Forward Industries, Inc. — FY2019 Form 10-K
Reporting period: Fiscal year ended September 30, 2019. This is an annual filing, not a standalone fourth-quarter report. The company combines a distribution business for carry and protective products with IPS, a product design and engineering services business acquired in January 2018.
Financial performance and liquidity
| Metric | FY2019 | FY2018 |
|---|---|---|
| Revenue | $37.4 million | $34.5 million |
| Gross profit / margin | $6.6 million / 17.6% | $6.6 million / 19.0% |
| Operating income (loss) | ($3.1 million) | $0.3 million |
| Net income (loss) | ($3.6 million) | $1.4 million |
| Basic and diluted EPS | ($0.38) | $0.15 |
| Cash from operating activities | ($2.0 million) | $1.0 million |
- Revenue and segments: Consolidated revenue rose 8%, but distribution revenue fell 10% to $22.0 million. Design revenue was $15.4 million, versus $10.2 million for the shorter period after IPS was acquired in FY2018; the periods are therefore not directly comparable. The company attributed design growth partly to a new major-customer project.
- Margins and expenses: Distribution gross margin declined to 15.3% from 16.7%; design gross margin was 20.8%, down from 24.7%, primarily because of overruns on two projects in the first half. General and administrative expense increased to $7.7 million from $4.5 million, including a $1.9 million design-segment bad-debt provision, about $350,000 of additional legal expense related to the SEC investigation, and other cost increases.
- Balance sheet and liquidity: At September 30, 2019, cash was $3.1 million, accounts receivable $6.7 million, inventory $1.6 million, current assets $11.8 million and current liabilities $8.3 million. Working capital was $3.5 million, down from $7.6 million; the current ratio fell to 1.4 from 2.0. Management reported approximately $2.3 million cash on hand at December 13, 2019.
- Debt and obligations: The $1.3 million revolving credit line was fully drawn, with no availability reported at filing. A $1.6 million related-party promissory note held by Forward China was extended to January 17, 2020; the company expected to repay it using cash and/or obtain another credit facility. The line and a separate IPS term loan had debt-service covenant violations for which lenders granted waivers. The balance sheet also reported $3.2 million due to Forward China and $834,000 of short-term deferred acquisition consideration.
- Cash flows: Investing activities used $33,000, primarily for capital expenditures; financing activities provided $726,000, mainly from net line-of-credit borrowings. Cash declined by $1.3 million during the year.
Material changes and unusual items
- The company shifted from FY2018 net income to a FY2019 net loss, with both operating segments reporting losses. FY2018 included a $747,000 income-tax benefit related to the IPS acquisition; FY2019 recorded only a roughly $4,000 tax benefit.
- A $1.6 million provision was recorded against receivables from a major design customer. The company also received $327,000 in customer stock as consideration for design services and reported the investment at that amount; it said it did not consider the investment impaired.
- Acquisition-related fair-value changes reduced FY2019 results: the earn-out liability was increased by $260,000, compared with a $510,000 favorable adjustment in FY2018. The company reported no goodwill or intangible-asset impairment.
- The SEC informed the company on December 18, 2019 that its investigation into trading around the IPS acquisition announcement had concluded; the company was awaiting formal written confirmation. Legal expenses related to the investigation increased during FY2019.
- Management reported disclosure controls and internal control over financial reporting were effective as of September 30, 2019. The independent auditor gave an unqualified opinion on the financial statements and did not audit internal controls.
Outlook, risks and contingencies
- Management expected liquidity and financial resources to be adequate for the next 12 months from the filing date, and stated in the financial-statement notes that existing cash and working capital were expected to cover needs at least through December 2020. These expectations depend on operations and financing; the company cautioned that additional capital might be needed for strategic investments and that financing might not be available on acceptable terms.
- The company planned to expand retail distribution under its January 2019 Mooni agreement and anticipated products in retail outlets by the second fiscal quarter of 2020. It paid Mooni $400,000, appointed it as exclusive North American distributor, and received an option to acquire a controlling interest, subject to agreement terms. Retail timing and commercial success were not assured.
- Customer concentration remains significant: four largest distribution customers accounted for 87% of distribution revenue; diabetic products represented 89% of that segment’s revenue. The filing cites risk from customer losses, lower demand, reduced use of “in-box” cases and pricing pressure.
- All distribution products were sourced through Forward China, the exclusive buying agent and a related party principally owned by the CEO. The agreement provides for a $100,000 monthly service fee plus 4% of adjusted gross profit and was extended through October 22, 2020. China sourcing, tariffs, supplier concentration and potential conflicts of interest are material risks.
- The company reported no product-liability insurance and identified product claims, foreign-exchange movements, collection risks and competition as potential exposures. It disclosed an approximately $82,000 Dutch VAT-related guarantee, with no liability recorded at year-end.
- Adoption of lease accounting on October 1, 2019 was expected to add approximately $3.7 million to assets and liabilities, with no significant expected effect on earnings or cash flows.
Most important facts for investors to verify
- Whether the company repaid or refinanced the Forward China note due January 17, 2020, and maintained lender waivers and access to credit.
- Whether operating cash flow improved and the $1.6 million design-customer receivable provision proved adequate; monitor collection of remaining concentrated receivables and the value of the customer-stock investment.
- Whether retail launches under the Mooni agreement occurred as planned, generated sales, and justified the associated spending and acquisition option.
- Whether distribution customer concentration, diabetic-product demand and gross-margin pressure improved or worsened.
- Whether the SEC investigation received formal closure documentation, and how related-party sourcing terms and governance are overseen.