Forward Industries, Inc. — FY2011 Form 10-K
Business context and reporting period. The filing covers the fiscal year ended September 30, 2011; it does not provide separate fourth-quarter financial results. Forward designs, markets, and distributes protective cases and accessories, primarily for OEMs, while sourcing substantially all products from independent suppliers in China. It is investing in new products and retail, corporate, and online distribution in addition to its OEM business.
Key financial results
| Metric | FY2011 | FY2010 | Change |
|---|---|---|---|
| Net sales | $22.78 million | $19.00 million | Up 20% |
| Gross profit / margin | $5.06 million / 22% | $4.23 million / 22% | Gross profit up 20%; margin broadly flat |
| Operating expenses | $8.08 million | $5.80 million | Up 39% |
| Operating loss | $3.02 million | $1.57 million | Loss widened |
| Net loss | $2.90 million | $1.68 million | Loss widened |
| Basic and diluted loss per share | $0.36 | $0.21 | Loss per share increased |
| Cash used in operating activities | $1.79 million | $1.69 million | Use increased |
| Cash and cash equivalents at year-end | $14.91 million | $18.47 million | Down $3.56 million |
Diabetic-product sales rose 18% to $16.7 million and represented 73% of revenue; other-product sales rose 26% to approximately $6.2 million. Approximately $0.4 million of other-product sales to Flash Ventures was described as non-recurring. Sales and marketing expense increased 56% to $3.39 million, and general and administrative expense increased 29% to $4.69 million, reflecting added personnel, product development, expansion efforts, relocation, and professional fees.
At September 30, 2011, working capital was $18.3 million; current ratio was 6.1 and quick ratio 5.8. The company reported no short- or long-term debt. Investing activities used $1.77 million, primarily for notes receivable, as well as $0.28 million for property and equipment. The balance sheet included a $1.0 million current note receivable. Cash and cash equivalents included approximately $10.5 million held above applicable U.S. FDIC or European deposit-insurance limits.
Material changes and developments
- Revenue growth was accompanied by substantially higher operating expenses, so the operating loss and net loss increased despite higher gross profit.
- Gross margin remained approximately 22%; management cited customer pricing pressure and rising materials and labor costs, with material costs as a percentage of sales increasing.
- Customer concentration remained high: three customers generated approximately 69% of FY2011 sales, down from 73% in FY2010. Diabetic cases remained the dominant product line.
- Four suppliers accounted for approximately 90% of product purchases; one supplier alone accounted for 58%, versus 67% in FY2010.
- The company expanded its footprint and staffing for channel development, including 15 hires for the prospective retail business; those hires had not generated revenue by year-end.
Outlook, risks, and unusual items
- Management expected new programs awarded by two major diabetic customers to contribute meaningfully beginning in late FY2012, but anticipated lower gross margins on certain new or prospective programs. It expected ongoing margin pressure and significant cash use while investing in the strategy, while stating liquidity should be adequate for the next 12 months.
- A binding MOU with G-Form grants exclusive rights to specified protective technology in a designated territory, subject to minimum sales or corresponding royalty payments. The company had paid $490,000 in non-refundable advance royalties, recorded as a prepaid asset; no related product sales had occurred by year-end.
- Flash Ventures borrowed $1.0 million under an 11% unsecured note. After year-end, the maturity was extended to April 1, 2012 and the loan was to be secured; Flash paid $250,000 of principal on December 1, 2011. Flash had previously been late on an interest payment, later paid in full.
- Targus and affiliates sued the company, its CEO, and employees over former employees’ moves to Forward, alleging contract, fiduciary-duty, and unfair-competition claims. Damages were unspecified; the company said it would vigorously defend and recorded no loss provision.
- Other key risks include reliance on a few OEM customers and Chinese suppliers, possible reductions in in-box accessories, order variability, freight disruption, foreign exchange, and the inability to pass supplier cost increases through to customers.
Important facts for investors to verify
- Whether the new diabetic programs and retail-channel investments produce revenue and returns sufficient to offset higher ongoing expenses.
- Subsequent collection, security, and repayment status of the Flash note, and the accounting and recoverability of the G-Form advance.
- Whether customer and supplier concentration, pricing pressure, and rising input costs materially affect revenue or margins.
- The status and potential financial exposure of the Targus litigation; the filing does not state a damages amount.
- Cash availability and any restrictions or losses related to deposits above insured limits; the filing reports no debt at year-end.