Forward Industries, Inc. — Q1 FY2019 Form 10-Q
Reporting period: Three months ended December 31, 2018. The filing was signed February 14, 2019. Forward provides product design, development, distribution and manufacturing solutions through its distribution and design segments; IPS, acquired in January 2018, operates the design segment.
Financial performance
| Metric | Q1 FY2019 | Q1 FY2018 |
|---|---|---|
| Revenue | $10.18 million | $6.34 million |
| Gross profit / margin | $1.30 million / 12.8% | $1.00 million / 15.8% |
| Operating income (loss) | $(481,000) | $51,000 |
| Net income (loss) | $(531,000) | $47,000 |
| Basic and diluted EPS | $(0.06) | $0.01 |
| Operating cash flow | $(790,000) | $1.30 million |
Revenue growth largely reflects inclusion of IPS, whose results were not in the prior-year reported quarter. Pro forma revenue, assuming IPS had been included in the prior-year quarter, was $9.91 million; pro forma gross profit was $2.03 million and pre-tax loss was $78,000. The company reported no income-tax provision or benefit, citing its full valuation allowance on deferred tax assets.
Distribution revenue was $6.28 million, down about 1%; its gross margin was 15.7%, versus 15.8%. Design revenue was $3.90 million and gross margin was 8.1%; project overruns at two significant customers reduced design profitability. Distribution reported an operating loss of about $32,000 and design an operating loss of about $487,000.
Liquidity, cash flow and debt
- Cash was $4.42 million at December 31, 2018, compared with $4.37 million at September 30, 2018. Current assets were $15.42 million and current liabilities $8.33 million; working capital was $7.1 million, the current ratio 1.9 and the quick ratio 1.7.
- Operating cash use of $790,000 reflected the net loss and working-capital outflows, including a $326,000 increase in receivables; financing provided $857,000, principally from net line-of-credit borrowings. Investing used $20,000. Cash ended the quarter at $4.42 million.
- Debt included $1.30 million drawn on a $1.30 million revolving credit line, leaving $100,000 available at filing. The facility, secured by IPS assets and guaranteed by Forward, carried a 6.25% effective rate and was subject to lender renewal on April 30, 2019.
- A $1.6 million related-party note payable to Forward China carried 8% interest. Its maturity was extended in January 2019 from January 18 to April 18, 2019. Management said it planned to use existing cash to repay it; cash on hand was approximately $3.9 million as of February 8, 2019.
- Management said resources were expected to be adequate for operating and financial requirements over the next 12 months. Strategic acquisitions or investments could require additional capital, which might not be available on acceptable terms.
Material changes, outlook and risks
- Operating expenses rose to $1.78 million from $952,000, including higher sales and marketing and general and administrative costs. Interest expense was $45,000, versus none in the prior-year quarter.
- Management attributed the design segment’s low margin to overruns on two projects, described the issue as isolated, and expected design gross margins to return to historical levels above 20% in Q2 FY2019. This is management’s expectation, not a guarantee.
- Diabetic products generated 85% of distribution revenue, down from 89%; diabetic sales fell 6%. Distribution revenue remained concentrated: four customers accounted for 82.9% of segment sales. Design’s three largest customers accounted for 49.6% of segment sales.
- Forward sources substantially all OEM products from independent suppliers in China through Forward China. Forward China is owned by the CEO and chairman; the company also paid it about $359,000 in quarterly service fees. These supplier and customer concentrations expose results to order variability and related-party dependence.
- On January 29, 2019, the company entered a three-year Mooni distribution agreement, paid $400,000 subject to repayment requirements, and obtained an option to acquire a controlling interest at a valuation not exceeding $5 million. The filing says the option would take effect on the agreement’s 12-month anniversary if exercised.
- The company disclosed that the SEC served subpoenas on its executive officers on February 13, 2019, relating to its investigation of trading around the January 2018 IPS acquisition announcement, following a FINRA investigation referral. The filing does not state an outcome.
- Management identified risks including order variability, customer concentration, product-sales execution, IPS integration, diversification, tariffs or import restrictions, pricing pressure, and the need to raise capital for strategic opportunities. No legal proceedings were reported as material as of December 31, 2018.
- ASC 606 adoption in October 2018 had no material revenue impact or cumulative-effect adjustment. Management reported disclosure controls effective; its internal-control evaluation excluded IPS during the first year after acquisition, with inclusion planned for Q2 FY2019.
Investor verification priorities
- Track design-segment project execution and whether margins recover above 20% as management expected for Q2 FY2019.
- Verify repayment of the $1.6 million Forward China note by its extended April 18, 2019 maturity and renewal status of the credit line.
- Monitor the SEC investigation and any resulting company disclosures.
- Assess customer concentration, distribution demand—especially diabetic products—and the effect of the Mooni agreement and its $400,000 payment.
- Compare operating cash generation with reported earnings and monitor receivables, working capital and access to additional capital.