Business Context and Reporting Period
Franklin Wireless Corp. designs, manufactures and sells 3G and 4G wireless modules, USB modems and related broadband data products through wireless operators, strategic partners and distributors. The filing is an unaudited Form 10-Q for the quarter and nine months ended March 31, 2013. The supplied metadata identifies “2012 Q3,” but the filing itself clearly reports the March 31, 2013 period.
Key Financial Metrics
| Metric | Three Months Ended March 31, 2013 | Three Months Ended March 31, 2012 | Nine Months Ended March 31, 2013 | Nine Months Ended March 31, 2012 |
|---|---|---|---|---|
| Net sales | $6.53 million | $2.62 million | $25.02 million | $8.76 million |
| Gross profit | $1.45 million | $0.34 million | $5.50 million | $1.37 million |
| Gross margin | 22.3% | 13.1% | 22.0% | 15.6% |
| Operating loss | $(0.27) million | $(1.12) million | $(0.28) million | $(3.06) million |
| Net loss | $(0.23) million | $(0.87) million | $(0.45) million | $(2.28) million |
| Loss attributable to parent stockholders | $(0.05) million | $(0.63) million | $(0.03) million | $(1.58) million |
| Loss per diluted share | $(0.01) | $(0.05) | $(0.00) | $(0.13) |
- Nine-month operating expenses were $5.78 million, up from $4.43 million, including research and development expense of $2.15 million and selling, general and administrative expense of $3.63 million.
- Nine-month net cash provided by operating activities was $5.07 million, compared with $2.04 million in the prior-year period.
- Nine-month investing cash use was $1.31 million, primarily for property and equipment, product development and intangible assets.
- Nine-month financing cash use was $2.38 million, primarily reflecting the $2.41 million repurchase of common stock.
- Cash and cash equivalents increased to $10.74 million at March 31, 2013 from $9.42 million at June 30, 2012.
- Total current assets were $16.41 million versus $26.05 million at June 30, 2012; current liabilities were $6.06 million versus $12.79 million.
- Short-term borrowings were $139,134, with no other long-term liabilities reported at March 31, 2013. The filing does not provide a separate unused borrowing capacity figure.
Material Changes Versus Prior Comparable Period
- Quarterly sales increased 149.2% and nine-month sales increased 185.8%, primarily from new products and new customers in the United States. United States sales represented 91.8% of nine-month revenue, compared with 75.6% in the prior-year period.
- Asia sales declined 55.1% for the nine-month period because a significant prior-year purchase of M600 modules did not recur and FTI revenue was lower.
- Gross margins improved by 9.2 percentage points for the quarter and 6.4 percentage points for the nine-month period, reflecting product and customer mix, pricing and product costs, as well as greater absorption of fixed amortization costs.
- Losses narrowed substantially, but the company remained unprofitable. Nine-month loss attributable to parent stockholders improved to $31,722 from $1.58 million.
- Accounts receivable declined to $4.00 million from $13.07 million and inventory declined to $0.20 million from $1.75 million, contributing materially to operating cash flow. Accounts payable declined to $3.56 million from $10.08 million.
- Shares outstanding declined to 10.37 million from 11.88 million at June 30, 2012, primarily because of stock repurchases.
Outlook, Risks, Contingencies and Unusual Items
- Management identifies revenue drivers as retaining existing customers, demand for wireless data products, acceptance of new products, new customer relationships and the ability to meet customer demand. No quantitative financial guidance is provided.
- The company recorded a $103,803 gain on debt extinguishment in the quarter and nine-month period. Management also cited negotiated reductions in fees charged by a service provider as a source of higher other income.
- Customer concentration is significant: the three largest customers represented 43%, 26% and 18% of nine-month sales. The largest customers also represented 26% and 64% of accounts receivable, based on the disclosed percentages.
- One Asian manufacturer supplied 86% of product purchases during the nine months and accounted for $2.70 million of accounts payable at March 31, 2013. Delays, capacity constraints or quality problems could impair shipments and revenue.
- The company has no inventory reserve and no allowance for doubtful accounts at March 31, 2013. Demand is described as highly unpredictable, creating potential obsolescence and collectability risks.
- The unresolved C-Motech matter concerns the remaining repurchase of 1,566,672 shares for $1.63 million. C-Motech remains the registered owner of the shares and owns approximately 15% of the company. Franklin filed a breach-of-contract lawsuit on May 7, 2013.
- Patent litigation involving Novatel Wireless remained pending; the company stated that any loss could not yet be reasonably estimated and that it intends to defend the matter. A separate patent action involving a customer was also pending but was not expected to have a material effect.
- Change-of-control agreements could require aggregate payments of up to $8 million to three executives if specified triggering events occur; the agreements expire between September 2014 and September 2015.
- The company states that it has effective disclosure controls, no material changes in internal control, and no off-balance-sheet arrangements.
Important Facts for Investors to Verify
- Confirm that the reported period is March 31, 2013, rather than the “2012 Q3” metadata description.
- Assess whether the sharp sales growth and improved margins are sustainable or primarily reflect new-product launches, customer additions and volatile order timing.
- Review customer concentration, receivable collectability and dependence on the single major Asian manufacturer.
- Evaluate the effect of continued operating losses, rising research and development costs and recurring intangible-asset amortization on future profitability.
- Monitor the C-Motech share-repurchase litigation and potential $1.63 million obligation, as well as the pending patent proceedings.
- Reconcile the increase in operating cash flow with large working-capital reductions and determine whether those cash benefits are repeatable.