UNITED
STATES
SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
________________
FORM 10-Q
________________
[X] QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2017.
OR
[ ] TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____ to ____.
Commission File Number: 001-34780
________________
FORWARD
INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
________________
New
York
|
13-1950672
|
(State or other jurisdiction of
|
(I.R.S. Employer Identification
No.)
|
incorporation
or organization)
|
|
477 S. Rosemary Ave., Suite 219, West Palm Beach, FL
33401
(Address of principal executive offices, including zip
code)
(561) 465-0030
(Registrant’s telephone number, including area code)
________________
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding twelve months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes [
X
] No [ ]
Indicate by check mark whether the
registrant has submitted electronically and posted on its corporate Web site,
if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant was
required to submit and post such files). Yes [
X
] No
[ ]
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company.
See the definitions of “large accelerated filer”, “accelerated filer”, and
“smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
[ ]
|
Accelerated filer
[ ]
|
Non-accelerated
filer [ ]
|
Smaller reporting company [
X
]
|
(Do
not check if a smaller reporting company)
|
Emerging growth company
[ ]
|
If
an emerging growth company, indicate by checkmark if the registrant has not
elected to use the extended transition period for complying with any new or
revised financial accounting standards provided pursuant to Section 7(a)(2)(B)
of the Securities Act.
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).Yes [ ] No [
X
]
The number of shares
outstanding of the registrant’s common stock, par value $0.01 per share, on May
11, 2017, which is the latest practical date prior to the filing of this
report, was 8,780,830 shares.
Note Regarding Use of Certain Terms
In this Quarterly
Report on Form 10-Q, unless the context otherwise requires, the following terms
have the meanings assigned to them as set forth below:
“Forward”,
“Forward Industries”, “we”, “our”, and the “Company” refer to Forward
Industries, Inc., a New York corporation, together with its consolidated
subsidiaries;
“Common
stock” refers to the common stock, $.01 par value per share, of Forward
Industries, Inc.;
“Forward
US” refers to Forward Industries’ wholly owned subsidiary Forward Industries
(IN), Inc., an Indiana corporation;
“Forward
Switzerland” refers to Forward Industries’ wholly owned subsidiary Forward
Industries (Switzerland) GmbH, a Swiss corporation;
“Forward
China” refers to Forward Industries Asia-Pacific Corporation (f/k/a Seaton
Global Corporation), a British Virgin Islands registered corporation that is
Forward’s exclusive sourcing agent in the Asia Pacific Region;
“GAAP”
refers to accounting principles generally accepted in the United States;
“Commission”
refers to the United States Securities and Exchange Commission;
“Exchange
Act” refers to the United States Securities Exchange Act of 1934, as amended;
“Fiscal
2017” refers to our fiscal year ended September 30, 2017;
“Fiscal
2016” refers to our fiscal year ended September 30, 2016;
“Europe”
refers to the countries included in the European Union;
“EMEA
Region” means the geographic area encompassing Europe, the Middle East and
Africa;
“APAC
Region” refers to the Asia Pacific Region, consisting of Australia, New
Zealand, Hong Kong, Taiwan, China, South Korea, Japan, Singapore, Malaysia,
Thailand, Indonesia, India, the Philippines and Vietnam;
“Americas”
refers to the geographic area encompassing North, Central, and South America;
“OEM”
refers to Original Equipment Manufacturer; and
“Retail”
refers to the retail distribution channel.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
|
CONDENSED CONSOLIDATED BALANCE SHEETS
|
|
|
March 31,
|
|
|
September 30,
|
|
2017
|
|
|
2016
|
|
(Unaudited)
|
|
(Note 1)
|
Assets
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
Cash
|
$
|
3,649,284
|
|
|
$
|
4,760,620
|
|
Accounts receivable
|
|
4,424,939
|
|
|
|
4,864,423
|
|
Inventories
|
|
2,729,219
|
|
|
|
2,572,980
|
|
Prepaid expenses and other current assets
|
|
155,847
|
|
|
|
141,421
|
|
Total current assets
|
|
10,959,289
|
|
|
|
12,339,444
|
|
Property and equipment, net
|
|
31,576
|
|
|
|
43,030
|
|
Other assets
|
|
12,843
|
|
|
|
12,843
|
|
Total assets
|
$
|
11,003,708
|
|
|
$
|
12,395,317
|
|
|
Liabilities and shareholders' equity
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
Accounts payable
|
$
|
40,640
|
|
|
$
|
62,136
|
|
Due to Forward China
|
|
2,457,896
|
|
|
|
3,519,676
|
|
Accrued expenses and other current liabilities
|
|
292,602
|
|
|
|
587,741
|
|
Total current liabilities
|
|
2,791,138
|
|
|
|
4,169,553
|
|
Other liabilities
|
|
44,872
|
|
|
|
51,486
|
|
Total liabilities
|
|
2,836,010
|
|
|
|
4,221,039
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
Shareholders' equity:
|
|
|
|
|
|
|
|
Common stock, par value $0.01 per share; 40,000,000 shares authorized;
|
|
|
|
|
|
|
|
8,780,830 shares issued and outstanding
|
|
87,808
|
|
|
|
87,808
|
|
Additional paid-in capital
|
|
17,862,518
|
|
|
|
17,783,060
|
|
Accumulated deficit
|
|
(9,760,843
|
)
|
|
|
(9,674,805
|
)
|
Accumulated other comprehensive loss
|
|
(21,785
|
)
|
|
|
(21,785
|
)
|
Total shareholders' equity
|
|
8,167,698
|
|
|
|
8,174,278
|
|
Total liabilities and shareholders' equity
|
$
|
11,003,708
|
|
|
$
|
12,395,317
|
|
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
|
For the Three Months Ended March 31,
|
|
For the Six Months Ended March 31,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
Net revenues
|
$
|
4,532,876
|
|
|
$
|
7,025,453
|
|
|
$
|
11,124,124
|
|
|
$
|
14,163,336
|
|
Cost of goods sold
|
|
3,816,790
|
|
|
|
5,824,917
|
|
|
|
9,249,209
|
|
|
|
11,440,435
|
|
Gross profit
|
|
716,086
|
|
|
|
1,200,536
|
|
|
|
1,874,915
|
|
|
|
2,722,901
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
389,694
|
|
|
|
432,146
|
|
|
|
807,221
|
|
|
|
865,034
|
|
General and administrative
|
|
563,479
|
|
|
|
623,180
|
|
|
|
1,156,659
|
|
|
|
1,464,846
|
|
Total operating expenses
|
|
953,173
|
|
|
|
1,055,326
|
|
|
|
1,963,880
|
|
|
|
2,329,880
|
|
|
Income (loss) from operations
|
|
(237,087
|
)
|
|
|
145,210
|
|
|
|
(88,965
|
)
|
|
|
393,021
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense), net
|
|
(443
|
)
|
|
|
(907
|
)
|
|
|
2,927
|
|
|
|
(4,638
|
)
|
Total other income (expense), net
|
|
(443
|
)
|
|
|
(907
|
)
|
|
|
2,927
|
|
|
|
(4,638
|
)
|
|
Net income (loss)
|
$
|
(237,530
|
)
|
|
$
|
144,303
|
|
|
$
|
(86,038
|
)
|
|
$
|
388,383
|
|
|
Net income (loss)
|
$
|
(237,530
|
)
|
|
$
|
144,303
|
|
|
$
|
(86,038
|
)
|
|
$
|
388,383
|
|
Other comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Translation adjustments
|
|
-
|
|
|
|
(480
|
)
|
|
|
-
|
|
|
|
(916
|
)
|
Comprehensive income (loss)
|
$
|
(237,530
|
)
|
|
$
|
143,823
|
|
|
$
|
(86,038
|
)
|
|
$
|
387,467
|
|
|
Net income (loss) per basic common share
|
$
|
(0.03
|
)
|
|
$
|
0.02
|
|
|
$
|
(0.01
|
)
|
|
$
|
0.05
|
|
Net income (loss) per diluted common share
|
$
|
(0.03
|
)
|
|
$
|
0.02
|
|
|
$
|
(0.01
|
)
|
|
$
|
0.04
|
|
|
Weighted average number of common and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
common equivalent shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
8,671,240
|
|
|
|
8,503,436
|
|
|
|
8,646,103
|
|
|
|
8,445,152
|
|
Diluted
|
|
8,671,240
|
|
|
|
8,660,114
|
|
|
|
8,646,103
|
|
|
|
8,645,395
|
|
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
|
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
|
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
Other
|
|
|
|
|
|
Common Stock
|
|
Paid-In
|
|
Accumulated
|
|
Comprehensive
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
Capital
|
|
Deficit
|
|
Loss
|
|
|
Total
|
|
|
Balance - September 30, 2016
|
8,780,830
|
|
$
|
87,808
|
|
$
|
17,783,060
|
|
$
|
(9,674,805
|
)
|
|
$
|
(21,785
|
)
|
|
$
|
8,174,278
|
|
Share-based compensation
|
-
|
|
|
-
|
|
|
79,458
|
|
|
-
|
|
|
|
-
|
|
|
|
79,458
|
|
Net loss
|
-
|
|
|
-
|
|
|
-
|
|
|
(86,038
|
)
|
|
|
-
|
|
|
|
(86,038
|
)
|
Balance - March 31, 2017
|
8,780,830
|
|
$
|
87,808
|
|
$
|
17,862,518
|
|
$
|
(9,760,843
|
)
|
|
$
|
(21,785
|
)
|
|
$
|
8,167,698
|
|
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
|
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
|
(UNAUDITED)
|
|
|
For the Six Months Ended March 31,
|
|
2017
|
|
2016
|
Cash Flows From Operating Activities:
|
|
|
|
|
|
|
|
Net income (loss)
|
$
|
(86,038
|
)
|
|
$
|
388,383
|
|
Adjustments to reconcile net income (loss) to net cash
|
|
|
|
|
|
|
|
used in operating activities:
|
|
|
|
|
|
|
|
Share-based compensation
|
|
79,458
|
|
|
|
134,212
|
|
Depreciation and amortization
|
|
11,454
|
|
|
|
28,314
|
|
Deferred rent
|
|
(5,360
|
)
|
|
|
(8,057
|
)
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
Accounts receivable
|
|
439,484
|
|
|
|
(531,610
|
)
|
Inventories
|
|
(156,239
|
)
|
|
|
179,783
|
|
Prepaid expenses and other current assets
|
|
(14,426
|
)
|
|
|
(26,491
|
)
|
Other assets
|
|
-
|
|
|
|
28,119
|
|
Accounts payable and due to Forward China
|
|
(1,083,276
|
)
|
|
|
(526,668
|
)
|
Accrued expenses and other current liabilities
|
|
(296,393
|
)
|
|
|
(357,103
|
)
|
Other liabilities
|
|
-
|
|
|
|
(34,306
|
)
|
Net cash used in operating activities
|
|
(1,111,336
|
)
|
|
|
(725,424
|
)
|
|
Cash Flows From Investing Activities:
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
-
|
|
|
|
(46,347
|
)
|
Net cash used in investing activities
|
|
-
|
|
|
|
(46,347
|
)
|
|
Cash Flows From Financing Activities:
|
|
|
|
|
|
|
|
Restricted stock repurchased and retired
|
|
-
|
|
|
|
(1,667
|
)
|
Net cash used in financing activities
|
|
-
|
|
|
|
(1,667
|
)
|
|
Net decrease in cash
|
|
(1,111,336
|
)
|
|
|
(773,438
|
)
|
Cash at beginning of period
|
|
4,760,620
|
|
|
|
4,042,124
|
|
Cash at end of period
|
$
|
3,649,284
|
|
|
$
|
3,268,686
|
|
|
Supplemental Disclosure of Cash Flow Information:
|
|
|
|
|
|
|
|
Cash paid for interest
|
$
|
-
|
|
|
$
|
-
|
|
Cash paid for taxes
|
$
|
-
|
|
|
$
|
-
|
|
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
NOTE 1 OVERVIEW
Forward
Industries, Inc. (“Forward” or the “Company”) designs and distributes carry and
protective solutions, primarily for hand held electronic devices. The Company’s
principal customer market is original equipment manufacturers, or “OEMs” (or
the contract manufacturing firms of these OEM customers), that either package
their products as accessories “in box” together with their branded product
offerings, or sell them through their retail distribution channels. The
Company’s OEM products include carrying cases and other accessories for medical
monitoring and diagnostic kits and a variety of other portable electronic and
non-electronic products (such as sporting and recreational products, bar code
scanners, smartphones, GPS location devices, tablets, and firearms). The
Company’s OEM customers are located in: (i) the Asia-Pacific Region, which we
refer to as the “APAC Region”; (ii) Europe, the Middle East, and Africa, which
we refer to as the “EMEA Region”; and (iii) the Americas. The Company does not
manufacture any of its OEM products and sources substantially all of its OEM
products from independent suppliers in China, through Forward China (refer to
Note 7 – Buying Agency and Supply Agreement).
In the
opinion of management, the accompanying condensed consolidated financial
statements presented in this Quarterly Report on Form 10-Q reflect all normal
recurring adjustments necessary to present fairly the financial position and
results of operations and cash flows for the interim periods presented herein,
but are not necessarily indicative of the results of operations for the year
ending September 30, 2017. These condensed consolidated financial statements
should be read in conjunction with the Company’s audited consolidated financial
statements included in its Annual Report on Form 10-K for the fiscal year ended
September 30, 2016, and with the disclosures and risk factors presented
therein. The September 30, 2016 condensed consolidated balance sheet has been
derived from the audited consolidated financial statements.
NOTE 2 ACCOUNTING POLICIES
Accounting Estimates
The
preparation of the Company’s condensed consolidated financial statements in
conformity with accounting principles generally accepted in the United States
of America (“U.S. GAAP”) requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting periods.
Actual results could differ from those estimates and assumptions.
Basis of Presentation
The
accompanying condensed consolidated financial statements include the accounts
of Forward Industries, Inc. and its wholly owned subsidiaries (Forward US and Forward
Switzerland). All significant intercompany transactions and balances have been
eliminated in consolidation.
Income Taxes
The
Company recognizes future tax benefits and liabilities measured at enacted
rates attributable to temporary differences between financial statement and
income tax bases of assets and liabilities and to net tax operating loss
carryforwards to the extent that realization of these benefits is more likely
than not. As of March 31, 2017, there was no change to our assessment that a
full valuation allowance was required against all net deferred tax assets.
Accordingly, any deferred tax provision or benefit was offset by an equal and
opposite change to the valuation allowance. No current book income tax
provision was recorded against book net income due to the existence of
significant net operating loss carryforwards.
Revenue Recognition
The
Company generally recognizes revenue from product sales to its customers when:
(i) title and risk of loss are transferred (in general, these conditions occur
at either point of shipment or point of destination, depending on the terms of
sale); (ii) persuasive evidence of an arrangement exists; (iii) the Company has
no continuing obligations to the customer; and (iv) collection of the related
accounts receivable is reasonably assured. The Company defers revenue when it
receives consideration before achieving the criteria previously mentioned.
Reclassifications
Certain
amounts in the accompanying fiscal 2016 financial statements have been reclassified
to conform to the fiscal 2017 presentation.
FORWARD
INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE
2 ACCOUNTING POLICIES (CONTINUED)
Share-Based Compensation Expense
The
Company recognizes employee and director share-based compensation in its
condensed consolidated statements of operations and comprehensive income (loss)
at the grant-date fair value of stock options and other equity-based
compensation. The determination of stock option grant-date fair value is
estimated using the Black-Scholes option pricing model, which includes
variables such as the expected volatility of the Company’s share price, the
exercise behavior of its grantees, interest rates, and dividend yields. These
variables are projected based on the Company’s historical data, experience, and
other factors. In the case of awards with multiple vesting periods, the Company
has elected to use the graded vesting attribution method, which recognizes
compensation cost on a straight-line basis over each separately vesting portion
of the award as if the award was, in-substance, multiple awards. Refer to Note 4
- Share-Based Compensation. In addition, the Company recognizes share-based
compensation to non-employees based upon the fair value, using the
Black-Scholes option pricing model, determined at the deemed measurement dates
over the related contract service period.
Recent Accounting Pronouncements
In
May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting
Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers,”
which supersedes the revenue recognition requirements in Accounting Standards
Codification (“ASC”) 605-Revenue Recognition and most industry-specific
guidance throughout the ASC. ASU 2014-09
establishes principles for recognizing revenue
upon the transfer of promised goods or services to customers, in an amount that
reflects the expected consideration received in exchange for those goods or
services. In July 2015, the FASB deferred the effective date for annual
reporting periods beginning after December 15, 2017 (including interim
reporting periods within those periods). Early adoption is permitted to the
original effective date for annual reporting periods beginning after December
15, 2016 (including interim reporting periods within those periods). The
amendments may be applied retrospectively to each prior period (full
retrospective) or retrospectively with the cumulative effect recognized as of
the date of initial application (modified retrospective). The Company will
adopt ASU 2014-09 in the first quarter of fiscal 2018 and plans to apply the
full retrospective approach. Because the Company's primary source of revenues
is from the sale of finished goods, the Company does not anticipate that the adoption
of ASU 2014-09 will have a material impact on its consolidated financial
statements.
In
August 2014, the FASB issued ASU 2014-15, “Disclosure of Uncertainties about an
Entity’s Ability to Continue as a Going Concern”, which requires management to assess
a company’s ability to continue as a going concern and to provide related
footnote disclosures in certain circumstances. Before this new standard, there
was minimal guidance in U.S. GAAP specific to going concern. Under the new
standard, disclosures are required when conditions give rise to substantial
doubt about a company’s ability to continue as a going concern within one year
from the financial statement issuance date. The new standard applies to all
companies and is effective for the annual period ending after December 15,
2016, and all annual and interim periods thereafter. The Company will adopt
this standard in its fiscal year ended September 30, 2017 consolidated
financial statements.
In
July 2015, the FASB issued ASU 2015-11, “Inventory (Topic 330): Simplifying the
Measurement of Inventory,” which applies to inventory that is measured using
first-in, first-out (“FIFO”) or average cost. Under the updated guidance, an
entity should measure inventory that is within scope at the lower of cost and
net realizable value, which is the estimated selling prices in the ordinary
course of business, less reasonably predictable costs of completion, disposal
and transportation. Subsequent measurement is unchanged for inventory that is
measured using last-in, first-out (“LIFO”). This ASU is effective for annual
and interim periods beginning after December 15, 2016, and should be applied
prospectively with early adoption permitted at the beginning of an interim or
annual reporting period. The Company does not anticipate that the adoption of
ASU 2015-11 will have a material impact on its consolidated financial
statements.
In
November 2015, the FASB issued ASU 2015-17, “Income Taxes (Topic 740): Balance
Sheet Classification of Deferred Taxes,” which applies to the classification of
deferred tax assets and liabilities. The update eliminates the requirement to classify deferred tax assets and
liabilities as noncurrent or current within a classified statement of financial
position. This ASU is effective for annual and interim periods beginning after
December 15, 2016, and should be applied prospectively with early adoption
permitted at the beginning of an interim or annual reporting period. The
Company does not anticipate that the adoption of ASU 2015-17 will have a material
impact on its consolidated financial statements.
FORWARD
INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE
2 ACCOUNTING POLICIES (CONTINUED)
In
February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842),”
which will require lessees to report most leases as assets and liabilities on
the balance sheet, while lessor accounting will remain substantially unchanged.
This ASU requires a modified retrospective transition approach for existing
leases, whereby the new rules will be applied to the earliest year
presented. The new standard is effective for reporting periods beginning
after December 15, 2018 and early adoption is permitted. The Company is
currently evaluating the potential impact of adopting this guidance on its
consolidated financial statements.
In
March 2016, the FASB issued ASU 2016-09, “Compensation — Stock
Compensation (Topic 718): Improvements to Employee Share-Based Payment
Accounting,” which simplifies several aspects of the accounting for
share-based payment transactions, including the income tax consequences,
classification of awards as either equity or liabilities, and classification on
the statement of cash flows. This ASU is effective for fiscal years
beginning after December 15, 2016, and interim periods within those fiscal
years. Early adoption is permitted. The Company does not anticipate that the
adoption of ASU 2016-09 will have a material impact on its consolidated
financial statements.
NOTE
3
SHAREHOLDERS’ EQUITY
Stock Repurchase
In
September 2002 and January 2004, the Board authorized the repurchase of up to
an aggregate of 486,200 shares of outstanding common stock. Under those
authorizations, through March 31, 2017, the Company repurchased an aggregate of
224,690 shares at a cost of approximately $487,000. During the six months ended
March 31, 2017, the Company did not repurchase or retire any shares of its
outstanding restricted common stock.
NOTE
4
SHARE-BASED
COMPENSATION
The fair
value of each option award is estimated on the date of grant using the
Black-Scholes option pricing model that uses the following assumptions.
The expected term represents the period over which the
stock option awards are expected to be outstanding. The Company utilizes the
“simplified” method to develop an estimate of the expected term of “plain
vanilla” employee option grants. The expected volatility used is based on the
historical price of the Company’s stock over the most recent period
commensurate with the expected term of the award. The risk-free interest rate used
is based on the implied yield of U.S. Treasury zero-coupon issues with a
remaining term equivalent to the award’s expected term. The Company
historically has not paid any dividends on its common stock and had no
intention to do so on the date the share-based awards were granted. The
estimated annual forfeiture rate is based on management’s expectations and will
reduce expense ratably over the vesting period. The forfeiture rate will be
adjusted periodically based on the extent to which actual option forfeitures
differ, or are expected to differ, from the previous estimate, when it is
material.
There
were no options granted during the six months ended March 31, 2017 and 2016.
The
following table summarizes stock option activity during the six months ended March
31, 2017:
FORWARD
INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 SHARE-BASED COMPENSATION
(CONTINUED)
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Weighted
|
|
Average
|
|
|
|
|
|
|
Average
|
|
Remaining
|
|
|
|
Number of
|
|
|
Exercise
|
|
Life
|
|
Intrinsic
|
|
Options
|
|
|
Price
|
|
In Years
|
|
Value
|
Outstanding, September 30, 2016
|
266,000
|
|
|
$
|
2.27
|
|
|
|
|
|
Granted
|
-
|
|
|
|
|
|
|
|
|
|
Exercised
|
-
|
|
|
|
|
|
|
|
|
|
Forfeited
|
(10,000
|
)
|
|
|
3.73
|
|
|
|
|
|
Expired
|
-
|
|
|
|
|
|
|
|
|
|
Outstanding, March 31, 2017
|
256,000
|
|
|
$
|
2.22
|
|
4.3
|
|
$
|
31,400
|
|
Exercisable, March 31, 2017
|
215,999
|
|
|
$
|
2.51
|
|
3.5
|
|
$
|
9,549
|
The Company recognized
compensation expense of approximately $1,000 and $6,000 during the three months
ended March 31, 2017 and 2016, respectively, and approximately $3,000 and
$10,000 during the six months ended March 31, 2017 and 2016, respectively, for
stock option awards in its condensed consolidated statements of operations and
comprehensive income (loss).
As of March
31, 2017, there was approximately $5,000 of total unrecognized compensation
cost related to nonvested stock option awards. That cost is expected to be
recognized over a weighted average period of 1.0 years.
The
following table provides additional information regarding stock option awards
that were outstanding and exercisable at March 31, 2017:
Options Outstanding
|
|
Options Exercisable
|
|
|
|
Weighted
|
|
|
|
|
Weighted
|
|
Weighted
|
|
|
|
|
|
Average
|
|
Outstanding
|
|
|
Average
|
|
Average
|
|
Exercisable
|
Exercise
|
|
|
Exercise
|
|
Number of
|
|
|
Exercise
|
|
Remaining Life
|
|
Number of
|
Price
|
|
|
Price
|
|
Options
|
|
|
Price
|
|
In Years
|
|
Options
|
$0.64 to $1.99
|
|
$
|
1.00
|
|
97,500
|
|
$
|
1.25
|
|
5.1
|
|
57,499
|
$2.00 to $2.99
|
|
|
2.46
|
|
96,000
|
|
|
2.46
|
|
2.4
|
|
96,000
|
$3.00 to $3.79
|
|
|
3.74
|
|
62,500
|
|
|
3.74
|
|
3.9
|
|
62,500
|
|
|
|
|
|
256,000
|
|
|
|
|
3.5
|
|
215,999
|
Restricted Stock Awards
The Company recognized
compensation expense of approximately $29,000 and $44,000 during the three months
ended March 31, 2017 and 2016, respectively, and approximately $77,000 and
$122,000 during the six months ended March 31, 2017 and 2016, respectively, for
restricted stock awards in its condensed consolidated statements of operations and
comprehensive income (loss).
As of March
31, 2017, there was approximately $8,000 of total unrecognized compensation
cost related to nonvested restricted stock awards. That cost is expected to be
recognized over a weighted average period of 1.0 years.
The
following table summarizes restricted stock activity during the six months
ended March 31, 2017:
10
FORWARD
INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 SHARE-BASED COMPENSATION
(CONTINUED)
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
Average
|
|
|
Total
|
|
|
Number of
|
|
|
Grant Date
|
|
|
Grant Date
|
|
|
Shares
|
|
|
Fair Value
|
|
|
Fair Value
|
|
Non-vested, September 30, 2016
|
159,317
|
|
|
$
|
1.29
|
|
$
|
205,146
|
|
Granted
|
-
|
|
|
|
|
|
|
|
|
Vested
|
(124,317
|
)
|
|
|
1.47
|
|
|
(182,746
|
)
|
Forfeited
|
-
|
|
|
|
|
|
|
|
|
Non-vested, March 31, 2017
|
35,000
|
|
|
$
|
0.64
|
|
$
|
22,400
|
|
NOTE 5 INCOME
(LOSS)
PER
SHARE
Basic
income (loss) per share data for each period presented is computed using the
weighted-average number of shares of common stock outstanding during each such
period. Diluted income (loss) per share data is computed using the
weighted-average number of common and dilutive common-equivalent shares
outstanding during each period. Dilutive common-equivalent shares consist of:
(i) shares that would be issued upon the exercise of stock options and
warrants, computed using the treasury stock method; and (ii) shares of nonvested
restricted stock. The Company calculated the potential diluted earnings per
share in accordance with ASC 260, as follows:
|
For the Three Months Ended
|
|
For the Six Months Ended
|
|
March 31,
|
|
March 31,
|
|
|
2017
|
|
|
|
2016
|
|
|
2017
|
|
|
|
2016
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) (numerator for basic and diluted earnings per share)
|
$
|
(237,530
|
)
|
|
$
|
144,303
|
|
$
|
(86,038
|
)
|
|
$
|
388,383
|
|
Weighted average shares outstanding (denominator for basic earnings per share)
|
|
8,671,240
|
|
|
|
8,503,436
|
|
|
8,646,103
|
|
|
|
8,445,152
|
|
Effects of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumed exercise of stock options, treasury stock method
|
|
-
|
|
|
|
28,509
|
|
|
-
|
|
|
|
29,456
|
Assumed vesting of restricted stock, treasury stock method
|
|
-
|
|
|
|
128,169
|
|
|
-
|
|
|
|
170,787
|
Dilutive potential common shares
|
|
-
|
|
|
|
156,678
|
|
|
-
|
|
|
|
200,243
|
Denominator for diluted earnings per share - weighted average shares and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
assumed potential common shares
|
|
8,671,240
|
|
|
|
8,660,114
|
|
|
8,646,103
|
|
|
|
8,645,395
|
Basic earnings (loss) per share
|
$
|
(0.03
|
)
|
|
$
|
0.02
|
|
$
|
(0.01
|
)
|
|
$
|
0.05
|
Diluted earnings (loss) per share
|
$
|
(0.03
|
)
|
|
$
|
0.02
|
|
$
|
(0.01
|
)
|
|
$
|
0.04
|
The
following securities were excluded from the calculation of diluted earnings per
share because their inclusion would have been anti-dilutive:
|
As of March 31,
|
|
2017
|
|
2016
|
Options
|
256,000
|
|
208,500
|
Warrants
|
723,846
|
|
723,846
|
Total potentially dilutive shares
|
979,846
|
|
932,346
|
11
FORWARD
INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6
CONCENTRATIONS
Concentration of Revenues and Accounts Receivable
For the
three and six months ended March 31, 2017 and 2016, the Company had significant
customers with individual percentage of total revenues equaling 10% or greater
as follows:
|
For the Three Months Ended
|
|
For the Six Months Ended
|
|
March 31,
|
|
March 31,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Customer 1
|
25.1
|
%
|
|
17.7
|
%
|
|
26.6
|
%
|
|
18.4
|
%
|
Customer 2
|
23.4
|
%
|
|
28.5
|
%
|
|
21.6
|
%
|
|
24.3
|
%
|
Customer 3
|
22.0
|
%
|
|
34.0
|
%
|
|
22.6
|
%
|
|
33.9
|
%
|
Customer 4
|
10.4
|
%
|
|
11.3
|
%
|
|
11.8
|
%
|
|
12.2
|
%
|
Totals
|
80.9
|
%
|
|
91.5
|
%
|
|
82.6
|
%
|
|
88.8
|
%
|
At March
31, 2017 and September 30, 2016, concentration of accounts receivable with
significant customers representing 10% or greater of accounts receivable was as
follows:
|
March 31, 2017
|
|
September 30, 2016
|
Customer 1
|
40.8%
|
|
33.0%
|
Customer 2
|
17.3%
|
|
16.0%
|
Customer 3
|
15.2%
|
|
19.6%
|
Customer 4
|
12.7%
|
|
14.7%
|
Totals
|
86.0%
|
|
83.3%
|
NOTE
7
RELATED PARTY
TRANSACTIONS
Buying Agency and Supply Agreement
On March
12, 2012, the Company entered into a Buying Agency and Supply Agreement (the “Supply
Agreement”) with Forward Industries Asia-Pacific Corporation, a British Virgin
Islands corporation (“Forward China”). The Supply Agreement, as amended, provides
that, upon the terms and subject to the conditions set forth therein, Forward
China will act as the Company’s exclusive buying agent and supplier of Products
(as defined in the Supply Agreement) in the Asia Pacific region. The
Company purchases products at Forward China’s cost and also pays to Forward
China a monthly service fee equal to the sum of: (i) $100,000; and (ii) 4% of
“Adjusted Gross Profit”, which is defined as the selling price less the cost
from Forward China. The amended Supply Agreement expires on September 8, 2018,
subject to renewal. Terence Bernard Wise, Chief Executive Officer and Chairman
of the Company, is a principal of Forward China. In addition, Jenny P. Yu, a
Managing Director of Forward China, beneficially owns more than 5% of the
Company’s shares of common stock. The Company recognized approximately $344,000
and $366,000 during the three months ended March 31, 2017 and 2016,
respectively, and approximately $707,000 and $739,000 during the six months
ended March 31, 2017 and 2016, respectively, in service fees paid to Forward
China, which are included as a component of cost of goods sold in the
accompanying condensed consolidated statements of operations and comprehensive income
(loss). During the three and six months ended March 31, 2017, the Company
received commissions from Forward China of $0 and $12,904, respectively, which
is included in net revenues. As a result of the continued decrease in the
Company’s net revenues, Forward China has agreed to forgo its rights to the 4%
portion of the service fee under the Supply Agreement beginning with the third
fiscal quarter until the end of fiscal year 2017. The Company and Forward
China are currently negotiating a revised service fee under the Agreement.
NOTE 8 LEGAL PROCEEDINGS
From
time to time, the Company may become a party to legal actions or proceedings in
the ordinary course of its business. As of March 31, 2017, there were no such actions
or proceedings, either individually or in the aggregate, that, if decided
adversely to the Company’s interests, the Company believes would be material to
its business.
12
The
following discussion and analysis should be read in conjunction with our
unaudited condensed consolidated financial statements, and the notes thereto,
and other financial information appearing elsewhere in this Quarterly Report on
Form 10-Q and the audited consolidated financial statements and notes thereto
included in our Annual Report on Form 10-K for the fiscal year ended September
30, 2016. The following discussion and analysis compares our consolidated
results of operations for the three and six months ended March 31, 2017 (the
“2017 Quarter” and “2017 Period”, respectively) with those for the three and
six months ended March 31, 2016 (the “2016 Quarter” and “2016 Period”,
respectively). All figures in the following discussion are presented on a
consolidated basis. All dollar amounts and percentages presented herein have
been rounded to approximate values.
Business Overview
Forward Industries, Inc. designs and distributes carry
and protective solutions, primarily for hand held electronic devices, including
soft-sided carrying cases, bags, clips, hand straps, protective plates and
other accessories made of leather, nylon, vinyl, plastic, PVC and other
synthetic materials. Our principal customer market is original equipment
manufacturers, or “OEMs” (or the contract manufacturing firms of these OEM
customers), that either package our products as accessories “in box” together
with their branded product offerings, or sell them through their retail
distribution channels. Our OEM products include carrying cases and other
accessories for blood glucose monitoring kits and a variety of other portable
electronic and non-electronic products (such as sporting and recreational
products, bar code scanners, smartphones, GPS and location devices, tablets,
firearms and other products). Our carrying cases are designed to enable these
devices to be stowed in a pocket, handbag, briefcase, or backpack, clipped to a
belt or shoulder strap, or strapped to an arm, while protecting the consumer’s electronic
or other product from scratches, dust, and mishandling. Our OEM customers are
located in: (i) the Asia-Pacific Region, which we refer to as the “APAC
Region”; (ii) Europe, the Middle East, and Africa, which we refer to as the
“EMEA Region”; and (iii) the Americas. We do not manufacture any of our OEM
products and source substantially all of our OEM products from independent
suppliers in China, through Forward China (refer to Note 7 to the unaudited condensed consolidated financial
statements – Buying Agency and Supply Agreement).
During
the second quarter of fiscal 2016, we began entering into supply agreements
with our major healthcare customers. By the end of fiscal 2016, we had entered
into supply agreements with all four of our major healthcare customers. Although
there are no minimum purchase requirements, the agreements provide the
framework and pricing for supplying the customers with our carrying cases.
Variability of Revenues and Results of Operation
s
Because a
high percentage of our net revenues is highly concentrated in four large
customers, and because the volumes of these customers’ order flows to us are
highly variable, having short lead times, our quarterly revenues, and
consequently our results of operations, are susceptible to significant
variability over a relatively short period of time.
Critical Accounting Policies and Estimates
We discuss the material accounting policies that are
critical in making the estimates and judgments in our Annual Report on Form
10-K for the fiscal year ended September 30, 2016, under the caption
“Management’s Discussion and Analysis—Critical Accounting Policies and
Estimates”. There has been no material change in critical accounting policies
or estimates since September 30, 2016.
Recent
Accounting Pronouncements
For information on recent accounting pronouncements, see
Note 2 to the unaudited condensed consolidated financial statements.
RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2017 COMPARED TO THE THREE MONTHS ENDED MARCH
31, 2016
Net Income
(Loss)
Net loss in
the 2017 Quarter was approximately ($238,000) compared to net income of approximately
$144,000 in the 2016 Quarter. The 2017 Quarter change from net income to a net
loss is primarily due to a decrease in net revenues of approximately $2,492,000
as well as a decline in gross margin of 1.3%, which resulted in a decrease in gross
profit of approximately $484,000. This was partially offset by a decrease in general
and administrative expenses of approximately $60,000 and a decrease in sales
and marketing expenses of approximately $42,000.
13
|
Main Components of Net Income (Loss)
|
|
(amounts in thousands)
|
|
|
2017
|
|
|
|
2016
|
|
|
Increase
|
|
|
|
Quarter
|
|
|
|
Quarter
|
|
|
(Decrease)
|
|
Net revenues
|
$
|
4,533
|
|
|
$
|
7,025
|
|
$
|
(2,492
|
)
|
|
Gross profit
|
$
|
716
|
|
|
$
|
1,200
|
|
$
|
(484
|
)
|
Less:
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing expenses
|
|
390
|
|
|
|
432
|
|
|
(42
|
)
|
General and administrative expenses
|
|
563
|
|
|
|
623
|
|
|
(60
|
)
|
Other expense (income), net
|
|
1
|
|
|
|
1
|
|
|
-
|
|
Net Income (loss)
|
$
|
(238
|
)
|
|
$
|
144
|
|
$
|
(382
|
)
|
Net income (loss) per basic and diluted share was ($0.03)
per share for the 2017 Quarter and $0.02 per share for the 2016 Quarter.
Net Revenues
Net revenues in the 2017 Quarter decreased $2.5 million, or
35%, to $4.5 million from $7.0 million in the 2016 Quarter primarily due to lower
revenues from Diabetic Products, partially offset by higher revenues from Other
Products. The net revenues derived from our core diabetes kit cases continues
to decline, primarily because our major customers face significant pricing
pressure from competitors bringing out less expensive meters and also new
innovative diabetic products which are not being sold with a meter case. As a
result of the continued decrease in our net revenues, Forward China, which is
controlled by our Chairman and Chief Executive Officer, has agreed to forgo its
rights to the 4% portion of the service fee under the Forward China Supply
Agreement (the “Agreement”) beginning with the third fiscal quarter until the
end of fiscal year 2017. The base monthly service fee payment of $100,000
will still be due to Forward China. In the 2017 Quarter, the 4% portion of the
service fee amounted to approximately $44,000. The Company and Forward China
are currently negotiating a revised service fee under the Agreement.
The tables below set forth revenues by channel, product
line, and geographic location of our customers for the periods
indicated:
|
Net Revenues for 2017 Quarter
|
|
(amounts in thousands)
|
|
Americas
|
|
APAC
|
|
EMEA
|
|
Total
|
Diabetic products
|
$
|
2,057
|
|
$
|
1,070
|
|
$
|
669
|
|
$
|
3,796
|
Other products
|
|
176
|
|
|
509
|
|
|
52
|
|
|
737
|
Total net revenues
|
$
|
2,233
|
|
$
|
1,579
|
|
$
|
721
|
|
$
|
4,533
|
|
|
Net Revenues for 2016 Quarter
|
|
(amounts in thousands)
|
|
Americas
|
|
APAC
|
|
EMEA
|
|
Total
|
Diabetic products
|
$
|
1,718
|
|
$
|
2,436
|
|
$
|
2,313
|
|
$
|
6,467
|
Other products
|
|
252
|
|
|
168
|
|
|
138
|
|
|
558
|
Total net revenues
|
$
|
1,970
|
|
$
|
2,604
|
|
$
|
2,451
|
|
$
|
7,025
|
|
|
Diabetic Product Revenues
We design
and sell carrying cases for blood glucose diagnostic kits directly to OEMs (or their
contract manufacturers). The OEM customer or its contract manufacturer
packages our carry cases “in box” as a custom accessory for the OEM’s blood
glucose testing and monitoring kits, or to a lesser extent, sells them through its
retail distribution channels.
Revenues from
Diabetic Products decreased $2.7 million to $3.8 million in the 2017 Quarter,
from $6.5 million in the 2016 Quarter. The decrease was primarily due to lower
revenues derived from all four of our major Diabetic Products’ customers.
The following
table sets forth our revenues by Diabetic Products’ customers for the periods
indicated:
|
(amounts in thousands)
|
|
2017
|
|
2016
|
|
Increase
|
|
Quarter
|
|
Quarter
|
|
(Decrease)
|
|
|
Diabetic Products Customer A
|
$
|
1,138
|
|
$
|
1,243
|
|
$
|
(105
|
)
|
Diabetic Products Customer B
|
|
1,063
|
|
|
2,005
|
|
|
(942
|
)
|
Diabetic Products Customer C
|
|
998
|
|
|
2,390
|
|
|
(1,392
|
)
|
Diabetic Products Customer D
|
|
470
|
|
|
793
|
|
|
(323
|
)
|
All other Diabetic Products Customers
|
|
127
|
|
|
36
|
|
|
91
|
|
Totals
|
$
|
3,796
|
|
$
|
6,467
|
|
$
|
(2,671
|
)
|
Revenues
from Diabetic Products represented 84% of our total net revenues in the 2017
Quarter compared to 92% of our total net revenues in the 2016 Quarter.
Other Product Revenues
We design
and sell cases and protective solutions to OEMs for a diverse array of portable
electronic devices (such as bar code scanners, GPS devices, cellular phones,
tablets and cameras), as well as a variety of other products (such as sporting
and recreational products and firearms) on a made-to-order basis that are
customized to fit the products sold by our OEM customers.
Revenues
of Other Products increased $0.2 million to $0.7 million in the 2017 Quarter
from $0.5 million in the 2016 Quarter. This is primarily due to overall net
increases of $0.1 million from several existing customers as well as the
addition of $0.1 million from some new customers. We will continue to focus on
our sales and sales support teams in our attempt to expand and diversify our Other
Products customer base.
Revenues
from Other Products represented 16% of our net revenues in the 2017 Quarter compared
to 8% of our total net revenues in the 2016 Quarter.
Gross Profit
The decrease
in gross profit of approximately $484,000 was driven by a year over year
decline in net revenues of 35% as well as a decline in gross margins. The
decline in gross margins results from pricing pressures from our customers. Our
gross margin decreased to 15.8% in the 2017 Quarter compared to 17.1% in the
2016 Quarter.
Sales and Marketing Expenses
Sales and
marketing expenses decreased approximately $42,000, or 10%, to approximately $390,000
in the 2017 Quarter compared to approximately $432,000 in the 2016 Quarter,
primarily due to decreased personnel expenses of approximately $53,000,
partially offset by increased other expenses of approximately $13,000.
Fluctuations in other components of “Sales and Marketing Expenses” were not
material individually or in the aggregate.
General and Administrative Expenses
General
and administrative expenses decreased approximately $60,000, or 10%, to approximately
$563,000 in the 2017 Quarter from approximately $623,000 in the 2016 Quarter, primarily
due to decreased professional fees of approximately $25,000, personnel expenses
of approximately $20,000, and depreciation of approximately $10,000. Fluctuations
in other components of “General and Administrative Expenses” were not
individually material.
Other
Expense (Income), Net
Other expense
(income), net, consisting primarily of foreign exchange losses, was approximately
$0 in the 2017 Quarter compared to approximately $1,000 in the 2016 Quarter.
For the three
months ended March 31, 2017, the Company generated a net loss of approximately
$238,000. While the Company maintains significant net operating loss
carryforwards, no income tax expense (benefit) was recognized as the Company’s
deferred tax provision is completely offset by a full valuation allowance.
RESULTS
OF OPERATIONS FOR THE SIX MONTHS ENDED MARCH 31, 2017 COMPARED TO THE SIX
MONTHS ENDED MARCH 31, 2016
Net Income
(Loss)
Net loss in
the 2017 Period was approximately ($86,000) compared to net income of
approximately $388,000 in the 2016 Period. The 2017 Period change from net
income to a net loss is primarily due to a decrease in net revenues of
approximately $3,039,000 as well as a decline in gross margin of 2.3%, which
resulted in a decrease in gross profit of approximately $848,000. This was
partially offset by a decrease in general and administrative expenses of
approximately $308,000 and a decrease in sales and marketing expenses of
approximately $58,000.
|
Main Components of Net Income (Loss)
|
|
(amounts in thousands)
|
|
2017
|
|
2016
|
|
Increase
|
|
Period
|
|
Period
|
|
(Decrease)
|
Net revenues
|
$
|
11,124
|
|
|
$
|
14,163
|
|
$
|
(3,039
|
)
|
|
Gross profit
|
$
|
1,875
|
|
|
$
|
2,723
|
|
$
|
(848
|
)
|
Less:
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing expenses
|
|
807
|
|
|
|
865
|
|
|
(58
|
)
|
General and administrative expenses
|
|
1,157
|
|
|
|
1,465
|
|
|
(308
|
)
|
Other expense (income), net
|
|
(3
|
)
|
|
|
5
|
|
|
(8
|
)
|
Net Income (loss)
|
$
|
(86
|
)
|
|
$
|
388
|
|
$
|
(474
|
)
|
Net income (loss) per basic share was ($0.01) per
share for the 2017 Period and $0.05 per share for the 2016 Period. Net income
(loss) per diluted share was ($0.01) per share for the 2017 Period and $0.04
per share for the 2016 Period.
Net Revenues
Net revenues
in the 2017 Period decreased $3.0 million, or 21%, to $11.1 million from $14.2
million in the 2016 Period primarily due to lower revenues from Diabetic
Products, partially offset by higher revenues from Other Products. The net
revenues derived from our core diabetes kit cases continues to decline,
primarily because our major customers face significant pricing pressure from
competitors bringing out less expensive meters and also new innovative diabetic
products which are not being sold with a meter case. As mentioned above, as a
result of the continued decrease in our net revenues, Forward China, which is
controlled by our Chairman and Chief Executive Officer, has agreed to forgo its
rights to the 4% portion of the service fee under the Agreement beginning with
the third fiscal quarter until the end of fiscal year 2017. The base monthly
service fee payment of $100,000 will still be due to Forward China. In the 2017
Period, the 4% portion of the service fee amounted to approximately $107,000. The
Company and Forward China are currently negotiating a revised service fee under
the Agreement.
The
tables below set forth revenues by channel, product line, and geographic
location of our customers for the periods indicated:
|
Net Revenues for 2017 Period
|
|
(amounts in thousands)
|
|
Americas
|
|
APAC
|
|
EMEA
|
|
Total
|
Diabetic products
|
$
|
4,082
|
|
$
|
2,632
|
|
$
|
2,604
|
|
$
|
9,318
|
Other products
|
|
473
|
|
|
1,113
|
|
|
220
|
|
|
1,806
|
Total net revenues
|
$
|
4,555
|
|
$
|
3,745
|
|
$
|
2,824
|
|
$
|
11,124
|
|
|
Net Revenues for 2016 Period
|
|
(amounts in thousands)
|
|
Americas
|
|
APAC
|
|
EMEA
|
|
Total
|
Diabetic products
|
$
|
3,094
|
|
$
|
4,901
|
|
$
|
4,703
|
|
$
|
12,698
|
Other products
|
|
818
|
|
|
354
|
|
|
293
|
|
|
1,465
|
Total net revenues
|
$
|
3,912
|
|
$
|
5,255
|
|
$
|
4,996
|
|
$
|
14,163
|
Diabetic Product Revenues
We design
and sell carrying cases for blood glucose diagnostic kits directly to OEMs (or
their contract manufacturers). The OEM customer or its contract manufacturer
packages our carry cases “in box” as a custom accessory for the OEM’s blood
glucose testing and monitoring kits, or to a lesser extent, sells them through its
retail distribution channels.
Revenues from
Diabetic Products decreased $3.4 million to $9.3 million in the 2017 Period,
from $12.7 million in the 2016 Period. The decrease was primarily due to lower
revenues derived from three of our major Diabetic Products’ customers (Diabetic
Products Customers B, C and D). The decrease was offset, in part, by higher
revenues derived from our largest major Diabetic Products’ customers (Diabetic
Products Customer A).
The following
table sets forth our revenues by Diabetic Products’ customers for the periods
indicated:
|
(amounts in thousands)
|
|
2017
|
|
2016
|
|
Increase
|
|
Period
|
|
Period
|
|
(Decrease)
|
Diabetic Products Customer A
|
$
|
2,964
|
|
$
|
2,607
|
|
$
|
357
|
|
Diabetic Products Customer C
|
|
2,515
|
|
|
4,803
|
|
|
(2,288
|
)
|
Diabetic Products Customer B
|
|
2,402
|
|
|
3,421
|
|
|
(1,019
|
)
|
Diabetic Products Customer D
|
|
1,308
|
|
|
1,722
|
|
|
(414
|
)
|
All other Diabetic Products Customers
|
|
129
|
|
|
145
|
|
|
(16
|
)
|
Totals
|
$
|
9,318
|
|
$
|
12,698
|
|
$
|
(3,380
|
)
|
Revenues
from Diabetic Products represented 84% of our total net revenues in the 2017 Period
compared to 90% of our total net revenues in the 2016 Period.
Other Product Revenues
We design
and sell cases and protective solutions to OEMs for a diverse array of portable
electronic devices (such as bar code scanners, GPS devices, cellular phones,
tablets and cameras), as well as a variety of other products (such as sporting
and recreational products and firearms) on a made-to-order basis that are
customized to fit the products sold by our OEM customers.
Revenues
of Other Products increased $0.3 million to $1.8 million in the 2017 Period
from $1.5 million in the 2016 Period. This is primarily due to overall net
increases of $0.2 million from several existing customers as well as the
addition of $0.1 million from some new customers. We will continue to focus on
our sales and sales support teams in our attempt to expand and diversify our Other
Products customer base.
Revenues
from Other Products represented 16% of our net revenues in the 2017 Period
compared to 10% of our total net revenues in the 2016 Period.
Gross Profit
The decrease
in gross profit of approximately $848,000 was driven by a year over year
decline in net revenues of 21% as well as a decline in gross margins. The
decline in gross margins results from pricing pressures from our customers. Our
gross margin decreased to 16.9% in the 2017 Period compared to 19.2% in the 2016
Period.
Sales and Marketing Expenses
Sales and
marketing expenses decreased approximately $58,000, or 7%, to approximately $807,000
in the 2017 Period compared to approximately $865,000 in the 2016 Period,
primarily due to decreased personnel expenses of approximately $112,000,
partially offset by increased other expenses of approximately $36,000 and
increased travel and entertainment expenses of approximately $18,000.
Fluctuations in other components of “Sales and Marketing Expenses” were not
material individually or in the aggregate.
General and Administrative Expenses
General
and administrative expenses decreased approximately $308,000, or 21%, to
approximately $1,157,000 in the 2017 Period from approximately $1,465,000 in
the 2016 Period, primarily due to decreased personnel expenses of approximately
$75,000, director fees (including share-based compensation) of approximately
$75,000, director expense reimbursement of approximately $47,000, professional
fees of approximately $44,000, directors and officers insurance of approximately $29,000, other costs of approximately $26,000,
and depreciation of approximately $17,000.
Fluctuations in other components of
“General and Administrative Expenses” were not individually material.
Other
Expense (Income), Net
Other expense
(income), net, consisting primarily of foreign exchange losses, was approximately
($3,000) in the 2017 Period compared to approximately $5,000 in the 2016 Period.
For the six
months ended March 31, 2017, the Company generated a net loss of approximately
$86,000. While the Company maintains significant net operating loss
carryforwards, no income tax expense (benefit) was recognized as the Company’s
deferred tax provision is completely offset by a full valuation allowance.
LIQUIDITY AND CAPITAL
RESOURCES
Our
primary sources of liquidity are our operations. Our working capital would be
adversely affected by any: (i) additional operating losses; (ii) increases in accounts
receivable and inventories arising in the ordinary course of business; and
(iii) material increases in expenses. Historically, our sources of liquidity
have been adequate to satisfy working capital requirements arising in the
ordinary course of business. We anticipate that our liquidity and financial
resources for the next twelve months from the date of the filing of this Form
10-Q will be adequate to manage our operating and financial requirements.
At March
31, 2017, our current ratio (current assets divided by current liabilities) was
3.9; our quick ratio (current assets less inventories divided by current liabilities)
was 2.9; and our working capital (current assets less current liabilities) was
$8.2 million. As of March 31, 2017, we had no short or long-term debt
outstanding.
We do not anticipate the need to
purchase additional material capital assets in order to carry out our business.
During
the six months ended March 31, 2017 and 2016, our sources and uses of cash were
as follows:
Cash Flows from Operating Activities
During
the 2017 Period, cash used in operating activities of approximately $1,111,000 resulted
primarily from a decrease in accounts payable (including due to Forward China)
of approximately $1,083,000, a decrease in accrued expenses and other current
liabilities of approximately $296,000, an increase in inventories of
approximately $156,000 and a net loss of approximately $86,000, partially
offset by a decrease in accounts receivable of approximately $439,000, and the
add back of non-cash share-based compensation of approximately $79,000.
During
the 2016 Period, cash used in operating activities of approximately $725,000 resulted
primarily from an increase in accounts receivable of approximately $532,000, a
decrease in accounts payable (including due to Forward China) of approximately $527,000,
and a decrease in accrued expenses and other current liabilities of approximately
$357,000, partially offset by net income of approximately $388,000, a decrease
in inventories of approximately $180,000, and the add back of non-cash share-based
compensation of approximately $134,000.
Cash Flows from Investing Activities
In the
2017 Period, there was no cash used in investing activities.
In the
2016 Period, cash used in investing activities of approximately $46,000
resulted from purchases of property and equipment.
Cash Flows from Financing Activities
In the
2017 Period, there was no cash used in financing activities.
In the
2016 Period, cash used in financing activities of approximately $2,000 resulted
from the repurchase of restricted stock.
Related
Party Transactions
For
information on related party transactions and their financial impact, see Note 7
to the unaudited condensed consolidated financial statements contained herein.
Cautionary
Note Regarding Forward-Looking Statements
This report contains
“forward-looking statements”, as such term is used within the meaning of the
Private Securities Litigation Reform Act of 1995, including statements
regarding our liquidity and working capital. Forward-looking statements can be
identified by words such as “anticipates,” “intends,” “plans,” “seeks,”
“believes,” “estimates,” “expects” and similar references to future periods.
Forward-looking statements are based on our current expectations and
assumptions regarding our business, the economy and other future conditions.
Because forward-looking statements relate to the future, they are subject to
inherent uncertainties, risks and changes in circumstances that are difficult
to predict. Our actual results may differ materially from those contemplated by
the forward-looking statements. We caution you therefore against relying on any
of these forward-looking statements. They are neither statements of historical
fact nor guarantees or assurances of future performance. Important factors that
could cause actual results to differ materially from those in the forward-looking
statements include the failure to receive material orders, failure to diversify
the industries in which we sell our products, potential imposed tariffs or
other restrictions placed on Chinese imports by the U.S. government, and
continued pricing pressure on our products. Further information on our risk factors is
contained in our filings with the SEC, including our Form 10-K for the year
ended September 30, 2016. Any forward-looking statement made by us speaks only
as of the date on which it is made. Factors or events that could cause our
actual results to differ may emerge from time to time, and it is not possible
for us to predict all of them. We undertake no obligation to publicly update
any forward-looking statement, whether as a result of new information, future
developments or otherwise, except as may be required by law.
Not
applicable.
Evaluation of Disclosure Controls and Procedures
. Our management carried out an evaluation, with the
participation of our Principal Executive Officer and Principal Financial
Officer, required by Rule 13a-15 and Rule 15d-15 of the Securities
Exchange Act of 1934 (the “Exchange Act”) of the effectiveness of our
disclosure controls and procedures as defined in Rule 13a-15(e) and Rule
15d-15(e) under the Exchange Act. Based on their evaluation, our management has
concluded that our disclosure controls and procedures are effective as of the
end of the period covered by this report to ensure that information required to
be disclosed by us in the reports that we file or submit under the Exchange Act
is recorded, processed, summarized and reported within the time periods
specified in the SEC’s rules and forms and is accumulated and communicated to
our management, including our Principal Executive Officer and Principal
Financial Officer, as appropriate to allow timely decisions regarding required
disclosure.
Changes in Internal Control Over Financial Reporting
. There were no changes in our internal control over
financial reporting as defined in Rule 13a-15(f) and Rule 15d-15(f) under the
Exchange Act that occurred during the period covered by this report that have
materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting.
Limitations of the Effectiveness of Controls and Procedures
.
A
control system, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the control system
are met. Because of the inherent limitations of any control system, no
evaluation of controls can provide absolute assurance that all control issues,
if any, within a company have been detected.
PART II.
OTHER
INFORMATION
|
|
|
ITEM 1.
|
LEGAL PROCEEDINGS
|
|
|
From time to time, the Company may become a party to legal actions
or proceedings in the ordinary course of its business. As of March 31, 2017,
there were no such actions or proceedings, either individually or in the
aggregate, that, if decided adversely to the Company’s interests, the Company
believes would be material to its business.
|
|
ITEM 1A.
|
RISK FACTORS
|
|
|
Not applicable
to smaller reporting companies.
|
|
ITEM 2.
|
UNREGISTERED SALES OF EQUITY SECURITIES AND
USE OF PROCEEDS
|
|
|
None.
|
|
ITEM 3.
|
DEFAULTS UPON SENIOR SECURITIES
|
|
|
None.
|
|
ITEM 4.
|
MINE SAFETY DISCLOSURES
|
|
|
Not
Applicable
|
|
ITEM 5.
|
OTHER INFORMATION
|
|
None.
|
|
ITEM 6.
|
EXHIBITS
|
|
|
The exhibits listed in the accompanying
“Index to Exhibits” are filed or incorporated by reference as part of this
Form 10‑Q.
|
Signatures
Pursuant
to the requirements of the Securities Exchange Act of 1934, as amended, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, hereunto duly authorized.
Dated: May 12, 2017
FORWARD INDUSTRIES, INC.
|
|
|
By:
/s/ Terence Wise
|
Terence Wise
|
Chief Executive Officer
|
(Principal Executive Officer)
|
|
|
By:
/s/ Michael Matte
Michael Matte
|
Chief
Financial Officer
(Principal Financial and Accounting Officer)
|
22
INDEX TO EXHIBITS
|
|
|
|
Incorporated by Reference
|
|
Filed or
Furnished
|
No.
|
|
Exhibit Description
|
|
Form
|
|
Date
|
|
Number
|
|
Herewith
|
|
|
|
|
|
|
|
|
|
|
|
3.1
|
|
Restated Certificate of
Incorporation
|
|
10-K
|
|
12/8/10
|
|
3(i)
|
|
|
3.2
|
|
Certificate of Amendment to
the Certificate of Incorporation, April 26, 2013
|
|
8-K
|
|
4/26/13
|
|
3.1
|
|
|
3.3
|
|
Certificate
o
f Amendment to the Certificate of Incorporation,
June 28, 2013
|
|
8-K
|
|
7/3/13
|
|
3.1
|
|
|
3.4
|
|
Third Amended and Restated
Bylaws, as of May 28, 2014
|
|
10-K
|
|
12/10/14
|
|
3(ii)
|
|
|
4.1
|
|
Rights Agreement, dated as
of April 26, 2013
|
|
8-K
|
|
4/26/13
|
|
4.1
|
|
|
10.1
|
|
Buying Agency and Supply
Agreement with Forward Industries (Asia-Pacific), Corporation, dated as of
September 9, 2015
|
|
10-K
|
|
12/16/15
|
|
10.7
|
|
|
31.1
|
|
Certification of Principal
Executive Officer (Section 302)
|
|
|
|
|
|
|
|
Filed
|
31.2
|
|
Certification of Principal
Financial Officer (Section 302)
|
|
|
|
|
|
|
|
Filed
|
32.1
|
|
Certification of Principal
Executive Officer and Principal Financial Officer (Section 906)
|
|
|
|
|
|
|
|
Furnished*
|
101
INS
|
|
XBRL Instance Document
|
|
|
|
|
|
|
|
Filed
|
101 SCH
|
|
XBRL Taxonomy Extension
Schema
|
|
|
|
|
|
|
|
Filed
|
101 CAL
|
|
XBRL Taxonomy Extension
Calculation Linkbase
|
|
|
|
|
|
|
|
Filed
|
101
LAB
|
|
XBRL Taxonomy Extension
Label Linkbase
|
|
|
|
|
|
|
|
Filed
|
101
PRE
|
|
XBRL Taxonomy Extension Presentation
Linkbase
|
|
|
|
|
|
|
|
Filed
|
101
DEF
|
|
XBRL Taxonomy
Extension Definition Linkbase
|
|
|
|
|
|
|
|
Filed
|
———————
* This
exhibit is being furnished rather than filed and shall not be deemed
incorporated by reference into any filing, in accordance with Item 601 of
Regulation S-K.
Copies of this report (including the financial
statements) and any of the exhibits referred to above will be furnished at no
cost to our shareholders who make a written request to Forward Industries,
Inc., 477 S. Rosemary Ave. Ste. 219, West Palm Beach, Florida 33401,
Attention: Corporate Secretary.
23
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