Forward Industries, Inc. — Q2 FY2024 Form 10-Q
Business context and period. The unaudited quarter and six-month period ended March 31, 2024 (fiscal Q2 and first half) cover the company’s OEM distribution and product-design businesses. The retail distribution segment is presented as discontinued operations after the company decided to exit it in July 2023. Forward Industries sources substantially all OEM products through Forward China, an entity owned by its chairman and CEO.
Financial performance and position
| Metric | Three months ended Mar. 31, 2024 | Six months ended Mar. 31, 2024 | Comparable 2023 period |
|---|---|---|---|
| Revenue from continuing operations | $7.83 million | $14.98 million | $9.74 million / $19.49 million |
| Gross profit; gross margin | $1.61 million; 20.5% | $3.25 million; 21.7% | $1.93 million; 19.8% / $3.89 million; 20.0% |
| Operating loss | $540,000 | $920,000 | $92,000 / $220,000 |
| Loss from continuing operations | $546,000 | $927,000 | $119,000 / $210,000 |
| Net loss, including discontinued operations | $553,000 | $907,000 | $871,000 / $1.30 million |
| Basic and diluted loss per share | $0.05 | $0.09 | $0.09 / $0.13 |
First-half operating cash flow was negative $528,000, versus negative $50,000 in 2023. Investing cash use was $40,000 and financing cash use was $350,000, primarily repayment of the Forward China note. Cash declined to $2.26 million at March 31, 2024, from $3.18 million at September 30, 2023.
At March 31, current assets were $9.51 million and current liabilities $10.80 million; the company reported a $1.286 million working-capital deficit, compared with $26,000 of working capital at September 30, 2023. Total liabilities were $13.42 million and shareholders’ equity $1.77 million. Liabilities included $8.69 million due to Forward China, a $750,000 Forward China note payable classified as current, and $3.05 million of operating lease liabilities. The company reported $1.30 million available on its bank line of credit at March 31; the facility matured May 31, 2024 and was not to be renewed.
Material changes and operating drivers
- Continuing-operations revenue fell 19.6% in Q2 and 23.1% for the first half year over year. OEM distribution revenue declined 32.0% and 43.5%, respectively; design revenue declined 10.8% and 7.6%.
- The lost major diabetic-products customer was a principal driver of OEM decline. First-half diabetic-product revenue dropped 53.9%, while other OEM product revenue rose 27.7%. Management expects diabetic-product sales to decline further. OEM operating income improved to $154,000 for the first half, from $140,000.
- Design segment operating income fell to $209,000 for the first half from $964,000; Q2 recorded a $57,000 operating loss versus $531,000 of income a year earlier. Management cited lower project volume and utilization, partly offset by new customers, lower payroll costs, and higher billing rates on some projects.
- Gross margin improved, attributed to OEM revenue mix and lower sourcing fees, but gross profit fell as revenue declined. Higher general and administrative expense, including the absence of prior-year credit-loss recoveries, contributed to the greater continuing-operations loss.
- The retail exit reduced discontinued assets held for sale from $508,000 at September 30, 2023 to zero at March 31, 2024. Management expected to dispose of remaining retail inventory by June 30, 2024 and collect remaining receivables by fiscal year-end. Discontinued operations generated $20,000 of income for the first half versus a $1.09 million loss in 2023.
Liquidity, outlook, risks and notable matters
- Management stated that existing cash and working capital, the retail exit, and an agreement with Forward China should meet liquidity needs through at least May 31, 2025. It also described liquidity resources as adequate for the 12 months following the report. Management may reduce labor or salaries if needed; additional capital could be required for acquisitions or investments.
- Forward China agreed to limit collection requests on approximately $7.365 million of payables outstanding at October 30, 2023 to $500,000 in any 12-month period, payable within 30 days of request. Approximately $7.162 million remained covered at March 31. Newer purchases are outside the arrangement and subject to normal payment terms.
- The $750,000 Forward China promissory note bears 8% interest and matures December 31, 2024. The company plans to repay it using cash and/or seek another extension; there is no assurance an extension or other acceptable financing will be available.
- Nasdaq had identified both bid-price and shareholders’ equity listing deficiencies. Following an April 9, 2024 hearing, the company received an extension to July 9, 2024 to regain compliance; it gave no assurance it would do so. Management was negotiating with Forward China to convert some payables into equity. A shareholder vote on June 10, 2024 was planned to seek approval for a broader 1-for-3 to 1-for-10 reverse-split range; approval, implementation, and effectiveness were uncertain.
- Risks include customer concentration and variability, further customer losses and pricing pressure, design customer payment risk, reliance on a related-party sourcing agent and Chinese suppliers, supply-chain disruption, financing availability, and Nasdaq compliance. One design customer represented 27.6% of consolidated revenue in both the quarter and first half. The filing reported no legal proceedings considered material and no material changes to previously disclosed risk factors.
- The company recorded no income-tax provision, citing net operating loss carryforwards and a full valuation allowance against deferred tax assets. Management reported no indicators of goodwill or intangible-asset impairment at March 31. The filing states the financial statements include no adjustments that might result if the company cannot continue as a going concern.
Most important facts for investors to verify
- Progress toward Nasdaq bid-price and equity compliance by the July 9, 2024 deadline, including the proposed reverse-split vote and any conversion of Forward China payables into equity.
- Cash generation, working-capital needs, collections under the Forward China payable arrangement, and repayment or extension of the $750,000 note due December 31, 2024.
- Renewal or replacement of the bank line that matured May 31, 2024, and the company’s actual liquidity runway relative to management’s stated outlook.
- Whether OEM revenue diversification offsets continued diabetic-products declines, and whether design utilization and profitability recover.
- Customer concentration, related-party sourcing terms, and completion of the retail segment’s remaining wind-down and collections.