Forward Industries, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended June 30, 2015; compared with the same periods in 2014. The company designs and sells protective and carrying products for OEM customers, sources substantially all OEM products from China, and has exited its retail business.
Financial results
| Metric | Three months ended June 30, 2015 | Nine months ended June 30, 2015 |
|---|---|---|
| Net sales | $7.23 million, down 20% | $22.42 million, down 7% |
| Gross profit / margin | $1.35 million / 19% (18% in 2014) | $4.26 million / 19% (20% in 2014) |
| Operating income (loss) | $494,000 | $(1.78) million |
| Net income (loss) | $495,000 | $(1.69) million |
| Net income (loss) applicable to common equity | $495,000 | $(2.17) million |
| Basic and diluted EPS | $0.06 | $(0.26) |
- Quarterly revenue fell primarily because of lower sales in both Diabetic and Other Products. Diabetic Products were 82% of quarterly sales and 83% of nine-month sales, reflecting significant product and customer concentration.
- For the quarter, gross margin improved year over year on product mix despite lower gross profit. For the nine months, margin declined one percentage point as sales volume fell.
- Nine-month general and administrative expense rose 61% to $4.16 million, primarily from proxy-contest and legal costs and former CFO/CEO separation costs. Quarterly G&A fell to $356,000, helped by a $425,000 insurance recovery related to the former CFO settlement, lower staffing costs, and reduced professional and occupancy expenses.
- Nine-month discontinued-operations income was $199,000, including a $200,000 recovery from a third party related to the G-Form matter. The retail business exit is complete.
Cash, liquidity, and capital
- At June 30, 2015, cash was $4.29 million, down from $6.48 million at September 30, 2014. Current assets were $12.87 million and current liabilities $5.87 million; working capital was $7.0 million. Management reported a 2.2 current ratio and 1.7 quick ratio.
- Operating activities used $1.78 million of cash in the nine months, versus $677,000 provided in 2014. Investing activities provided $908,000, mainly from liquidating marketable securities; financing activities used $1.32 million, primarily to redeem all outstanding 6% Senior Convertible Preferred Stock.
- The company reported no short- or long-term debt. Current liabilities included $4.51 million due to Forward China, a related-party sourcing agent.
- Preferred shares were fully redeemed for approximately $1.29 million in February 2015. Nine-month preferred dividends and accretion totaled approximately $476,000, contributing to the larger loss applicable to common equity.
Outlook, risks, and notable developments
- Management said liquidity and financial resources should be adequate for operating and financial requirements over the next 12 months. No specific revenue or earnings guidance was provided; interim results are not necessarily indicative of full-year results.
- Management cited volatile, short-lead-time orders and a highly concentrated customer base, price sensitivity and customer pricing pressure, and dependence on a limited supplier base. No supplier-base expansion occurred during the nine-month period.
- The exclusive buying agency and supply agreement with Forward China, whose principal is a company director, provides for a monthly $100,000 fee plus 4% of adjusted gross profit and was due to expire September 11, 2015. The company said renewal discussions were ongoing.
- Shareholders elected a new board majority in December 2014. The CEO resigned in January; a new CFO was hired in June and Terence Wise became CEO effective July 1, 2015. The report attributes significant first-quarter expenses to the proxy contest, legal matters, and acquisition-related professional services.
- The former CFO employment lawsuit was settled in February without admission of liability; the company recorded a $425,000 insurance reimbursement in the June quarter. As of June 30, management identified no legal proceedings it believed would be material if decided adversely. Disclosure controls were assessed as effective, and no material change in internal control was reported.
Important facts for investors to verify
- Whether Forward China agreement renewal was completed and on what terms, given the related-party relationship and material sourcing dependence.
- Whether customer demand, especially for Diabetic Products and the largest OEM accounts, stabilized after the reported revenue declines.
- How much of the nine-month loss and quarterly profit reflected unusual legal, separation, and insurance-recovery items versus recurring operations.
- Whether operating cash use and the decline in cash can be reversed, and how the related-party payable to Forward China is managed.
- Potential future dilution from outstanding options, warrants, and restricted stock; the filing reports 723,846 warrants and 278,500 options outstanding at June 30, 2015.