Forward Industries, Inc. — Q1 FY2021 Form 10-Q
Reporting period: Three months ended December 31, 2020; comparative period ended December 31, 2019. The filing was signed February 12, 2021. Forward Industries provides product design, development and manufacturing services and distributes products through its distribution and design segments. Q1 FY2021 includes Kablooe, acquired in August 2020; the prior-year quarter does not, limiting comparability.
Financial performance
| Metric | Q1 FY2021 | Q1 FY2020 | Change / context |
|---|---|---|---|
| Revenue | $9.718 million | $8.393 million | Up 15.8% |
| Gross profit | $2.263 million | $1.720 million | Up 31.6% |
| Gross margin | 23.3% | 20.5% | Improved |
| Operating income (loss) | $(167,493) | $(29,129) | Operating loss widened |
| Net income (loss) | $1.199 million | $(81,657) | Includes $1.357 million PPP loan forgiveness gain |
| Basic and diluted EPS | $0.12 | $(0.01) | Reported earnings reflect the forgiveness gain |
| Cash used in operating activities | $511,203 | $784,028 | Use of cash declined |
| Cash at period end | $2.332 million | $2.069 million | Cash declined $592,303 from September 30, 2020 |
Sales and marketing expense was $603,000 versus $535,000; general and administrative expense was $1.827 million versus $1.214 million. The company recorded no income tax provision, citing net operating loss carryforwards and a full valuation allowance on deferred tax assets.
Segments and material changes
- Distribution: Revenue rose 19.4% to $5.606 million; operating loss narrowed to $344,000 from $443,000. Gross margin improved to 13.0% from 12.8%. Other-product revenue grew to $1.140 million from $515,000, while diabetic-product revenue increased to $4.466 million from $4.181 million. Management expects diabetic-product sales to decline in future periods.
- Design: Revenue rose 11.2% to $4.112 million, including $447,000 of revenue from Kablooe. Gross margin increased to 37.4% from 30.2%, but operating income declined to $177,000 from $414,000. Higher G&A, including Kablooe costs and increased bad-debt expense, contributed to the decline.
- Underlying profitability: The company reported a consolidated operating loss despite positive net income. The $1.357 million PPP forgiveness gain was the principal reason for reported net income; the gain is described as not taxable under the CARES Act.
Financial position and liquidity
At December 31, 2020, total assets were $18.609 million, total liabilities $10.783 million, and shareholders’ equity $7.825 million. Working capital was $4.231 million, compared with $3.396 million at September 30, 2020. Cash was $2.332 million. The company stated that existing cash and working capital should meet liquidity needs at least through February 28, 2022, and anticipated adequate resources for the 12 months following the filing.
Debt included a $1.000 million bank line of credit and a $1.600 million promissory note payable to Forward China, a related party, due December 31, 2021. The line had a $1.300 million limit, a May 31, 2021 maturity, and $300,000 available at December 31; management reported $650,000 available at January 31, 2021. A $115,000 Kablooe loan was also outstanding, maturing in August 2021. Operating lease liabilities totaled $3.559 million. Management said repayment of the Forward China note may require existing cash and/or additional credit; it gave no assurance of another extension or acceptable financing.
Outlook, risks and unusual items
- COVID-19 disrupted supply chains and product shipments, delayed rollout of smart-enabled retail products, and reduced or delayed demand for design services. Revenue increased year over year but was below management expectations. The company said future effects remain uncertain and business conditions may remain challenging.
- Management plans to control expenses, align design and development schedules with demand, and improve productivity. No quantified revenue or earnings guidance was provided.
- Customer concentration is significant: four distribution customers accounted for 79% of distribution revenue and 89% of segment receivables at December 31, 2020. Customer orders may be variable and have short lead times.
- Related-party arrangements include Forward China’s exclusive buying-agent and supplier role and $343,000 in quarterly service fees. The CEO owns Forward China. The company also recorded $186,000 of Koble-branded product revenue; the brand is owned by a company owned by the CEO.
- IPS is defending a patent-related misappropriation claim in federal court; it denies the allegations and filed a motion to dismiss. The complaint specifies no monetary damages.
- The bank-line covenants were violated at September 30, 2020, but the lender waived the violation. Management reported disclosure controls effective and no material change in internal control during the quarter.
Important facts for investors to verify
- How much of reported earnings is attributable to the one-time $1.357 million PPP forgiveness gain, and what ongoing operating performance looks like without it.
- Whether the company can repay the $1.600 million related-party note at its December 2021 maturity and renew or replace the bank line before its May 2021 maturity.
- Whether COVID-related disruptions, customer concentration, receivable collections, or expected declines in diabetic-product sales materially affect revenue and cash flows.
- How Kablooe contributes to future revenue, margins and expenses, given it was included only in the current comparative period.
- The status and potential financial exposure of the patent dispute, and the terms and governance oversight of related-party transactions.