Forward Industries, Inc. — FY2022 Form 10-K
Reporting period: Fiscal year ended September 30, 2022; comparisons are with the year ended September 30, 2021. The company operates OEM distribution, retail distribution, and product design and engineering businesses. This is an annual report, not a standalone fourth-quarter report.
Financial results
| Metric | FY2022 | FY2021 |
|---|---|---|
| Net revenue | $42.34 million | $39.02 million |
| Gross profit / gross margin | $8.37 million / 19.8% | $8.13 million / 20.8% |
| Operating loss | $1.24 million | $0.76 million |
| Net income (loss) | $(1.38) million | $0.52 million |
| Basic and diluted earnings (loss) per share | $(0.14) | $0.05 |
| Cash provided by (used in) operating activities | $1.53 million | $(0.53) million |
- Revenue rose 8.5%, led by design growth of $3.62 million and retail growth of $0.95 million, partly offset by a $1.25 million decline in OEM distribution.
- Gross profit increased 2.9%, but gross margin fell one percentage point as higher freight, logistics, and product costs pressured distribution margins.
- Operating loss widened by about $0.48 million. The FY2021 net profit included $1.36 million of PPP loan forgiveness; FY2022 had no comparable gain.
- By segment, FY2022 revenue and operating income (loss) were: OEM distribution $18.04 million and $0.91 million; retail distribution $4.13 million and $(1.81) million; design $20.17 million and $2.15 million. Corporate expenses were $2.48 million.
- OEM operating margin declined to 5.0% from 7.7%; retail operating loss margin worsened to 43.8% from 24.5%; design operating margin improved to 10.6% from 3.6%.
Financial position and liquidity
- At September 30, 2022, cash was $2.58 million, working capital was $4.36 million (down from $5.59 million), and total assets were $20.94 million.
- Current liabilities were $9.98 million, including $7.71 million due to Forward China. The related-party note payable to Forward China was $1.40 million, bears 8% interest, and matures December 31, 2024; the company paid down $0.20 million of principal in FY2022.
- The company had a $1.30 million bank line of credit available and unused at September 30, 2022, maturing May 31, 2023. At November 30, 2022, it reported approximately $3.2 million cash on hand and the same $1.3 million of available credit.
- FY2022 operating cash flow was positive despite the net loss, primarily reflecting increases in payables and amounts due to Forward China, lower receivables, and other working-capital changes. Inventory increased $1.74 million. Investing cash use was $0.17 million and financing cash use was $0.20 million.
- Management said liquidity and financial resources were expected to be adequate for the 12 months following the report date; the financial-statement note states forecasted cash and working capital were expected to meet needs through at least December 31, 2023. The independent auditor identified the going-concern assessment as a critical audit matter, noting the judgment and sensitivity of forecasts to revenue, operating results, and economic conditions.
Material changes, outlook, and risks
- Management expected freight and transportation disruptions and inflation-related employee costs to continue into FY2023. It planned to control expenses and inventory, align design staffing and schedules with demand, and improve operating productivity. No specific revenue or earnings guidance was provided.
- Diabetic products represented 85% of OEM revenue and about 36% of consolidated revenue in FY2022. Diabetic product revenue fell 7.1%, to $15.40 million; management expects this business to decline as customers reduce orders and some glucose-monitoring solutions do not require carrying cases.
- Retail revenue grew, but higher freight, storage, inventory-related costs, and selling and marketing expense deepened the segment’s operating loss. Management said it would focus on product-demand matching and more profitable offerings.
- Key risks include customer and product concentration, continued price pressure and margin compression, uncertain consumer demand, supply-chain and shipping disruption, and dependence on Chinese suppliers and Forward China as exclusive buying agent. The Forward China supply agreement was due to expire October 22, 2023.
- Forward China is owned by the CEO and board chair. It receives a monthly service fee of $100,000 plus 4% of defined adjusted gross profit; FY2022 fees were $1.40 million. The related-party note and supplier payables are also material liquidity considerations. The CEO also owns Justwise, which provides Koble product design and marketing services.
- Other exposures include the risk of tariffs and China-U.S. tensions, inflation and rising interest rates, potential customer payment issues, and uncertain access to future financing. Management reported no material legal proceedings as of September 30, 2022 and no indications of goodwill or intangible-asset impairment.
- Management concluded disclosure controls and internal control over financial reporting were effective as of September 30, 2022. The auditor gave an unqualified opinion on the financial statements but did not audit or opine on internal control effectiveness.
Important facts for investors to verify
- Whether operating performance and cash generation improve, especially whether positive FY2022 operating cash flow can be sustained without further growth in payables or amounts due to Forward China.
- Cash needs and repayment plans for the $1.40 million related-party note, the unused bank line’s May 2023 maturity, and the note’s December 2024 maturity.
- Renewal or replacement of the Forward China sourcing agreement and the terms, oversight, and continuity of related-party transactions.
- Continued declines in diabetic-product orders, concentration among major customers, and the retail segment’s path toward improved profitability.
- Whether freight, inventory, and labor-cost pressures ease, and whether customer pricing pressure continues to erode gross margins.
- The assumptions underlying management’s liquidity forecast and the auditor’s highlighted going-concern assessment.