Forward Industries, Inc. — Form 10-Q Summary
Reporting period: Three months ended December 31, 2012 (fiscal 2013 first quarter); unaudited. Comparisons are with the three months ended December 31, 2011 unless noted.
Business context and strategy
Forward designs and distributes carrying cases and protective solutions, primarily for portable electronics and medical monitoring products. It sources substantially all products from independent suppliers in China. After deciding in June 2012 to exit its global Retail business, the company is concentrating on its OEM business and says its restructuring and cost rationalization are substantially complete.
Financial results and liquidity
| Metric | Q1 FY2013 | Q1 FY2012 |
|---|---|---|
| Net sales | $6.97 million | $6.16 million |
| Gross profit / margin | $1.50 million / 21.5% | $1.21 million / 19.7% |
| Operating income (loss) | $(52,000) | $(501,000) |
| Continuing-operations income (loss) | $181,000 | $(473,000) |
| Net income (loss), including discontinued operations | $139,000 | $(1.51) million |
| Operating cash flow | $(291,000) | $(4.02) million |
- Sales increased 13%. Diabetic product sales rose to $5.2 million from $4.0 million, while other product sales fell to $1.8 million from $2.1 million. Diabetic products accounted for 74% of total sales, versus 66%.
- Gross margin improvement reflected lower sourcing and quality-assurance costs. Sales and marketing expense increased 65% to $477,000, mainly from personnel costs; general and administrative expense fell 25% to $1.07 million.
- Other income was $233,000, including a $242,000 realized gain on marketable securities, partly offset by other items. The filing’s cash-flow reconciliation also reflects a gain on securities sales.
- Cash and cash equivalents were $3.70 million and marketable securities were $1.31 million at December 31, 2012. Working capital was $9.3 million; the current ratio was 3.01 and quick ratio 2.22. The company reported no short- or long-term debt.
- Cash declined by $912,000 during the quarter. Investing activities used $621,000, principally reflecting securities purchases and sales; there were no financing activities.
- Retail discontinued operations recorded a $42,000 loss, compared with a $1.04 million loss a year earlier. The company expected to complete the Retail exit by March 31, 2013 and anticipated a further approximately $100,000 discontinued-operations loss in fiscal Q2.
Outlook, risks, and unusual items
- Management said restructuring benefits were beginning to show and anticipated adequate liquidity for the next 12 months, but cautioned that operating improvements might not be sustained. No formal earnings or revenue guidance was provided.
- Management highlighted concentrated customers and products, variable customer orders and short lead times, price pressure in diabetic products, and rising supplier costs that may compress margins.
- Gross margin for sales to two major diabetic customers declined amid lower program prices and higher production costs. Sales to the largest diabetic customer fell from $2.4 million to $1.2 million, while growth from other customers more than offset the decline.
- The company maintains a full valuation allowance against its $3.71 million of deferred tax assets, citing uncertainty that they will be realized.
- A director is a principal of Forward China, the exclusive Asia-Pacific buying agent and supplier. The company recorded $252,000 in related service fees in cost of goods sold during the quarter. A Swiss subsidiary also guaranteed up to approximately $99,000 for a Dutch VAT-related undertaking; approximately $609,000 of assets at the Swiss bank secured the arrangement. No liability had been incurred.
- The Targus litigation was settled effective October 17, 2012; substantially all of the settlement payment was made by the company’s insurer. The company reported no other litigation it believed would be material.
Important facts for investors to verify
- The filing checks “No” to whether the company had filed all required Exchange Act reports during the preceding 12 months; verify the filing-compliance status and any related implications.
- Assess whether the improved gross margin and operating performance can persist given pricing pressure, supplier cost increases, and customer concentration.
- Review the sustainability and quality of earnings, including the securities gain and discontinued-operation adjustments related to Retail customer settlements.
- Monitor cash conversion and working-capital movements, the remaining costs and timing of the Retail exit, and the related-party sourcing arrangement.
- Consider the full valuation allowance on deferred tax assets and the contingent VAT guarantee and related pledged assets.