Forward Industries, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended March 31, 2021. The company provides design, development and manufacturing services and distributes products through its distribution and design segments. Kablooe, acquired in August 2020, is included in 2021 results but not the comparable 2020 periods.
Financial performance
| Metric | Three months ended March 31, 2021 | Six months ended March 31, 2021 | Prior comparable period |
|---|---|---|---|
| Revenue | $8.40 million | $18.11 million | $7.93 million and $16.32 million, respectively |
| Gross profit / margin | $1.74 million / 20.8% | $4.01 million / 22.1% | $1.45 million / 18.3%; $3.17 million / 19.4% |
| Operating loss | $816,000 | $984,000 | $1.67 million and $1.70 million |
| Net income (loss) | $(835,000) | $364,000 | $(1.37) million and $(1.45) million |
| EPS, basic and diluted | $(0.08) | $0.04 | $(0.14) and $(0.15) |
- Quarterly revenue increased 5.8%; six-month revenue increased 11.0%. For the six-month period, distribution revenue rose 8.2% and design revenue rose 14.6%.
- Quarterly gross margin improved to 20.8% from 18.3%; six-month gross margin improved to 22.1% from 19.4%. Management attributed much of the design-segment growth and margin improvement to Kablooe, and distribution improvement to higher-margin non-medical and other products.
- Six-month net income included a $1.357 million gain from forgiveness of the company’s PPP loan. Excluding this item, the reported net income does not reflect an equivalent recurring operating profit; the company reported a six-month operating loss of $984,000.
- Quarterly distribution-segment revenue declined 3.0%, while design revenue increased 18.3%. Diabetic products remained a large share of distribution sales, and management expects diabetic-product revenue to decline over time.
Cash flow, liquidity and debt
- Cash was $1.53 million at March 31, 2021, down $1.40 million from September 30, 2020. Six-month cash used was $398,000 in operating activities, $38,000 in investing activities and $960,000 in financing activities.
- Working capital was $5.25 million, versus $3.40 million at September 30, 2020. Accounts receivable were $6.33 million and inventory was $2.15 million at quarter-end.
- The $1.3 million revolving credit facility had no amount drawn at March 31, leaving $1.3 million available. The bank renewed the facility in May 2021 through May 31, 2022. A debt-service covenant violation at September 30, 2020 had been waived.
- The company owed $1.6 million to related party Forward China under an 8% promissory note due December 31, 2022; the note has been extended previously. It also had $72,000 outstanding on a Kablooe loan due August 2021. Operating lease liabilities totaled approximately $3.49 million.
- Management stated that cash and working capital were expected to meet liquidity needs through at least June 30, 2022. At April 30, the company reported approximately $1.3 million cash and $1.3 million available on its line of credit. Repayment of the Forward China note may require cash or additional financing; neither further extension nor acceptable financing is assured.
Outlook, risks and notable items
- Management said conditions remained challenging and the pandemic’s longer-term effects could not be reasonably estimated. COVID-19 disrupted supply chains and shipments, delayed smart-enabled retail product rollout, and reduced or delayed some design-service demand. Higher freight costs also pressured results.
- Cost reductions effective April 2021 included temporary executive and board compensation cuts, headcount reductions and reduced consultant spending. The company estimated about $200,000 of cash savings in the third quarter of fiscal 2021 and planned to reassess the measures. No specific revenue or earnings guidance was provided.
- Customer concentration is significant: three distribution customers represented 75% of distribution revenue in the quarter and 71% for the six-month period. The filing also notes customer concentration in accounts receivable, creating collection and customer-dependence risks.
- Forward China is a related party owned by the CEO and Chairman and serves as exclusive buying agent and supplier under an agreement expiring October 2023. The company recorded $683,000 of related-party service fees for the six-month period. The company also sold $339,000 of Koble-branded products during the period; the brand is owned by a company belonging to the CEO and Chairman.
- IPS is defending a patent-related lawsuit alleging misappropriation of intellectual property. The complaint specifies no monetary damages; the company denies the allegations and its motion to dismiss was pending at the filing date.
- The company recorded no goodwill impairment in the current period; the prior-year comparison included a $1.015 million impairment. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether revenue and gross-margin improvement can continue as diabetic-product sales are expected to decline and pandemic-related demand and shipping disruptions persist.
- The quality and collectability of receivables, including the increase in design-segment bad-debt expense and customer concentration.
- Liquidity assumptions through June 2022, the line-of-credit renewal and covenants, and the company’s plan to repay the $1.6 million Forward China note at maturity.
- The sustainability of earnings apart from the one-time PPP loan forgiveness gain, and the performance contribution and costs of the Kablooe acquisition.
- Developments in the patent litigation and the company’s related-party arrangements, including Forward China supply fees and Koble product sales.