Forward Industries, Inc. — FY2020 Form 10-K
Reporting period: Fiscal year ended September 30, 2020. This 10-K reports annual results; it does not provide standalone fourth-quarter financial statements.
Business context
Forward provides product design and engineering services and distributes carrying cases, accessories and other products. Its reportable segments are distribution and design. Distribution products are sourced through Forward China, the company’s exclusive buying agent, which is owned by Chairman and CEO Terence Wise. In August 2020, Forward acquired Kablooe, a medical and consumer product design business, to expand and diversify its design capabilities.
Financial performance and liquidity
| Metric | FY2020 | FY2019 |
|---|---|---|
| Revenue | $34.48 million | $37.41 million |
| Gross profit / margin | $6.64 million / 19.3% | $6.58 million / 17.6% |
| Operating loss | $1.98 million | $3.10 million |
| Net loss | $1.78 million | $3.60 million |
| Basic and diluted loss per share | $0.19 | $0.38 |
| Cash used in operating activities | $0.26 million | $1.97 million |
- Distribution revenue fell 5.6% to $20.75 million; segment gross margin declined to 13.4% from 15.3%. Segment operating loss was $1.60 million, versus $1.38 million.
- Design revenue declined 11.0% to $13.73 million. Gross margin improved to 28.2% from 20.8%; segment operating loss narrowed to $0.38 million from $1.72 million. Kablooe contributed $0.17 million of revenue after its August acquisition.
- At September 30, cash was $2.92 million, working capital was $3.40 million, and total liabilities were $12.77 million. Cash was $2.59 million at November 30, 2020.
- Year-end borrowings included $1.00 million drawn on a $1.30 million revolving credit line and a $1.60 million note payable to Forward China. The related-party note was extended after year-end to December 31, 2021. Notes payable totaled $1.51 million; operating lease liabilities totaled $3.62 million.
- The company reported $1.36 million of PPP loan proceeds in FY2020; the SBA approved forgiveness in December 2020, after year-end. The credit line had $0.30 million available as of the filing date and matures May 31, 2021.
Changes, outlook and material matters
- Total revenue declined 7.8%. Diabetic-product revenue fell $2.31 million, while other-product revenue rose $1.08 million, including $0.76 million from personal protective equipment. Diabetic products still represented 83% of distribution revenue.
- COVID-19 reduced employee productivity, disrupted sourcing and shipments, delayed the smart-enabled retail rollout, and reduced or delayed design-project demand. Management said the future financial effects were uncertain and expected challenging conditions to continue; it provided no numerical earnings or revenue guidance.
- Management said it expected liquidity and financial resources to be adequate for the 12 months from the filing date, and believed cash and working capital would meet needs at least through December 2021. This outlook depends in part on cash generation and available financing; the company cautioned that additional capital might be needed for acquisitions or investments.
- Forward recorded a $1.02 million goodwill impairment tied to IPS and a $0.33 million impairment of an investment in a design customer. The improved net loss also reflected lower general and administrative expense and favorable fair-value changes in acquisition-related consideration.
- Customer concentration remains significant: the four largest distribution customers generated 79% of distribution revenue; three major design customers generated 46% of design revenue. Management expects diabetic-product revenue to continue declining.
- IPS was named a third-party defendant in a patent dispute alleging misappropriation of intellectual property. The complaint stated no specific damages; IPS denied the allegations and filed a motion to dismiss in December 2020.
- The company’s exclusive sourcing agreement with Forward China requires a $100,000 monthly fee plus 4% of adjusted gross profit and runs through October 2023. Forward China also holds the $1.60 million note. The company reported violations of credit-line debt-service covenants at both year-end 2020 and 2019; the lender waived them in both years.
- The independent auditor issued an unqualified opinion on the financial statements. Management concluded disclosure controls and internal control over financial reporting were effective as of September 30, 2020.
Key investor verification points
- Track diabetic-product demand, customer concentration, and whether growth in other products and design services can offset declines.
- Confirm cash collection trends, working-capital needs, the status and terms of the credit line, and repayment or refinancing of the Forward China note.
- Assess whether the delayed retail rollout gains traction and whether Kablooe integration produces expected revenue and profitability.
- Review the accounting estimates underlying goodwill and investment impairments, and monitor further impairment indicators.
- Monitor the patent litigation and the company’s exposure to its related-party sourcing agent and supplier arrangements.