Forward Industries, Inc. — Q2 FY2014 Form 10-Q
Business context and reporting period. The filing covers the quarter and six months ended March 31, 2014; the fiscal year ends September 30. Forward designs and distributes custom carrying cases and protective solutions, primarily for handheld devices, and has exited its Retail business to focus on OEM sales. It sources substantially all OEM products from independent suppliers in China.
Financial performance and position
| Metric | Three months ended March 31, 2014 | Six months ended March 31, 2014 |
|---|---|---|
| Net sales | $6.70 million, down 14% year over year | $15.12 million, up 2% |
| Gross profit / margin | $1.40 million / 21%, versus $1.49 million / 19% | $3.25 million / 21%, versus $2.96 million / 20% |
| Operating income (loss) | $(133,000), versus $206,000 income | $239,000, versus $154,000 income |
| Continuing operations income (loss) | $(283,000), versus $286,000 income | $64,000, versus $468,000 income |
| Net income (loss) | $(301,000), versus $148,000 income | $50,000, versus $287,000 income |
| Net income (loss) applicable to common equity | $(349,000), versus $148,000 income | $(46,000), versus $287,000 income |
| Operating cash flow | Not separately presented | $(253,000), versus $(205,000) |
At March 31, cash and cash equivalents were $6.13 million and marketable securities were $1.23 million. Current assets were $14.75 million and current liabilities $4.00 million, for working capital of $10.75 million; the current and quick ratios were 3.6 and 3.1. The company reported no short- or long-term debt. Cash declined $492,000 over the six-month period. Investing activities used $200,000 net, primarily reflecting purchases and sales of marketable securities; financing activities used $38,000 for preferred dividends.
Material changes versus prior periods
- Quarterly sales fell $1.09 million, mainly from lower diabetic and other-product sales. Six-month sales rose $355,000, as higher diabetic-product sales more than offset lower other-product sales.
- Diabetic products represented 86% of quarterly sales and 81% of six-month sales. Sales varied by customer and program; six-month growth was led by Customer A and a new program, while other major customers declined.
- Quarterly sales and marketing expense rose 42% to $725,000, mainly from expanded sales and support staffing and increased travel. Six-month expense rose 40% to $1.34 million. Six-month general and administrative expense fell 10% to $1.67 million.
- Other expense was $149,000 for the quarter and $174,000 for six months, versus other income of $81,000 and $314,000 in the comparable periods. The change included warrant remeasurement expense and weaker marketable-securities results; the six-month securities result was a $39,000 loss versus a $328,000 gain.
- Preferred dividends and accretion reduced amounts applicable to common equity by $48,000 for the quarter and $96,000 for six months. Preferred stock carrying value was $775,000; its aggregate liquidation value was $1.275 million.
Outlook, risks, contingencies and unusual items
- Management said liquidity and financial resources should be adequate for the next 12 months. No specific revenue or earnings guidance was provided. The company continues to seek acquisitions intended to diversify revenue and add to organic results.
- Management cited concentrated customers and products, variable order volumes and short lead times, price pressure in diabetic products, and rising China-based supplier costs that may constrain margins.
- Forward China, the exclusive sourcing agent, is related to a company director. Fees were $544,000 for six months and $2.05 million was payable at March 31, versus $108,000 at September 30, 2013. The sourcing agreement was amended and runs through March 11, 2015, subject to renewal.
- The company reclassified the warrant fair-value liability to additional paid-in capital after meeting registration requirements; the reclassification was non-cash. Warrants remain exercisable, and the preferred stock has cumulative 6% cash dividends and conversion and redemption provisions.
- A Swiss subsidiary guarantee supports a Dutch VAT undertaking of up to €75,000 (approximately $104,000). No liability had been incurred; approximately $1.49 million of assets held at the Swiss bank secured the arrangement.
- Management reported disclosure controls effective at quarter-end and said material weaknesses identified in 2013 had been remediated by December 31, 2013. The filing reports no legal proceedings believed material to the company.
- The company recorded approximately $280,000 of discontinued-operations assets related to expected payments under a 2013 settlement with G-Form. Separately, a month-to-month New York office lease with a related party increased from $2,500 to approximately $12,700 monthly effective April 1, 2014.
Important facts for investors to verify
- Whether customer concentration, program timing and diabetic-product demand continue to affect quarterly sales.
- Whether supplier-cost increases can be passed through to customers and sustain gross margins.
- The composition and expected collection timing of the $2.05 million payable to Forward China and the terms of the related-party sourcing arrangement.
- The cash and dilution implications of the preferred stock and warrants, including preferred dividends, conversion rights and potential common shares.
- Whether operating cash flow improves, and whether management’s 12-month liquidity expectation remains supported by cash, securities and working-capital needs.
- Whether the expected G-Form settlement payments are collected and how the higher related-party office costs affect expenses.