Forward Industries, Inc. — Q1 FY2015 10-Q
Reporting period: Three months ended December 31, 2014; comparisons are to the three months ended December 31, 2013. Forward designs, markets, and distributes made-to-order protective and carrying products for OEM customers, sourcing substantially all products from independent suppliers in China. Its former retail business is reported as discontinued operations.
Financial results and liquidity
- Sales: $7.94 million, down 5.6% from $8.42 million. Diabetic Products sales rose to $6.7 million from $6.4 million; Other Products sales fell to $1.2 million from $2.0 million.
- Gross profit and margin: $1.56 million versus $1.85 million; gross margin was approximately 19.7%, down from 21.9%.
- Operating results: Operating loss was $1.59 million versus operating income of $372,000. Continuing-operations net loss was $1.70 million versus income of $347,000. Consolidated net loss was $1.50 million, including $199,000 income from discontinued operations, versus net income of $351,000. Net loss applicable to common equity was $1.98 million, or $0.23 per share, versus income of $303,000, or $0.04 per share.
- Expenses and other items: General and administrative expense rose to $2.47 million from $857,000, primarily due to proxy-contest and litigation costs and prior management’s acquisition-related work. Sales and marketing expense was $682,000 versus $617,000. Net other expense was $110,000, mainly reflecting investment losses of $110,000.
- Cash flow: Operating activities used $2.38 million versus $1.02 million. Investing activities provided $918,000, primarily from sales of marketable securities; financing activities used $32,000. Cash decreased $1.49 million to $4.98 million.
- Balance sheet at December 31, 2014: Current assets were $14.18 million and current liabilities $5.70 million; working capital was $8.48 million, current ratio 2.5, and quick ratio 2.0. The company reported no short- or long-term debt. Total assets were $14.32 million; total liabilities were $5.83 million. Redeemable convertible preferred stock of $1.29 million is presented as temporary equity.
Material changes and developments
- Sales declined primarily because Other Products demand fell; Diabetic Products increased and represented 85% of sales, up from 76%. Gross margin weakened amid competitive pricing and lower volume.
- The $1.61 million increase in G&A was driven chiefly by approximately $1.5 million of proxy-defense and legal costs, plus approximately $0.2 million of consulting and legal fees related to acquisition-target work pursued by prior management.
- Shareholders elected a new director slate at the December 30, 2014 annual meeting, turning over a majority of the board. The former CEO resigned effective January 15, 2015; the new board appointed an interim president. The company terminated its related-party New York office services and investment management agreements with LCA in January 2015.
- The board-change event triggered a deemed-liquidation right under the 6% Senior Convertible Preferred Stock. A majority of holders requested redemption on January 9, 2015; the company estimated the payment at approximately $1.29 million and said it intended to pay imminently.
- Discontinued operations included a $200,000 recovery in December 2014 related to a previously reserved G-Form receivable.
Outlook, risks, and contingencies
- No specific earnings or revenue guidance was provided. Management expected liquidity and financial resources to be adequate for the next 12 months, while warning that near-term preferred-stock redemption of approximately $1.3 million, approximately $0.2 million of former-CEO benefits, and possible legal settlements could significantly affect available liquidity.
- Management cited concentrated customers and products, variable order volumes and short lead times, pricing pressure in the diabetic-products market, rising China sourcing costs, and limited supplier diversification as ongoing challenges.
- Legal matters included a pending former-CFO lawsuit alleging retaliation and contract-related claims, with settlement discussions ongoing and damages unspecified. Other proxy-contest-related matters were withdrawn, discontinued, or remained pending as described in the filing; outcomes and potential costs are uncertain.
- The Forward China buying-agency and supply agreement, involving a director who is a principal of Forward China, ran through March 11, 2015, subject to renewal. The company incurred approximately $287,000 in related service fees this quarter.
Important facts for investors to verify
- Whether the preferred-stock redemption was completed, its final cash cost, and the effect on liquidity after the reporting date.
- The amount and timing of any settlement or other payments related to the former-CFO lawsuit and remaining legal proceedings.
- Whether the Forward China agreement was renewed or replaced, and the effect of its fees and supplier concentration on margins.
- Whether sales recover or diversify beyond diabetic products and a concentrated customer base, and whether gross margins stabilize.
- The composition and recurrence of elevated G&A costs following the board and management transition.