Forward Industries, Inc. — Q1 FY2022 Form 10-Q
Reporting period: Three months ended December 31, 2021; comparison is the three months ended December 31, 2020. The company provides design, development and manufacturing services and reports OEM distribution, retail distribution and design segments. Financial statements are unaudited.
Financial performance
| Metric | Q1 FY2022 | Q1 FY2021 | Change |
|---|---|---|---|
| Revenue | $11.614 million | $9.718 million | +19.5% |
| Gross profit | $2.619 million | $2.263 million | +15.7% |
| Gross margin | 22.6% | 23.3% | -0.7 percentage points |
| Operating income (loss) | $214,000 | ($167,000) | Improved $381,000 |
| Net income | $180,000 | $1.199 million | -85.0% |
| Basic and diluted EPS | $0.02 | $0.12 | Down $0.10 |
| Cash from (used in) operations | $1.138 million | ($511,000) | Improved $1.649 million |
Revenue growth was driven mainly by retail distribution and design; OEM distribution revenue was nearly flat. Gross margin fell as higher import costs reduced retail margins and lower design-segment utilization also weighed on margins. Operating expenses included $738,000 of sales and marketing, up 22.4%, and $1.667 million of general and administrative expenses, down 8.8%.
Segments and material changes
- OEM distribution: Revenue was $5.242 million, up 0.5%; operating income was $497,000 versus $417,000. Diabetic-product revenue fell 5.2% to $4.234 million, while other-product revenue rose 34.8% to $1.008 million. Management expects diabetic products to become a smaller part of OEM revenue.
- Retail distribution: Revenue increased to $1.392 million from $392,000, reflecting new offerings, retail partnerships and higher sales through some existing retailers. Operating loss widened to $228,000 from $179,000, largely due to supply-chain-related costs and higher sales commissions.
- Design: Revenue rose 21.1% to $4.980 million. Operating income increased to $585,000 from $177,000, with margin improving to 11.7% from 4.3%, reflecting higher revenue and lower personnel and bad-debt costs.
Prior-year net income included a $1.357 million gain from forgiveness of a Paycheck Protection Program loan; this nonrecurring gain explains most of the year-over-year decline in net income. There was no income-tax provision in either quarter. The company maintains a full valuation allowance against net deferred tax assets.
Cash, liquidity and obligations
- Cash was $2.432 million at December 31, 2021, up from $1.410 million at September 30, 2021. Operating cash flow benefited from higher payables and amounts due to Forward China and increased deferred income, partly offset by a $910,000 inventory increase.
- Working capital was $4.229 million, down from $5.587 million at September 30, 2021. Management attributed the decline primarily to the Forward China note becoming current.
- Total assets were $21.978 million and total liabilities were $14.315 million at December 31, 2021. Shareholders’ equity was $7.662 million.
- The company owed Forward China $6.962 million in amounts due and had a $1.550 million related-party promissory note outstanding. The note bears 8% interest, matures December 31, 2022, and was reduced by a $50,000 principal payment during the quarter.
- IPS had an undrawn $1.3 million revolving credit line maturing May 31, 2022, secured by IPS assets and guaranteed by the company. The company said it planned to seek renewal through May 31, 2023, but gave no assurance it would be renewed.
- Operating lease liabilities had a present value of $4.011 million. The balance sheet also showed $3.844 million of operating lease right-of-use assets.
Outlook, risks and unusual items
Management said existing cash and working capital should meet liquidity needs through at least February 28, 2023, and anticipated resources would be adequate for the 12 months following the report. It planned to repay the Forward China note at maturity using cash and/or additional financing. Management cautioned that renewal of the credit line, further payment-term extensions from Forward China, and additional financing are not assured. Strategic acquisitions or investments could require additional capital.
COVID-19-related freight costs, shipping delays and labor shortages affected product availability and costs; management expected transportation disruptions and cost-of-sales volatility to continue through FY2022. The long-term financial impact was not reasonably estimable. Management also cited variable customer orders and concentration: two OEM customers each accounted for at least 10% of consolidated revenue in the quarter. Retail growth is expected to increase sales and marketing costs, both in dollars and as a percentage of revenue. Management said it would focus on expense control and aligning design and development schedules with demand.
The company’s Supply Agreement with Forward China, owned by the CEO and Chairman, includes a monthly service fee of $100,000 plus 4% of defined adjusted gross profit; fees recorded in cost of sales were $362,000 for the quarter. The company also recognized $540,000 of Koble-brand product revenue, versus $186,000 a year earlier; the brand is owned by an entity of the CEO and Chairman. A patent-related dispute involving subsidiary IPS was dismissed without prejudice in January 2022. Management reported no other legal proceedings it believed would be material and no material changes to the risk factors disclosed in its prior Form 10-K.
Important facts for investors to verify
- Whether the $1.3 million credit facility was renewed after its May 31, 2022 maturity, and the eventual repayment or refinancing of the Forward China note due December 31, 2022.
- Whether cash generation remains adequate as inventory and working-capital needs change; quarterly operating cash flow included material increases in payables and deferred income.
- Whether freight and other supply-chain costs continue to pressure gross margins, particularly in retail distribution.
- Whether retail revenue growth can improve segment profitability and offset higher sales and marketing costs.
- How customer concentration and the expected decline in diabetic-product sales affect OEM revenue, and how related-party fees and transactions are governed.