Forward Industries, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended June 30, 2021; filed August 12, 2021. The filing compares results with the periods ended June 30, 2020. Forward provides product design, development, manufacturing and distribution services. Fiscal 2021 results include Kablooe, acquired in August 2020; comparative 2020 results do not.
Financial performance and position
| Metric | Three months ended June 30 | Nine months ended June 30 |
|---|---|---|
| Revenue | $9.96 million, up 4.4% from $9.55 million | $28.08 million, up 8.5% from $25.87 million |
| Gross profit / margin | $2.18 million / 21.9%, versus $1.77 million / 18.6% | $6.19 million / 22.0%, versus $4.95 million / 19.1% |
| Operating income (loss) | $268,000, versus a loss of $175,000 | Loss of $715,000, versus a loss of $1.87 million |
| Net income (loss) | $244,000, versus a loss of $215,000 | $608,000, versus a loss of $1.67 million |
| Basic and diluted EPS | $0.02, versus $(0.02) | $0.06, versus $(0.18) |
| Operating cash flow | $338,000 used in the nine-month period, versus $760,000 used in 2020 |
Nine-month net income included a $1.357 million gain from forgiveness of the company’s Paycheck Protection Program loan; it therefore does not reflect positive operating income. No income tax provision was recorded, primarily because of net operating loss carryforwards and a full valuation allowance on deferred tax assets.
- Segments: Third-quarter distribution revenue fell 10.5% to $5.72 million, while design revenue rose 34.3% to $4.25 million. Design benefited in part from Kablooe and had operating income of $393,000; distribution had an operating loss of $125,000. For nine months, distribution revenue was nearly flat at $15.81 million, while design revenue increased 20.7% to $12.27 million.
- Margins and costs: Distribution gross margin declined to 13.7% in the quarter and 13.1% for nine months, with management citing higher freight costs and pricing/mix pressure in diabetic-product cases. Design gross margin improved to 33.0% and 33.5%, respectively, supported by Kablooe, revenue growth and improved utilization.
- Liquidity: Cash was $1.60 million at June 30, down from $2.92 million at September 30, 2020. Working capital was $5.57 million, up from $3.40 million, primarily reflecting the extension of the Forward China note. Total assets were $18.93 million and shareholders’ equity was $7.49 million.
- Debt and obligations: The $1.30 million bank revolving credit line was undrawn at June 30 and matures May 31, 2022. The company owed $1.60 million on a related-party note to Forward China, due December 31, 2022, and $29,000 on Kablooe debt. Operating lease liabilities totaled approximately $3.99 million. Amounts due to Forward China were $4.44 million at June 30.
Changes, outlook and risks
- Revenue growth and improved gross margin accompanied a return to quarterly operating and net income. For the nine-month period, however, operations remained loss-making; reported net income primarily reflects PPP loan forgiveness. Comparisons are affected by Kablooe’s inclusion only in 2021.
- Management said COVID-19 continued to disrupt supply chains, manufacturing and shipments, delay retail-product rollouts, and constrain some customers’ spending. Freight costs rose amid a global shipping-container shortage. The longer-term financial effect could not be reasonably estimated.
- Temporary executive, board and other cost reductions implemented in April ended in June 2021; management estimated approximately $200,000 of third-quarter cash savings. Compensation returned to prior levels in July. No formal revenue or earnings guidance was provided.
- Management expected available liquidity to meet operating and financial requirements through at least September 30, 2022. It noted uncertainty about further extensions of Forward China payment terms or note maturity, and about obtaining any additional financing on acceptable terms. Strategic acquisitions or investments could require additional capital.
- Customer concentration is significant, particularly in distribution: the five listed customers represented 76% of quarterly and 79% of nine-month distribution revenue. Management also expects diabetic-product revenue to continue declining while seeking to diversify into other products.
- A patent dispute names IPS as a third-party defendant; IPS denies the allegations and is seeking dismissal. The complaint specifies no monetary damages, and the court had not ruled on the motion as of the filing. The SBA may review PPP loan forgiveness for six years.
- Forward China is a related-party supplier owned by the CEO and chairman. The company incurred $1.04 million of related-party supply-agreement service fees in the nine-month period. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether operating cash flow and cash balances improve, given nine-month operating cash use, inventory and receivables growth, and the decline in cash.
- Repayment or refinancing plans for the $1.60 million Forward China note by December 2022, and the sustainability of $4.44 million due to Forward China.
- Whether design-segment growth and margins persist after accounting for Kablooe’s acquisition contribution and integration costs.
- The pace of diabetic-product revenue declines, progress diversifying distribution revenue, customer concentration, and the effect of freight costs and pricing pressure on margins.
- Developments in the patent litigation and any change in the SBA’s review of PPP loan forgiveness.