Forward Industries, Inc. — FY2016 Form 10-K
Reporting period: Fiscal year ended September 30, 2016; comparisons are with FY2015. This is an annual filing, not a standalone fourth-quarter report.
Business context
The company designs and distributes custom carrying and protective products, primarily for OEMs, and outsources manufacturing to suppliers in China through its exclusive sourcing agent, Forward China. Diabetic-product cases generated approximately 88% of FY2016 revenue; other products generated 12%. The company operates as one segment and had exited its retail business.
Financial performance and liquidity
| Metric | FY2016 | FY2015 | Change |
|---|---|---|---|
| Net revenue | $27.48 million | $30.01 million | Down 8% |
| Gross profit | $5.08 million | $5.79 million | Down 12% |
| Gross margin | 18.5% | 19.3% | Down 0.8 percentage points |
| Operating income (loss) | $617,000 | $(1.51) million | Improved |
| Net income (loss) | $607,000 | $(1.43) million | Improved |
| Basic and diluted EPS | $0.07 | $(0.23) | Improved |
| Cash from (used in) operations | $768,000 | $(2.02) million | Improved |
Lower revenue and gross profit were more than offset by lower operating expenses. General and administrative expense fell 48% to $2.57 million, primarily because FY2015 included proxy-contest and other legal costs. Sales and marketing expense declined 20% to $1.89 million. FY2016 income tax provision was zero; the company maintained a full valuation allowance against net deferred tax assets.
At September 30, 2016, cash and cash equivalents were $4.76 million, working capital was $8.2 million, the current ratio was 3.0, and the quick ratio was 2.3. The company reported no short- or long-term debt. Cash increased $718,000 during the year. Investing activities used $48,000, principally for property and equipment; financing activities used $2,000. Management said available resources were expected to meet operating and financial requirements for the next 12 months.
Changes versus FY2015
- Revenue declined $2.53 million. Diabetic-product revenue fell $640,000, while other-product revenue fell $1.89 million, primarily following the loss of several small customers.
- Four customers contributed approximately 88% of revenue, up from 82% in FY2015. Customer A represented about 31%; Customer B, 25%; Customer C, 19%; and Customer D, 13%.
- Regional revenue declined in APAC and the Americas; EMEA revenue also decreased modestly. Customer and product mix varied by region.
- Operating cash flow turned positive, aided in part by lower receivables and inventory; this was partly offset by reduced payables to suppliers and lower accrued liabilities.
- FY2015 included $199,000 of income from discontinued operations and $1.29 million to redeem all outstanding convertible preferred stock. Neither item recurred in FY2016.
Outlook, risks and unusual items
- Management intends to invest in sales and support to deepen customer relationships and diversify the customer and product base. It also began searching for acquisitions complementary to the business; no specific targets, terms, or financial guidance were provided.
- Management cited volatile customer orders, customer pricing pressure, and rising supplier costs as continuing challenges to revenue and gross margins. It also noted potential concentration among suppliers could weaken its ability to negotiate costs.
- Key risks include dependence on a small number of diabetic-monitoring OEM customers, possible reduced use of carrying cases in new products, and reliance on China-based sourcing and one exclusive agent. The filing also highlighted possible U.S. tariffs or other trade restrictions on Chinese imports as a risk, not a stated outcome.
- Forward China is a related party: CEO and Chairman Terence Wise is one of its principals. The company paid the agent approximately $1.47 million in FY2016 under an agreement providing a $100,000 monthly fee plus 4% of adjusted gross profit. The agreement runs through September 2018, subject to renewal.
- A Dutch VAT-related guarantee was capped at €75,000 (approximately $84,000). No liability had been incurred, but the Swiss bank held a security interest in approximately $1.7 million of Forward Switzerland assets on deposit.
- No material legal proceedings were reported as of September 30, 2016. Management concluded disclosure controls and internal control over financial reporting were effective; the external auditor did not audit internal control effectiveness.
Important facts for investors to verify
- Whether revenue and margins can stabilize amid customer concentration, declining diabetic-case demand, and pricing and supplier-cost pressures.
- Current order trends and the status of efforts to broaden customers, products, and potential acquisition opportunities.
- The economics, governance safeguards, and ongoing performance of the related-party sourcing arrangement, including supplier concentration and the collateral supporting the VAT guarantee.
- Whether working capital and cash generation remain adequate as customer hub arrangements can increase inventory and extend the time before revenue recognition.
- The realizability of tax-loss carryforwards: the company reported substantial carryforwards but maintained a full valuation allowance against net deferred tax assets.