Forward Industries(FORD) - 2019 Q3 - Quarterly Report

Part I. Financial Information Financial Statements The unaudited condensed consolidated financial statements show a decrease in total assets and shareholders' equity, with a significant net loss for the nine months ended June 30, 2019, primarily due to declining gross profit and increased operating expenses Condensed Consolidated Balance Sheet Highlights (Unaudited) | Account | June 30, 2019 (in millions) | September 30, 2018 (in millions) | | :--- | :--- | :--- | | Total current assets | $13.01 | $15.21 | | Total assets | $17.37 | $19.23 | | Total current liabilities | $7.44 | $7.62 | | Total liabilities | $7.85 | $8.13 | | Total shareholders' equity | $9.52 | $11.10 | Condensed Consolidated Statements of Operations Highlights (Unaudited) | Metric | Three Months Ended June 30, 2019 (in thousands) | Three Months Ended June 30, 2018 (in thousands) | Nine Months Ended June 30, 2019 (in thousands) | Nine Months Ended June 30, 2018 (in thousands) | | :--- | :--- | :--- | :--- | :--- | | Net Revenues | $9,909 | $9,539 | $28,265 | $24,888 | | Gross Profit | $1,894 | $1,914 | $4,508 | $4,691 | | Income (loss) from operations | $(50) | $(210) | $(1,605) | $73 | | Net Income (loss) | $(104) | $235 | $(1,765) | $1,231 | | Net income (loss) per basic share | $(0.01) | $0.02 | $(0.19) | $0.13 | - For the nine months ended June 30, 2019, net cash used in operating activities was approximately $2.2 million, a significant reversal from the $618,000 provided by operating activities in the prior-year period, primarily due to the net loss and changes in working capital[23] - The company operates through two reportable segments following the acquisition of IPS in January 2018: the Distribution segment (comprising Forward US, Forward Switzerland, and Forward UK) and the Design segment (comprising IPS)[30] - The company has significant revenue concentration, with four customers accounting for 86.1% of the Distribution segment's revenue and five customers accounting for 56.8% of the Design segment's revenue for the nine months ended June 30, 2019[110][113] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's consolidated net loss for the quarter and nine-month period, attributing it to lower margins, project overruns, and increased operating expenses, while also addressing liquidity and future funding - The company is under investigation by the SEC regarding trading in its securities surrounding the January 2018 acquisition of Intelligent Product Solutions, Inc. (IPS), with certain executive officers receiving subpoenas in February 2019[129][130] - The company is expanding its retail distribution network through agreements with manufacturer's representatives to introduce products, including those from a new partnership with Mooni AB International, into major retailers[134][135] Results of Operations for the Three Months Ended June 30, 2019 Compared to the Three Months Ended June 30, 2018 Consolidated net revenues increased 3.9% to $9.9 million in Q3 2019, but the company reported a net loss of $(104,000) due to a widened loss in the Distribution segment and a significant swing in other income/expenses Segment Performance - Q3 2019 vs Q3 2018 (in thousands) | Segment | Metric | Q3 2019 | Q3 2018 | Change | | :--- | :--- | :--- | :--- | :--- | | Distribution | Net Revenues | $6,022 | $5,910 | 2% | | | Gross Profit | $921 | $973 | (5.3)% | | | Income (Loss) Before Taxes | $(304) | $294 | $(598) | | Design | Net Revenues | $3,887 | $3,629 | 7.1% | | | Gross Profit | $973 | $940 | 3.5% | | | Income (Loss) Before Taxes | $200 | $(59) | $259 | - Distribution segment's Diabetic Products revenue increased by 4.7% to $5.4 million, while Other Products revenue declined by $134,000[152][156] - Distribution G&A expenses decreased primarily due to a $191,000 decline in share-based compensation, partially offset by a $204,000 increase in legal fees related to the SEC investigation[164] Results of Operations for the Nine Months Ended June 30, 2019 Compared to the Nine Months Ended June 30, 2018 Consolidated revenues grew to $28.3 million for the nine months ended June 30, 2019, but the company incurred a $1.77 million net loss before tax due to revenue decline in Distribution, compressed Design segment margins, and increased G&A expenses Segment Performance - 9M 2019 vs 9M 2018 (in thousands) | Segment | Metric | 9M 2019 | 9M 2018 | Change | | :--- | :--- | :--- | :--- | :--- | | Distribution | Net Revenues | $17,072 | $18,441 | (7.4)% | | | Gross Profit | $2,659 | $3,021 | (12)% | | | Income (Loss) Before Taxes | $(987) | $469 | $(1,456) | | Design | Net Revenues | $11,193 | $6,447 | 73.6% | | | Gross Profit | $1,849 | $1,670 | 10.7% | | | Income (Loss) Before Taxes | $(779) | $14 | $(793) | - The Design segment's gross margin for the nine-month period fell to 16.5% from a historical average above 20%, attributed to project overruns on two significant customer projects completed in Q2 2019[184] - Distribution segment G&A expenses increased by 21% ($438,000), primarily due to a $354,000 increase in legal fees for the SEC investigation and a $159,000 increase in bad debt expense[187] - Design segment G&A expenses for the nine months included a bad debt expense of approximately $258,000 due to slower paying customers[188] Liquidity and Capital Resources The company's liquidity, primarily from operations, saw working capital decrease to $5.6 million by June 30, 2019, with $2.2 million cash used in operations, and faces a likely risk of failing debt covenant tests at year-end Key Liquidity Ratios | Ratio | June 30, 2019 | September 30, 2018 | | :--- | :--- | :--- | | Current Ratio | 1.7 | 2.0 | | Quick Ratio | 1.5 | 1.8 | | Working Capital | ~$5.6 million | ~$7.6 million | - The company plans to fund the $1.6 million Forward China promissory note, due October 17, 2019, using existing cash or by obtaining an additional credit facility[195] - Due to the net loss at the IPS subsidiary for the nine months ended June 30, 2019, there is a likely risk of failing debt covenant testing at year-end, which could result in lenders demanding payment in full[121][123] Quantitative and Qualitative Disclosures About Market Risk This item is not applicable to the company - Not applicable[208] Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective as of June 30, 2019, with no material changes to internal control over financial reporting during the quarter - Management concluded that disclosure controls and procedures were effective as of the end of the period covered by the report[209] - No material changes in internal control over financial reporting occurred during the quarter[210] Part II. Other Information Legal Proceedings As of June 30, 2019, the company reported no material legal actions or proceedings in the ordinary course of business - As of June 30, 2019, there were no material legal actions or proceedings against the company in the ordinary course of business[213] Risk Factors This item is not applicable as the company is a smaller reporting company - Not applicable to smaller reporting companies[214] Unregistered Sales of Equity Securities and Use of Proceeds The company reported no unregistered sales of equity securities or use of proceeds during the period - None[215] Defaults Upon Senior Securities The company reported no defaults upon senior securities - None[216] Mine Safety Disclosures This item is not applicable to the company - Not Applicable[217] Other Information The company reported no other information for this item - None[218] Exhibits This section provides an index of all exhibits filed with or incorporated by reference into the Form 10-Q, including agreements related to the IPS acquisition and officer certifications - The report includes an index of exhibits filed, such as agreements related to the IPS acquisition, related-party transactions, and officer certifications[219][226]