Forward Industries, Inc. — Q3 FY2022 Form 10-Q
Reporting period: Fiscal third quarter and nine months ended June 30, 2022; filed August 10, 2022. The filing covers the company’s OEM distribution, retail distribution, and product-design businesses. Financial statements are unaudited.
Financial performance
- Quarter revenue: $10.59 million, up 6.3% year over year. Gross profit was $1.92 million, down 12.1%; gross margin contracted to 18.1% from 21.9%. Operating loss was $386,000 versus operating income of $268,000; net loss was $419,000, or $0.04 per share, versus net income of $244,000, or $0.02 per share.
- Nine-month revenue: $32.52 million, up 15.8%. Gross profit increased 9.7% to $6.79 million, but gross margin fell to 20.9% from 22.0%. Operating loss narrowed to $494,000 from $715,000. Net loss was $595,000, or $0.06 per share, compared with net income of $608,000, or $0.06 per share.
- Cash flow: Operating activities generated $1.16 million in the nine months, compared with $338,000 used in the prior-year period. Inventory growth used $2.81 million of cash, partly offset by increased payables, including amounts due to Forward China. Investing used $140,000; financing used $150,000, primarily for repayment of the Forward China note. Cash increased to $2.28 million from $1.41 million at September 30, 2021.
- Liquidity and obligations: Working capital was $5.07 million, down from $5.59 million at September 30, 2021. Current liabilities included $8.76 million due to Forward China. The company also had a $1.45 million note payable to Forward China, bearing 8% interest and due December 31, 2023. Its $1.3 million bank credit line was undrawn and available at June 30, 2022; maturity is May 31, 2023. Operating lease liabilities totaled approximately $3.82 million.
- Margins and expenses: Higher import, freight, storage, and logistics costs pressured OEM and retail distribution margins. Design profitability benefited from stronger utilization and billing rates. Quarterly general and administrative expenses rose 26.7% to $1.64 million; nine-month sales and marketing expenses rose 16.9% to $2.11 million.
Changes by segment
- OEM distribution: Quarterly revenue rose 7.5% to $4.78 million, but segment operating income fell to $179,000 from $361,000. Nine-month revenue increased 5.6% to $14.69 million, while operating income declined to $1.00 million from $1.08 million. Diabetic products accounted for 85% of nine-month OEM revenue; management expects that product category to decline over time as customer products increasingly do not require carrying cases.
- Retail distribution: Quarterly revenue fell to $878,000 from $1.28 million, and operating loss widened to $397,000. Nine-month revenue rose to $2.92 million, but operating loss widened to $981,000 from $490,000, with higher logistics and marketing costs contributing.
- Design: Quarterly revenue increased 16.3% to $4.94 million and operating income rose to $447,000. Nine-month revenue increased 21.5% to $14.91 million, while operating income improved to $1.42 million from $281,000.
Outlook, risks, and unusual items
- Management stated that existing cash and working capital should meet liquidity needs through at least August 31, 2023, and anticipated adequate resources for the 12 months following the report. Repayment of the Forward China note is expected to be funded from cash and/or an additional credit facility; neither further vendor payment extensions nor acceptable new financing is assured.
- Management expected COVID-related shipping and transportation disruption to continue into FY2023, with ongoing volatility in distribution costs. It also cited inflation-driven employee costs and anticipated a more significant effect in the second half of FY2022. The long-term financial impact of COVID-19 could not be reasonably estimated.
- Customer concentration is material: two OEM customers or affiliates together represented 24.2% of quarterly and 24.1% of nine-month revenue. Three customers represented 40.4% of accounts receivable at June 30, 2022.
- Forward China is the company’s largest vendor and is owned by the CEO and Chairman. The supply agreement, which expires October 2023, includes a monthly service fee of $100,000 plus 4% of adjusted gross profit; fees were $1.06 million for the nine months. The CEO-owned JustWise also receives fees under a Koble product design, marketing, and licensing arrangement.
- The prior-year nine-month comparison included a $1.36 million gain from forgiveness of a PPP loan; this did not recur. The SBA may review that forgiveness during a six-year period. Management reported no material goodwill or intangible-asset impairment, no material legal proceedings, no material changes to the previously disclosed risk factors, and effective disclosure controls.
Key facts for investors to verify
- Whether distribution freight and import costs ease, and whether reported gross-margin pressure persists.
- Inventory growth and the company’s reliance on increased payables to generate operating cash flow.
- Forward China payment terms, the related-party note repayment plan, and the availability and terms of replacement financing if needed.
- Retail segment progress toward profitability and the durability of design-segment growth and margins.
- Customer concentration, including changes in major customer orders and collection of concentrated receivables.