Franklin Wireless Corp. — Form 10-Q Summary
Reporting period: Three and nine months ended March 31, 2022, compared with the corresponding periods ended March 31, 2021. The request metadata identifies “2021 Q3,” but the filing is for the third quarter of fiscal 2022.
Business Context
Franklin Wireless provides wireless connectivity products, including mobile hotspots, routers, trackers, embedded modules, modems and gateways supporting 5G/4G, machine-to-machine and Internet of Things applications. Products are sold primarily to wireless operators, strategic partners and distributors. The company operates one reportable segment and owns 66.3% of Franklin Technology Inc. (“FTI”), a South Korean product design and development subsidiary.
Key Financial Metrics
| Metric | Three months ended March 31, 2022 | Three months ended March 31, 2021 | Nine months ended March 31, 2022 | Nine months ended March 31, 2021 |
|---|---|---|---|---|
| Net sales | $6.7 million | $44.3 million | $11.9 million | $173.1 million |
| Gross profit | $1.4 million | $7.6 million | $2.2 million | $30.5 million |
| Gross margin | 20.3% | 17.1% | 18.7% | 17.6% |
| Operating income (loss) | $(1.1) million | $5.2 million | $(4.5) million | $23.1 million |
| Net income (loss) | $(0.8) million | $4.2 million | $(3.0) million | $18.4 million |
| Net income (loss) attributable to parent | $(0.8) million | $3.9 million | $(3.1) million | $17.7 million |
| Basic earnings (loss) per share | $(0.07) | $0.34 | $(0.26) | $1.57 |
| Net cash provided by (used in) operating activities | Not separately provided | Not separately provided | $(7.3) million | $20.5 million |
As of March 31, 2022, cash and cash equivalents were $36.5 million and certificates of deposit were $6.6 million, for total disclosed liquidity of $43.1 million. Current assets were $53.3 million versus current liabilities of $13.7 million. Total assets were $57.2 million and total liabilities were $13.9 million. The filing reports no traditional borrowings; liabilities primarily consisted of accounts payable and operating lease liabilities. Lease liabilities totaled $0.5 million.
Material Changes Versus the Prior Comparable Period
- Third-quarter sales decreased 84.9% to $6.7 million, primarily because demand from a major carrier customer normalized after unusually high pandemic-period demand in the prior year.
- Nine-month sales decreased 93.2% to $11.9 million. North American sales declined 93.6%, reflecting lower demand from two major carrier customers.
- Gross margin improved to 20.3% in the quarter and 18.7% for the nine-month period, compared with 17.1% and 17.6%, respectively, primarily due to a greater contribution from higher-margin service revenue.
- Operating expenses increased 4.5% in the quarter, mainly from higher stock-option compensation, but decreased 9.8% for the nine-month period due principally to lower shipping and handling and bad-debt costs.
- The company moved from operating cash generation of $20.5 million in the first nine months of fiscal 2021 to operating cash use of $7.3 million in fiscal 2022. The change was driven largely by a $6.7 million inventory increase and the operating loss.
- Inventory increased to $7.7 million from $1.0 million at June 30, 2021, while accounts payable increased to $12.3 million from $9.7 million.
- Cash and cash equivalents declined by $9.3 million during the nine months, to $36.5 million. Investing cash use increased to $1.8 million, including $1.2 million of certificate-of-deposit purchases and $0.5 million of capitalized product development costs.
- Prior-year financing cash flow included $6.0 million from the sale of treasury stock; current-year financing cash flow was only $21,595 from stock-option exercises.
Outlook, Risks, Contingencies and Unusual Items
- Management states that available capital is sufficient to fund existing operations and obligations for at least one year from the filing date. It also cautions that failure to achieve the business plan or obtain additional funding could require curtailment of operations.
- No formal revenue or earnings guidance is provided. Management identifies customer retention, demand for wireless products, new-product acceptance, new customer relationships and the ability to meet customer demand as key drivers.
- On March 21, 2022, the company agreed to loan $10.0 million to FTI. The five-year note bears interest-only payments at 2% annually and is intended to fund FTI’s acquisition of a South Korean facility and working capital. FTI is required to grant a mortgage on the facility to secure the note after acquisition.
- The company remains exposed to the Verizon Ellipsis Jetpack battery recall involving approximately 2.5 million devices. Franklin states that it has not recreated the reported failures and cannot estimate the future financial impact.
- Shareholder, derivative and “short-swing” profit litigation related principally to the recall and alleged disclosure issues remains pending. Discovery is ongoing in certain matters, and the company cannot quantify potential recall-related litigation exposure.
- A dispute with Anydata remains unresolved. Management states that a loss is reasonably possible but not estimable as of March 31, 2022.
- Revenue is concentrated: two customers represented 49% and 26% of nine-month sales. Two Asian manufacturers represented 99% of product purchases, creating supplier concentration and potential delay, capacity and quality risks.
- COVID-19-related supply-chain disruption, potential tariffs of 10% to 25%, customer indemnification obligations and inventory obsolescence are identified risks. No inventory-obsolescence reserve was recorded at March 31, 2022.
- The company recorded a $1.1 million income-tax benefit for the nine-month period, including a $1.2 million increase in non-current deferred tax assets. The prior-year period included a $0.5 million gain from forgiveness of a Paycheck Protection Program loan.
Facts Investors Should Verify
- Whether carrier demand and sales volumes recover after the sharp fiscal 2022 decline.
- The recoverability and future utilization of the $7.7 million inventory balance.
- Terms, funding, collateral and collectability of the $10.0 million loan to FTI.
- Potential costs, claims, settlements or insurance coverage associated with the Jetpack recall and related litigation.
- Customer and supplier concentration, including the effect of any order cancellations or manufacturing disruptions.
- Whether operating cash flow can return to positive levels without additional financing or asset liquidation.
- The realization of deferred tax assets and the assumptions supporting the reported tax benefit.