Forward Industries, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended March 31, 2018; comparative periods ended March 31, 2017. Financial statements are unaudited. Forward designs and distributes protective products for OEMs and, since January 18, 2018, also provides product design and engineering services through acquired subsidiary IPS.
Financial performance
| Metric | Three months ended March 31 | Six months ended March 31 |
|---|---|---|
| Revenue | $9.01 million vs. $4.53 million | $15.35 million vs. $11.12 million |
| Gross profit | $1.83 million vs. $0.72 million | $2.83 million vs. $1.87 million |
| Operating income (loss) | $232,000 vs. $(237,000) | $283,000 vs. $(89,000) |
| Net income (loss) | $948,000 vs. $(238,000) | $995,000 vs. $(86,000) |
| Diluted EPS | $0.10 vs. $(0.03) | $0.11 vs. $(0.01) |
Revenue increased approximately 99% for the quarter and 38% for the six-month period. The quarter included $2.82 million of IPS revenue for the post-acquisition period; distribution revenue also increased, led by diabetic products. Consolidated gross margin was approximately 20.3% for the quarter and 18.5% for the six months. Distribution-segment margin was 16.9% for the quarter and 16.3% for the six months; IPS design-segment margin was 27.9% for its shortened post-acquisition period.
Reported net income included a $747,000 tax benefit arising from the deferred tax liability recorded with the IPS acquisition and a corresponding reduction in the valuation allowance. Pretax income was $201,000 for the quarter and $248,000 for the six months; thus, reported profit was materially affected by this non-recurring acquisition-related tax benefit.
Cash flow, liquidity and debt
- Cash was $3.33 million at March 31, 2018, down $1.30 million from September 30, 2017.
- Six-month operating cash outflow was $1.24 million, compared with $1.11 million in the prior-year period. Investing cash outflow was $1.36 million, principally for the IPS acquisition; financing provided $1.30 million.
- Current assets were $14.22 million and current liabilities $6.62 million; management reported working capital of $7.6 million, a current ratio of 2.1 and a quick ratio of 1.9.
- At quarter-end, the balance sheet included an $800,000 line-of-credit balance, $1.98 million of notes payable, and $91,682 of capital-lease obligations. The company also recorded $1.536 million of deferred consideration, including short- and long-term portions.
- Management said approximately $450,000 remained available under the $1.0 million line of credit as of the filing and expected liquidity to be adequate for the next 12 months, while noting possible use of the facility for working capital and IPS needs.
Material changes, outlook and risks
- IPS acquisition: Consideration was approximately $3.97 million at acquisition-date fair value, comprising about $1.93 million cash, $500,000 in Forward shares, $936,000 fair value of deferred cash consideration and $600,000 fair value of earnout consideration. The agreement provides for $1.0 million of deferred cash payments and potential earnouts of up to $2.2 million, subject to EBITDA milestones. Forward also assumed approximately $1.57 million of IPS debt. Purchase accounting included $2.18 million of goodwill and $1.53 million of finite-lived intangible assets; valuations were preliminary.
- The acquisition was partly funded by a $1.6 million, 8% promissory note payable to Forward China, a related party principally owned by Forward’s chairman and CEO. The note matures January 18, 2019 and requires monthly interest payments. Forward China also receives a monthly service fee under the exclusive buying-agency and supply agreement; fees were approximately $719,000 for the six months.
- Distribution revenue remains highly concentrated: four customers represented 84.9% of segment revenue for the six months, and four customers represented 85.3% of segment receivables at March 31. Management cited variable customer orders and short lead times. Distribution gross margin declined slightly year over year for the six-month period amid customer pricing pressure.
- Management cited cross-selling, broader services and potential proprietary products as opportunities from combining Forward and IPS. It also cautioned that results may vary and identified risks including customer order changes, integration of IPS, customer and industry concentration, import tariffs or restrictions, and pricing pressure. No quantitative earnings guidance was provided.
- On May 8, 2018, FINRA informed the company its investigation of trading around the IPS acquisition announcement was complete and had been referred to the SEC. As of the filing date, the company reported no SEC communication. Management reported no legal proceedings it believed would be material and concluded disclosure controls were effective; the evaluation excluded IPS during its first year of integration.
- Subsequent events included new CEO and CFO employment agreements, additional fully vested equity awards, and formation of board business-development and acquisition committees.
Key facts for investors to verify
- How much of continuing earnings and future cash generation comes from operations, excluding the $747,000 acquisition-related tax benefit?
- Whether IPS integration, performance, customer retention and earnout milestones support the acquisition assumptions and recorded goodwill and intangible-asset values.
- Upcoming debt and consideration requirements, particularly the January 2019 related-party note maturity and the $500,000 deferred payment due May 31, 2018, and the company’s remaining borrowing availability.
- Whether customer and receivables concentration, pricing pressure, and dependence on the Forward China sourcing relationship change materially.
- Any developments concerning the SEC referral and the integration of IPS into financial reporting controls.