Forward Industries, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended June 30, 2018; filed August 14, 2018. The company designs and distributes protective products and, following its January 2018 acquisition of Intelligent Product Solutions (IPS), also provides product design and engineering services.
Financial performance
| Metric | Three months ended June 30 | Nine months ended June 30 |
|---|---|---|
| Revenue, 2018 | $9.54 million | $24.89 million |
| Revenue, 2017 | $7.33 million | $18.46 million |
| Gross profit, 2018 | $1.91 million | $4.69 million |
| Operating income (loss), 2018 | ($210,000) | $73,000 |
| Net income, 2018 | $235,000 | $1.23 million |
| Net income, 2017 | $552,000 | $466,000 |
| Basic and diluted EPS, 2018 | $0.02 | $0.13 |
Quarterly revenue rose about 30%, principally reflecting IPS, consolidated gross margin was approximately 20.1% versus 17.4% a year earlier, and operating results shifted to a loss. Nine-month revenue increased about 35%, while operating income fell from $460,000 to $73,000. Nine-month net income included a $747,000 tax benefit associated with the IPS acquisition and a net favorable fair-value adjustment of approximately $498,000; these items materially affect comparability.
For the quarter, distribution revenue fell 20% to $5.91 million, while IPS design revenue was $3.63 million. Distribution gross margin declined to 16.5% from 17.4%; IPS design gross margin was 25.9%. Management attributed distribution weakness to lower diabetic-product sales and other-product sales, including lower sales to a navigation and wireless-device customer. Distribution’s nine-month revenue was essentially flat year over year; diabetic-product growth was offset by lower other-product revenue.
Cash, liquidity and obligations
- Cash was $4.34 million at June 30, 2018, down from $4.62 million at September 30, 2017.
- Nine-month operating cash flow was positive $618,000, versus cash used of $699,000 in 2017. Investing used $1.37 million, mainly for the IPS purchase; financing provided $469,000.
- Current assets were $14.95 million and current liabilities $7.33 million; working capital was $7.61 million. The company reported a 2.0 current ratio and 1.9 quick ratio.
- Balance-sheet debt included $1.90 million in short- and long-term notes payable, $550,000 drawn on a $1.0 million revolving credit line at June 30, and $85,000 in capital lease obligations. The filing states that $800,000 remained available under the credit line as of the filing date and that the facility, then maturing August 31, 2018, would likely be extended for another year.
- The $1.6 million acquisition-funding note payable to Forward China, a related party principally owned by the company’s chairman and CEO, bears 8% interest and is due January 18, 2019. IPS acquisition terms also include $500,000 paid deferred consideration and further scheduled payments of $200,000 in 2019 and $300,000 in 2020, plus contingent earn-out payments of up to $2.2 million.
Material developments, outlook and risks
- IPS was acquired January 18, 2018. The acquisition added the design segment and contributed $6.45 million of revenue from acquisition through June 30. Management cited cross-selling and integrated product-design, development, manufacturing and distribution opportunities, but noted that expected synergies had not materialized as quickly as anticipated.
- The estimated IPS earn-out fair value fell from $600,000 at acquisition to $90,000 at June 30, producing a $510,000 noncash gain. Management cited lower gross margins, higher expenses and weaker-than-projected EBITDA. A related impairment assessment found no impairment of goodwill or acquired intangible assets at June 30; goodwill was $2.18 million.
- Management expected available liquidity to be adequate for operating and financial needs over the 12 months following filing. It anticipated possible use of the credit line for working capital and IPS capital needs. No quantified earnings or revenue guidance was provided.
- Customer concentration is significant: four distribution customers represented 83.7% of distribution revenue for the quarter; four design customers represented 55.9% of design revenue. Substantially all distribution products are sourced in China through Forward China, which also receives a monthly service fee of $100,000 plus 4% of defined adjusted gross profit. The company owed Forward China $3.82 million for inventory at June 30.
- FINRA completed its investigation of trading around the IPS acquisition announcement and referred the matter to the SEC; the company reported no SEC communication as of filing. The company said it would report further developments if material. No material legal proceedings were reported.
- Management reported disclosure controls effective, but excluded IPS from its internal-control assessment during the permitted post-acquisition integration period. The company identified risks including customer orders and concentration, IPS integration, industry diversification, possible U.S. import tariffs or restrictions, and pricing pressure.
Investor facts to verify
- Whether IPS integration, cross-selling and cost synergies improve operating performance, and whether earn-out expectations continue to change.
- Distribution customer demand, product mix and margins, given the quarterly revenue decline and high customer concentration.
- Cash collection and working-capital trends, including accounts receivable, and the company’s reported availability and extension status for its revolving credit line.
- Repayment plans for the January 2019 related-party note and the remaining deferred acquisition payments and assumed debt.
- Any material SEC developments following the FINRA referral, and the results of subsequent goodwill and intangible-asset impairment assessments.