Forward Industries, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended June 30, 2014. The company designs and distributes protective cases and accessories, primarily for OEM customers; it exited its Retail business, which is reported as discontinued operations.
Financial performance and position
| Metric | Three months ended June 30, 2014 | Prior-year quarter | Nine months ended June 30, 2014 | Prior-year period |
|---|---|---|---|---|
| Net sales | $9.07 million | $8.59 million | $24.18 million | $23.35 million |
| Gross profit | $1.67 million | $1.79 million | $4.91 million | $4.73 million |
| Gross margin | 18% | 21% | 20% | 20% |
| Income from operations | $32,000 | $474,000 | $270,000 | $628,000 |
| Income (loss) from continuing operations | $41,000 | $(226,000) | $105,000 | $242,000 |
| Net income (loss) | $20,000 | $(245,000) | $70,000 | $42,000 |
| Net loss applicable to common equity | $(28,000) | $(538,000) | $(74,000) | $(251,000) |
- Cash flow: Nine-month operating cash flow was $677,000, versus $598,000 a year earlier. Investing activities used $223,000 and financing activities used $57,000, including preferred dividends. Cash increased by $397,000 to $7.01 million.
- Liquidity: At June 30, cash and cash equivalents were $7.01 million and marketable securities were $1.26 million. Working capital was $10.8 million; the current ratio was 2.8 and quick ratio 2.4. The company reported no short- or long-term debt.
- Balance sheet: Current assets were $16.95 million and current liabilities $6.16 million. Amounts due to related-party sourcing agent Forward China rose to $4.27 million from $108,000 at September 30, 2013.
- Preferred securities: The company had $804,000 carrying value of 6% senior convertible preferred stock, with an aggregate liquidation value of $1.275 million. Nine-month preferred dividends and accretion totaled $145,000.
Changes and key developments
- Quarterly sales increased about 6%, while nine-month sales increased about 4%. Diabetic-products sales represented 76% of quarterly sales and 79% of nine-month sales.
- Quarterly gross profit fell despite higher sales, and gross margin declined to 18% from 21%. Management cited customer price concessions, higher supplier costs it could not fully pass through, and a lower-margin new program.
- Sales and marketing expense increased 28% for the quarter and 38% for the nine months, mainly from expanded sales and support staffing. General and administrative expense rose 21% in the quarter, including proxy-contest and professional costs; nine-month expense was broadly unchanged.
- Quarterly results benefited from the change in marketable-securities results: a $9,000 net gain compared with a $702,000 net loss in the prior-year quarter. Nine-month securities results were a $31,000 net loss versus a $374,000 net loss. Warrant-liability remeasurement also affected nine-month other expense; after registration requirements were met, the warrant liability was reclassified to additional paid-in capital in March 2014.
- Retail discontinued-operations losses were $21,000 for the quarter and $35,000 for the nine months, compared with $19,000 and $199,000, respectively, in the prior-year periods.
Outlook, risks and contingencies
- Management expected liquidity and financial resources to be adequate for the next twelve months. It gave no numerical revenue or earnings guidance and said it was prepared to cut costs if sales investments did not produce sustained growth.
- Management described customer and product concentration, variable customer orders and short lead times, price pressure, and rising China-based supplier costs as continuing challenges. Diabetic products remain a large share of sales; several customer programs were nearing the end of their life cycles.
- The company continued to evaluate acquisition opportunities and anticipated further legal and other costs tied to a proxy contest and the 2014 annual shareholder meeting.
- The exclusive buying-agent and supply agreement with Forward China, a related party, was amended in March 2014 and runs to March 11, 2015, subject to renewal. Forward China service fees were $930,000 for the nine months; $4.27 million was payable at June 30.
- A related-party New York office charge increased from $2,500 to approximately $12,700 monthly effective April 1, 2014. The company recorded $43,000 of rent expense for the nine months.
- Two lawsuits related to the proxy contest were pending after quarter-end. A director’s derivative suit sought to restrict certain Board actions; the court rejected his request for a temporary restraining order. The company separately sued the director and an associate over alleged securities-disclosure violations. The allegations are not findings of fact.
- A bank guarantee related to potential Dutch VAT obligations was approximately $104,000. The Swiss bank held a security interest in approximately $1.85 million of the subsidiary’s assets on deposit; the company reported no liability under the guarantee.
- Management said disclosure controls were effective at quarter-end. Material weaknesses identified in prior periods relating to preferred-stock accounting and communication of significant financial matters were reported as remediated in the quarter ended December 31, 2013. The filing references a prior-period restatement related to preferred-stock accounting.
Key facts for investors to verify
- Whether sales investments translate into growth while protecting gross margin amid customer pricing pressure and supplier-cost increases.
- Customer and program concentration, including the timing of diabetic-product program transitions and the durability of new customer programs.
- The nature, terms, and settlement status of the $4.27 million payable to Forward China, and the economics of the related-party sourcing arrangement.
- The potential dilution, dividends, liquidation preference, conversion and redemption terms of the preferred stock and associated warrants.
- Developments in the proxy-related litigation and the resulting legal, governance, and expense impacts.
- Whether the reported remediation of prior control weaknesses remains effective, particularly for complex financing transactions and significant expense accruals.