Forward Industries, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended June 30, 2017; comparative periods ended June 30, 2016. The filing was signed August 14, 2017.
Business context
Forward designs and distributes carrying cases and protective accessories, principally for medical monitoring devices and other portable products. It does not manufacture its products; substantially all are sourced from independent suppliers in China through Forward China. Four major customers accounted for 82.1% of quarterly revenue and 82.5% of nine-month revenue.
Financial performance and liquidity
| Metric | Three months ended June 30 | Nine months ended June 30 |
|---|---|---|
| Revenue | $7.33 million, up 10% year over year | $18.46 million, down 11% |
| Gross profit and margin | $1.28 million; 17.4% (16.2% in 2016) | $3.15 million; 17.1% (18.3% in 2016) |
| Operating income | $549,000, versus $85,000 | $460,000, versus $478,000 |
| Net income | $552,000, versus $78,000; $0.06 per basic and diluted share | $466,000, essentially unchanged; $0.05 per basic and diluted share |
| Operating cash flow | Nine-month cash used: $699,000, versus $1.24 million provided in 2016 |
At June 30, cash was $4.06 million, working capital was $8.7 million, and the current and quick ratios were 3.2 and 2.7. The company reported no short- or long-term debt. Total assets were $12.77 million and total liabilities were $4.04 million. Cash declined $699,000 from September 30, 2016. The main operating cash use was a $1.77 million increase in accounts receivable, partly offset by a $744,000 inventory reduction. No cash was used for investing or financing activities in the nine-month period.
Changes versus prior periods
- Quarterly revenue increased by $668,000, while year-to-date revenue fell by $2.37 million. The nine-month decline principally reflected lower diabetic-product sales, partly offset by growth in other products.
- Quarterly net income improved by $474,000, reflecting higher revenue and gross profit, lower sales and marketing costs, and lower general and administrative costs. For the nine-month period, lower operating expenses largely offset reduced gross profit, leaving net income nearly unchanged.
- Quarterly gross margin improved year over year, but the nine-month margin declined, which management attributed to customer pricing pressure.
- Cash used in operations in 2017 contrasted with cash provided in the prior-year period, notably because receivables increased rather than decreased.
Outlook, risks, and unusual items
- Management said available liquidity should be adequate for operating and financial requirements over the next 12 months. It did not provide specific revenue or earnings guidance.
- Effective May 1, two major diabetic-product customers changed some shipments from consignment to FOB shipping point. The change accelerated recognition of approximately $808,000 of revenue in the quarter and nine-month period. Remaining goods previously on consignment were expected to be recognized in fiscal Q4; management said revenue from these customers should then return to normal levels.
- Management said core diabetes-case revenue continues to face pressure from lower-priced meters and newer products that are not sold with a meter case. Customer concentration and variable, short-lead-time orders make quarterly results susceptible to significant fluctuations.
- Forward China, whose principal includes the company’s CEO and Chairman, is the exclusive buying agent and supplier in the region. The company pays a $100,000 monthly base fee plus 4% of adjusted gross profit. Forward China temporarily waived the 4% component from fiscal Q3 through fiscal year-end 2017; the parties were negotiating a revised fee. Management warned that margins could decline if the waiver does not continue. The related-party payable was $3.58 million at June 30.
- The $808,000 revenue acceleration and the temporary related-party fee waiver are material to interpreting reported revenue and margins. No income tax expense or benefit was recorded because deferred taxes were fully offset by a valuation allowance.
- Management identified potential risks including failure to receive material orders, limited customer and industry diversification, possible U.S. tariffs or other restrictions on Chinese imports, and continued product pricing pressure. No legal proceedings believed material were reported. Management stated disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- How much of fiscal Q4 revenue reflects recognition of the remaining consignment goods, and what are subsequent recurring order levels?
- Whether the Forward China fee waiver was extended or replaced, and the resulting impact on gross margin and related-party balances.
- Whether the increase in accounts receivable converts to cash, given the concentration of receivables among four customers (85.9% at June 30).
- Whether diabetic-product demand and customer concentration continue to weaken, and whether growth in other products meaningfully diversifies revenue.
- Whether the company’s stated 12-month liquidity expectation remains supported by operating cash generation.