Forward Industries, Inc. — Q2 FY2016 Form 10-Q
Reporting period: Three and six months ended March 31, 2016; filed May 16, 2016. The company designs and distributes protective cases and related products, primarily to OEM customers, and sources substantially all products from suppliers in China. Its former retail business is discontinued.
Financial performance
| Metric | Three months ended March 31 | Six months ended March 31 |
|---|---|---|
| Revenue, 2016 (2015) | $7.03 million ($7.25 million) | $14.16 million ($15.19 million) |
| Gross profit, 2016 (2015) | $1.20 million ($1.35 million) | $2.72 million ($2.91 million) |
| Gross margin, 2016 (2015) | 17.1% (18.7%) | 19.2% (19.2%) |
| Continuing operations, 2016 (2015) | Income of $144,000 (loss of $688,000) | Income of $388,000 (loss of $2.39 million) |
| Net income (loss), 2016 (2015) | $144,000 (loss of $688,000) | $388,000 (loss of $2.19 million) |
| Cash used in operating activities, 2016 (2015) | Not separately reported for quarter | $725,000 ($3.36 million) |
- Six-month basic and diluted earnings per share were $0.05 and $0.04, respectively, versus a $0.34 loss per share for both measures in 2015.
- At March 31, cash was $3.27 million; current assets were $12.26 million and current liabilities $4.46 million, yielding working capital of $7.8 million, a 2.7 current ratio, and a 2.1 quick ratio.
- Total liabilities were $4.52 million. The company reported no short- or long-term debt outstanding. Cash declined $773,000 from September 30, 2015.
Changes and operating drivers
- Six-month revenue declined 7%, mainly because other-product revenue fell $1.0 million to $1.5 million after the loss of several small customers. Diabetic-product revenue was essentially flat at $12.7 million and represented 90% of sales, up from 84%.
- Second-quarter revenue declined 3%. Diabetic-product revenue increased, but other-product revenue fell $0.8 million to $0.6 million. Diabetic products accounted for 92% of quarterly revenue versus 82% a year earlier.
- Six-month operating expenses fell substantially: general and administrative costs declined $2.34 million and sales and marketing costs declined $513,000. Management attributed the improvement mainly to lower legal and professional fees, lower personnel costs, and headcount reductions. Prior-year costs included litigation and settlements involving former executives and a proxy contest.
- Despite lower revenue, six-month gross margin held at 19.2%; quarterly margin narrowed to 17.1% from 18.7%. Management cited falling quarterly gross profit due to lower sales and margin pressure.
Liquidity, outlook, risks, and unusual items
- Management said liquidity and financial resources should be adequate for the next 12 months. No formal revenue or earnings guidance was provided. The company does not anticipate significant capital-asset purchases.
- Operating cash use in the six-month period reflected, in part, an increase in accounts receivable of $532,000 and a decrease in accounts payable, amounts due to Forward China, and accrued liabilities totaling approximately $884,000.
- Management warned that revenue and results can vary significantly because a high proportion of sales comes from a few large customers with variable order volumes and short lead times. Diabetic-product concentration increased, while other-product sales and customer breadth weakened.
- Rising costs among China-based suppliers can pressure margins when costs cannot be passed to customers. Management expects the supplier base may become more concentrated, potentially weakening its ability to resist cost increases.
- The company purchases through Forward China under an agreement running through September 8, 2018, with renewal possible. A director is a principal of Forward China, and another Forward China executive owns more than 5% of company shares. The company recorded $739,000 in six-month supply-agent service fees and owed Forward China $3.61 million at March 31.
- The 2015 comparative period included $199,000 of discontinued-operations income from a recovery related to the former retail business; there was no discontinued-operations activity in the 2016 period. The former CFO settlement obligation was fully paid, and the filing reported no material legal proceedings as of March 31.
- Disclosure controls were assessed as effective; management reported no material changes in internal control over financial reporting during the period.
Important facts for investors to verify
- Customer concentration, order variability, and the share of revenue attributable to diabetic products and the largest customers.
- Whether margin pressure from China sourcing costs and supplier concentration persists, and whether cost increases can be passed through.
- Collection of receivables and the timing and terms of amounts payable to Forward China, including the related-party service-fee arrangement.
- Whether cost reductions are sustainable after unusually high prior-year legal, settlement, and proxy-contest expenses subsided.
- The company’s cash-generation outlook: it remained profitable for the six-month period but used $725,000 of operating cash.