Forward Industries, Inc. — Form 10-Q Summary
Business context and reporting period
Forward Industries is a global design, sourcing and distribution company serving medical and technology customers. This unaudited filing covers the fiscal third quarter and nine months ended June 30, 2023; it was filed August 14, 2023. The company reported three segments: OEM distribution, retail distribution and product design.
Financial performance and position
| Metric | Three months ended June 30, 2023 | Nine months ended June 30, 2023 |
|---|---|---|
| Revenue | $10.13 million, down 4.4% | $31.59 million, down 2.8% |
| Gross profit / margin | $1.82 million / 18.0%, versus $1.92 million / 18.1% | $5.25 million / 16.6%, versus $6.79 million / 20.9% |
| Operating loss | $522,000, versus $386,000 | $1.83 million, versus $494,000 |
| Net loss / loss per share | $537,000 / $0.05, versus $419,000 / $0.04 | $1.84 million / $0.18, versus $595,000 / $0.06 |
| Cash from operating activities | $562,000 for the nine months, versus $1.16 million |
- At June 30, cash was $2.82 million and working capital was $2.48 million, down from $4.36 million at September 30, 2022. Total assets were $19.24 million; total liabilities were $14.76 million.
- Cash increased by $246,000 over the nine months. Investing activities used $117,000 and financing activities used $200,000, primarily for capital expenditures and repayment of the Forward China note, respectively.
- Debt included a $1.20 million unsecured note payable to Forward China, bearing 8% interest and due December 31, 2024. The company had $1.30 million available under its bank credit line, which matures May 31, 2024; the filing does not report a drawn balance. The line’s effective rate was 9.0% at June 30.
- Accounts payable due to Forward China was approximately $7.95 million. Operating lease liabilities totaled approximately $3.35 million, of which $406,000 was current.
Material changes and segment results
- OEM revenue fell 38.6% in the quarter and 22.7% year to date. A major diabetic-customer contract expired in March 2023 and was not renewed amid pricing pressure; management expects a significant future decline in OEM revenue. OEM operating income was $163,000 for the quarter and $303,000 year to date, down from $179,000 and $1.00 million, respectively.
- Retail revenue rose to $1.42 million for the quarter and $3.40 million year to date, but the segment recorded operating losses of $680,000 and $1.74 million, respectively. Design revenue rose to $5.78 million for the quarter and $16.84 million year to date; segment operating income was $576,000 and $1.54 million, respectively.
- On July 21, 2023, after the reporting date, the company decided to exit retail distribution. Management expects consolidated revenue to decline in future periods and expects sales and marketing expenses to decrease in fiscal 2024. Exit costs were not yet estimable, and the company said the exit would not affect its OEM or design operations.
- Net loss for the nine months increased substantially despite revenue declining only modestly, mainly reflecting lower gross profit amid pricing pressure, product and freight costs, retail inventory reserves and inflation. The $40,000 reduction in the Kablooe earnout liability benefited year-to-date other income.
Outlook, risks and other notable disclosures
- Management forecast that existing cash and working capital would meet liquidity needs through at least August 31, 2024. It cited approximately $3.0 million cash on hand and $1.3 million of available credit at July 31, 2023. This outlook depends on forecast cash flows and is subject to risks.
- The Forward China sourcing agreement, with a related-party entity owned by the CEO and chairman, expires October 22, 2023. The fixed monthly fee was reduced from $100,000 to $83,333 effective April 1, producing stated savings of $50,000 in the quarter and expected savings of $50,000 for the rest of fiscal 2023. Renewal negotiations were underway; failure to agree could significantly affect operations.
- Forward China has extended the note’s maturity in the past and extended payment terms on payables when needed. The company said it could not assure further extensions or availability of alternative financing. The note is planned to be repaid at maturity using cash and/or additional credit.
- COVID-related transportation costs and inflation continued to pressure costs; management anticipated challenging conditions and continued cost control. Customer concentration, pricing pressure, supply-chain issues and customers’ ability to pay were identified risks. A design customer accounted for 30.1% of quarterly revenue and 22.7% of nine-month revenue.
- On July 31, 2023, Nasdaq notified the company that its share price had been below $1 for 30 consecutive trading days. The compliance deadline was January 29, 2024; a reverse split was among the options under consideration. Delisting could reduce liquidity and access to capital.
- The company reported no legal proceedings it believed would be material, and management concluded disclosure controls were effective as of June 30, 2023. No material changes to internal control over financial reporting were reported.
Important facts for investors to verify
- Progress and estimated costs of the retail exit, including effects on revenue, inventory, customer obligations and cash needs.
- Whether a new Forward China sourcing agreement was reached, its pricing and terms, and the treatment of the $7.95 million payable and $1.20 million note.
- Post-quarter cash, credit availability and actual cash generation relative to management’s liquidity forecast.
- OEM customer retention and diversification, and design-segment reliance on its major customer.
- Nasdaq bid-price compliance status and any reverse-split or delisting developments.