Forward Industries, Inc. — Form 10-Q Summary
Business context and reporting period
Forward Industries, Inc. filed this unaudited quarterly report for its fiscal first quarter, the three months ended December 31, 2019, compared with the three months ended December 31, 2018. The company operates two reportable segments: distribution of customized carrying and protective products, and design and development services through Intelligent Product Solutions (IPS).
Key financial results
| Metric | Q1 FY2020 | Q1 FY2019 |
|---|---|---|
| Revenue | $8.39 million | $10.18 million |
| Gross profit | $1.72 million | $1.30 million |
| Gross margin | 20.5% | 12.8% |
| Operating loss | $29,000 | $481,000 |
| Net loss | $82,000 | $531,000 |
| Basic and diluted loss per share | $0.01 | $0.06 |
| Cash used in operating activities | $784,000 | $790,000 |
Revenue fell approximately 18%, while gross profit rose approximately 32% and net loss narrowed substantially. Distribution revenue declined 25% to $4.70 million; design revenue declined 5% to $3.70 million. Distribution segment operating loss was $443,000, versus operating income of $6,000 a year earlier. Design segment operating income was $414,000, compared with an operating loss of $487,000.
Distribution gross margin fell to 12.8% from 15.7%, reflecting pricing pressure and product mix. Design gross margin improved to 30.2% from 8.1%; management attributed the prior-year weakness to project overruns and the current-quarter improvement to more efficient project management. The current-quarter net loss also benefited from a roughly $65,000 bad-debt recovery.
Cash, liquidity and debt
Cash was $2.07 million at December 31, 2019, down from $3.09 million at September 30, 2019. Cash used in investing activities was $6,000, and financing activities used $234,000, including a $200,000 deferred-consideration payment. Cash declined by $1.02 million during the quarter.
Current assets were $10.98 million and current liabilities were $7.64 million at quarter-end; working capital was $3.3 million. The reported current and quick ratios were 1.4 and 1.3, respectively. Total liabilities were $11.04 million. The balance sheet included a $1.3 million line of credit, $1.63 million of short-term notes payable, and $3.66 million of operating lease liabilities. At December 31, the line was fully drawn with no availability; management reported $1.1 million available under it as of the filing date and approximately $3.5 million of cash on hand as of February 12, 2020.
A $1.6 million promissory note payable to Forward China, a related party, was extended to March 17, 2020 and bears 8% interest. Management expected to fund repayment with existing cash and/or an additional credit facility. The company reported covenant violations at September 30, 2019 under the line of credit and a term loan, for which lenders granted waivers.
Changes, outlook, risks and unusual items
- Management said it expected liquidity and financial resources to be adequate for the next 12 months, but strategic acquisitions or investments would require additional capital, with no assurance financing could be obtained on acceptable terms.
- The company was building a North American retail distribution network for Mooni products and anticipated products in retail outlets by the second fiscal quarter of 2020. Management anticipated retail-related selling expenses would rise as sales and commissions increased. This is an expectation, not reported realized performance.
- Distribution revenue remains highly concentrated: three customers represented 78.8% of distribution-segment revenue in the quarter. Customer order volumes and timing are variable. Substantially all distribution products are sourced through Forward China, whose owner is the company’s CEO and chairman. The company paid Forward China approximately $338,000 in quarterly service fees and extended the supply agreement through October 22, 2020.
- On January 21, 2020, the company executed an 8% promissory note for approximately $1.626 million with a design-segment customer to recover receivables previously reserved as bad debt. Monthly principal and interest payments were scheduled to begin April 1, 2020.
- The company adopted lease accounting standard ASC 842 on October 1, 2019, recognizing operating lease right-of-use assets and liabilities; it reported no material impairment of goodwill or intangible assets.
- The SEC informed the company in December 2019 that its investigation concerning trading around the IPS acquisition announcement had concluded. The company reported no legal proceedings it believed would be material.
- Disclosed risks include dependence on a small number of customers, failure to receive material orders, pricing pressure, tariffs or import restrictions, product-market execution, and successful integration of IPS. Management reported disclosure controls were effective.
Important facts for investors to verify
- Whether the company repaid or refinanced the $1.6 million Forward China note by its March 17, 2020 maturity, and the resulting liquidity and related-party implications.
- Whether the $1.626 million customer note is being collected on schedule and whether its payments translate into cash recovery of the previously reserved receivable.
- Subsequent retail launch progress, sales, margins and costs, compared with management’s anticipated second-quarter availability.
- Changes in major-customer revenue and receivable concentrations, and the effect of continued diabetic-product demand and pricing pressure.
- Availability and terms of the credit line, covenant compliance and the company’s actual cash position after December 31, 2019.