Forward Industries, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended June 30, 2020; filed August 14, 2020. The company provides product design, development and manufacturing solutions, with reportable Distribution and Design segments.
Financial performance
| Metric | Three months ended June 30, 2020 | Nine months ended June 30, 2020 |
|---|---|---|
| Revenue | $9.55 million, down 3.6% year over year | $25.87 million, down 8.5% |
| Gross profit and margin | $1.77 million; 18.6% (versus $1.89 million; 19.1%) | $4.95 million; 19.1% (versus $4.51 million; 15.9%) |
| Operating loss | $175,000 (versus $50,000) | $1.87 million (versus $1.61 million) |
| Net loss and loss per share | $215,000; $0.02 per share (versus $104,000; $0.01) | $1.67 million; $0.18 per share (versus $1.77 million; $0.19) |
| Operating cash flow | Not presented for the quarter | Cash used of $760,000 (versus $2.20 million) |
- Distribution revenue for the quarter rose 6.1%, as higher other-product sales— including $758,000 of personal protective equipment—more than offset declining diabetic-product sales. Design revenue fell 18.7%, partly due to COVID-related delays and reduced demand.
- For the nine-month period, Distribution revenue declined 8.0%; diabetic-product revenue fell 12.6%. Design revenue declined 9.2%, while Design gross margin improved to 28.0% from 16.5%, partly reflecting prior-year project overruns.
- The nine-month results include a $1.015 million goodwill impairment and a $327,000 impairment of a customer investment. The quarter had no goodwill impairment charge.
Balance sheet, liquidity and debt
- At June 30, cash was $3.08 million, current assets $12.58 million and current liabilities $8.40 million. Working capital was $4.18 million; current and quick ratios were 1.5 and 1.4, respectively.
- Cash decreased by $8,000 during the nine months. Operations used $760,000; investing used $56,000; financing provided $808,000, including $1.357 million of Paycheck Protection Program (PPP) proceeds. Cash on hand was $3.023 million at July 31, 2020.
- The company had $1.0 million drawn on its $1.3 million revolving credit facility at June 30, leaving $300,000 available. The facility was renewed August 5 and extended to May 31, 2021. Management warned that IPS may fail annual debt-service covenant testing at September 30, 2020; the lender could demand repayment following a default.
- A $1.6 million promissory note payable to Forward China, a company owned by the CEO and Chairman, was extended to September 30, 2020. The company said it planned to repay it from cash and/or additional financing. PPP forgiveness was uncertain; the loan bears 1% interest and begins scheduled payments in November 2020 if not forgiven.
- Total liabilities were $12.46 million, including $3.52 million of operating lease liabilities. Management stated that existing cash and working capital should meet liquidity needs through at least September 30, 2021.
Outlook, risks and notable items
- COVID-19 disrupted supply, manufacturing and shipments, delayed the smart-enabled retail product rollout, reduced or postponed Design projects, and temporarily delayed receivable collections. Employees began returning to the office in August with minimal reported operational challenges. Management said visibility for the rest of 2020 was limited and business conditions were expected to remain challenging; it provided no specific financial guidance.
- Management plans to control expenses, align Design schedules with demand and improve productivity. It expects diabetic-product revenues to continue declining and is seeking to expand higher-margin products and diversify customers.
- Customer concentration is significant: the three largest Distribution customers generated 62.6% of segment revenue in the quarter. The company also identified COVID-related collection risk, supply-chain exposure, and cybersecurity and efficiency risks from remote work.
- The revolving-credit covenant risk, uncertain PPP forgiveness and maturity of the related-party Forward China note are significant liquidity considerations. The Forward China supply agreement, also a related-party arrangement, provides for monthly fees and was due to expire October 22, 2020.
- In August, the company received $98,000 from a customer whose $1.626 million promissory note receivable had been fully reserved. A subsequent-event disclosure reports a non-binding letter of intent to acquire a medical design-development company’s assets for approximately $1.5 million in cash and stock, plus assumed liabilities.
- Management reported effective disclosure controls. It reported no legal proceedings believed material at June 30, 2020. The filing notes prior-period SEC-subpoena response costs, but does not describe a material proceeding.
Key facts for investors to verify
- Whether the company repaid or refinanced the $1.6 million Forward China note by its September 30, 2020 maturity, and the terms or outcome of the credit-facility covenant test.
- Whether the PPP loan was forgiven, and the repayment obligations for any unforgiven balance.
- Subsequent collections on the fully reserved customer note and the quality and aging of the increased accounts receivable balance.
- Whether COVID-related delays, diabetic-product declines and customer concentration continued to affect revenue, margins and cash flow.
- Whether the proposed acquisition proceeded, and its final consideration, financing and expected effect on liquidity.