Forward Industries, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended March 31, 2023; filed May 12, 2023. Forward Industries is a global design, manufacturing, sourcing and distribution company with OEM distribution, retail distribution and design segments. Figures below are in U.S. dollars.
Financial performance
| Metric | Three months ended March 31, 2023 | Prior year quarter | Six months ended March 31, 2023 | Prior year period |
|---|---|---|---|---|
| Revenue | $10.658 million | $10.315 million | $21.468 million | $21.928 million |
| Gross profit | $1.512 million | $2.253 million | $3.431 million | $4.871 million |
| Gross margin | 14.2% | 21.8% | 16.0% | 22.2% |
| Operating loss | $844,000 | $323,000 | $1.311 million | $109,000 |
| Net loss | $871,000 | $356,000 | $1.301 million | $176,000 |
| Loss per share, basic and diluted | $0.09 | $0.04 | $0.13 | $0.02 |
- Quarterly revenue rose 3.3%, while six-month revenue fell 2.1%. For the quarter, design and retail growth more than offset lower OEM sales; for the six-month period, design growth was outweighed by declines in OEM and retail.
- Gross profit declined in both comparisons, reflecting customer pricing pressure, higher product and import/logistics costs, inflation and retail inventory reserves. Cost of sales increased 13.4% in the quarter despite revenue growth.
- Six-month operating cash flow was negative $50,000, versus positive $360,000 a year earlier. Investing cash use was $70,000 and financing cash use was $100,000, principally note repayments. Cash declined by $220,000 to $2.356 million at March 31.
- At March 31, current assets were $13.973 million and current liabilities $10.907 million; working capital was $3.066 million, down from $4.359 million at September 30, 2022. Total liabilities were $15.284 million and shareholders’ equity $5.004 million.
- Cash at April 30 was approximately $2.8 million. The company reported $1.3 million available on its bank revolving credit line, renewed in March 2023 and maturing May 31, 2024. The line is secured by IPS assets, guaranteed by the company, and bears interest at 0.75% above prime; its effective rate was 8.75% at March 31.
Material changes and segment results
- OEM distribution: Six-month revenue decreased 15.0% to $8.434 million and operating income fell to $140,000 from $823,000. A major diabetic-products customer’s contract expired in March; the company did not renew it amid pricing pressure. That customer represented about 12% of consolidated revenue in each six-month comparison. Management expects a significant decline in future OEM revenue.
- Retail distribution: Six-month revenue slipped 3.2% to $1.976 million, while the operating loss widened to $1.062 million from $584,000. Higher import, storage and logistics costs and inventory reserves weighed on margins. Slow-moving inventory and warehouse consolidation are among the actions under evaluation.
- Design: Six-month revenue increased 10.9% to $11.058 million, mainly due to a major customer and additional projects. Operating income was $963,000, slightly below $974,000 a year earlier; higher labor and selling costs offset improved utilization and billing rates.
Outlook, risks and unusual items
- Management stated that existing cash and working capital, based on forecast cash flows, should meet liquidity needs through at least May 31, 2024. It also anticipates adequate liquidity and resources for the 12 months following the report. These are forward-looking estimates, not guarantees.
- Forward China, the company’s largest vendor and an entity owned by its CEO and Chairman, is party to the sourcing agreement expiring October 22, 2023. Effective April 1, the fixed monthly fee was reduced from $100,000 to $83,333, expected to save $100,000 through fiscal year-end. Negotiations on a replacement agreement were underway; failure to agree could significantly affect operations.
- At March 31, the company owed Forward China $8.977 million in payables and had a $1.3 million related-party promissory note outstanding, bearing 8% interest and due December 31, 2024. The company made a further $50,000 principal payment after quarter-end. Management noted that Forward China has extended payment terms in the past, but continued extensions are not assured.
- Management cited ongoing inflation and pandemic-related freight and supply-chain effects, uncertain transportation costs, customer concentration and possible customer payment or demand weakness. It expects continued volatility in OEM and retail cost of sales for the rest of fiscal 2023 and is assessing further cost reductions.
- The six-month results included a $40,000 gain from reducing the estimated Kablooe acquisition earnout liability, plus $18,000 of net duty drawback income. No income tax provision was recorded; deferred tax assets remained fully valuation-allowanced. Management reported no goodwill or intangible-asset impairment indicators at March 31.
- The filing reported no legal proceedings believed to be material and no material changes to previously disclosed risk factors. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- How much OEM revenue and margin are lost following expiration of the major diabetic customer contract, and whether other customers can replace that business.
- Whether the company and Forward China reach a new sourcing agreement before October 22, 2023, and how related-party terms and the substantial payable balance evolve.
- Whether retail losses, inventory reserves and logistics costs decline, and whether proposed warehouse and cost actions deliver savings.
- Whether operating cash flow improves without relying on increased payables or payment-term extensions, and whether the stated liquidity outlook remains supportable.
- How the 8.75% effective bank-line rate, the related-party note due in 2024, and lease liabilities affect future cash requirements.
- Whether design-segment customer concentration and accounts receivable collection risks change; one design customer represented 24.1% of quarterly consolidated revenue and 19.6% of receivables at March 31.