Forward Industries, Inc. — Q1 FY2012 Form 10-Q
Reporting period: Three months ended December 31, 2011; comparative period is the three months ended December 31, 2010. Forward designs, markets, and distributes protective cases and accessories, sourcing substantially all products from independent suppliers in China. The filing was signed February 9, 2012.
Financial performance
| Metric | Q1 FY2012 | Q1 FY2011 |
|---|---|---|
| Net sales | $6.884 million | $5.968 million |
| Gross profit / gross margin | $1.395 million / 20.3% | $1.377 million / 23.1% |
| Operating expenses | $2.913 million | $1.353 million |
| Operating income (loss) | $(1.518) million | $23,221 |
| Net income (loss) | $(1.513) million | $17,475 |
| Basic and diluted EPS | $(0.19) | $0.00 |
| Cash used in operating activities | $4.019 million | $336,000 |
Revenue increased 15% year over year, including $721,000 of initial Forward-branded sales, about 10% of total sales. OEM sales rose to $6.163 million from $5.968 million. Diabetic-product sales declined to $4.0 million from $4.2 million, while other OEM sales increased to $2.1 million from $1.7 million. Forward-branded sales were $647,000 in EMEA and $74,000 in the Americas.
Gross profit increased only $18,000 despite higher sales. Gross margin fell about 2.8 percentage points, reflecting higher material costs and weaker margins on OEM diabetic and other products; higher-margin Forward-branded sales partly offset the pressure. Sales and marketing expense rose to $1.273 million from $423,000, and general and administrative expense rose to $1.640 million from $931,000. Management attributed the increases mainly to expanded personnel and sales resources, product development, consulting, legal, and occupancy costs.
Financial position and liquidity
At December 31, 2011, cash and cash equivalents were $11.084 million, down from $14.912 million at September 30, 2011. Current assets were $22.249 million and current liabilities were $5.360 million, giving working capital of $16.9 million; management reported a 4.2 current ratio and 3.8 quick ratio. The company had no short- or long-term debt outstanding.
Operating cash use was $4.019 million, driven by the net loss and working-capital investment, including increases in receivables ($2.354 million), inventory ($1.084 million), and prepaid and other current assets ($1.018 million). Investing activities provided $191,000, including a $250,000 repayment on the Flash Ventures note, partly offset by $59,000 of property and equipment purchases. There were no financing activities. Cash balances included approximately $8.5 million above insured limits.
Changes, outlook, and risks
- The company began reporting two operating segments, OEM and Forward-branded. Forward-branded operations commenced in the quarter and generated $721,000 in sales, but reported a $901,000 operating loss; OEM reported $684,000 of operating income.
- Management said it expects higher operating costs as it builds products and retail and corporate distribution channels. It expects newly awarded programs for two major diabetic customers to contribute meaningfully beginning in late FY2012, but anticipates lower gross margins on some programs. No quantified earnings or revenue guidance was provided.
- Management expects liquidity and financial resources to be adequate for the next 12 months, while anticipating significant cash use from strategy-related operating expenses and possible strategic-partner investments. It is evaluating alternative sourcing and logistics arrangements; savings or implementation are not assured.
- Key business risks include customer and product concentration, variable customer orders and short lead times, pricing pressure, rising supplier material and labor costs, and reliance on China-based suppliers. The company said higher costs may not be passed through to customers.
- The company’s $750,000 unsecured note receivable from Flash carried 11% interest and was extended to April 1, 2012; Flash paid $250,000 principal in December. The company also reported $525,000 of advance royalties, including $500,000 paid to G-Form, for which no licensed-product sales had occurred by quarter-end.
- A Targus-related lawsuit sought unspecified damages. The company recorded no loss provision and said it intended to defend the claims; in January 2012, the court sustained a demurrer in part and allowed amendment of one claim. A Dutch VAT-related bank guarantee was capped at €75,000 (about $97,000); no liability had been incurred.
- The company maintained a full valuation allowance against deferred tax assets of approximately $1.832 million, citing uncertainty about their future use. The quarter’s $1,640 income tax provision was attributed to Forward UK.
- Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether new diabetic programs begin contributing as expected in late FY2012, and their actual revenue and margins.
- Whether the Forward-branded expansion gains traction and can cover its operating and channel-development costs.
- Whether OEM customer concentration, supplier cost inflation, and lower product margins continue to pressure profitability.
- Cash conversion and working-capital needs, including collection of receivables, inventory levels, supplier advances, and repayment of the Flash note by its amended maturity.
- Developments in the Targus litigation and any exposure under the VAT guarantee or strategic-partner arrangements.