Forward Industries, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended March 31, 2019. The company provides product design, development and manufacturing services and distributes primarily customized carrying cases and accessories. Its reportable segments are Distribution and Design; IPS, which operates the Design segment, was acquired in January 2018.
Financial performance
| Metric | Three months ended March 31, 2019 | Six months ended March 31, 2019 |
|---|---|---|
| Revenue | $8.17 million | $18.36 million |
| Gross profit / margin | $1.31 million / approximately 16.0% | $2.61 million / approximately 14.2% |
| Operating loss | $1.08 million | $1.56 million |
| Net loss / diluted loss per share | $1.13 million / $0.12 | $1.66 million / $0.17 |
| Operating cash flow | Six-month use of $2.76 million |
For the six months, investing activities used $24,000 and financing activities provided $804,000. Cash declined by $1.98 million, from $4.37 million at September 30, 2018 to $2.39 million at March 31, 2019. Management reported approximately $4.6 million of cash on hand as of May 10, 2019.
At March 31, current assets were $12.26 million and current liabilities were $6.41 million; working capital was approximately $5.9 million, the current ratio 1.9 and the quick ratio 1.7. The company had $1.30 million drawn on its $1.30 million TD Bank line of credit, leaving no availability. Short-term notes payable were $1.70 million, including a $1.6 million related-party note; long-term notes payable were $8,000. The balance sheet also included capital leases and deferred consideration.
Changes versus the prior comparable period
- Second-quarter revenue fell 9% year over year to $8.17 million; gross profit declined $520,000, and the company moved from $201,000 of pretax income to a $1.13 million net loss. Higher general and administrative costs and weaker Distribution revenue contributed to the reversal.
- Six-month revenue rose 20% to $18.36 million, but gross profit fell $219,000 and the company recorded a $1.66 million net loss versus $995,000 of net income. The comparison is not like-for-like: the 2018 six-month period included less than three months of IPS operations.
- Distribution revenue declined 12% for the six months, mainly on lower diabetic-product sales. Design revenue increased with the longer period of IPS consolidation, but Design reported a $945,000 operating loss for the six months.
- Operating cash use increased from $1.24 million in the prior six-month period to $2.76 million. Cash was also affected by lower accounts payable and amounts due to Forward China.
Outlook, risks and notable items
- Management expected Distribution revenue in the final two quarters of fiscal 2019 to be more in line with the corresponding prior-year quarters, while also stating that diabetic-customer revenue was expected to continue declining. It expected Design gross margins to recover to historically above 20% after two projects with overruns were completed; six-month Design gross margin was 12.0%.
- Management said it expected liquidity and financial resources to be adequate for the next 12 months, but warned that year-end debt-service covenant compliance was uncertain. The lender could demand repayment of the fully drawn line if a covenant default occurred. The company planned to repay the $1.6 million Forward China note from existing cash; its maturity was extended after quarter-end to July 17, 2019.
- Customer concentration is substantial: four Distribution customers represented 83.6% of six-month Distribution revenue. Management also cited variable order flows and short lead times as causes of revenue volatility.
- The SEC served the company and certain executives with subpoenas in February 2019 concerning trading around the January 2018 IPS acquisition announcement; the company said it was cooperating. Related legal fees contributed to higher expenses. Management said an insurance policy’s $150,000 deductible had been met and anticipated reimbursement of future covered bills, which was not assured.
- The company entered a three-year Mooni distribution agreement, paid $400,000 subject to repayment requirements, and received an option to acquire a controlling interest at a valuation capped at $5 million. The payment was recorded in prepaid and other assets. As of the report filing, it had not sold or purchased Mooni products.
- Forward China is a related party owned by the CEO and Chairman. The company paid it approximately $703,000 in service fees during the six-month period; the agreement was extended through October 22, 2019. The company also owes it the $1.6 million note bearing 8% interest.
Key facts for investors to verify
- Progress on the SEC investigation, related legal costs, and the amount and timing of any insurance reimbursement.
- Year-end covenant compliance, line-of-credit availability or repayment demands, and repayment of the extended Forward China note.
- Whether management’s Distribution revenue and Design margin expectations are achieved, given diabetic-product declines and prior project overruns.
- Customer concentration, receivable collectability, and the effect of the reported bad-debt expense and allowances.
- Mooni agreement performance, repayment conditions on the $400,000 payment, and any decision to exercise the acquisition option.