Forward Industries, Inc. — Q2 FY2015 Form 10-Q
Reporting period: Quarter and six months ended March 31, 2015. Unaudited consolidated results. The company designs, markets, and distributes protective and carrying solutions, primarily for OEM customers; it exited its retail business and focuses on OEM sales.
Financial results
| Metric | Three months ended March 31, 2015 | Six months ended March 31, 2015 |
|---|---|---|
| Net sales | $7.25 million; +8% year over year | $15.19 million; +0.5% |
| Gross profit / margin | $1.35 million / 18.7%, versus $1.40 million / 20.9% | $2.91 million / 19.2%, versus $3.25 million / 21.5% |
| Operating income (loss) | $(0.68) million | $(2.27) million |
| Net income (loss) | $(0.69) million | $(2.19) million |
| Net loss applicable to common equity | $(0.69) million; $(0.08) per share | $(2.67) million; $(0.31) per share |
| Operating cash flow | Not presented separately for the quarter | $(3.36) million, versus $(0.25) million |
At March 31, cash and cash equivalents were $2.70 million, with no marketable securities and no short- or long-term debt. Current assets were $11.12 million and current liabilities $4.67 million; working capital was $6.45 million, the current ratio 2.4, and the quick ratio 1.9. Cash declined $3.77 million in the six-month period. Investing activities provided $0.91 million, mainly from liquidating marketable securities; financing activities used $1.32 million, primarily to redeem preferred stock.
Material changes and unusual items
- Six-month sales were nearly flat, while gross profit fell 10% and gross margin declined about 2.3 percentage points. Management cited rising product costs and competitive pricing.
- General and administrative expense rose $2.14 million to $3.81 million for the six months. The company attributed the increase primarily to proxy-defense and other legal fees, and settlements and separation costs for former executives. For the quarter, G&A increased $0.53 million year over year.
- Diabetic products generated 84% of six-month sales, versus 81% a year earlier. Management described the customer base and product offering as concentrated; demand and order volumes can be volatile and pricing is pressured.
- The company redeemed all 6% Senior Convertible Preferred Stock for approximately $1.29 million in February 2015, following a change-of-control provision triggered by the December 2014 board turnover. Preferred stock accretion and dividends totaled approximately $476,000 for the six months.
- A settlement with the former CFO provided for $315,000 in cash salary-related payments, approximately $375,000 for legal fees and other amounts, and 35,000 restricted stock units. A former CEO separation agreement also created continuing payment obligations. Approximately $0.31 million remained accrued for both former executives at March 31; management expected to fund about $0.3 million of remaining severance and benefits in the near term.
- Six-month discontinued-operations income of $199,000 included a $200,000 recovery related to a previously reserved receivable from G-Form. A separate derivative lawsuit was dismissed with prejudice on April 13, 2015. The former CFO lawsuit was settled without admission of liability or wrongdoing.
- Related-party buying-agent Forward China is the exclusive Asia-Pacific sourcing agent and supplier. Its fee is $100,000 monthly plus 4% of adjusted gross profit; fees included in cost of goods sold were $773,000 for the six months. A company director is a principal of Forward China. The agreement, as amended, was scheduled to terminate September 11, 2015, subject to renewal.
Outlook, risks, and controls
Management stated that liquidity and financial resources should be adequate for the next twelve months, while noting expected near-term severance and benefit payments. No numerical earnings or revenue guidance was provided. Key risks cited include customer concentration, variable short-lead-time orders, pricing pressure, rising supplier costs, and dependence on a concentrated supplier base in China. The company reported effective disclosure controls as of quarter-end and no changes in internal control over financial reporting during the period.
Important facts for investors to verify
- Whether operating performance and cash generation improve after the unusual proxy, legal, and executive-separation costs.
- Cash use, remaining severance obligations, and the basis for management’s twelve-month liquidity assessment.
- Customer concentration and the sustainability of diabetic-products sales, gross margins, and pricing.
- Terms, renewal status, and related-party economics of the Forward China sourcing agreement.
- The filing reports $773,000 of Forward China fees in six-month results; investors may wish to review the agreement and related-party disclosures for the complete fee calculation and governance context.