Forward Industries, Inc. — Q1 FY2016 Form 10-Q
Reporting period: Three months ended December 31, 2015; comparative period is the three months ended December 31, 2014. The company designs and distributes custom carrying cases and protective products, principally for OEM customers. It has exited retail and focuses on OEM products; substantially all OEM products are sourced from independent suppliers in China through Forward China.
Financial performance
| Metric | Q1 FY2016 | Q1 FY2015 |
|---|---|---|
| Net sales | $7.14 million | $7.94 million |
| Gross profit / margin | $1.52 million / 21% | $1.56 million / 20% |
| Operating expenses | $1.27 million | $3.15 million |
| Income (loss) from continuing operations | $244,000 | $(1.70) million |
| Net income (loss) | $244,000 | $(1.50) million |
| Net income (loss) applicable to common equity | $244,000 | $(1.98) million |
| Basic and diluted EPS | $0.03 | $(0.23) |
| Cash used in operating activities | $672,000 | $2.38 million |
Sales declined approximately 10%, primarily from lower diabetic-products sales. Gross profit dollars slipped about $40,000, while gross margin improved to 21% from 20%. Lower sales and marketing expense ($433,000, down 37%) and general and administrative expense ($842,000, down 66%) more than offset the gross-profit decline. Management attributed the G&A reduction chiefly to lower proxy-contest legal and professional costs and lower personnel costs, including prior-period CFO-settlement accruals. Prior-year results also included a $110,000 investment loss and $199,000 of income from discontinued operations, including a $200,000 recovery related to the former retail business.
Balance sheet, liquidity and cash flow
- At December 31, 2015, cash and cash equivalents were $3.32 million, down $718,000 from September 30, 2015. Current assets were $13.11 million and current liabilities $5.49 million; working capital was $7.6 million. The company reported a 2.4 current ratio and 1.9 quick ratio.
- Total liabilities were $5.60 million; the company reported no short- or long-term debt. A significant current obligation was $4.29 million due to Forward China.
- Operating cash outflow was $672,000 despite net income, mainly reflecting a $1.07 million increase in accounts receivable. Investing cash outflow was $44,000, principally for property and equipment; financing cash outflow was $2,000 for restricted-stock repurchases.
- Management said available liquidity and financial resources were expected to be adequate for operating and financial needs over the next 12 months. No material capital-asset purchases were anticipated.
Business changes, outlook and risks
- Diabetic products generated $6.2 million, or 87% of sales, versus $6.7 million, or 85%, a year earlier. Lower sales to two large customers were partly offset by gains from two others. This concentration leaves revenue exposed to customer order variability and pricing pressure.
- Other-product sales decreased to $0.9 million from $1.2 million. Management described quarterly revenue as susceptible to significant swings because a few large customers have variable order flows and short lead times.
- Management cited rising China supplier costs, possible further supplier-base concentration, and the risk that costs cannot be fully passed through to customers, potentially pressuring margins. Forward China is a related party; service fees were approximately $373,000 in the quarter, included in cost of goods sold. The supply agreement, on substantially similar terms to the prior agreement, expires September 8, 2016, subject to renewal.
- The company is pursuing organic growth and an active search for complementary acquisition targets intended to be accretive; the filing provides no specific acquisition timetable or financial guidance. Management cautioned that failure to receive material orders and pricing pressures could cause actual results to differ from forward-looking statements.
- The former CFO employment-related lawsuit was settled in February 2015; approximately $30,000 remained accrued at quarter-end. The company reported no other legal proceedings it believed would be material if adversely decided.
- Management reported disclosure controls were effective at period-end and no material change in internal control over financial reporting during the quarter. No current book tax provision was recorded against income, citing net operating loss carryforwards; deferred tax assets remained fully valuation-allowanced.
Important facts for investors to verify
- Whether sales to major diabetic-products customers stabilize or decline further, and whether customer and product concentration changes.
- Receivables collection and working-capital trends, particularly the $1.07 million quarterly increase in accounts receivable and continuing operating cash outflow.
- Terms, renewal prospects and related-party governance for the Forward China supply agreement, including the $4.29 million payable and service fees.
- Whether supplier cost increases and pricing pressure affect gross margin, and whether the company can diversify suppliers and customers.
- Whether the expected 12-month liquidity adequacy holds if operating results weaken, and the funding and economics of any acquisition activity.