Forward Industries, Inc. — Q2 FY2013 Form 10-Q
Business context and period. The filing covers the quarter and six months ended March 31, 2013; fiscal year-end is September 30. Forward designs and distributes protective carrying solutions, primarily for OEM customers, and sources substantially all OEM products from independent suppliers in China. It is exiting its Retail business and reported that the exit was substantially complete at quarter-end.
Financial performance and position
| Metric | Three months ended March 31, 2013 | Six months ended March 31, 2013 |
|---|---|---|
| Net sales, continuing operations | $7.79 million, up 25% | $14.76 million, up 19% |
| Gross profit / gross margin | $1.52 million / 19.5% (prior year: $1.09 million / 17.5%) | $3.02 million / 20.4% (prior year: $2.30 million / 18.6%) |
| Operating income (loss) | $206,000 (prior year: $(571,000)) | $154,000 (prior year: $(1.07) million) |
| Continuing-operations income (loss) | $286,000 (prior year: $(539,000)) | $468,000 (prior year: $(1.01) million) |
| Net income (loss), including discontinued operations | $148,000 (prior year: $(1.54) million) | $287,000 (prior year: $(3.06) million) |
| Operating cash flow | $(205,000) for the six months (prior year: $(5.53) million) |
Six-month diluted and basic earnings per share were $0.04, versus a loss of $0.38 in the prior-year period. Net gains on marketable securities were $86,000 for the quarter and $328,000 for the six months; these gains materially contributed to other income.
At March 31, cash and cash equivalents were $4.02 million, marketable securities $1.12 million, and total current assets $13.08 million. Current liabilities were $3.54 million; working capital was $9.5 million, the current ratio 3.7 and the quick ratio 3.0. The company reported no short- or long-term debt. Total assets were $13.26 million and shareholders’ equity $9.72 million. Cash declined $584,000 from September 30, 2012. Investing activities used $379,000, including substantial purchases and sales of securities.
Changes versus the prior comparable period
- OEM revenue growth, led by diabetic-products sales, and lower general and administrative costs moved continuing operations from a loss to income. Sales and marketing costs increased as the company expanded its sales and support teams.
- Diabetic-products sales rose to $11.5 million for the six months, but represented 78% of total sales, versus 71% a year earlier. Revenue from historically largest diabetic customer A fell, while sales to customers B, C and D increased.
- Management attributed improved gross margin mainly to lower sourcing and quality-assurance costs following restructuring. It also reported margin compression on programs for diabetic customers B and C, reflecting lower selling prices and higher purchase costs.
- Discontinued Retail operations recorded a six-month loss of $181,000, compared with about $2.05 million in the prior-year period. Retail sales fell to $398,000 from $1.66 million as the business was wound down.
- Accounts receivable and inventory fell from September 30 levels, while accounts payable and accrued liabilities also declined. Operating cash flow remained negative despite reported net income.
Outlook, risks and unusual items
- No specific numerical earnings or revenue guidance is provided. Management expects liquidity and financial resources to be adequate for the next 12 months, while noting that sustaining operating improvements and restoring gross margins remain challenges.
- Management cites customer concentration, variable order volumes and short lead times, price-sensitive diabetic-products demand, supplier cost increases, and the ability to pass costs to customers as key business risks. Supplier diversification and customer-base expansion are identified as priorities.
- The company is negotiating with G-Form over a settlement under a June 2012 memorandum of understanding. Discontinued-operation assets include approximately $385,000 relating to an expected settlement; the filing does not state a final settlement amount.
- A Dutch VAT-related bank guarantee is capped at €75,000 (approximately $96,000); no liability had been incurred. Approximately $995,000 held with the Swiss bank securing the guarantee was subject to a security interest.
- On April 16, 2013, the company entered an investment-management agreement with LCA, whose managing member is the company’s chairman. Fees include 1% annually of average account net asset value and a 20% performance fee subject to a high-water mark, plus expense reimbursement.
- On April 26, 2013, the board adopted a shareholder rights plan. Rights generally become exercisable after a person or group reaches 20% beneficial ownership or announces a qualifying offer.
- Management reported disclosure controls were effective and no material change in internal control over financial reporting occurred during the quarter. It reported no legal proceedings believed likely to be material.
Key facts for investors to verify
- Whether OEM growth and improved gross margins persist, particularly given pricing and purchase-cost pressure in diabetic-product programs.
- Customer concentration and sales trends by major customer, including the decline in customer A and growth in customers B, C and D.
- Cash conversion and working-capital trends: six-month operating cash use was $205,000 despite positive net income.
- Outcome and timing of the G-Form settlement, including the recoverability of the approximately $385,000 recorded asset.
- Marketable-securities exposure and the extent to which investment gains contributed to reported income.
- Related-party terms, fees and performance of the LCA investment-management arrangement, and the effect of the shareholder rights plan.
- The six-month 2012 discontinued-operations loss is reported with slightly different amounts in the filing’s statements and notes (approximately $2.046 million versus $2.045 million); verify the precise comparative figure.