Forward Industries, Inc. — Form 10-Q Summary
Business and period: This unaudited filing covers the fiscal second quarter and six months ended March 31, 2020. Forward provides product design and development services through IPS and distributes custom carrying and protective products, sourcing substantially all distribution products from suppliers in China. The filing was signed June 25, 2020.
Financial performance
| Metric | Three months ended March 31, 2020 | Prior-year quarter | Six months ended March 31, 2020 | Prior-year period |
|---|---|---|---|---|
| Revenue | $7.93 million | $8.17 million | $16.32 million | $18.36 million |
| Gross profit | $1.45 million | $1.31 million | $3.17 million | $2.61 million |
| Gross margin | 18.3% | 16.0% | 19.4% | 14.2% |
| Operating loss | $1.67 million | $1.08 million | $1.70 million | $1.56 million |
| Net loss | $1.37 million | $1.13 million | $1.45 million | $1.66 million |
| Basic and diluted loss per share | $0.14 | $0.12 | $0.15 | $0.17 |
- Segment trends: Quarterly distribution revenue fell 3% to $4.62 million; design revenue fell 3% to $3.31 million. For the six-month period, distribution revenue declined 16% to $9.32 million and design revenue declined 4% to $7.00 million.
- Distribution gross margin weakened to 12.8% for the quarter and 12.5% for six months, versus 15.8% and 15.7%, respectively, mainly due to pricing pressure and a mix shift toward lower-margin products. Design gross margin improved to 27.0% for the quarter and 28.7% for six months, compared with 16.4% and 12.0%, reflecting better project execution and prior-year project overruns.
- The quarterly loss widened, primarily reflecting a $1.015 million goodwill impairment. Six-month net loss improved year over year despite that charge, helped by higher gross profit and lower expenses.
Cash, liquidity and debt
- Cash was $1.35 million at March 31, 2020, down from $3.09 million at September 30, 2019. Current assets were $9.96 million and current liabilities $6.51 million; working capital was approximately $3.45 million. The current ratio was 1.5 and the quick ratio 1.4.
- Operating activities used $554,000 in cash in the first six months, versus $2.76 million used in the prior-year period. Investing activities used $27,000; financing activities used $1.16 million. Cash declined by $1.74 million over the period.
- At March 31, the company had $400,000 drawn on its $1.3 million TD Bank revolving credit line, with $900,000 available; the facility matures August 29, 2020. At the filing date, management reported $300,000 available.
- Notes payable were $1.61 million, including a $1.6 million related-party note payable to Forward China at 8% interest, extended to July 17, 2020. The company said it planned to repay it from cash and/or obtain additional financing. A separate term loan was paid off in early April.
- IPS may risk failing annual debt-service covenants given its six-month loss; the lender could demand repayment following a default. The company had previously breached the covenant at September 30, 2019 but received a waiver.
- Management stated that liquidity was expected to be adequate for the next 12 months from the filing date and that cash and working capital were believed sufficient at least through June 30, 2021. Cash on hand was approximately $3.5 million as of June 5, 2020.
Material changes, outlook and risks
- Management said COVID-19 had minimally affected results through March 31, but its duration and financial effects remained uncertain. It revised its remaining-year and long-term outlook following the quarter’s revenue and earnings shortfall, citing COVID-19 in part, and expected challenging conditions with limited visibility. Planned responses included expense control, aligning development schedules with demand, and improving productivity.
- The revised projections triggered an interim goodwill review. The company recorded a $1.015 million impairment of IPS goodwill, reducing its carrying value to $1.17 million. Management used Level 3 valuation inputs, including forecasts and discount-rate assumptions; changes in those estimates could materially affect valuations. No impairment of intangible assets was identified.
- A design-segment customer failed to make payments under a January 2020 promissory note for approximately $1.626 million, which was intended to recover previously reserved receivables. The note was fully reserved at March 31, leaving no net balance. The company also fully impaired its approximately $327,000 investment in that customer.
- A $350,000 reduction in the estimated earn-out consideration produced other income; a $9,000 adjustment to deferred cash consideration partly offset it. The related deferred payment liability was $293,000 at quarter-end.
- After quarter-end, the company received an approximately $1.4 million unsecured PPP loan on April 18, 2020, bearing 1% interest and due in 2022. Forgiveness is subject to program requirements and SBA review; the company cautioned that forgiveness is not assured and eligibility could be challenged.
- Forward entered a non-binding letter of intent to acquire the assets of a medical-industry design-development company for aggregate consideration of up to approximately $1.5 million. Closing and terms were not assured.
- Revenue and receivables are concentrated. Distribution’s four largest customers represented 85% of quarterly segment revenue and 86.3% of segment receivables at March 31. Management also expects diabetic-product revenues to continue declining.
- Related-party matters include the Forward China supply agreement, owned by the CEO and chairman, which generated approximately $676,000 of service fees in the six-month period, and the $1.6 million related-party note. The supply agreement was extended through October 22, 2020.
- No legal proceedings were reported that management believed would be material. Management assessed disclosure controls as effective; it reported no material internal-control changes other than controls implemented for lease accounting adoption.
Investor verification checklist
- Track customer orders, collections, and concentration—especially diabetic-product demand and the aging of receivables amid COVID-19.
- Confirm cash generation and liquidity after March 31, including the reported June 5 cash balance, revolving-credit availability, and repayment or refinancing of the Forward China note.
- Monitor IPS covenant compliance, lender actions, and any further waivers or amendments to debt maturities.
- Verify PPP loan eligibility, use of proceeds, repayment requirements, and whether any amount is ultimately forgiven.
- Assess the assumptions behind the $1.015 million goodwill impairment and whether further impairment or operating deterioration occurs.
- Follow the impaired customer note and investment, the medical design-business acquisition proposal, and any resulting cash or share commitments.