Forward Industries, Inc. — Form 10-Q Summary
Business and reporting period: The company designs and distributes carry and protective products, sourcing substantially all OEM products through Forward China. This report covers the first quarter of fiscal 2018, the three months ended December 31, 2017, and compares it with the three months ended December 31, 2016. Results exclude Intelligent Product Solutions, Inc. (IPS), acquired after quarter-end on January 18, 2018.
Financial performance
| Metric | Q1 FY2018 | Q1 FY2017 |
|---|---|---|
| Revenue | $6.336 million | $6.591 million |
| Gross profit / gross margin | $1.003 million / 15.8% | $1.159 million / 17.6% |
| Operating income | $51,073 | $148,122 |
| Net income | $46,651 | $151,492 |
| Basic and diluted EPS | $0.01 | $0.02 |
| Cash from (used in) operations | $1.300 million | ($519,810) |
- Revenue declined 4%; gross profit fell 13%, and net income decreased by about $105,000.
- Diabetic product revenue rose to $5.662 million from $5.522 million and represented 89% of revenue, versus 84%. Other product revenue fell to $674,000 from $1.069 million.
- Sales and marketing expense declined 33% to $278,062, while general and administrative expense increased 14% to $673,461, partly due to IPS-related professional fees.
- Quarter-end cash was $5.904 million, up from $4.623 million at September 30, 2017. Working capital was $9.0 million; current and quick ratios were 2.9 and 2.5. The company reported no debt outstanding at December 31, 2017.
- Operating cash generation reflected, among other factors, lower receivables and a $736,000 increase in accounts payable and amounts due to Forward China. Investing cash use was $18,892; there was no financing cash flow.
Material developments, outlook and risks
- IPS acquisition after quarter-end: Consideration included approximately $1.9 million cash, assumption of approximately $1.5 million of debt, 401,836 Forward shares, $1.0 million of deferred cash payments, and potential earnouts of up to $2.2 million tied to EBITDA milestones. IPS results are not included in this quarter’s financial statements.
- To help fund the acquisition, the company issued Forward China a $1.6 million, 8% promissory note due January 18, 2019, with monthly interest payments. Some of the approximately $1.5 million of assumed IPS debt was in default following a covenant violation. The company also disclosed deferred payments and annual compensation of $256,000 for each of two IPS executives.
- Management cited cross-selling and integrated product design, development, manufacturing, and distribution opportunities. It expected liquidity and financial resources to be adequate for the next 12 months, but this statement should be considered alongside acquisition-related obligations and debt.
- Forward China is a related party: the CEO and chairman is its principal. The company paid it approximately $360,000 in quarterly service fees, included in cost of goods sold; the agreement provides for a $100,000 monthly fee plus 4% of defined adjusted gross profit.
- Customer concentration is substantial: four customers accounted for 86.8% of quarterly revenue. Management warned that short-lead-time, variable orders can make results fluctuate significantly.
- Key stated risks include successfully integrating IPS, customer order variability, limited diversification, import tariffs or restrictions, and pricing pressure. Management reported effective disclosure controls and no material legal proceedings as of quarter-end.
- From January 22 through February 12, 2018, warrant holders cashlessly exercised 521,621 warrants, receiving 223,704 shares. No specific revenue or earnings guidance was provided.
Important facts for investors to verify
- IPS purchase accounting, acquired debt terms and covenant status, contingent earnout exposure, and the combined company’s post-acquisition liquidity.
- Whether the anticipated integration and cross-selling benefits materialize, and the resulting impact on operating costs and profitability.
- Customer retention and order trends, especially given the 86.8% revenue concentration and the decline in other-product sales.
- Forward China’s related-party fees, the acquisition note, and the governance and economic implications of the relationship.
- Share dilution from acquisition consideration, employee awards, and remaining warrants; confirm the applicable post-quarter share count.