Forward Industries, Inc. — FY2018 Form 10-K
Reporting period: Fiscal year ended September 30, 2018. This is an annual report, not a standalone fourth-quarter report. Comparisons with FY2017 are affected by the January 18, 2018 acquisition of Intelligent Product Solutions (IPS); IPS results are included only from acquisition through year-end.
Business context
Forward operates two segments: distribution of carry and protective products, and IPS’s product design and engineering services. The IPS acquisition expanded the company’s offering to product design, development, sourcing and distribution. Distribution products are sourced through Forward China, the company’s exclusive buying agent, which is related to the Chairman and CEO.
Financial performance
| Metric | FY2018 | FY2017 |
|---|---|---|
| Revenue | $34.50 million | $24.76 million |
| Gross profit / margin | $6.57 million / 19.0% | $4.19 million / 16.9% |
| Operating income / margin | $261,000 / 0.8% | $598,000 / 2.4% |
| Income before taxes | $632,000 | $579,000 |
| Income tax benefit | $747,000 | — |
| Net income / diluted EPS | $1.38 million / $0.15 | $579,000 / $0.07 |
| Operating cash flow | $956,000 | $(138,000) |
- Revenue rose 39%, primarily because of IPS. Distribution revenue declined 2% to $24.35 million; IPS contributed $10.15 million for its partial-year period.
- Distribution gross margin slipped to 16.7% from 16.9%; IPS reported a 24.7% gross margin. Consolidated operating income declined despite higher revenue.
- Net income included a $747,000 tax benefit from reducing the deferred-tax valuation allowance following the acquisition, and a net $498,000 non-cash gain from fair-value adjustments to acquisition consideration. Earnings therefore materially exceeded pretax income.
- Cash and cash equivalents were $4.37 million at year-end, versus $4.62 million a year earlier. Investing cash outflow was $1.39 million, chiefly reflecting the IPS purchase, net of acquired cash.
Liquidity, debt and financial position
- Current assets were $15.21 million and current liabilities $7.62 million; working capital was $7.8 million. The current ratio was 2.1, down from 3.1, and the quick ratio was 1.8, down from 2.6.
- Year-end borrowings included $350,000 drawn on IPS’s $1.3 million revolving credit facility, $1.82 million in short- and long-term notes payable, and $121,000 in capital lease obligations. The company also owed Forward China $4.20 million in accounts payable and had $538,000 of deferred acquisition consideration.
- A separate $1.6 million, 8% note payable to Forward China matured January 18, 2019. Management said it expected to fund repayment with existing cash. The company reported approximately $4.2 million cash on hand as of December 14, 2018, and stated that resources should be adequate for the next 12 months.
Material changes, outlook and risks
- IPS acquisition consideration included $1.93 million cash, $500,000 in company shares, assumed debt, $1.0 million deferred cash payments and potential earn-outs of up to $2.2 million. The earn-out liability was reduced by $510,000 after IPS’s performance fell short of milestones; management said expected cross-selling and cost synergies had not materialized as quickly as anticipated. No impairment of acquired goodwill or intangible assets was recorded.
- Management expects the combined business to grow as integration and cross-selling develop, while noting that the long-term nature of design projects may delay growth. No specific revenue or earnings guidance was provided.
- Distribution remains highly concentrated: diabetic products were 89% of distribution revenue, and four distribution customers accounted for approximately 84% of that segment’s revenue. Four design customers represented 47% of design revenue.
- Key risks include customer concentration and changing demand for diabetic carrying cases; pricing pressure and supplier cost inflation; reliance on China-based sourcing through a single related-party agent; U.S.–China tariffs; integration and execution risks at IPS; and foreign-exchange, credit and working-capital exposure.
- The company reported no material legal proceedings as of September 30, 2018, but cited professional costs related to its response to a FINRA investigation into trading activity in its stock. Management concluded disclosure controls and internal control over financial reporting were effective, but excluded IPS from the internal-controls assessment during its first year after acquisition.
Important facts for investors to verify
- Whether the January 2019 related-party note was repaid as planned, and the subsequent balance and terms of debt and the credit facility.
- Whether IPS meets performance expectations and whether the anticipated integration, cross-selling and synergies emerge; review future impairment and earn-out valuations.
- Ongoing concentration in diabetic products and major customers, including any changes in product designs that reduce demand for carrying cases.
- Forward China agreement renewal and related-party fees, sourcing dependence, supplier alternatives and any tariff effects.
- The composition and sustainability of earnings: FY2018 net income included substantial tax and fair-value benefits despite lower operating income.
- Progress in integrating IPS into internal controls and any further disclosure about the FINRA matter.