Forward Industries, Inc. — Form 10-Q Summary
Reporting period: Fiscal first quarter ended December 31, 2016; comparisons are with the three months ended December 31, 2015. The filing was signed February 13, 2017. Forward designs and distributes protective cases and accessories, primarily for handheld devices; it does not manufacture its OEM products and sources substantially all of them from China.
Key financial metrics
| Metric | Q1 FY2017 | Q1 FY2016 |
|---|---|---|
| Net revenue | $6.591 million | $7.138 million |
| Gross profit / margin | $1.159 million / 17.6% | $1.522 million / 21.3% |
| Operating income | $148,122 | $247,811 |
| Net income | $151,492 | $244,080 |
| Basic and diluted earnings per share | $0.02 | $0.03 |
| Net cash used in operating activities | $519,810 | $672,048 |
- Cash was $4.241 million at December 31, 2016, down from $4.761 million at September 30, 2016. Total assets were $12.737 million and shareholders’ equity was $8.375 million.
- Working capital was $8.4 million; current and quick ratios were 2.9 and 2.4, respectively. The company reported no short- or long-term debt outstanding.
- Current liabilities included $3.825 million due to Forward China, the company’s related-party buying agent and supplier. Accounts receivable was $5.767 million.
- There were no investing or financing cash flows in the quarter. Operating cash use was driven principally by a $902,317 increase in accounts receivable.
Changes versus the prior-year quarter
- Revenue declined 8% (about $547,000), primarily because diabetic-product sales decreased $712,000. Other-product revenue increased $165,000, approximately.
- Gross profit fell about $363,000 as lower revenue combined with pricing pressure and lower gross margin. Management also cited rising supplier costs that can narrow margins when they cannot be passed on to customers.
- Net income decreased about $93,000. Lower general and administrative expense (about $248,000) and sales and marketing expense (about $15,000) partly offset the gross-profit decline.
- Operating cash use improved from $672,048 to $519,810, while cash declined by $519,810 during the quarter. No capital equipment purchases were made in the current quarter.
Outlook, risks and notable items
- Management stated that liquidity and financial resources were expected to be adequate for operating and financial requirements over the next 12 months; this is an expectation, not a quantified earnings or revenue forecast.
- Quarterly results are exposed to significant variability because a high share of revenue comes from four customers with variable order flows and short lead times. Those customers represented 83.7% of quarterly revenue; four customers accounted for 88.3% of receivables at quarter-end.
- Substantially all OEM products are sourced from independent suppliers in China through Forward China. The supply agreement provides for a monthly service fee of $100,000 plus 4% of adjusted gross profit. Forward China received approximately $363,000 in service fees in the quarter. The CEO is a principal of Forward China, and a Forward China managing director beneficially owns more than 5% of the company’s shares.
- Management identified risks including failure to receive material orders, limited customer or industry diversification, possible U.S. tariffs or other restrictions on Chinese imports, and product pricing pressure. It also noted progress by its sourcing agent in quality assurance and supplier negotiations.
- No income tax expense was recorded despite pretax income because of significant net operating loss carryforwards; a full valuation allowance remained against deferred tax assets. The filing reported no legal proceedings believed material as of December 31, 2016.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter. The filing cautions that interim results are not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether customer ordering patterns and receivable collections support revenue recovery and reduce working-capital pressure.
- Whether the company can pass through supplier cost increases and stabilize gross margins.
- The terms, ongoing fees and related-party oversight of the Forward China supply arrangement, including the $3.825 million payable.
- Whether customer and product diversification advances beyond the quarter’s concentration levels.
- Management’s 12-month liquidity expectation, particularly if operating cash outflows or receivables increase.