Forward Industries, Inc. — Form 10-Q Summary
Reporting period: Unaudited quarter and six months ended March 31, 2017; fiscal second quarter of 2017. Comparisons are with the corresponding 2016 periods.
Business context
Forward designs and distributes carrying cases and protective accessories, primarily for handheld devices. It does not manufacture its OEM products and sources substantially all of them from independent suppliers in China through Forward China, its exclusive buying agent and supplier in the Asia-Pacific region.
Financial results
| Metric | Three months ended March 31, 2017 | Six months ended March 31, 2017 |
|---|---|---|
| Net revenue | $4.53 million, down 35% year over year | $11.12 million, down 21% |
| Gross profit / margin | $716,086 / 15.8%; prior-year margin 17.1% | $1.87 million / 16.9%; prior-year margin 19.2% |
| Operating income (loss) | $(237,087) | $(88,965) |
| Net income (loss) | $(237,530), or $(0.03) per basic and diluted share | $(86,038), or $(0.01) per basic and diluted share |
For the six-month period, operating expenses declined to $1.96 million from $2.33 million, including lower general and administrative and sales and marketing costs. These reductions did not offset the lower revenue and gross profit. The company recorded no income tax provision or benefit, citing net operating loss carryforwards and a full valuation allowance.
At March 31, 2017, cash was $3.65 million, working capital was $8.2 million, the current ratio was 3.9, and the quick ratio was 2.9. Total assets were $11.00 million and total liabilities were $2.84 million. The company reported no short- or long-term debt. Cash declined by $1.11 million from September 30, 2016.
Operating activities used $1.11 million of cash in the six months, compared with $725,424 used in the prior-year period. The 2017 outflow mainly reflected reductions in accounts payable, including amounts due to Forward China, and accrued liabilities, partly offset by collections of receivables. There was no investing or financing cash flow in the period.
Material changes and management commentary
- Diabetic-product revenue fell to $3.80 million in the quarter from $6.47 million, and to $9.32 million for six months from $12.70 million. Management attributed the decline to customer pricing pressure, less expensive competing meters, and newer diabetes products that do not include a meter case.
- Other-product revenue increased to $737,000 in the quarter from $558,000, and to $1.81 million for six months from $1.47 million. Management said it would continue efforts to broaden this customer base.
- Forward China agreed to waive the 4% component of its service fee from fiscal Q3 through fiscal year-end 2017; the $100,000 monthly base fee remains payable. The waived component was approximately $44,000 in the second quarter and $107,000 in the six-month period. The parties were negotiating a revised fee. The arrangement is related-party: the CEO and chairman is a principal of Forward China.
- Management stated that liquidity should be adequate for operating and financial requirements over the next 12 months, while noting that losses, higher receivables or inventory, and increased expenses could pressure working capital. No specific revenue or earnings guidance was provided.
Risks, contingencies, and other items
- Revenue and results are exposed to short-lead-time, variable orders and customer concentration. Four customers represented 80.9% of quarterly revenue and 82.6% of six-month revenue; they accounted for 86.0% of receivables at March 31, 2017.
- Substantially all OEM products are sourced from China. Management identified failure to receive material orders, limited industry diversification, possible U.S. tariffs or other restrictions on Chinese imports, and continued pricing pressure as risks.
- The filing reported no legal proceedings believed to be material as of March 31, 2017. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether diabetic-product demand and customer orders continue to decline, and whether growth in other products can meaningfully diversify revenue.
- Whether gross margins stabilize after the reported year-over-year decline and ongoing customer pricing pressure.
- Final terms and implementation of the revised related-party Forward China service fee, including the effect of the temporary 4% waiver.
- Customer receivable concentration, collections, and the pace of cash use, particularly as payables and accrued liabilities change.
- Management’s liquidity outlook and the exposure to China sourcing, trade restrictions, and order variability.