Forward Industries, Inc. — FY2013 Form 10-K
Reporting period: Fiscal year ended September 30, 2013. This is an annual report, not a standalone fourth-quarter report. Filed January 14, 2014.
Business context
Forward designs, markets, and distributes protective cases and accessories, principally for OEM customers; it does not manufacture its products and sources substantially all supply from China. After deciding in June 2012 to exit its global retail business, the company substantially completed that exit and focused on its OEM business. Diabetic-product cases accounted for 78% of FY2013 net sales.
Financial results and liquidity
| Metric | FY2013 | FY2012 |
|---|---|---|
| Net sales | $30.91 million | $29.40 million |
| Gross profit / margin | $6.38 million / 20.6% | $3.89 million / 13.2% |
| Operating income (loss) | $706,000 | ($3.26 million) |
| Continuing-operations income (loss) | $5,000 | ($3.31 million) |
| Net loss | ($207,000) | ($9.63 million) |
| Net loss applicable to common equity | ($754,000) | ($9.63 million) |
| Net cash from (used in) operations | $2.25 million | ($10.79 million) |
- Sales rose 5%: diabetic products increased $2.6 million to $24.3 million, partly offset by a $1.0 million decline in other products to $6.7 million.
- Gross margin improved mainly from lower sourcing and quality-assurance costs after restructuring, and the absence of FY2012 quality-related inspection, freight, and handling costs. Sales and marketing expense increased $0.6 million; general and administrative expense fell $2.1 million.
- FY2013 other expense included a net $722,000 loss on marketable securities. The filing reports approximately $3.87 million of realized losses and $3.15 million of realized gains, as well as additional unrealized effects.
- Retail discontinued operations produced a $212,000 loss in FY2013, compared with a $6.32 million loss in FY2012.
- At September 30, 2013, cash and cash equivalents were $6.62 million and marketable securities were $1.08 million. Working capital was $10.0 million; current and quick ratios were 3.1 and 2.6. The company reported no short- or long-term debt.
- Financing activities included approximately $1.2 million net proceeds from preferred stock and warrants. The 6% senior convertible preferred stock had a $1.275 million aggregate liquidation value; preferred dividends, accretion, and a beneficial conversion feature reduced FY2013 income applicable to common equity by $547,000.
Changes, outlook, and notable matters
- Management said restructuring was substantially complete and was reinvesting some savings in sales, design, and customer support, while seeking to diversify customers and considering acquisitions. No specific revenue or earnings guidance was provided; management expected liquidity and financial resources to meet requirements for the next 12 months.
- Four customers generated 75% of continuing-operations sales, versus 70% in FY2012; four customers represented 73% of receivables at year-end. Four suppliers provided 92% of OEM products. Management cited customer concentration, pricing pressure, rising China sourcing costs, variable demand, and dependence on the exclusive sourcing agent as significant risks.
- Management concluded disclosure controls and internal control over financial reporting were ineffective at year-end. Identified material weaknesses involved accounting for the preferred-stock-and-warrant financing and failure to communicate a significant expense item to senior management. The financing weakness led to correction of the June 2013 quarter’s financial statements. Remediation was underway; the auditor did not attest to internal controls.
- A roughly $280,000 settlement payment due from G-Form was overdue; the company filed an arbitration demand to enforce the agreement and recorded no allowance, expecting full payment.
- Related-party arrangements include the exclusive sourcing agreement with Forward China, whose principal is a company director, and an investment-management agreement with an entity managed by the Board Chairman. FY2013 sourcing-agent fees were approximately $1.292 million; asset-based investment fees were approximately $13,000. The company reported $722,000 net investment losses.
Key investor verification points
- Confirm remediation and testing of the disclosed control weaknesses, and review any subsequent financial-statement corrections.
- Track collection or resolution of the overdue G-Form settlement receivable.
- Assess customer and supplier concentration, the sourcing-agent relationship and renewal, and the impact of pricing and input-cost changes on margins.
- Review preferred-stock dividends, redemption and conversion terms, warrant liability, and potential dilution to common shareholders.
- Examine investment-account performance, risk controls, and related-party fees given the FY2013 securities losses.
- Compare subsequent operating cash flow and liquidity with management’s stated 12-month outlook.