Forward Industries, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended June 30, 2013; filed August 12, 2013. The company designs and distributes protective and carrying solutions, primarily for portable devices. Following its decision to exit retail in 2012, it focused on its OEM business; the retail exit was substantially complete by March 31, 2013.
Financial performance
| Metric | Three months ended June 30, 2013 | Nine months ended June 30, 2013 |
|---|---|---|
| Net sales | $8.59 million, up from $7.66 million | $23.35 million, up from $20.05 million |
| Gross profit / margin | $1.84 million / 21.5%; prior-year margin 9.9% | $4.86 million / 20.8%; prior-year margin 15.3% |
| Operating income (loss) | $474,000; prior-year loss $613,000 | $628,000; prior-year loss $1.69 million |
| Continuing operations income (loss) | $(226,000); prior-year loss $631,000 | $242,000; prior-year loss $1.64 million |
| Net income (loss), including discontinued operations | $(245,000); prior-year loss $3.31 million | $42,000; prior-year loss $6.37 million |
| Net income (loss) per common share | $(0.03); prior-year $(0.41) | $0.01; prior-year $(0.78) |
- Quarterly sales growth was driven mainly by diabetic products. Diabetic products represented 79% of quarterly sales and 78% of nine-month sales.
- Gross-margin improvement reflected lower sourcing and quality-assurance costs after restructuring and the absence of prior-year quality-related costs. Management also reported margin pressure on successor programs for certain major diabetic customers.
- Sales and marketing expense rose to $602,000 for the quarter and $1.62 million for the nine months, principally due to higher personnel costs. General and administrative expense fell to $768,000 and $2.61 million, respectively, mainly from restructuring and lower personnel and professional costs.
- Marketable-securities losses were $702,000 for the quarter and $374,000 for the nine months, materially reducing reported earnings. The company classified its securities as trading beginning October 1, 2012; trading-related gains and losses are recognized in earnings.
- Discontinued retail operations generated losses of $19,000 for the quarter and $199,000 for the nine months, versus losses of $2.68 million and $4.72 million in the comparable 2012 periods.
Cash, liquidity, and financing
- At June 30, 2013, cash and cash equivalents were $5.01 million, marketable securities $406,000, and working capital $9.94 million. The current ratio was 2.94 and the quick ratio 2.47.
- There was no short- or long-term debt outstanding. Total current liabilities were $5.13 million; total liabilities were $5.21 million.
- Operating activities provided $598,000 in the nine-month period, compared with $8.67 million used in the prior-year period. Investing activities used $375,000, including substantial purchases and sales of marketable securities; financing activities provided $181,000 net.
- The company reported approximately $750,000 of gross proceeds from its June private placement of 6% senior convertible preferred stock and warrants. Approximately $500,000 of the proceeds was received in July. On August 7, after quarter-end, it raised a further approximately $425,000 gross, bringing placement proceeds to approximately $1.175 million.
- The preferred stock carries cumulative 6% cash dividends, has a liquidation preference, and is convertible into common stock. Warrants are exercisable beginning January 1, 2014. The company may conduct additional closings.
Outlook, risks, and other notable items
- Management said it expected liquidity and financial resources to be adequate for operating and financial requirements over the next 12 months. The filing provides no quantified earnings or revenue guidance.
- Management highlighted customer and product concentration, variable orders and short lead times, price sensitivity and downward pricing pressure in diabetic products, and rising China supplier costs. It cited customer and supplier diversification as priorities.
- A July 3 settlement with G-Form related to retail inventory and other matters was expected to provide approximately $311,000. The filing reports $31,000 paid in July and the balance due 60 days after inventory delivery, which occurred in August.
- A guarantee related to potential Dutch VAT exposure was capped at €75,000 (approximately $98,000); no liability had been incurred. The Swiss bank held approximately $1.245 million of Forward Switzerland assets as security for the guarantee.
- The company’s investment management agreement is with an entity managed by its chairman. Fees include a 1% annual asset-based fee and a potential performance fee; approximately $6,000 of asset-based fees was recorded for the period.
- Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter. No legal proceedings believed material were reported.
Important facts for investors to verify
- Whether diabetic-product and major-customer concentration, program transitions, and pricing pressure affect future sales and margins.
- The composition, valuation, and subsequent performance of the marketable-securities portfolio, and the drivers of the quarter’s reported investment loss.
- The preferred-stock and warrant terms, potential dilution, dividend obligations, and proceeds received after quarter-end.
- Collection and final accounting for the G-Form settlement, and any continuing costs or obligations associated with the retail exit.
- Availability of cash pledged as security for the VAT guarantee and the status of the guarantee through its stated renewal period.