Forward Industries, Inc. — FY2017 Form 10-K
Reporting period: Fiscal year ended September 30, 2017; filed December 14, 2017. The company designs and distributes customized carrying and protective solutions for OEMs, sourcing substantially all products from China. This is an annual report, not a standalone fourth-quarter report.
Financial results
| Metric | FY2017 | FY2016 | Change |
|---|---|---|---|
| Net revenue | $24.76 million | $27.48 million | Down $2.72 million, or 10% |
| Gross profit / margin | $4.19 million / 16.9% | $5.08 million / 18.5% | Profit down 17%; margin down 1.6 percentage points |
| Operating income | $598,000 | $617,000 | Down $18,000 |
| Net income | $579,000 | $607,000 | Down $27,000 |
| Basic and diluted EPS | $0.07 | $0.07 | Unchanged |
| Operating cash flow | $(138,000) | $768,000 | Declined $906,000 |
Lower revenue and gross profit were substantially offset by lower operating expenses: sales and marketing declined 21% to $1.50 million and general and administrative expenses declined 19% to $2.09 million. No income tax provision was recorded in either year; the company maintained a full valuation allowance against deferred tax assets.
Liquidity, debt and balance sheet
- At September 30, 2017, cash was $4.62 million, accounts receivable $6.22 million and inventory $2.12 million. Cash was $4.76 million at September 30, 2016.
- Working capital was $8.9 million, compared with $8.2 million a year earlier; current ratio was 3.1 and quick ratio 2.6, versus 3.0 and 2.3, respectively.
- No short- or long-term debt was outstanding. Cash at December 11, 2017 was approximately $5.6 million.
- FY2017 operating cash use primarily reflected a $1.35 million increase in receivables, partly offset by lower inventory and net income. No cash was used for investing or financing activities in FY2017.
Material changes and business concentration
- Diabetic Products revenue fell $3.13 million to $21.02 million, primarily from lower purchases by three major customers; Other Products revenue rose $0.41 million to $3.75 million. Diabetic Products accounted for 85% of revenue, down from 88%.
- Four customers generated 83.2% of revenue, compared with 87.5% in FY2016. One customer alone contributed 21.5% of FY2017 revenue; the largest contributed 26.3%.
- By customer location, revenue fell in APAC to $7.71 million from $10.21 million, and in EMEA to $9.28 million from $9.93 million; Americas revenue rose to $7.77 million from $7.33 million.
- Receivables increased approximately $1.35 million year over year, while inventory decreased approximately $452,000.
Outlook, risks and unusual items
- Management expected existing liquidity to meet operating and financial needs for the next 12 months, but provided no specific revenue or earnings guidance. It was pursuing customer diversification, organic growth, potential acquisitions and strategic partnerships.
- Management highlighted continued customer price pressure and rising China-based supplier costs as threats to margins. Demand and revenue may be volatile due to concentrated customers, short order lead times and reliance on cases being included “in box.” A new diabetes-monitoring product that does not use a carrying case was cited as a risk.
- Substantially all products were purchased through Forward China, the exclusive sourcing agent. The CEO is a principal of the agent. FY2017 service fees were approximately $1.435 million, including an extension fee; Forward China waived the 4% adjusted-gross-profit portion for part of the year, then reinstated it for FY2017’s fourth quarter. The agreement was extended to March 8, 2019.
- The filing identified potential exposure to U.S.–China tariffs or trade restrictions, foreign-exchange movements, supplier concentration, contract-manufacturer payment risk, and customer agreements that could extend payment terms or increase liability. Management’s liquidity outlook and risk discussion are forward-looking and subject to uncertainty.
- A Dutch VAT-related bank guarantee of up to €75,000 (approximately $89,000) remained in place; no liability had been incurred. Approximately $1.4 million of assets held at the Swiss bank were pledged as security. The company reported no legal proceedings believed material as of September 30, 2017.
- The financial statements received an unqualified independent audit opinion. Management reported disclosure controls and internal control over financial reporting effective at year-end; the auditor did not express an opinion on internal-control effectiveness.
Important facts for investors to verify
- Whether major diabetic-monitoring customers maintain or reduce orders, and whether product designs increasingly eliminate carrying cases.
- Customer diversification progress and the effect of concentrated accounts on sales, receivables and cash flow.
- Gross-margin trends amid customer pricing demands, supplier inflation and the company’s dependence on Forward China.
- Receivables collection and operating cash generation following FY2017’s cash use.
- Terms and related-party economics of the Forward China agreement, including service fees and the CEO’s relationship with the agent.
- Potential effects of trade restrictions, currency changes, the VAT guarantee and use of tax-loss carryforwards subject to a full valuation allowance.