Forward Industries, Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2023, the three months ended December 31, 2022; comparative period is the three months ended December 31, 2021. The filing was dated February 14, 2023. Forward Industries designs, manufactures, sources and distributes products through OEM distribution, retail distribution and design segments.
Financial performance and position
| Metric | Q1 FY2023 | Q1 FY2022 |
|---|---|---|
| Revenue | $10.81 million | $11.61 million |
| Gross profit / gross margin | $1.92 million / 17.8% | $2.62 million / 22.6% |
| Operating income (loss) | $(467,000) | $214,000 |
| Net income (loss) | $(430,000) | $180,000 |
| Basic and diluted EPS | $(0.04) | $0.02 |
| Operating cash flow | $(149,000) | $1.14 million |
| Capital expenditures | $45,000 | $66,000 |
| Cash at period end | $2.33 million | $2.43 million |
Gross margin fell 4.8 percentage points. Management cited customer pricing pressure, higher import and logistics costs, and inflation. The filing reports no income tax provision in either quarter.
At December 31, 2022, total assets were $21.86 million, total liabilities $16.00 million, and shareholders’ equity $5.86 million. Working capital was $3.92 million, down from $4.36 million at September 30, 2022. Current assets were $15.39 million and current liabilities $11.47 million. Cash declined by $244,000 during the quarter; operating cash use reflected higher receivables and inventory and lower accrued liabilities, partly offset by increased accounts payable and amounts due to Forward China.
Debt and liquidity: The company had a $1.35 million promissory-note balance payable to Forward China, bearing 8% interest and maturing December 31, 2024. The company reported $1.30 million available under its bank line of credit, which matures May 31, 2023; the line was undrawn according to the filing’s availability disclosure. The balance sheet also showed $9.48 million due to Forward China. Operating lease liabilities totaled $3.54 million, including $387,000 current.
Material changes and segment results
- Revenue decreased 6.9% year over year; gross profit declined 26.7%, and the company moved from operating and net income to losses.
- OEM distribution: Revenue was $4.38 million, down 16.5%; operating income fell to $112,000 from $497,000. Lower diabetic and other-product sales, unfavorable product mix and import costs weighed on results.
- Retail distribution: Revenue was $1.06 million, down 24.1%; operating loss widened to $326,000 from $228,000. Lower sales and freight, storage and logistics costs pressured profitability.
- Design: Revenue increased 8.0% to $5.38 million, but operating income declined to $433,000 from $585,000, reflecting higher direct labor and sales and marketing costs, partly offset by improved utilization and billing rates.
- Sales and marketing expense decreased 6.5% to $690,000. General and administrative expense increased 1.7% to approximately $1.70 million, driven mainly by corporate payroll costs and professional fees.
Outlook, risks and unusual items
- A major diabetic-customer contract expires in March 2023 and will not be renewed because of pricing pressures. The customer represented 12% of consolidated revenue in each comparative quarter; management expects a significant decline in future OEM revenue.
- The exclusive sourcing agreement with Forward China, an entity owned by the CEO and Chairman, expires October 22, 2023. Negotiations on a new agreement were expected to begin early in fiscal Q3; management stated that failure to reach an agreement could significantly affect operations.
- Management expected existing cash and working capital to meet liquidity needs through at least February 29, 2024, and expected the bank line to be renewed based on prior renewals. Neither renewal is assured. Management was evaluating costs and possible cost reductions in light of the customer loss and retail operating losses.
- Management described ongoing uncertainty from inflation, freight and transportation costs, supply-chain conditions and customer demand. It anticipated continued challenging business conditions and cost volatility during fiscal 2023. No specific financial guidance was provided.
- Other income included a $40,000 gain from reducing the estimated Kablooe earnout liability and $18,000 of net duty-drawback income. The earnout reduction reflected revised expectations of reaching performance targets.
- Related-party arrangements include the Forward China sourcing agreement and note, and a Koble brand services and licensing agreement with an entity owned by the CEO and Chairman. The filing reported no legal proceedings considered material and no material changes to previously disclosed risk factors. Management stated disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether the major diabetic customer was lost as expected and the resulting revenue and margin impact.
- Whether the bank credit line was renewed at or after its May 31, 2023 maturity, and on what terms.
- The outcome and terms of negotiations to renew or replace the Forward China sourcing agreement before October 22, 2023.
- Whether cash conversion improves, particularly receivables, inventory and reliance on amounts payable to Forward China.
- Progress in reducing retail-segment losses and restoring gross margins amid pricing, freight and inflation pressures.
- The ongoing costs, governance and terms of the company’s related-party transactions with Forward China and Justwise.