Forward Industries, Inc. — Q2 FY2022 Form 10-Q
Reporting period: Three and six months ended March 31, 2022. The company provides product design, development, manufacturing and distribution services through OEM distribution, retail distribution and design segments. Financial statements are unaudited.
Financial performance and position
| Metric | Three months ended March 31, 2022 | Six months ended March 31, 2022 |
|---|---|---|
| Revenue | $10.31 million, up 22.9% year over year | $21.93 million, up 21.1% |
| Gross profit / margin | $2.25 million / 21.8%, versus 20.8% | $4.87 million / 22.2%, described as relatively consistent year over year |
| Operating loss | $323,000, versus $816,000 | $109,000, versus $984,000 |
| Net income (loss) | $(356,000), versus $(835,000) | $(176,000), versus $364,000 |
| Basic and diluted EPS | $(0.04), versus $(0.08) | $(0.02), versus $0.04 |
- For the six months, operating cash flow was positive $360,000, compared with cash used of $398,000 in the prior-year period. Inventory growth used $1.83 million of cash; higher payables, amounts due to Forward China and deferred income helped offset this.
- Cash was $1.54 million at March 31, 2022. At April 30, the company reported $1.90 million cash and $1.30 million available on its revolving credit line.
- Working capital was $3.90 million, down from $5.59 million at September 30, 2021, mainly because a $1.50 million Forward China note became current. Total liabilities were $14.60 million and shareholders’ equity was $7.37 million at March 31.
- Debt included the $1.50 million related-party note due December 31, 2022. The $1.30 million revolving line, renewed through May 31, 2023, was fully available. Operating lease liabilities totaled about $3.92 million.
Material changes and segment trends
- Quarterly revenue increased across all segments. Design revenue rose to $4.99 million from $3.91 million, OEM distribution to $4.68 million from $4.25 million, and retail distribution to $649,000 from $229,000.
- For the six months, design revenue increased to $9.97 million from $8.03 million and retail revenue to $2.04 million from $621,000. OEM revenue rose to $9.92 million from $9.47 million.
- Design segment operating income was $974,000 for the six months, versus a $112,000 loss, reflecting higher revenue, utilization and billing rates and lower bad-debt expense. OEM operating income increased to $823,000 from $719,000. Retail segment operating loss widened to $584,000 from $389,000.
- Quarterly gross margin improved, but management said higher freight and importation costs pressured OEM and retail margins. The six-month net result turned to a loss in part because the prior-year period included a $1.36 million PPP-loan forgiveness gain that did not recur.
- Two OEM customers or their affiliates/contract manufacturers represented 26.2% of consolidated revenue for the quarter and 25.7% for the six-month period. Two OEM customers represented 34.8% of accounts receivable at March 31.
Outlook, risks and contingencies
- Management believes existing cash and working capital should cover liquidity needs through at least May 31, 2023. It plans to repay the Forward China note at maturity using cash and/or additional financing; it cautions that further extensions or acceptable new financing are not assured.
- Management expects COVID-related shipping, freight and logistics disruption to continue through FY2022, with future effects uncertain. Inflation is increasing employee costs, which management expected to have a greater impact in the second half of FY2022. It also expects continued volatility in OEM and retail cost of sales and higher sales and marketing costs as retail grows.
- The company said it would control expenses and align design and development schedules with demand. No specific financial guidance was provided.
- Forward China is the company’s largest vendor and is owned by its CEO and Chairman. The company owed it $7.24 million at March 31 and incurred $712,000 in supply-agreement service fees during the six months. A separate agreement with CEO-owned JustWise provides Koble design and marketing services for monthly fees plus a product-cost-based fee.
- A patent-related matter against IPS was dismissed without prejudice in January 2022; the filing reports no other pending proceedings believed material. Management reported effective disclosure controls and no material changes in internal control over financial reporting.
Important facts for investors to verify
- Whether operating cash generation can be sustained as inventory, freight costs and working-capital needs fluctuate.
- Repayment plans and funding availability for the $1.50 million Forward China note due December 2022, alongside the substantial payable balance to that related party.
- Customer concentration, including the dependence of OEM revenue on diabetic-product customers and management’s expectation that diabetic-product sales may decline.
- Whether retail growth can improve segment profitability despite freight, promotional and marketing expenses.
- Potential dilution: 1.261 million options and warrants were excluded from diluted EPS as anti-dilutive; 10,061,185 common shares were outstanding at March 31, 2022.