Forward Industries, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended June 30, 2016; filed August 12, 2016. The company designs and distributes protective and carrying products, primarily for OEM customers, and sources substantially all products from suppliers in China. Its former retail business is discontinued.
Financial performance
| Metric | Three months ended June 30 | Nine months ended June 30 |
|---|---|---|
| Net revenue, 2016 | $6.665 million | $20.828 million |
| Net revenue, 2015 | $7.231 million | $22.422 million |
| Gross profit, 2016 | $1.078 million | $3.801 million |
| Gross margin, 2016 | 16.2% | 18.3% |
| Net income (loss), 2016 | $78,000 | $466,000 |
| Net income (loss), 2015 | $495,000 | $(1.694) million |
| Basic and diluted EPS, 2016 | $0.01 | $0.05 |
Quarterly revenue fell 8% year over year and nine-month revenue fell 7%. Gross margin declined from 18.6% to 16.2% for the quarter and from 19.0% to 18.3% for the nine-month period. The quarterly operating result was $85,000, versus $494,000 a year earlier. Nine-month operating income was $478,000, compared with an operating loss of $1.777 million in 2015.
Quarterly continuing-operations income decreased to $78,000 from $495,000, mainly because gross profit fell approximately $270,000 and G&A rose approximately $185,000; lower sales and marketing expense partly offset the change. Nine-month results improved substantially, primarily due to lower G&A and sales and marketing costs, partly offset by lower gross profit.
Cash, liquidity, and balance sheet
- Cash and cash equivalents were $5.235 million at June 30, 2016, up from $4.042 million at September 30, 2015.
- Current assets were $12.913 million and current liabilities $4.970 million; working capital was approximately $7.9 million. The reported current ratio was 2.6 and quick ratio 2.1.
- Total liabilities were $5.025 million. The company reported no short- or long-term debt. The balance sheet included $4.120 million due to Forward China.
- Nine-month operating cash flow was $1.243 million, versus cash used of $1.777 million in 2015. Investing activities used $48,000, primarily for equipment; financing activities used $2,000 for restricted-stock repurchases.
Material changes, outlook, and risks
- Management said the company had recorded five consecutive profitable quarters, but revenue had declined in each of the last three quarters. It anticipated adequate liquidity and financial resources for the next 12 months; no quantified revenue or earnings guidance was provided.
- Management cited rising costs from China-based suppliers as a pressure on gross margins when cost increases cannot be passed on. It also warned that a more concentrated supplier base could weaken its ability to negotiate costs.
- Customer and receivable concentration is significant: four customers represented 86.2% of quarterly revenue and 88.3% of nine-month revenue; those customers accounted for 88.2% of receivables at June 30.
- Diabetic products represented 87% of quarterly revenue and 89% of nine-month revenue. Other-product revenue declined, primarily from the loss of several small customers.
- Forward China is the exclusive buying agent and supplier under an agreement expiring September 8, 2018. The CEO is a principal of Forward China; the company recorded $362,000 of related service fees in the quarter and $1.101 million for nine months, included in cost of goods sold.
- Prior-year comparisons include unusual items: 2015 quarterly G&A benefited from approximately $425,000 of insurance recovery proceeds related to the former CFO settlement; 2015 nine-month discontinued operations included a $200,000 recovery of previously written-off receivables. The company redeemed all outstanding preferred stock for approximately $1.288 million in February 2015.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting. It reported no legal proceedings believed material as of June 30, 2016. The filing lists no risk factors under Item 1A, which it says is not applicable to smaller reporting companies.
Key facts for investors to verify
- Whether revenue declines, customer concentration, and reliance on diabetic products continue or worsen.
- Whether supplier-cost pressure reduces margins and whether the company can pass increases through to customers.
- The terms, performance, and related-party governance of the Forward China supply arrangement and its $4.120 million payable balance.
- Whether operating cash generation and management’s 12-month liquidity expectation remain supported by working-capital trends.
- The sustainability of reported profitability, considering lower revenue, margin compression, and prior-period unusual items.