 17.0% of sales, compared with $7.29 million, or 23.6%, in fiscal 2014. Research and development expense was $2.92 million. Other income declined to $0.45 million from $1.42 million, primarily because of lower reversals of previously accrued marketing-related expenses.
Total assets were $24.72 million and total liabilities were $8.44 million at June 30, 2015. Short-term borrowings were $148,295, with no long-term debt reported. Contractual obligations totaled $1.64 million, including $1.49 million of lease commitments and $148,295 of bank borrowings.
Accounts receivable were $5.46 million and inventories were $2.28 million. An inventory reserve of $120,867 was recorded at year-end, compared with no slow-moving inventory reserve in the prior year. The company reported no off-balance-sheet arrangements.
Material Changes Versus the Prior Comparable Period
- U.S. sales more than doubled to $36.71 million, representing 79.2% of consolidated sales, primarily following the launch of two new products.
- EMEA sales increased 20.8% to $4.58 million, while Asia sales declined 48.1% to $3.64 million and Caribbean and South American sales declined 32.9% to $1.42 million.
- Gross margin expanded to 18.1%, reflecting customer and product mix, pricing, and product-cost changes.
- The company returned to operating profitability and net profitability.
- Operating cash flow turned positive, helped materially by a $1.87 million increase in accounts payable and other working-capital movements.
- Long-lived assets declined to $1.36 million from $2.62 million, primarily because of amortization and depreciation.
- Foreign-currency translation produced a $421,622 loss in accumulated other comprehensive income.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
Management stated that it expected available capital and operating resources to fund existing operations and obligations through at least June 30, 2016. It also estimated that more than $5.0 million could be required over the next twelve months for capital expenditures, software licenses, and testing and certification of new products. Additional debt or equity financing may be required if operating cash flow is insufficient.
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. No quantitative revenue or earnings guidance was provided.
- Customer concentration is substantial: two customers represented 68% and 10% of fiscal 2015 sales and 87% and 7% of year-end accounts receivable. Customer agreements do not require minimum purchases.
- The majority of products were manufactured by one Asian supplier, which represented 81.2% of fiscal 2015 purchases. Supply delays, quality issues, or capacity constraints could impair shipments and revenue.
- The company faces intense competition, rapid technology changes, regulatory certification requirements, international operating risks, and potential intellectual-property claims.
- The company is involved in an unresolved dispute with C-Motech concerning 1,566,672 shares, approximately 15% of outstanding common stock. Related litigation was stayed following recognition of C-Motech’s South Korean bankruptcy proceeding.
- A patent dispute with Nova Intellectual Solutions was subject to a settlement reached in principle in July 2015, but a formal settlement agreement had not been finalized as of the filing date.
- Change-of-control agreements provide potential lump-sum payments of $5.0 million to the president and $2.0 million to the chief operating officer.
- The San Diego office lease expired August 31, 2015; a new four-year lease was signed with anticipated commencement November 1, 2015, at monthly rent of $23,115 plus certain common-area costs.
- Management reported effective disclosure controls and internal control over financial reporting. The independent auditor audited the financial statements but did not provide an attestation opinion on internal control effectiveness.
Most Important Facts for Investors to Verify
- Whether the sharp increase in U.S. sales and improved margins is sustainable, given product-launch timing and customer concentration.
- The extent to which fiscal 2015 operating cash flow depended on higher accounts payable rather than recurring profitability.
- Customer renewal and purchase commitments, particularly for the two customers representing 78% of sales combined.
- Supply-chain concentration and the company’s ability to diversify manufacturing beyond its primary Asian supplier.
- Required funding for the stated potential $5.0 million-plus of next-twelve-month expenditures and the availability of financing on acceptable terms.
- The ultimate ownership and disposition of the disputed 1,566,672 shares and the outcome of related C-Motech litigation and bankruptcy proceedings.
- The resolution and financial impact, if any, of the Nova Intellectual Solutions patent settlement.
- Recoverability of deferred tax assets, including approximately $5.2 million of federal and $1.7 million of state net operating loss carryforwards, which may be subject to utilization limitations.