Forward Industries, Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2024, the three months ended December 31, 2023. Comparative results are for the three months ended December 31, 2022. The company provides product design and engineering services and distributes OEM accessories; its retail distribution segment is reported as discontinued operations after the company decided to exit that business in July 2023.
Financial performance and position
| Metric | Quarter ended Dec. 31, 2023 | Prior-year quarter / comparison |
|---|---|---|
| Continuing-operations revenue | $7.152 million | $9.753 million; down 26.7% |
| Gross profit / gross margin | $1.642 million / 23.0% | $1.966 million / 20.2% |
| Operating loss | $380,000 | $128,000 loss |
| Loss from continuing operations | $381,000 | $91,000 loss |
| Discontinued-operations result | $27,000 income | $339,000 loss |
| Net loss / loss per share | $354,000 / $0.04 | $430,000 / $0.04 |
| Operating cash flow | $116,000 provided | $149,000 used |
OEM distribution revenue was $2.010 million, down 54.1%; design revenue was $5.142 million, down 4.4%. Segment operating income was $41,000 for OEM distribution (down from $112,000) and $266,000 for design (down from $433,000). Management attributed the consolidated gross-margin improvement primarily to OEM product mix and lower sourcing fees, partly offset by lower design utilization.
Cash was $3.027 million at December 31, 2023, compared with $3.180 million at September 30, 2023. Total assets were $16.344 million and total liabilities were $14.031 million. Working capital, excluding discontinued assets held for sale, was a deficit of $949,000, versus $26,000 of working capital at September 30, 2023. Cash used in investing activities was $20,000, principally for property and equipment; financing activities used $250,000 for principal repayment on the Forward China note.
Debt and liquidity: the Forward China promissory note had $850,000 outstanding, due December 31, 2024, bearing 8% interest. The company had $8.894 million due to Forward China, including approximately $7.365 million of pre-existing payables covered by a collection-limitation agreement. Forward China agreed to seek no more than $500,000 of those covered payables in any 12-month period, payable within 30 days of request; later purchases are outside the agreement. A bank line of credit had $1.3 million available, with a 9.25% effective rate and a May 31, 2024 maturity. Operating lease liabilities totaled approximately $3.149 million.
Material changes and management commentary
- Revenue declined mainly because OEM diabetic-product sales fell 64.3%, including the loss of a major customer whose contract expired in March 2023. Management expects diabetic sales to remain a smaller part of OEM revenue and anticipates further revenue pressure from that customer loss.
- OEM sales of other products rose 49.5%, reflecting new customers and higher volume from some existing customers. Management says it will continue efforts to diversify this customer base.
- Design revenue declined modestly due to lower sales from certain prior-year customers and project timing, partly offset by new-customer projects. Lower utilization and higher direct labor costs reduced design operating margin from 8.1% to 5.2%.
- The retail exit reduced discontinued-operations losses: the segment reported $27,000 income on $665,000 revenue, compared with a $339,000 loss on $1.057 million revenue a year earlier. The company expected to dispose of remaining retail inventory by June 30, 2024 and collect remaining retail receivables by fiscal year-end.
- Management stated that forecast cash flows, the retail exit, and the Forward China payables arrangement support sufficient liquidity through at least February 28, 2025. It also cautioned that the bank line expires May 31, 2024 and may not be renewed, and that repayment of the Forward China note may require existing cash or another extension.
- After the quarter, Nasdaq notified the company on January 30, 2024 that its shares were scheduled for delisting for failure to meet the $1.00 minimum bid-price requirement. The company requested a hearing, scheduled for April 9, 2024, which stayed suspension or delisting pending the hearing process. Shareholders approved a discretionary 1-for-2 to 1-for-3 reverse split on February 6, 2024; the board had not yet determined whether or when to implement it. The company gave no assurance it would regain compliance.
Risks, contingencies, and unusual items
- Substantial reliance on Forward China, an entity owned by the company’s CEO and chairman, as its principal sourcing agent, vendor, creditor, and holder of significant payables creates related-party and liquidity exposure. The sourcing agreement runs through October 31, 2024.
- Revenue and receivables are exposed to customer concentration: one design customer accounted for 27.5% of consolidated revenue in the quarter and 28.4% of receivables at December 31, 2023. The expired diabetic-customer contract and order variability are additional risks.
- The filing identifies risks including customer losses and pricing pressure, customer payment delays, supply-chain or China factory disruptions, and the ability to commercialize design products profitably. Management reported no material change to previously disclosed risk factors.
- The company reported no legal proceedings believed to be material and no defaults upon senior securities. Management concluded disclosure controls were effective; it reported no material changes in internal control over financial reporting.
- The company recorded no income tax provision; it maintained a full valuation allowance against net deferred tax assets. Management reported no goodwill or intangible-asset impairment indicators at December 31, 2023.
Important facts for investors to verify
- Whether the bank renews or replaces the $1.3 million credit line before its May 31, 2024 maturity, and how the company funds the $850,000 note due December 31, 2024.
- How much of the covered Forward China payables is requested and paid under the $500,000-per-12-month limit, and whether newer payables remain current under normal terms.
- Progress and proceeds from liquidation of retail inventory and collection of discontinued-segment receivables.
- Nasdaq hearing outcome, continued listing status, and whether the approved reverse split is implemented and restores bid-price compliance.
- Trends in OEM diabetic sales, diversification of other OEM customers, design utilization and margins, and the concentrated design-customer exposure.