FWDI

Forward Industries, Inc. - 10-Q Summary (Period Ended March 31, 2011)

Business Context and Reporting Period

This is a Quarterly Report on Form 10-Q for Forward Industries, Inc., a smaller reporting company incorporated in New York. The report covers the three and six-month periods ended March 31, 2011. The Company designs, markets, and distributes carry and protective solutions for handheld electronic devices (primarily medical monitoring kits, GPS, and cellular telephones) and other consumer products. Its principal customers are Original Equipment Manufacturers (OEMs) located in the APAC region, the Americas, and Europe.

Key Financial Metrics

Cash Flow (Six Months Ended Mar 31, 2011): Net cash used in operating activities was $1,104,575. Net cash used in investing activities was $1,074,823, primarily due to a $1,000,000 loan issued to Flash Ventures, Inc.

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 13% ($576k) for the quarter and 28% ($2.4m) for the six-month period compared to the prior year. Growth was driven by higher sales of diabetic products (up 11% QoQ, 23% YoY) and "other products" (up 23% QoQ, 45% YoY).
• Expense Increase: Operating expenses rose significantly. General and Administrative (G&A) expenses increased 99% ($548k) for the quarter and 66% ($801k) for the six-month period. This was driven by personnel costs (recruitment, retention bonuses, relocation), professional fees related to acquisition efforts, and share-based compensation.
• Widening Loss: Despite higher gross profit, the net loss widened to $0.55 million for the quarter (from $0.11 million) and $0.54 million for the six-month period (from $0.30 million) due to the surge in operating expenses.
• Investing Activity: The Company issued a $1,000,000 note receivable to Flash Ventures, Inc. in January 2011, a new investing activity not present in the prior period.

Guidance, Outlook, and Risks

Management Strategy: Management is pursuing a strategy to grow the existing OEM business and expand into retail distribution through internal development and product diversification. This shift is expected to increase operating expenses in the near term before revenue benefits are fully realized.

Acquisition Update: The Company terminated its Letter of Intent to acquire Flash Ventures, Inc. on April 14, 2011. Consequently, the anticipated capital outlay for the acquisition will not occur, but the Company must now pursue retail channel development internally, which may take longer.

Risks and Contingencies:

• Customer Concentration: Sales are highly concentrated; two customers accounted for approximately 72% of accounts receivable at March 31, 2011. Diabetic product sales represented 79% of total net sales for the quarter.
• Loan Risk: There is a risk that the $1,000,000 loan to Flash Ventures, Inc. may not be repaid. Flash was late on an interest payment in March 2011 but paid in full.
• Valuation Allowance: The Company maintains a full valuation allowance against its deferred tax assets ($621,000) due to cumulative losses and uncertainty regarding future taxable income.
• Executive Relocation: The Company relocated executive offices from Florida to California in April 2011, incurring new lease and relocation costs.

Investor Verification Checklist

• Verify the repayment status of the $1,000,000 note receivable to Flash Ventures, Inc., given the previous late payment.
• Monitor the concentration risk associated with the top two customers representing 72% of accounts receivable.
• Assess the timeline and cost efficiency of the new internal strategy to develop retail distribution following the termination of the Flash acquisition.
• Review the impact of increased G&A expenses (specifically personnel and professional fees) on future profitability as the company scales its sales force.
• Confirm the status of the $107,000 bank letter of guarantee held by Forward Switzerland for potential VAT liabilities in the Netherlands.