Forward Industries, Inc. — Q1 FY2014 Form 10-Q
Reporting period: Three months ended December 31, 2013, compared with the three months ended December 31, 2012. The company designs and distributes carry and protective products, primarily for OEM customers. It has exited its Retail business and reports continuing operations as a single OEM segment.
Financial performance and position
- Revenue: $8.42 million, up 21% from $6.97 million. Diabetic products generated $6.4 million (76% of sales); sales of those products rose from $5.2 million. Geographic sales were $3.4 million in APAC, $2.5 million in the Americas and $2.5 million in EMEA.
- Gross profit and margin: $1.85 million versus $1.50 million; gross margin was 22% in both periods. Sales and marketing expense increased 29% to $617,000, while general and administrative expense decreased 20% to $856,000.
- Operating and net income: Operating income was $372,000, compared with an operating loss of $52,000. Continuing-operations income was $347,000 versus $181,000. Net income was $351,000 versus $139,000; preferred dividends and accretion of $49,000 reduced income applicable to common equity to $303,000. Diluted earnings per share were $0.04 versus $0.02.
- Other items: Marketable securities generated an $81,000 net loss, compared with a $242,000 gain in the prior-year quarter. Discontinued operations contributed $5,000 of income versus a $42,000 loss.
- Cash flow: Operating activities used $1.02 million, primarily reflecting a $1.70 million increase in receivables. Investing activities used $181,000 net, including $4.10 million of securities purchases and $3.93 million of sales. Financing activities used $19,000 for preferred dividends. Cash ended the quarter at $5.40 million, down from $6.62 million at September 30, 2013.
- Liquidity and debt: Current assets were $15.40 million and current liabilities $5.01 million; working capital was $10.3 million, the current ratio 3.07 and quick ratio 2.66. The company reported no short- or long-term debt. Marketable securities were $1.17 million.
- Capital structure: The company had 8,195,808 common shares outstanding on February 3, 2014. It also had 648,846 shares of 6% senior convertible preferred stock outstanding, with a stated aggregate liquidation value of $1.275 million, and associated warrants. Preferred dividends are cumulative; preferred stock is presented as temporary equity.
Changes, outlook and risks
- Revenue growth was driven principally by higher diabetic-product sales, especially programs with Diabetic Customer A. Management said the business remains highly concentrated in a few customers and products, with variable orders, short lead times, price sensitivity and downward pricing pressure.
- Management cited rising costs from China-based suppliers and warned that supplier-base concentration may increase, potentially weakening its ability to resist cost increases. It is investing in sales, design and support teams to diversify and grow the business and has begun searching for acquisition targets. No numerical revenue or earnings guidance was provided.
- Management expected liquidity and financial resources to be adequate for operating and financial needs over the next 12 months. Interim results, it cautioned, are not necessarily indicative of full-year results.
- Related-party arrangements include the exclusive Asia-Pacific buying agent and supplier, whose principal is a company director; service fees charged to cost of goods sold were approximately $295,000 for the quarter. The chairman also manages the investment adviser retained to manage certain company investment accounts.
- The company disclosed prior material weaknesses involving accounting for a preferred-stock-and-warrant financing and communication of significant financial matters, including an omitted expense accrual. It stated that it implemented corrective controls and considered the weaknesses remediated as of December 31, 2013. Disclosure controls and procedures were deemed effective at quarter-end.
- A Dutch VAT-related bank guarantee of up to €75,000 (approximately $103,000) remained in place; the company reported no related liability. Management reported no legal proceedings believed to be material as of quarter-end.
Important facts for investors to verify
- Customer and diabetic-product concentration, including the effect of changing order volumes and pricing on margins.
- Receivable collection and cash conversion, given operating cash use and the quarter’s increase in accounts receivable.
- Terms, dividend and conversion rights, redemption provisions and potential dilution from the preferred stock and warrants; reconcile the warrant-liability amounts presented in the notes and balance sheet.
- Progress and durability of internal-control remediation, particularly for complex financing transactions and communication of expenses.
- Supplier concentration, related-party fees and the performance, liquidity terms and fees of the investment-management arrangement.
- Collection of the approximately $280,000 settlement receivable from G-Form included in discontinued-operation assets.