Forward Industries, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended June 30, 2011; filed August 11, 2011. The company designs, markets, and distributes protective and carrying accessories, primarily for portable electronics, selling mainly to OEMs. Financial statements are unaudited.
Financial performance and position
| Metric | Three months ended June 30 | Nine months ended June 30 |
|---|---|---|
| Net sales | 2011: $6.16 million; 2010: $5.06 million | 2011: $17.12 million; 2010: $13.60 million |
| Gross profit / margin | 2011: $1.44 million / 23%; 2010: $1.27 million / 25% | 2011: $3.97 million / 23%; 2010: $3.19 million / 23% |
| Operating income (loss) | 2011: ($770,000); 2010: $24,000 | 2011: ($1.35 million); 2010: ($261,000) |
| Net income (loss) | 2011: ($683,000); 2010: $17,000 | 2011: ($1.22 million); 2010: ($282,000) |
For the nine months, operating cash flow was negative $1.67 million, investing cash flow was negative $1.34 million, and financing cash flow was zero. Cash declined $3.01 million from September 30, 2010 to $15.46 million at June 30, 2011. Investing outflows mainly funded notes receivable and $152,000 of property and equipment purchases.
At June 30, 2011, total assets were $23.69 million, current assets $23.38 million, and current liabilities $3.44 million. Working capital was $19.9 million; current and quick ratios were 6.8 and 6.4. The company reported no short- or long-term debt. Notes receivable were $1.22 million. Shareholders’ equity was $20.26 million.
Changes versus comparable periods
- Third-quarter sales increased 22%; nine-month sales increased 26%. Diabetic-product sales and other-product sales both grew. Diabetic products remained the largest category, accounting for 73% of nine-month sales, versus 75% a year earlier.
- Despite higher sales and gross profit, operating expenses rose substantially. Nine-month sales and marketing expense increased 33% and general and administrative expense increased 73%, contributing to a wider net loss.
- Quarterly gross margin fell from 25% to 23%, principally amid higher material costs and lower margins on certain other-product sales. Nine-month gross margin was unchanged at 23%.
- Two customers and their affiliates/contract manufacturers represented approximately 62% of accounts receivable at quarter-end, down from 75% at September 30, 2010.
Outlook, commentary, and risks
- Management is investing in product development and expanded retail, corporate, and online distribution while continuing to build OEM sales. It expects operating expenses to keep rising and does not expect spending to peak until approximately mid-Fiscal 2012. Management said liquidity should be adequate for the next 12 months; this is not a quantified earnings or revenue forecast.
- Management expects recently awarded OEM programs to contribute meaningfully to revenue beginning in late Fiscal 2012, but anticipates lower gross margins on certain new or prospective programs.
- Sales are concentrated among a few customers, order flows can vary sharply, and the company faces supplier cost increases and limited ability to pass them on. China-based suppliers provide substantially all products.
- The proposed Flash Ventures acquisition was terminated April 14, 2011. The company had advanced Flash $1.0 million under an unsecured note bearing 11% interest, due December 1, 2011; Flash was late paying its first interest installment but paid it in full, and paid the second installment on time.
- The company also loaned a prospective joint-venture partner $190,000 in June and an additional $300,000 in July 2011. These unsecured notes bear 9% interest and mature September 22, 2011. Management cautioned that nonpayment could materially affect liquidity and growth plans.
- A Dutch VAT-related bank guarantee covers up to €75,000 (approximately $109,000); no liability had been incurred. The company reported no material pending legal proceedings. Management concluded disclosure controls were effective and reported no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Repayment, interest status, and collectability of the unsecured Flash and prospective-partner notes, including the July advance and September maturities.
- Whether increased spending and new distribution/product initiatives generate enough sales and gross profit to offset higher operating costs, and whether spending peaks as management expects.
- Customer and product concentration, order variability, and the effect of supplier cost increases on margins, particularly as new programs replace mature ones.
- Cash usage and liquidity relative to management’s 12-month adequacy assessment; also note approximately $15.3 million of cash was held at financial institutions in amounts that may exceed FDIC insurance limits.
- The full valuation allowance against deferred tax assets and the potential effect if management’s assessment of future usability changes.