Forward Industries, Inc. — FY2014 Form 10-K
Business context and reporting period. The filing covers the fiscal year ended September 30, 2014 (not just the fourth quarter). Forward designs and distributes carrying and protective accessories for OEM customers; it outsources substantially all manufacturing to suppliers in China. The company has substantially exited its retail business and focuses on OEM operations. Diabetic products generated 79% of FY2014 sales.
Financial performance and liquidity
| Metric | FY2014 | FY2013 |
|---|---|---|
| Net sales | $33.36 million | $30.91 million |
| Gross profit / margin | $6.55 million / 19.6% | $6.38 million / 20.6% |
| Operating income (loss) | $(0.10) million | $0.71 million |
| Continuing operations income (loss) | $(0.47) million | $0.005 million |
| Discontinued operations loss | $(0.33) million | $(0.21) million |
| Net loss / loss per common share | $(0.80) million / $(0.12) | $(0.21) million / $(0.09) |
| Operating cash flow | $0.23 million | $2.25 million |
| Cash and cash equivalents | $6.48 million | $6.62 million |
- Sales increased 8%, with diabetic products up $2.0 million and other products up $0.5 million. A new camera customer contributed $1.5 million of FY2014 sales.
- Gross profit rose 3%, but gross margin fell about one percentage point, reflecting lower margins on camera and GPS products and pricing pressure.
- Sales and marketing costs increased 28% to $2.81 million, mainly from personnel investment. General and administrative costs rose 10% to $3.85 million, including higher legal and acquisition-search fees.
- Cash from operations declined sharply year over year. FY2014 working-capital cash generation included a $2.3 million increase in accounts payable, including amounts due to Forward China; receivables rose $1.7 million and inventory rose $0.3 million.
- At September 30, 2014, working capital was $10.0 million, current ratio 2.6 and quick ratio 2.2. The company reported no short- or long-term debt. Current assets included $6.48 million cash and $1.05 million marketable securities.
- FY2014 investing activities used $0.25 million net; financing activities used $0.12 million, including $76,000 in preferred dividends. The 6% convertible preferred stock had an aggregate liquidation value of $1.275 million; its carrying value was approximately $0.83 million.
Material changes, outlook and risks
- Revenue mix remained concentrated: four diabetic OEM customers accounted for 76% of sales, versus 75% in FY2013; the largest customer represented 27%. Four customers also represented 77% of receivables at year-end.
- Management said it was investing in sales, design and support to strengthen customer service, diversify the customer base and pursue OEM growth. It was also searching for acquisitions intended to be earnings-accretive. No quantified earnings or revenue guidance was provided.
- Management expected available liquidity to be adequate for operating and financial needs over the next 12 months, while acknowledging uncertainty around profitability and the return on growth investments.
- Key business risks include customer and diabetic-product concentration, customer demands for price reductions, rising Chinese supplier costs, dependence on a single exclusive sourcing agent and a concentrated supplier base. Supplier A accounted for 66% of OEM purchases in FY2014.
- Forward China’s agreement was exclusive, due to expire March 11, 2015 subject to renewal. The company purchased products at the agent’s cost and paid a service fee of $100,000 monthly plus 4% of adjusted gross profit. A company director was a principal of Forward China; FY2014 fees were approximately $1.41 million.
- Unusual items and contingencies: FY2014 included $0.25 million net investment losses, a $0.14 million warrant-liability fair-value loss, and a $0.28 million fully reserved receivable from former retail counterparty G-Form. A court judgment in November 2014 ordered G-Form to pay $331,282 including interest and legal fees; collection remained in progress.
- Significant litigation and governance uncertainty followed a director-led proxy contest and lawsuits involving directors, the company and its former CFO. As of the filing date, appeals and proceedings remained pending; a preliminary injunction barred issuance of proposed Series B preferred stock before the annual meeting.
- Management concluded disclosure controls and internal control over financial reporting were effective at September 30, 2014. The independent auditor did not attest to internal-control effectiveness. The financial statements received an unqualified audit opinion.
Most important facts for investors to verify
- Whether operating cash generation can recover without reliance on increased supplier payables, and whether the large year-end balance due to Forward China is settled on agreed terms.
- Subsequent sales, orders and pricing from the four major diabetic customers, and progress in diversifying revenue and suppliers.
- Actual collection status of the G-Form judgment and any resulting cash recovery beyond the fully reserved receivable.
- Outcomes and costs of the proxy contest, director litigation, former CFO lawsuit and preferred-stock injunction or appeal.
- Renewal or replacement of the Forward China agreement, related-party fee terms, and any further capital needs or preferred-stock obligations.