UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[
X
] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For
the fiscal year ended September 30, 2010
[ ] 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: 0-6669
FORWARD INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
New York
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13-1950672
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(State or other jurisdiction of
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(I.R.S.
Employer Identification No.)
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incorporation or organization)
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1801 Green Rd., Suite E, Pompano Beach, FL 33064
(Address of principal executive offices, including zip
code)
(954) 419-9544
(Registrants telephone number, including area code)
Securities registered pursuant to Section 12(b) of the
Act:
None
Securities registered pursuant to Section 12(g) of the
Act:
Common Stock, $0.01 par value per share
Indicate by check mark if the
registrant is a well-known seasoned issuer, as defined in Rule 405 of the
Securities Act.
[
] Yes [
X
] No
Indicate by check mark if the
registrant is not required to file reports pursuant to Section 13 or Section
15(d) of the Act.
[
] Yes [
X
] No
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 12 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. [
X
] Yes [
] No
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Website, if any, every Interactive Data File required to be
submitted and posted pursuant to Rue 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to
submit and post such files). [
X
] Yes [
] No
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of Registrants knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this form 10-K. [
X
]
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
[
] Non-accelerated filer (Do not check if a smaller
reporting company)
|
[
] Accelerated filer
[
X
] Smaller
reporting company
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). [
] Yes [
X
] No
The
aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the price at which the common equity
was last sold, as of the last business day of the Registrants most recently
completed second fiscal quarter was: $16,299,566.
As
of December 8, 2010, 8,055,219 shares of the Registrants common stock were
outstanding.
Documents
Incorporated by Reference
Certain specified portions of the
registrants proxy statement in respect of its annual meeting of shareholders
expected to be held on or about March 8, 2011, are incorporated by reference
into Part III (Items 10-14) of this Annual Report on Form 10-K to the extent
described herein.
1
Forward Industries, Inc
.
Table of Contents
2
Note Regarding Use of Certain Terms
In
this Annual Report on Form 10-K, unless the context otherwise requires, the following
terms have the meanings assigned to them as set forth below:
"we", "our", and the "Company" refer to Forward
Industries, Inc., a New York corporation, together with its consolidated
subsidiaries;
Forward or Forward Industries refers to Forward Industries, Inc.;
common stock refers to the common stock, $.01 par value per share, of Forward
Industries, Inc.;
"Koszegi" refers to Forward Industries wholly owned subsidiary
Koszegi Industries, Inc., an Indiana corporation;
Forward HK refers to Forward Industries wholly
owned subsidiary Forward Industries HK, Ltd., a Hong Kong corporation (formerly Koszegi Asia Ltd.);
Forward Innovations refers to Forward Industries
wholly owned subsidiary Forward Innovations GmbH, a Swiss corporation;
Forward APAC refers to Forward Industries wholly
owned subsidiary Forward Asia Pacific Limited, a Hong Kong corporation;
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 2010 refers to our fiscal year ended
September 30, 2010;
Fiscal 2009 refers to our fiscal year ended
September 30, 2009;
Fiscal 2008 refers to our fiscal year ended
September 30, 2008;
Europe refers to the countries included in the
European Union;
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 of certain consumer electronic
products.
3
PART I
ITEM 1.
BUSINESS
General
We design, market, and distribute
carry and protective solutions primarily for hand held electronic devices,
including medical monitoring and diagnostic kits, bar code scanners, GPS and
location devices, cellular telephones, laptop computers, and MP3 players. Our
technology solutions include soft-sided carrying cases, bags, clips, hand
straps, protective plates and skins, and other accessories. We also design,
market and distribute carry and protective solutions for other consumer
products such as firearms, sporting and recreational products, and aeronautical
products. Our customers are the original equipment manufacturers, or OEMs,
of these electronic and other consumer products (or the contract manufacturing
firms of these OEM customers) that either package our carry solution products
as accessories in box together with their product offerings, or to a much
lesser extent, sell them through their retail distribution channels. We do not
manufacture any of the products that we design, market, and distribute. We
source substantially all products we market and distribute from independent
suppliers in China. Our suppliers custom manufacture our carrying solutions
and related products to our order, based on our designs and know-how, and to
our customers specifications.
Corporate History
Forward Industries, Inc. was
incorporated in 1961 under the laws of the State of New York as a manufacturer
and distributer of advertising specialty and promotional products. In 1989, we
acquired Koszegi Industries, Inc., a manufacturer of soft-sided carrying
cases. The carrying case business became our predominant business, and in
September 1997, we sold the assets relating to the production of advertising
specialty and promotional products, ceasing to operate in that segment.
In May 1994, we formed Forward
Industries HK Ltd. as a wholly owned, Hong Kong-based, subsidiary of Forward to
facilitate a more nimble and robust carrying case procurement and quality
control infrastructure, and to enhance our foreign sourcing capabilities. Thereafter
we determined that our domestic production capability was unnecessary, sold the
related assets, and we now source substantially all our products from suppliers
in the APAC Region. See "Product Supply".
In May 2001 we formed Forward
Innovations GmbH, a wholly owned Swiss subsidiary of Forward, to facilitate
distribution of aftermarket products under our licenses for cell phone cases
with a major North American multinational and to further develop our OEM
European business presence. After the expiration of the last of these licenses
in March 2009, staff at Forward Innovations was significantly reduced and now primarily
serves our OEM European customers. See Marketing, Distribution, and Sales.
4
As previously reported in
our Current Report on Form 8-K filed with the Commission on August 16, 2010, in
August 2010, the Company and LaGrange Capital Partners, L.P. and certain
affiliates of LaGrange Capital Partners, L.P. (collectively, the LaGrange
Group) entered into a Settlement Agreement (the Settlement Agreement). The
agreement was the result of a period of negotiations between the LaGrange Group
and the Special Committee of the Board of Directors following LaGrange Groups
filings of Schedules 13D, as amended, in which it requested certain changes in
the Companys management and its Board of Directors and demanded a special
meeting of shareholders in order to facilitate such changes. In response to
these actions the Board had in June 2010 adopted a shareholders rights plan
based on the recommendation of the Special Committee of the Board.
Pursuant to the
Settlement Agreement: the Companys President (Chief Executive Officer) and
Acting Chairman of the Board resigned from those positions; two non-employee
directors resigned from the Board; the continuing members of the Board
appointed three new, non-employee director nominees of the LaGrange Group to
fill the resulting vacancies in the Board and appointed Frank LaGrange Johnson,
founder and general partner of LaGrange Capital Partners, as Chairman of the
Board. In addition, under the Settlement Agreement, the Company in effect
terminated the shareholder rights plan and the LaGrange Group abandoned its
consent solicitation to call a special meeting of shareholders. For more
detailed information as to the terms and provisions of the Settlement
Agreement, see the Current Report on Form 8-K referred to above.
As disclosed prior to the Settlement
Agreement, the Board of Directors had adopted a strategy to diversify our business
and likely outside the carrying and technology solutions business by means of
acquisition. Management has announced a strategy of growing our OEM business
and expanding the technology solutions business with new product offerings; in
appropriate circumstances, an acquisition might be complementary with this
strategy.
Products
We design and market to our
customers order carry and protective solutions for hand held consumer
electronics and other products, 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 products are used
by consumers for protecting and carrying or transporting portable electronic and
other products such as blood glucose monitoring kits, bar code scanners, GPS
and location devices, cellular telephones, laptop computers, MP3 players,
firearms, sporting and recreational products, and aeronautical 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 electronic or other product from scratches,
dust, and mishandling.
Diabetic Products
We sell carrying cases for blood
glucose diagnostic kits directly to OEMs (or their contract manufacturers) of
these electronic, monitoring kits made for use by diabetics. We typically sell
these cases at prices ranging from $0.40 to $9.00 per unit. Unit volumes are
sold predominantly at the lower end of this price range. The OEM customer or
its contract manufacturer packages our carry cases in box as a custom
accessory for the OEMs blood glucose testing and monitoring kits, or to a much
lesser extent, sells them through their retail distribution channels. The kits
typically include a small, electronic blood glucose monitor, testing strips,
lancets for drawing a drop of blood and our carrying case, customized with the
manufacturers logo and designed to fit and secure the glucose monitor, testing
strips, and lancets in separate straps, pouches, and holders. As the kits and
technology change, our carrying case designs change to accommodate the changes
in size, shape and layout of the electronic monitoring device, strips and
lancet. Since the end of 2007, OEMs have sought to reduce the cost of these
cases by simplifying their design.
Other Products
We also sell carrying and protective
solutions to OEMs for a diverse array of other portable electronic and other
products, including bar code scanners, GPS and location devices, cellular
telephones, laptop computers, MP3 players, firearms, sporting and recreational
products, and aeronautical products on a made-to-order basis that are
customized to fit the products sold by our OEM customers. Our selling prices
for these products also vary across a broad range, depending on the size and
nature of the product for which we design and sell the carry solution.
5
Product Development
In our OEM business, the product
life cycle in distributing and selling our technology solutions to our OEM
customers is as follows. We typically receive requests to submit product
designs in connection with a customers introduction and rollout to market of a
new product that the customer has determined to accessorize and customize with
a carry solution. Our OEM customers furnish the desired functionality, size
and other basic specifications for the carrying solutions or other product,
including the OEMs identifying logo imprint on the product. Our in-house
design and production staff develops more detailed product specifications and
design options for our customers evaluation. We then furnish the customer
with product samples. Working with our suppliers and the customer, samples are
modified and refined. Once approved for commercial introduction and order by
our customer, we work with our suppliers to ensure conformity of commercial
production to the definitive product samples and specifications. Manufacture
and delivery of products in production quantities are coordinated with the
customers manufacturing and shipment schedules so that our carry solution
products are available with the OEMs product (and included in box, as the
case may be) prior to shipment and sale, or to a lesser extent sold by the OEM
through its retail distribution channels.
Marketing, Distribution, and Sales
Geographic Sales Distribution
Through our wholly owned
subsidiaries, Koszegi and Forward Innovations, we distribute and sell our
products globally, predominantly as accessories packaged in box with the
products of our OEM customers. The approximate percentages of net sales to
customers by their geographic location for Fiscal 2010 and Fiscal 2009 are as
follows:
|
Net
Sales
Fiscal
Years Ended September 30,
|
Geographic Location:
|
2010
|
|
2009
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APAC.......................................................................................................................
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43%
|
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38%
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Americas..................................................................................................................
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33%
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40%
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Europe......................................................................................................................
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24%
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22%
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Totals
....................................................................................................................
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100%
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100%
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The importance of the
APAC region is attributable to the fact that certain of our key OEM customers
outsource product manufacture to contract manufacturers located in China or
elsewhere in Asia. In these instances, we ship product to, and product is
packaged in box at, such contract manufacturers facility. If payment to us
is due from the contract manufacturer, we identify the sale to its geographic
location rather than that of the OEM customer for whom the contract
manufacturer is supplying product. The increase in APAC contribution to net
sales in Fiscal 2010 compared to Fiscal 2009 was due to the increase in revenue
from our largest diabetic case customer, which uses such a contract
manufacturer. See Note 13 to the audited consolidated financial statements
included in Item 8 of this Annual Report.
Channels
of Distribution
We primarily ship our products
directly to our OEM customers or their contract manufactures, who package our
carry solutions products in box with the OEM customers products. Certain
OEMs that became our customers in Fiscal 2009 or 2010 also purchase our carry
and protective solution products and offer them for sale as stand-alone
accessories to complement their product offerings.
Sales by
Product Line
Sales of carry and protective
solutions for Diabetic Products and for Other Products, i.e., all products
other than diabetic carry cases for blood glucose monitor kits, accounted for
approximately the following percentages of total net sales in Fiscal 2010 and
Fiscal 2009:
6
|
Fiscal Year Ended
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Sales:
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2010
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2009
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Diabetic Products...................................................................................................
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74%
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75%
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Other Products .......................................................................................................
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26%
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25%
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Totals
....................................................................................................................
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100%
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100%
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Sales
Concentration
We have approximately 80 active
customers. Of these, three customers, including their affiliates and contract
manufacturers, accounted for approximately 73% of our net sales in Fiscal 2010
and 66% in Fiscal 2009. All three are OEMs of diabetic monitoring kits. These
customers package our carry and protective solutions in box with their
branded products, or to a lesser extent, sell them through their retail
distribution channels. The approximate percentages of net sales contributed by
each of these three customers for Fiscal 2010 and Fiscal 2009 are as follows:
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Fiscal
Year Ended
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Customer:
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2010
|
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2009
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Diabetic Customer A..............................................................................................
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39%
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35%
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Diabetic Customer B...............................................................................................
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19%
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21%
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Diabetic Customer C...............................................................................................
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15%
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10%
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Totals
....................................................................................................................
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73%
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66%
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Sales
Force
During Fiscal 2010 and Fiscal 2009
all net sales were made directly by our employees, which are assigned key
accounts or defined geographic sales territories. See Risk Factors in Item
1A. of this Annual Report -
Our business could suffer if the services of
key sales personnel we rely on were lost to us.
OEM
Distribution Hubs
We have distribution hub agreements
with five OEM customers. These agreements obligate us to supply our products
to the customers distribution hubs (may be multiple locations) where its
products are manufactured and/or warehoused pending sale and where our products
are packaged in-box with the OEM customers products or, to a much lesser
extent, distributed for retail sale. The product quantities we are required to
supply to each distribution hub are based on the OEM customers forecasts. We
do not recognize revenue for product shipped to a hub until we have been
advised by our customer that product has been withdrawn from the distribution
hub to be placed in box/its sales channel. Hub arrangements have had the general
effect of extending financing for our customers inventory build by extending
the time between our placement of orders to our suppliers in order to ship and
supply the hubs and the time that we are able to recognize revenue. The
corollary effect is an increase in our inventory levels.
Credit
Risk
We generally sell our products on 60-
to 90-day credit terms customary in the industry. Historically, we have not
had significant credit problems with our customers. Our significant OEM
customers are large, multi-national companies with good credit histories. None
of these customers is or has been in default to us, and payments from all
customers are generally received from them on a timely basis. Three customers,
including their affiliates or contract manufacturers, accounted for
approximately 75% of our accounts receivable at September 30, 2010. Two
customers, including their affiliates or contract manufacturers, accounted for
approximately 63% of our accounts receivable at September 30, 2009.
When we ship product to our OEM
customers designated contract manufacturer and invoice such manufacturer (and
not the OEM customer), even though our order flows originate with and depend on
our relationship with the OEM, our accounts receivable credit risk lies with
the contract manufacturer. Our OEM customer does not guarantee the credit of
the contract manufacturer to whom the OEM requests us to ship our carrying case
products, and such order volumes may be significant from time to time. In most
cases, these contract manufacturers are themselves major multinational
enterprises with good credit. See Item 1A of this Annual Report on Form 10-K:
Risk Factors.
7
Foreign
Exchange Risk
Certain of our OEM customers have
established sales and manufacturing operations in China. In addition, as noted
above, certain OEM customers may outsource manufacturing and packaging of the
products with which our carrying case solutions are packaged in box to
contract manufacturers located in China or in Southeast Asia. Accordingly, our
payment and remittance arrangements with such customers or their contract
manufacturers may subject these arrangements to Chinese or other local currency
regulations. See Item 1A. of this Annual Report on Form 10-K: Risk Factors
Payments
to us by or on behalf of our customers of accounts receivable originated in
China may become subject to local regulations or moratorium that restrict the
right to convert foreign currencies into U.S. dollars or U.S. dollars into
foreign currencies, or that prevent, delay, or restrict the ability to remit
U.S. dollars to the United States
.
Product Supply
Manufacturing
The manufacture of custom carrying
cases and other carry and protective solutions generally consists of die
cutting fabrics and heat sealing, gluing, sewing, and decorating (affixing
logos to) the cut-outs by means of silk screening, hot-stamping, embroidering
or embossing. The principal materials used in the manufacture of our products
are vinyl, nylon, leather, metal and plastic parts (for clips, buckles, loops,
hinges and other hardware), foam padding and cardboard, all of which are
obtained according to our specifications from suppliers. We do not believe
that any of the component materials or parts used by our suppliers in the
manufacture of our products is supply constrained. We believe that there are
adequate available alternative sources of supply for all of the materials used
to manufacture, package, and ship our products.
Suppliers
We procure substantially all our
supply of carrying solutions products from independent suppliers in China. We
purchased approximately 88% of our products from four such suppliers in Fiscal
2010 and 90% from seven such suppliers in Fiscal 2009. One China supplier
accounted for approximately 67% and 54% of our product purchases in Fiscal 2010
and 2009. Depending on the product, we may require several different suppliers
to furnish component parts or pieces. During Fiscal 2010 and currently, in
negotiations with our suppliers of terms for products under new programs, we
are experiencing higher price quotes, which we believe are attributable in
significant degree to inflationary impacts on the suppliers labor and
materials costs that they are attempting to pass on to us.
We place orders with one or more
suppliers at the time we receive firm orders from our OEM customers for a
particular product. Accordingly, we do not have minimum supply requirement
agreements with our suppliers to guarantee us supply of finished product, nor
have we made purchase commitments to purchase minimum amounts from any of our suppliers.
However, from time to time, we may order products from our suppliers in
anticipation of receiving a customer order to meet required delivery times.
Quality Assurance
To ensure that product manufacturing
by our Chinese suppliers meets our quality assurance standards, products we
sell and distribute are inspected by independent contractors in China, which
may be affiliated with one or more of our suppliers. These contractors are
subject to the control and supervision of our quality assurance employees based
in Hong Kong.
Quality assurance and
sourcing-related expenses are reflected in cost of goods sold in our results of
operations. In January 2009, our Hong Kong inspection facility renewed its ISO
9001:2000 quality certification.
8
Logistics
Once our products are approved for
shipment by our inspection and quality control procedures, the products are
typically shipped to our customers destination port on ocean-going container
vessels. In certain cases, at the customers request, we will ship products by
air freight or ground transport to a customers location in China or Hong Kong.
Most ocean-going shipments bound for the United States are off-loaded at the
port of Los Angeles or San Francisco, but certain customers arrange for
shipments to East coast ports, such as Miami or Philadelphia. European
shipments generally are routed via Rotterdam, Frankfurt, or London. See Item
1A. in this Annual Report Risk Factors
Our shipments of products via
container freight to customers in the United States and Europe may become
subject to delays or cancellation at port facilities due to work stoppages or
slowdowns, damage caused by weather or terrorism and congestion due to
inadequacy of equipment and other causes.
We ship our products to our
customers by common carrier.
Insurance
We maintain commercial loss and
liability, business interruption, and general claims and other insurance
customary for our business. We do not maintain credit insurance for our trade
accounts receivable.
Competition
The business in which we engage is
highly competitive in terms of product pricing, design, delivery terms, and
customer service. In the production of carry and protective solutions for OEM
products, we compete with numerous United States and foreign producers and
distributors. Some of our competitors are substantially larger than we are and
have greater financial and other resources. We believe that we sustain our
competitive position through maintenance of an effective product design
capability, rapid response time to customer requests for proposals and product
shipment, competitive pricing, reliable product delivery, and product quality.
We believe that our ability to compete based on product quality assurance
considerations is enhanced by the local presence of our Hong Kong and
outsourced Chinese based quality control and shipment capabilities. See Item
1A. in this Annual Report on Form 10-K: Risk Factors -
The carrying
solutions business is highly competitive and does not pose significant barriers
to entry.
Employees
At September 30, 2010, we had 32
full-time employees, of whom two are employed in executive capacities, six are
employed in administrative and clerical capacities, seven are employed in sales
and sales support, six are employed in design and product development
capacities, and 11 are employed in sourcing, quality control, and warehouse
capacities. We consider our employee relations to be satisfactory. None of our
employees are covered by a collective bargaining agreement.
Since June 2003, we have employed
our U.S. employees through a co-employment agreement with ADP Total Source, a
Professional Employer Organization. The objective of this arrangement is for ADP
Total Source to assume many of the legal and administrative responsibilities of
human resources management, health benefits, workers' compensation, payroll,
payroll tax compliance, 401(K) plan administration and unemployment insurance
and to perform these functions at lesser expense than if we were to perform them
directly.
Regulation and Environmental
Protection
Our business is subject to various
regulations in various jurisdictions, including the United States and member
states of the European Community, that restrict the use or importation of
products manufactured with compounds deemed to be hazardous. We work with our
suppliers to ensure compliance with such regulations. In addition, from time
to time one or more customers may require testing of our products to ensure
compliance with applicable consumer safety rules and regulations or the
customers safety or packaging protocols. Because we do not manufacture the
products that we sell and distribute, compliance with federal, state and local
laws and regulations pertaining to the discharge of materials into the
environment, or otherwise relating to the protection of the environment, has
not had, and is not anticipated to have, any direct material effect upon our
capital expenditures, earnings, or competitive position. However, compliance
with such laws and regulations on the part of our suppliers may result in
increased costs of supply to us, particularly if domestic environmental
regulation in China becomes more prevalent.
We have not been engaged in any
environmental litigation or incurred any material costs related to compliance
with environmental or other regulations. From time to time we incur chemical
and/or safety laboratory testing expense in order to address customer requests
regarding our product materials or method of manufacture or regarding their
packaging methods and standards.
9
ITEM 1A.
RISK FACTORS
Please read the note regarding
"Cautionary statement for purposes of the Safe Harbor provisions of the
Private Securities Litigation Reform Act of 1995" that appears on pages 16-17
of this Annual Report on Form 10-K.
Our business remains highly
concentrated in our Diabetic Products line, posing risks to our financial
condition and results of operations compared to periods when revenue from
customers from two principal product lines were more balanced. If our Diabetic
Products line were to suffer the loss of a principal customer or a material decline
in or loss of sales, our business would be materially and adversely affected.
As a consequence of the steep
decline in revenues from sales of cell phone accessories over the past several
years, revenues from sales of diabetic cases to OEM customers now accounts for approximately
74% of net revenues. While sales of other products reflect new customer adds
and improved revenues in Fiscal 2010, our business remains characterized by
high product line as well as customer concentration. In such circumstances,
our financial condition and results of operations are subject to higher risk
from the loss of a diabetic case customer or from changes in the business
practices of OEMs of blood glucose monitors, for example, a decision to reduce
or eliminate inclusion of cases in box with the electronic device or a decision
to focus on insulin pumps instead of insulin by injection.
Our business is and has been characterized
by a high degree of customer concentration. Our three largest customers accounted
for approximately 73% and 66% of net sales in Fiscal 2010 and Fiscal 2009,
respectively; the loss of, or material reduction in orders from, any of these
customers would materially and adversely affect our results of operations and
financial condition.
At present the predominant
percentage of our sales revenues is concentrated in three large OEM customers
for our diabetic blood glucose carry cases, including their affiliates and/or
their contract manufacturers. The loss of any of these customers, whether as a
result of its purchase of its carry solution requirements from another vendor, its
decision to manufacture its own carrying cases, its decision to award its
orders to one of our competitors, or otherwise, would have a material adverse
effect on our financial condition, liquidity and results of operations.
We have previously announced our
intention to diversify our business by means of acquisition or other business combination.
The difficult business conditions of
the last several years led our large OEM customers to embark on cost cutting
and expense reduction strategies that have reduced our revenue and adversely
affected our gross margin and net profit. This led prior management to
announce an acquisition strategy to diversify away from and/or balance the
OEM-centered business. In August 2010, when our new management team was
installed, it outlined a business strategy to grow the OEM business and expand
into new product channels and technology solutions. In general, our
management believes that an acquisition within the technology accessories
business might, in the right circumstances, be complementary with the strategy
it has identified. If an acquisition is undertaken, there can be no assurance
as to the cost in cash or securities of such an acquisition or other
combination, the potential dilution to existing shareholders if our securities
are issued as part of transaction consideration, or the business risks that
accompany any such transaction. There can be no assurance that we will be
successful in our efforts to make an acquisition or that any business that we
do acquire or invest in will be profitable. There can be no assurance as to
the timing of a transaction, or that the market price of our common stock will
not decline in response to any such transaction as may be effected.
If any one or more of our OEM
customers elect to reduce or discontinue inclusion of cases in-box, our
results of operations and financial condition would be materially and adversely
affected.
The predominant percentage of our
revenues is derived from sales of case accessories to our OEM customers who
package our cases in-box with their electronics. With the global recession
and weak recovery, OEMs have sought continuously to reduce expenses. If one or
more of our OEM customers generally begin to reduce or discontinue the practice
of including carry case accessories in-box, we would incur a significant
decline in revenues and our results of operations and financial condition would
be materially and adversely affected.
10
Our business strategy is to
develop and grow our existing business; to the extent that operating expenses
trend significantly higher before we realize higher revenues, our operating
results may be adversely and materially affected.
Our new management team intends to
pursue a more marketing- and product development-driven business model to grow
our existing business and expand product offerings, compared to the prior management
team that was focused on maintaining the liquidity of the balance sheet as it
assessed potential acquisitions. In executing this strategy, we are likely to
incur increased selling, general, and administrative expense as we devote
increased resources to product sales and development. Such increased expenses
are likely to impact our income statement and reduce cash and equivalents
before such efforts result in higher revenues, if at all, which may materially
and adversely affect our results of operations. Realization of this strategy
and improvement in our results of operations will depend on managements
ability to execute successfully on its strategy and business plan.
At any time,
a significant percentage of our accounts receivable risk may be concentrated in
a small number of customers.
Three customers accounted for
approximately 75% of our accounts receivable at September 30, 2010, and two
customers accounted for approximately 63% of our accounts receivable at
September 30, 2009. The failure to receive or collect such amounts when and as
due could have a material adverse effect on our financial condition, liquidity,
and results of operations.
In a price constrained global economy
we continue to encounter pressures from our largest OEM customers to maintain or
even roll back prices or to supply lower priced carry solutions. The effects of
such price constraints on our business may be exacerbated by inflationary
pressures that affect our costs of supply.
During Fiscal 2010 and Fiscal 2009,
we experienced significant pricing pressure from our largest OEM customers to
maintain or even reduce the prices we charge them. When we are unable to
extract comparable concessions from our suppliers on prices they charge us,
product sales margins erode.
In addition to margin compression
from customers, from time to time we may encounter increased prices from our
Chinese suppliers who are reacting to inflationary increases in materials and
labor costs incurred by them. We believe that Fiscal 2010 and the current
fiscal year represent a period of such inflationary pressures. In addition,
prices that our Chinese vendors charge to us may reflect appreciation of the
Chinese currency against the US dollar, which can be passed through to us in
the form of higher US dollar prices. This in turn will tend to reduce gross
profit percentage if we are unable to raise prices. We anticipate that
constraints on our ability to maintain or increase prices to our major
customers will continue to exert downward pressure on our gross profit
percentage in the fiscal year ending September 30, 2011. This is particularly
the situation with respect to our large diabetic customers for existing as well
as new programs.
Our
results of operations are subject to the risks of fluctuations in the values of
foreign currencies relative to the U.S. Dollar; for example, if the factors
tending to support appreciation of the Chinese renminbi, in which a significant
portion of our suppliers costs are denominated, and depreciation of the US
Dollar, in which most of our revenues are denominated, continue, our gross
margins will be subject to pressure.
11
Our results of operations are
expressed in U.S. Dollars. When the U.S. Dollar appreciates or depreciates in
value against a currency in which all or a significant portion of our costs of
goods sold are denominated, such as the Chinese renminbi, our results will be
benefited or adversely affected, respectively, assuming no change in prices we
charge to our customers. If, for example, China were to permit the renminbi to
float to a free market rate of exchange, it is widely anticipated that the U.S.
Dollar would depreciate in value relative to the renminbi, which would have the
effect of increasing the prices we pay to our suppliers (our costs of goods sold)
in U.S. dollar terms and adversely affecting our gross margins if we could not
pass those increases along to our customers or enter into financial
arrangements that hedged or otherwise mitigated this foreign exchange risk. During
Fiscal 2010 and Fiscal 2009 currency markets pushed the renminbi up and the
U.S. Dollar down, having the effect described above. The opposite relationship
would apply to U.S. Dollar fluctuations with respect to a currency in which
sales revenues or other accounts receivable are denominated, such as the Euro.
When the U.S. Dollar appreciates or depreciates in value against the Euro, our
results of operations can be adversely affected or benefited, respectively.
The significant appreciation of the Euro against the U.S. Dollar, as occurred
during most of calendar 2009, had the effect of increasing, in U.S. dollar
terms, our sales revenues that were denominated in Euros. The reversal of this
trend in 2010 adversely affected our results of operations. The degree of
impact is proportional to the amount of foreign currency expense or revenue, as
the case may be, and the fluctuations in exchange rates over the period in
which the effect is measured on our financial statements.
Payments to us by or on behalf of our
customers of accounts receivable originated in China may become subject to
local regulations or moratorium that restrict the right to convert foreign
currencies into U.S. dollars or U.S. dollars into foreign currencies, or that
prevent, delay, or restrict the ability to remit U.S. dollars to the United
States.
In the event that any foreign
government were to impose regulatory restrictions on the ability to effect
conversion of local currency into U.S. dollars, repatriation of U.S. dollars or
other currencies to the United States, or payment in any form to foreign
business entities, or were to impose or enforce tighter restrictions on foreign
exchange license holders, our receipt or recognition of U.S. dollars in
payment, directly or indirectly, of invoices for sales of our products could be
delayed or otherwise affected. If this were to affect receipt or recognition
of material amounts of revenues, our liquidity or results of operations could
be materially and adversely affected.
Future revenues are difficult to
predict and are likely to show significant variability as a consequence of
customer concentration.
Because our sales revenues are
highly concentrated in a few large customers, and because the volumes of these
customers' order flows to us can fluctuate markedly in a short period of time,
our quarterly revenues, and consequently our results of operations, may be
highly variable and subject to significant changes over a relatively short
period of time.
Our largest OEM customers may keep
consumer products with which our carry solutions are packaged
"in-box" in active promotion for many months, or for a very short
period of time, depending on various factors, including sales trends for the
product, product development cycles, new product introductions, and our
customers' competitors' product offerings. As demand for the consumer product
relating to the in-box program matures and decreases, we may be forced to
accept significant price and/or volume reductions in customer orders for our
carry solutions, which will adversely affect revenue.
These factors tend to lead to a high
degree of variability in our quarterly revenue levels. Significant, rapid
shifts in our operating results may occur if and when one or more of these
customers increase or decrease the size(s) of, or eliminate, their orders from
us by amounts that are material to our business.
Our gross margins, and therefore
our profitability, vary considerably by customer and by product type, and if
the revenue contribution from one or more OEM customers changes materially,
relative to total revenues, our gross profit percentage may fluctuate or decline.
Our gross profit margins on the
products we sell can vary widely depending on the product type, customer, order
size, and market in which the customer's products are sold. For example,
selling prices and profit margins both within our soft-sided carrying cases
product line and between such line and other carry solutions such as straps,
clips, cleaning cloths, and cases for larger other products can vary widely.
Because of the broad variability in price ranges and product types, we
anticipate that gross margins, and accordingly their impact on operating
income or loss, may fluctuate depending on the relative revenue contribution by
customer of carrying cases for blood glucose monitors compared to carry
solutions for other products, as well as our OEM customers' order patterns
and preferences for more or less expensive cases and or other accessories to be
included as accessories "in box". Such fluctuations may have the
effect of masking the impact of fluctuations in unit volume sale trends.
Product manufacture is often outsourced
by our OEM customers to contract manufacturing firms in China and in these
cases it is the contract manufacturer to which we must look for payment.
12
Such firms are performing
manufacturing, assembly, and product packaging functions, including the
bundling of our product accessories with the OEM customer's product. As a
consequence of this business practice, we often sell our carry solution
products to the contract manufacturing firm. This is particularly significant
in the case of diabetic product sales to certain customers. In these cases, we
invoice the contract manufacturing firm and not the OEM customer. Therefore,
it is the contract manufacturing firm's credit to which we must look for
payment in such cases and not that of our OEM customer. This may alter the
credit profile of our customer base and may involve significant purchase order
volumes. In some, but not all cases, the manufacturing firm is itself a large,
multinational entity with significant financial resources.
Our dependence on foreign
manufacturers creates quality control and other risks to our business. From
time to time we may experience certain quality control, on-time delivery, cost,
or other issues that may jeopardize customer relationships.
Substantially, all of our products
are manufactured by Chinese manufacturers in China. Our reliance on foreign
suppliers, manufacturers, and other contractors involves significant risks,
including risk of product quality issues and reduced control over quality
assurance, manufacturing yields and costs, pricing, timely delivery schedules,
the potential lack of adequate manufacturing capacity and availability of
product, the lack of capital, and potential misappropriation of our designs.
Our shipments of products via
container freight to customers in the United States and Europe may become subject
to delays or cancellation due to work stoppages or slowdowns, piracy, damage to
port facilities caused by weather or terrorism, and congestion due to
inadequacy of port terminal equipment and other causes.
Substantially all of our products
are sourced from China. To the extent that there are disruptions or delays in
loading container cargo in Chinese ports or off-loading cargo at ports of
destination as a result of labor disputes, work-rules related slowdowns, tariff
or World Trade Organization-related disputes, piracy, physical damage to port
terminal facilities or equipment caused by severe weather or terrorist
incidents, congestion in port terminal facilities, inadequate equipment to
load, dock and offload container vessels or energy-related tie-ups or
otherwise, or for other reasons, product shipments to our customers will be
delayed. In any such case, our customer may cancel or change the terms of its
purchase order, resulting in a cancellation or delay of payments to us. A
closure or partial closure of Hong Kong, Chinese, United States or European
port facilities or other causes of delays in the loading, importation,
offloading or movement of our products to the shipping destination agreed with
our customer could result in increased expenses, as we try to avoid such
delays, delayed shipments or cancelled orders, or all of the above. Depending
on the severity of such consequences, this may have an adverse effect on our
financial condition and results of operations.
The carrying solutions business
is highly competitive and does not pose significant barriers to entry.
There are many competitors in the
sale of carry solutions products to OEMs, and competition is intense. Since
little or no significant proprietary technology is involved in the design,
production, or distribution of the types of products we sell, others may enter
the business with relative ease and compete against us. Such competition may
result in the diminution of our market share or the loss of one or more major
OEM customers, thereby adversely affecting our net sales, results of
operations, and financial condition. Many of our competitors are larger,
better capitalized, and more diversified than we are and may be better able to
withstand a downturn in the general economy or in the product areas in which we
specialize. These competitors may also have less sales concentration than we
do and be better able to withstand the loss of a key customer or diminution in
its orders.
Our business could suffer if the
services of key sales personnel we rely on were lost to us.
We are highly dependent on the
efforts and services of certain key sales representatives who have account
responsibility for, and have longstanding relationships with one or more of our
largest customers. Our business could be materially and adversely affected if
we lost the services of any such individual. If we lost the services of a key
sales representative, we might experience a material reduction in orders from his
customers, resulting in a loss of revenues, which would materially and
adversely affect our results of operations and financial condition.
13
We do not
pay dividends on our common stock.
We have not paid any cash dividends
on our common stock since 1987. The payment in the future of cash dividends by
us, if any, will depend upon our results of operations, short-term and
long-term cash availability, working capital, working capital needs, and other
factors, as determined by our Board of Directors. Applicable laws may also
restrict the ability of a corporation to pay dividends, for example when such
payment would render the corporation insolvent. We do not anticipate that cash
dividends will be paid in the foreseeable future. The absence of dividend
payments on a common stock might make such stock susceptible to greater market
price swings.
We have
in place anti-takeover
measures and charter provisions that may prevent a hostile or unwanted effort
to acquire Forward.
Our Board of Directors is authorized
to issue up to 4,000,000 shares of "blank check" preferred stock. Our
Board of Directors has the authority, without shareholder approval, to issue
such preferred stock in one or more series and to fix the relative rights and
preferences thereof including their redemption, dividend and conversion rights.
Our ability to issue the authorized but unissued shares of preferred stock
could be used to impede takeovers of our company. Under certain circumstance,
the issuance of the preferred stock could make it more difficult for a third
party to gain control of Forward, discourage bids for the common stock at a
premium, or otherwise adversely affect the market price of our common stock. In
addition, our certificate of incorporation requires the affirmative vote of
two-thirds of the shares outstanding to approve a business combination such as
a merger or sale of all or substantially all assets. Such provision and blank
check preferred stock may discourage attempts to acquire Forward. Applicable
laws that impose restrictions on, or regulate the manner of, a takeover attempt
may also have the effect of deterring any such transaction. We are not aware
of any attempt to acquire Forward.
We maintain cash balances in our
bank accounts that exceed the FDIC insurance
limitation.
We maintain our cash assets at
commercial banks in the U.S. in amounts in excess of the Federal Deposit
Insurance Corporation insurance limit of $250,000 and in Europe in amounts that
may exceed any applicable deposit insurance limits. In the event of a failure
at a commercial bank where we maintain our deposits or uninsured losses on
money market or other cash equivalents in which we maintain cash balances, we
may incur a loss to the extent such loss exceeds the insurance limitation,
which could have a material adverse effect upon our financial conditions and
our results of operations.
ITEM 1B.
UNRESOLVED STAFF
COMMENTS
Not Applicable
ITEM 2.
PROPERTIES
We sub-lease approximately 5,300
square feet of office and warehouse space at 1801 Green Road, Pompano Beach,
Florida on a month to month basis from a tenant at the same premises. We use
this office space as our executive office and our United States sales office.
In November 2008, Forward HK entered
into a three-year lease commitment for approximately 4,400 square feet of
office space in Kowloon, Hong Kong, which extends through October, 2011. We use
this office space as our sourcing, quality assurance, and logistics center.
Forward Innovations sub-leases
approximately 1,300 square feet of office space in Cham, Switzerland from a
tenant at the same location. We use this office as our European sales and
administrative office. This lease can be cancelled by either party with a
six-month notice.
We believe that each of the
foregoing leased properties is adequate for the purposes for which it is used.
All leases are with independent third parties. We believe that the loss of any
lease would not have a material adverse effect on our operations as we believe
that we could identify and lease comparable facilities upon approximately
equivalent terms.
14
ITEM 3.
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 September 30, 2010, there were no such actions or proceedings,
either individually or in the aggregate, that, if decided adversely to the
Companys interests, the Company believes would be material to its business.
ITEM 4.
RESERVED
PART II
ITEM 5.
MARKET
FOR REGISTRANTS COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
Market for
Common Stock
The principal market for our common
stock is the NASDAQ SmallCap Market. Our common stock is traded under the
symbol "FORD". The following table sets forth the high and low
closing bid quotations for our common stock on the NASDAQ SmallCap Market for
each quarter in the last two fiscal years.
|
Bid Price Information for Common Stock*
|
|
Fiscal 2010
|
|
Fiscal 2009
|
|
High Bid
|
Low Bid
|
|
High Bid
|
Low Bid
|
First Quarter
|
$2.15
|
$1.69
|
|
$3.30
|
$1.51
|
Second Quarter
|
$3.20
|
$1.96
|
|
$2.38
|
$1.55
|
Third
Quarter
|
$5.60
|
$2.96
|
|
$1.85
|
$1.55
|
Fourth
Quarter
|
$4.59
|
$2.90
|
|
$1.79
|
$1.40
|
_______________________________
*
High and low bid price information as furnished
by The NASDAQ Stock Market Inc.
On December 2, 2010, the closing bid quotation for our
common stock was $3.70
Holders of common stock
.
As of December 2, 2010, there were
approximately 128 holders of record of our common stock, excluding
approximately 9,164 beneficial holders of common stock whose shares are held in
street name.
Dividends
We have not paid any cash dividends
on our common stock since 1987 and do not plan to pay cash dividends in the
foreseeable future. The payment of dividends in the future, if any, will depend
upon our results of operations, as well as our short-term and long-term cash
availability, working capital, working capital needs, and other factors, as
determined by our Board of Directors. Currently, except as may be provided by
applicable laws, there are no contractual or other restrictions on our ability
to pay dividends if we were to decide to declare and pay them.
Recent sales of unregistered
securities
During Fiscal 2010, we did not sell
any shares of common stock, or securities exercisable for or exchangeable into
common stock, or any other securities that were not registered under the
Securities Act of 1933.
Securities authorized for
issuance under equity compensation plans
.
For information relating to this
topic, see Part III, Item 11 of this Annual Report. Executive
CompensationSecurities Authorized for Issuance under Equity Compensation
Plans, which is incorporated in this Annual Report on Form 10-K by reference
to our 2010 Proxy Statement.
15
Purchase
of Equity Securities
No repurchase of any shares of our
common stock or other equity security was made by or on behalf of the Company
during the fourth quarter of Fiscal 2010.
In September 2002 and January 2004,
our Board of Directors authorized the repurchase of up to an aggregate of 486,200
shares of our common stock. Under those authorizations, as of September 30,
2010, we had repurchased an aggregate of 172,603 shares at a cost of
approximately $0.4 million, leaving a balance of 313,597 shares (approximately 3.9%
of the shares outstanding at September 30, 2010) under those authorizations,
but none during Fiscal 2010 or Fiscal 2009. Separately from the foregoing
authorizations, in Fiscal 2010 in connection with exercises of stock options to
purchase 50,000 shares in the aggregate of common stock by two non-employee
directors and an officer, such persons received, net, an aggregate of 24,030
shares in transactions valuing such shares at market on the respective dates of
exercise in lieu of payment of the exercise price of such options. Under
applicable authority, such transactions are not deemed to constitute purchases
by us of our common stock.
ITEM 6.
SELECTED
FINANCIAL DATA
Not applicable.
ITEM 7.
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and
analysis should be read in conjunction with our audited Consolidated Financial
Statements and the notes thereto and other financial information appearing in Item
8 of this Annual Report on Form 10-K. This discussion and analysis compares
our consolidated results of operations for the fiscal year ended September 30, 2010
("Fiscal 2010"), with those for the fiscal year ended September 30, 2009
("Fiscal 2009"), and is based on or derived from the audited
Consolidated Financial Statements included in Item 8 in this Annual Report. 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.
Cautionary statement for purposes of the Safe Harbor
provisions of the Private Securities Litigation Reform Act of 1995
The following managements
discussion and analysis includes forward-looking statements (as such term is
used within the meaning of the Private Securities Litigation Reform Act of 1995).
These forward-looking statements are not based on historical fact and involve
assessments of certain risks, developments, and uncertainties in our business.
Such forward looking statements can be identified by the use of forward-looking
terminology such as may, will, should, expect, anticipate, estimate,
intend, continue, or believe, or the negatives or other variations of
these terms or comparable terminology. Forward looking statements may include
projections, forecasts, or estimates of future performance and developments.
Forward looking statements contained in this Annual Report are based upon
assumptions and assessments that we believe to be reasonable as of the date of
this Annual Report. Whether those assumptions and assessments will be realized
will be determined by future factors, developments, and events, which are
difficult to predict and may be beyond our control. Actual results, factors,
developments, and events may differ materially from those we assumed and
assessed. Such risk factors, uncertainties, contingencies, and developments,
including those discussed in this Managements Discussion and Analysis of
Financial Condition and Results of Operations and those identified in Risk
Factors in Item 1A of this Annual Report on Form 10-K, could cause our future
operating results to differ materially from those set forth in any forward
looking statement. Such factors include, among others, the following: our
ability to maintain constructive commercial relationships with our key
customers, including during periods of economic downturns generally or
downturns/volatility in their specific businesses; the impacts on our financial
condition, results of operations, and business prospects arising from making an
acquisition or failing to make an acquisition; our success in winning new
business from our customers and against competing vendors; whether replacement
programs that we win will be more or less successful or profitable than those
that are replaced; levels of demand and pricing generally for blood glucose
monitoring devices sold by our customers for which we supply carry solutions;
managements ability to successfully execute its business plan and strategy;
variability in order flow from our OEM customers; OEM customers decisions to
reduce or eliminate their practice of including carry case accessories in-box;
the loss of key sales employees upon whom relationships with key OEM customers
depend; general economic and business conditions, nationally and
internationally in the countries in which we do business; the continuation of a
global economic recession; the failure of one or more of our suppliers; failures
in our ability to maintain adequate quality control in our products; demographic
changes; changes in technology, including developments in the treatment or
control of diabetes that adversely affect the incidence of use and replacement
rates of handheld blood glucose monitors by diabetics; increased competition in
the business of distribution of carry solutions for handheld electronic devices
generally or increased competition to include carry solutions with products
manufactured by our OEM customers in particular; changes affecting the business
or business prospects of one or more of our principal OEM customers;
governmental regulations and changes in, or the failure to comply with,
governmental regulations; and other factors included elsewhere in this Annual
Report and our other reports filed with the Commission. Accordingly, there can
be no assurance that any such forward looking statement, projection, forecast
or estimate can be realized or that actual returns, results, or business
prospects will not differ materially from those set forth in any forward
looking statement.
16
Given these uncertainties, readers
are cautioned not to place undue reliance on such forward-looking statements.
The Company disclaims any obligation to update any such factors or to publicly
announce the results of any revisions to any of the forward-looking statements
contained herein to reflect future results, events or developments. See Part
I, Item IA, Risk Factors in this Annual Report.
Business Overview
Trends and Economic Environment
Our new management team remains
committed to growing our OEM business. However, we also intend to pursue a more
marketing- and product development-driven business model to expand our product
offerings through retail distribution channels, marking a significant evolution
in our strategy in the consumer electronics and technology accessories segment.
In executing this strategy, we are likely to incur significantly increased
selling, general, and administrative expense, as we devote increased resources
to develop and/or acquire new product offerings, diversified sales channels,
and an improved capability to sell and distribute under this model. The
realization of the benefits of these initiatives will be determined by the
speed in which we can bring new products to market and by the success and
acceptance of these products in the marketplace. We continue to believe that
meaningful improvement to our results of operations will be driven by revenue
growth.
With regard to the growth of our OEM
business, recent gains in sales orders from certain of our major diabetic
product customers have been encouraging, but the magnitude is modest, and we
believe that the sustainability of improvement in revenues from these customers
is uncertain. Furthermore, we continue to operate in a very challenging
business environment, where changes in revenue contribution from our major diabetic
case customers, with whom we are highly concentrated, are somewhat volatile. We
expect further progress in Fiscal 2011 in our efforts to expand our OEM customer
and product base and reduce such concentration, and anticipate that we can
build on the 10% growth in revenue contributed by other products in Fiscal
2010.
Previously, we have disclosed our
intention to expand and/or diversify our business by means of acquisition.
Management is committed to building our business in the electronics and
technology accessories segment and has continued to evaluate acquisition
opportunities. If an acquisition of any business should be consummated, the
Company would likely become obliged to commit some combination of cash, stock,
and other resources to acquire and/or integrate such business and/or its
personnel. See Risk Factors in Item 1.A of this Annual Report
Variability
of Revenues and Results of Operation
Because a high percentage of our
sales revenues is highly concentrated in a few large customers, and because the
volumes of these customers order flows to us are highly variable, with short
lead times, our quarterly revenues, and consequently our results of operations,
are susceptible to significant variability over a relatively short period of
time.
17
Critical Accounting Policies and
Estimates
We have identified the accounting
policies and significant estimation processes below as critical to our business
operations and the understanding of our results of operations. The discussion
below is not intended to be comprehensive. In many cases, the accounting
treatment of a particular transaction is specifically dictated by accounting
principles generally accepted in the United States, with no need for
managements judgment of a particular transaction. In other cases, management
is required to exercise judgment in the application of accounting principles
with respect to particular transactions. The impact and any associated risks
related to these policies on our business operations are discussed throughout
this Managements Discussion and Analysis of Financial Condition and Results
of Operations where such policies affect reported and expected financial
results. For a detailed discussion of the applications of these and other
accounting policies, refer to Item 8. Financial Statements and Supplementary
Data in this Annual Report. Our preparation of our consolidated financial
statements requires us to make estimates and assumptions that are believed to
be reasonable under the circumstances. There can be no assurance that actual
results will not differ from those estimates and such differences could be
significant.
Cash Equivalents
Cash and cash equivalents consist
primarily of cash on deposit, highly liquid money market accounts, and
certificates of deposit with original contractual maturities of three months or
less, predominantly in US dollar denominated instruments. The Company minimizes
its credit risk associated with cash and cash equivalents by investing in high
quality instruments and by periodically evaluating the credit quality of the
primary financial institution issuers of such instruments. The Company holds
cash and cash equivalents at major financial institutions in the United States,
at which cash amounts may significantly exceed FDIC insured limits, and in
Europe. Historically, the Company has not experienced any losses due to such
cash concentrations.
Accounts Receivable
Accounts receivable consist of
unsecured trade accounts with various customers. The Company performs periodic
credit evaluations of its customers and believes that adequate allowances for
any uncollectible receivables are maintained. Credit terms to the majority of
customers are generally net thirty (30) days to net sixty (60) days; however,
the Company extends to certain customers, particularly its largest customers,
payment terms up to 90 days. The Company has not historically experienced
significant losses in extending credit to customers. At September 30, 2010 and
2009, the allowance for doubtful accounts was approximately $19,000 and
$25,000, respectively.
Inventory Valuation
Inventories consist primarily of
finished goods and are stated at the lower of cost (determined by the first-in,
first-out method) or market. Based on managements estimates, an allowance is
made to reduce excess, obsolete, or otherwise un-saleable inventories to net
realizable value. The allowance is established through charges to cost of goods
sold on the Companys consolidated statements of operations. As reserved
inventory is disposed of, the Company charges off the associated allowance. In
determining the adequacy of the allowance, managements estimates are based
upon several factors, including analyses of inventory levels, historical loss
trends, sales history, and projections of future sales demand. The Companys
estimates of the allowance may change from time to time based on managements
assessments, and such changes could be material. At September 30, 2010 and 2009,
the allowance for obsolete inventory was approximately $28,000 and $33,000,
respectively.
Property, Plant and Equipment
Property, plant and equipment
consist of furniture, fixtures, and equipment and leasehold improvements and
are recorded at cost. Expenditures for major additions and improvements are
capitalized and minor replacements, maintenance, and repairs are charged to
expense as incurred. When property, plant and equipment are retired or
otherwise disposed of, the cost and accumulated depreciation are removed from
the accounts and any resulting gain or loss is included in the results of
operations for the respective period. Depreciation is provided over the
estimated useful lives of the related assets using the straight-line method for
financial statement purposes. The estimated useful life for furniture, fixtures
and equipment ranges from three to ten years. Amortization of leasehold
improvements is computed using the straight-line method over the shorter of the
remaining lease term or the estimated useful lives of the improvements. The
Company recorded approximately $54,000 and $76,000 of depreciation and
amortization expense in Fiscal 2010 and Fiscal 2009, respectively. Depreciation
and amortization for production related property, plant and equipment is
included as a component of costs of goods sold in the accompanying consolidated
statements of operations. Depreciation and amortization for selling and general
and administrative related property, plant and equipment, is included as a
component of operating expenses in the accompanying consolidated statements of
operations.
18
Revenue
Recognition
In accordance with generally
accepted accounting principles in the U.S., we generally recognize revenue from
product sales to customers when: (1) title and risk of loss are
transferred; (2) persuasive evidence of an arrangement exists; (3) we
have no continuing obligations to the customer; and (4) the collection of
related accounts receivable is probable.
Income
Taxes
The Company accounts for its income
taxes in accordance with accounting principles generally accepted in the United
States which requires, among other things, recognition of 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
tax net operating loss carryforwards to the extent that realization of these
benefits is more likely than not. The Company periodically evaluates the
realizability of its net deferred tax assets. See Note 8 to Notes to
Consolidated Financial Statements. The Companys policy is to account for
interest and penalties
relating to income taxes, if any, in income tax expense in the statement of
operations. For the periods presented in the accompanying consolidated statements
of operations no income tax related interest or penalties were assessed or
recorded.
Results of Operations for Fiscal 2010
compared to Fiscal 2009
Net loss
We incurred a net loss of $1.7
million in Fiscal 2010 compared to net loss of $1.4 million in Fiscal 2009. The
higher net loss is primarily the result of higher general and administrative
expenses (including approximately $1.1 million attributable to developments
leading up to and including the Settlement Agreement as more fully described
below) and to a lesser extent lower other income (primarily interest income)
in Fiscal 2010, offset in part by higher gross profit, lower selling expenses,
and lower income tax expense in Fiscal 2010, as reflected in the table below:
(thousands of dollars)
|
|
Fiscal
2010
|
Fiscal
2009
|
Increase
(Decrease)
|
Net Sales........................................................................................................................
|
$18,997
|
$17,440
|
1,556
|
|
|
|
|
Gross Profit....................................................................................................................
|
4,232
|
3,582
|
650
|
Selling Expenses...........................................................................................................
|
(2,167)
|
(2,616)
|
(449)
|
General and Administrative Expenses.......................................................................
|
(3,636)
|
(2,316)
|
1,320
|
Other Income.................................................................................................................
|
10
|
256
|
(246)
|
Income Tax Expense.....................................................................................................
|
(124)
|
(300)
|
(176)
|
Net Loss*......................................................................................................................
|
($1,685)
|
($1,394)
|
291
|
* Table may not total due to
rounding.
Basic and diluted loss
per share data were ($0.21) for Fiscal 2010, compared to ($0.18) for Fiscal
2009. The increase in loss per share in Fiscal 2010 was due to the increase in
net loss.
Net Sales
Net sales increased $1.6 million, or
9%, to $19.0 million in Fiscal 2010 from $17.4 million in Fiscal 2009 due to
higher sales of diabetic products, which increased $1.1 million, or 8%, and
higher sales of Other Products, which increased $0.5 million, or 10%. The
tables below set forth net sales by product line and geographic location of our
customers for the periods indicated.
19
Net Sales for Fiscal 2010
(millions of dollars)
|
|
APAC
|
Americas
|
Europe
|
Total
|
Diabetic Products..................................................
|
$7.4
|
$3.0
|
$3.8
|
$14.1
|
Other Products.......................................................
|
0.9
|
3.2
|
0.8
|
4.9
|
Totals*
...............................................................
|
$8.2
|
$6.2
|
$4.6
|
$19.0
|
Net Sales for Fiscal 2009
(millions of dollars)
|
|
APAC
|
Americas
|
Europe
|
Total
|
Diabetic Products..................................................
|
$5.9
|
$3.5
|
$3.6
|
$13.0
|
Other Products.......................................................
|
0.8
|
3.5
|
0.1
|
4.4
|
Totals*
...............................................................
|
$6.7
|
$7.0
|
$3.7
|
$17.4
|
* Tables may
not total due to rounding.
Diabetic Product Sales
We design to the order of, 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 OEMs blood
glucose testing and monitoring kits, or to a lesser extent, sell them through
their retail distribution channels.
Sales of cases and related
accessories for blood glucose monitoring kits increased $1.1 million, or 8%, to
$14.1 million in Fiscal 2010 from $13.0 million in Fiscal 2009. This increase
was due primarily to increased orders from two of our major diabetic customers,
as presented in the table below, which sets forth our sales by diabetic
customer for the periods indicated.
(millions of dollars)
|
|
Fiscal
2010
|
Fiscal
2009
|
Increase
(Decrease)
|
Diabetic Customer A..........................................................................
|
$7.4
|
$6.0
|
$1.4
|
Diabetic Customer B...........................................................................
|
3.6
|
3.6
|
--
|
Diabetic Customer C...........................................................................
|
2.8
|
1.8
|
1.0
|
Diabetic Customer D..........................................................................
|
--
|
1.3
|
(1.2)
|
All other Diabetic Customers............................................................
|
0.2
|
0.3
|
--
|
Totals*.........................................................................................
|
$14.1
|
$13.0
|
$1.1
|
* Table may not total
due to rounding.
Sales of carrying cases for blood
glucose monitoring kits represented 74% of our total net sales in Fiscal 2010
compared to 75% of our total net sales in Fiscal 2009.
Other Product Sales
We design and sell carrying solutions
to OEMs for a diverse array of other portable electronic and other products,
including bar code scanners, GPS and location devices, cellular telephones,
laptop computers, MP3 players, firearms, sporting and recreational products,
and aeronautical products.
Sales of other products increased $0.5
million, or 10%, to $4.9 million in Fiscal 2010 from $4.4 million in Fiscal
2009. This improvement was due to a $1.6 million increase in sales to customers
from whom we received first time sales orders in the fourth quarter of Fiscal
2009 or more recently, offset in large part by a $0.9 million decrease in sales
of cell phone cases to Motorola in Fiscal 2010 compared to Fiscal 2009. In the
case of sales to newer customers, two of these contributed $0.6 million and
$0.3 million, respectively in Fiscal 2010.
20
Sales of other products represented
26% of our net sales in Fiscal 2010 compared to 25% of net sales in Fiscal
2009.
Gross Profit
Gross profit increased $0.6 million,
or 18%, to $4.2 million in Fiscal 2010 from $3.6 million in Fiscal 2009. This
was primarily due to the $1.6 million increase in net sales in Fiscal 2010 and,
to a lesser extent, a $0.1 million decrease in each of Hong Kong expense (which
is included in cost of goods sold) and freight duties and customs. The lower
Hong Kong expense in Fiscal 2010 primarily resulted from the absence of certain
severance and recruitment expenses that we incurred in Fiscal 2009 in respect
of staffing changes in connection with the relocation of the facility. Freight
duties and customs declined almost 22%, despite the higher sales base, due
primarily to the absence in Fiscal 2010 of special air freight charges incurred
in Fiscal 2009 to accommodate a diabetic customers requirements. Lesser
decreases in expenses for warehousing, rent, and postage also contributed to
the decrease in Hong Kong expense in Fiscal 2010.
As a percentage of net sales, our
gross profit was 22% in Fiscal 2010 compared to 21% in Fiscal 2009.
Selling Expenses
Selling expenses
decreased $0.4 million, or 17%, to $2.2 million in Fiscal 2010 from $2.6
million in Fiscal 2009. The decrease was due primarily to reductions in selling
personnel costs, related travel and entertainment expenses, and automobile
allowance expense, totaling $0.4 million in Fiscal 2010 resulting from changes
to our staffing and employee benefit plans made during Fiscal 2009. To a lesser
extent, decreases in occupancy costs, office expenses, other selling expenses
also contributed to the decline.
General and Administrative
Expenses
General and administrative expenses
increased $1.3 million, or 57%, to $3.6 million in Fiscal 2010 from $2.3
million in Fiscal 2009. Of the $1.3 million increase in general and
administrative expense, approximately $1.1 million, in the aggregate, was
attributable to developments leading up to and including the Settlement
Agreement entered into in August 2010, which included: $0.5 million of
severance expense incurred in connection with the termination of an executives
employment agreement in August 2010; $0.2 million higher legal expenses
primarily incurred in connection with the adoption of a shareholders rights
plan in June 2010 and related issues; $140 thousand of expense incurred in
connection with a settlement agreement entered into with a Schedule 13D
shareholder in August 2010; $58 thousand higher director compensation and
related expenses; and $50 thousand of bonus expense incurred in connection with
an executives retention agreement entered into in August 2010. In addition, we
incurred $0.2 million in professional fees in connection with assessment of
acquisition opportunities prior to the settlement agreement. To a lesser
extent, increases in travel and entertainment and office expenses in Fiscal
2010 also contributed to the increase. These increases were offset, in small
part, by reductions in occupancy costs in Fiscal 2010. See Part I. Item 1.
BusinessCorporate History in this Annual Report and Note 10 of Notes to
Financial Statements in Part II, Item 8, of this Annual Report.
Other Income (Expense)
Other income (expense), consisting
primarily of interest income on cash balances and foreign currency transaction
gains and losses, declined $0.2 million to $10 thousand of income in Fiscal
2010 from $0.3 million of income in Fiscal 2009. This resulted from a $0.2
million decline in interest income in Fiscal 2010, due primarily to lower
average interest rates on slightly lower cash balances compared to Fiscal 2009.
Exchange rate changes on foreign currency cash balances were not material.
Pre-tax Loss
Pre-tax loss increased $0.5 million,
or 43% to $1.6 million in Fiscal 2010 from $1.1 million in Fiscal 2009 as a
result of the changes as described above.
21
Income Tax Expense
We recorded income tax expense of $0.1
million in Fiscal 2010 primarily as a result our repatriation of $3.0 million
(net of Swiss withholding tax) of foreign source income of our Swiss
subsidiary, Forward Innovations, which had previously been considered to be
permanently invested and for which no United States tax liability had been
accrued as of September 30, 2009, and to a lesser extent, relating to permanent
and temporary differences under our equity compensation plan. On an operating
basis, without the repatriation of foreign source income, we would have
recognized an income tax benefit of approximately $0.5 million in Fiscal 2010,
before adjustment to our allowance against our deferred tax assets.
In Fiscal 2009, we recorded $0.3
million of income tax expense primarily due to the establishment of a full
valuation allowance against our deferred tax assets in Fiscal 2009.
Refer to Critical Accounting
Policies and EstimatesDeferred Income Taxes), above and Note 8 - Income
Taxes in our Notes to our Audited Consolidated Financial Statements included
in Item 8 of Part II of this Annual Report on Form 10-K.
Liquidity and Capital Resources
During Fiscal 2010, we used $1.7
million of cash in operations compared to generating $0.4 million from
operations in Fiscal 2009. Net cash used in operating activities in Fiscal 2010
consisted of a net loss of $1.7 million, reduced by $0.4 million for non-cash
items, and increased by net changes in working capital items of $0.4 million.
As to working capital items, uses of cash in operating activities in respect of
increases in accounts receivable, inventories, and prepaid and other current
assets were $1.4 million, $0.4 million, and $12 thousand, respectively. These changes
were offset, in part, by increases in accounts payable and accrued expenses and
other current liabilities of $0.6 million and $0.8 million, respectively, and a
decrease in other assets of $14 thousand, which provided cash to operating
activities. The increase in accounts receivable is attributable to the higher
sales levels in Fiscal 2010, particularly the fourth fiscal quarter, compared
to Fiscal 2009 and the timing in which these accounts receivable were
originated. The increase in inventories is in support of either firm purchase
orders or forecasted demand data received from our customers. The increase in
accounts payable is a result of the higher purchase volume in support of the
higher sales levels and the timing in which these purchases were originated. The
increase in accrued expenses and other current liabilities is primarily due to:
(i) $230 thousand in severance payable to a former officer of the Company; (ii)
$140 thousand in accrued shareholder settlement costs (refer to Note 10 of
Notes to Financial Statements); (iii) $95 thousand in wages and benefits that did
not clear the bank at September 30, 2010; (iv) $95 thousand increase in
sales commission and bonuses; (v) $91,000 of United States federal income taxes payable
in respect of Fiscal 2010 results of operations; and (vi) $50 thousand in
retention bonus payable to an officer of the Company.
During Fiscal 2009, we generated
$0.4 million of cash in operations consisting of a net loss of $1.4 million,
reduced by $0.7 million for non-cash items, and net changes in working capital
items of $1.1 million. Working capital items included decreases in accounts
receivable, inventory, and prepaid and other current assets of $0.4 million,
$0.7 million, and $0.4 million, respectively, which provided cash to operating
activities, as well as decreases in accounts payable, and accrued expenses and
other liabilities of $0.4 million and $56 thousand, respectively, which
effected cash used in operating activities.
Investing activities used $9
thousand in Fiscal 2010 for purchases of computer equipment. In Fiscal 2009,
$0.1 million was used in investing activities for purchases of property, plant
and equipment, primarily leasehold improvements and furniture and fixtures for
our new Hong Kong office.
In Fiscal 2010, financing
activities generated $67 thousand in proceeds from the exercise of stock
options. In Fiscal 2009, financing activities generated $14 thousand from the
disgorgement of short-swing profits to us by a former 10% shareholder in
accordance with applicable rules and regulations under the Exchange Act. We
accounted for the cash receipt as a contribution from a shareholder and
reflected the proceeds, net of tax, as an increase in additional paid-in
capital in our consolidated balance sheets.
22
At September 30, 2010, our current
ratio (current assets divided by current liabilities) was 7.3; our quick ratio
(current assets less inventories divided by current liabilities) was 7.0; and
our working capital (current assets less current liabilities) was $21 million.
As of such date, we had no short or long-term debt outstanding.
Our primary source of liquidity is
our cash on hand. The primary demands on our working capital are: operating
losses and accounts payable arising in the ordinary course of business, the most
significant of which arise when our customers place orders with us and we order
from our suppliers. Historically, our sources of liquidity have been adequate
to satisfy working capital requirements arising in the ordinary course of
business. Management has stated that it wishes to increase the Companys
existing OEM business and expand into new product offerings. If management
deems it appropriate, such expansion may occur by means of acquisition or other
business combination. If any such transaction were to be consummated, we
anticipate that it would involve the payment of cash and/or the issuance of
securities, either or both of which might be significant in amount. We
anticipate that our liquidity and financial resources for the ensuing fiscal
year will be adequate to manage our financial requirements.
At September 30, 2010, Forward
Innovations is contingently liable to a Swiss bank under a letter of guarantee with
a Swiss bank relating to the repayment of any amount up to €75,000 (equal to
approximately $102,000 as of September 30, 2010) paid by such bank to Forward
Innovations' freight forwarder and customs agent with respect to any value
added tax liability arising that the logistics provider is required to pay to
Dutch tax authorities on Forward Innovations behalf. The term of the bank
letter of guarantee expires February 28, 2011, but will be renewed
automatically for one-year periods until February 28, 2014, unless the
subsidiary provides the Swiss bank with written notice of termination at least
60 days prior the renewal date. It is the intent of Forward Innovations and the
logistics provider that the bank letter of guarantee amount be adjusted
annually, dependent upon the level of sales, if any, of Forward Innovations in
The Netherlands. In consideration of the issuance of the bank letter of
guarantee, Forward Innovations has granted the Swiss bank a security interest
in all of its assets on deposit with, held by, or credited to the subsidiarys
account with, the Swiss bank (approximately $0.5 million at September 30,
2010). As of September 30, 2010, Forward Innovations had not incurred a
liability in connection with this guarantee. Refer to Note 10- Commitments and
Contingencies Guarantee Obligation in our Notes to our Audited Consolidated
Financial Statements included in Item 8 of Part II of this Annual Report on
Form 10-K.
In September 2002 and January 2004,
our Board of Directors authorized the repurchase of up to an aggregate of 486,200
shares of our outstanding common stock. Under those authorizations, as of
September 30, 2010, we had repurchased an aggregate of 172,603 shares at a cost
of approximately $0.4 million but none during Fiscal 2010 or Fiscal 2009.
Contractual Obligations and Commercial
Commitments
The Company
has entered into various contractual obligations and commercial commitments
that, under accounting principles generally accepted in the United States are
not recorded as a liability. The following is a summary of such contractual
cash obligations as of September 30, 2010:
Contractual
Obligation or Commitment
|
Oct 10 Sep 11
|
Oct 11- Sep 13
|
Oct 14 Sept 15
|
Thereafter
|
Employment Agreements
|
$175,000
|
$44,000
|
$--
|
$--
|
Severance Agreement
|
219,000
|
|
|
|
Retention Agreement
|
125,000
|
|
|
|
Operating Leases
|
159,000
|
--
|
--
|
|
Totals
|
$678,000
|
$44,000
|
$--
|
$--
|
The
Company has not guaranteed the debt of any unconsolidated entity and does not
engage in derivative transactions or maintain any off-balance sheet special
purpose entities. See Note 5 to the Audited Consolidated Financial Statements
set forth at Item 8 of Part II of this Annual Report on Form 10-K.
23
ITEM 7A
. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not
applicable
ITEM 8
. FINANCIAL STATEMENTS AND SUPPLEMENATARY DATA
The consolidated financial statements and notes thereto
included in this Annual Report may be found at pages 28 to 45 of this Annual
Report on Form 10-K.
ITEM 9
. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
ITEM 9A
. CONTROLS AND PROCEDURES
Our management is responsible for
establishing and maintaining a system of disclosure controls and procedures (as
defined in Rule 13a-15(e)) under the Exchange Act) that is designed to ensure
that information required to be disclosed by the Company 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 Commission's rules and
forms. Disclosure controls and procedures include, without limitation, controls
and procedures designed to ensure that information required to be disclosed by
an issuer in the reports that it files or submits under the Exchange Act is
accumulated and communicated to the issuer's management, including its
principal executive officer or officers and principal financial officer or
officers, or persons performing similar functions, as appropriate to allow
timely decisions regarding required disclosure.
In accordance with Exchange Act
Rule 13a-15(b), our management, under the supervision and with the
participation of our Principal Executive Officer and Principal Financial
Officer, performed an evaluation of the effectiveness of the Company's
disclosure controls and procedures as of the end of the period covered by this
Report (the fourth quarter of the fiscal year ended September 30, 2010, in the
case of this Annual Report on Form 10-K). Based on that evaluation, the
Company's Principal Executive Officer and Principal Financial Officer concluded
that the Company's disclosure controls and procedures were effective, as of the
end of the period covered by this Report (the fourth quarter of the fiscal year
ended September, 30, 2010, in the case of this Annual Report on Form 10-K), to
provide reasonable assurance that information required to be disclosed in the
Company's reports filed or submitted under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the
Commission's rules and forms.
Managements Report on Internal Control Over Financial
Reporting
Our Principal Executive Officer and
our Principal Financial Officer are responsible for establishing and
maintaining adequate internal control over financial reporting. Internal
control over financial reporting is defined in Rule 13a-15(f) and 15d-15(f)
promulgated under the Securities Exchange Act of 1934 as a process designed by,
or under the supervision of, our principal executive and principal financial
officers and effected by our board of directors, management and other
personnel, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external reporting
purposes in accordance with generally accepted accounting principles and
includes those policies and procedures that:
-
pertain to the maintenance of records
that in reasonable detail accurately and fairly reflect the transactions and
dispositions of our assets;
-
provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and
that our receipts and expenditures are being made only in accordance with
authorizations of management and our directors; and
-
provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of our assets that
could have a material effect on the financial statements.
24
Because of its inherent limitations,
our internal control over financial reporting may not prevent or detect
misstatements. Therefore, even those systems determined to be effective can
provide only reasonable assurance with respect to financial statement
preparation and presentation. Projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
Our Principal Executive Officer and
our Principal Financial Officer assessed the effectiveness of our internal
control over financial reporting as of September 30, 2010. In making
this assessment, management used the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO) in Internal
Control Integrated Framework.
Based on this assessment, our Principal
Executive Officer and our Principal Financial Officer believe that, as of
September 30, 2010, our internal control over financial reporting is effective
based on those criteria.
This annual report does not include
an attestation report of the Companys registered public accounting firm
regarding internal control over financial reporting. Managements report was
not subject to attestation by the Companys registered public accounting firm
pursuant to rules of the Securities and Exchange Commission that permit the
Company to provide only managements report in this annual report.
This report shall not be deemed to
be filed for purposes of Section 18 of the Exchange Act or otherwise subject to
the liabilities of that section, unless the registrant specifically states that
the report is to be considered filed under the Exchange Act or incorporates
it by reference into a filing under the Securities Act or the Exchange Act.
Changes in internal control
Our management, with the
participation of our Principal Executive Officer and Principal Financial
Officer, performed an evaluation required by Rule 13a-15(d) of the Exchange Act
as to whether any change in our internal control over financial reporting (as
defined in Rule 13a-15(f) under the Exchange Act) occurred during the last
fiscal quarter of the fiscal year ended September 30, 2010. Based on that
evaluation, our Principal Executive Officer and our Principal Financial Officer
concluded that no change occurred in the Company's internal control over
financial reporting during the last fiscal quarter of the fiscal year ended
September 30, 2010 that has materially affected, or is reasonably likely to
materially affect, the Company's internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE
The information required by this item regarding directors
and executive officers is incorporated to this Annual Report on Form 10-K by
reference to our Definitive Proxy Statement to be filed with the Securities and
Exchange Commission in connection with the Annual Meeting of Stockholders
anticipated to be held in March 2011 (the 2010 Proxy Statement) under the
headings Election of Directors, Structure and Practices of the Board of
Directors, and Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters;Section 16(a) Beneficial Ownership Reporting
Compliance. Information regarding executive officers is also incorporated to
this Annual Report on Form 10-K by reference to the 2010 Proxy Statement under
the caption Executive Officers. The information required by this item
relating to Corporate Governance, including Code of Ethics, is incorporated to
this Annual Report on Form 10-K by reference to the 2010 Proxy Statement under
the heading Structure and Practices of the Board of Directors.
25
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated
to this Annual Report on Form 10-K by reference to the 2010 Proxy Statement
under the heading Executive Compensation and Related Information.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
The information required by this item is incorporated
to this Annual Report on Form 10-K by reference to the 2010 Proxy Statement
under the headings Executive Compensation and Related InformationSecurities
Authorized for Issuance Under Equity Compensation Plans and Security
Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this item is incorporated
to this Annual Report on Form 10-K by reference to the 2010 Proxy Statement
under the headings Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder MattersCertain Relationships, Director
Independence, and Related Transactions and Structure and Practices of the
Board of Directors;Board of Directors and Director Independence.
ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item is incorporated
to this Annual Report on Form 10-K by reference to the 2010 Proxy Statement
under the heading Matters Relating to Independent Registered Public
Accountants;Principal Accountant Fees and Services.
PART IV
ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
|
|
|
a.
|
Financial Statements
|
|
|
|
|
|
Report of Independent
Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Shareholders Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
|
|
|
|
|
b.
|
Exhibits
|
|
|
|
|
|
3.
|
Articles of Incorporation and By-Laws
|
|
|
|
|
|
|
|
3(i)
|
Amended and
Restated Certificate of Incorporation (amendment as filed by the New
York Department of State on February 12, 2010)
|
|
|
|
|
|
|
|
|
3(ii)
|
Third Amended and
Restated By-Laws of Forward Industries, Inc., as of August 10, 2010
|
|
|
|
|
|
|
|
4.
|
Instruments Defining the Rights of Security Holders
|
|
|
|
|
|
|
|
4.1
|
Shareholder
Protection Rights Agreement, dated as of June 9, 2010, by and between
Forward Industries, Inc. and American Stock Transfer & Trust Company
LLC, as Rights Agent (incorporated by reference to Exhibit 4.1 to the
Company's Current Report on Form 8-K, as filed with the Commission on
June 15, 2010)
|
26
|
|
4.2
|
Amendment, dated as of August 10, 2010, to Shareholder
Protection Rights Agreement, dated as of June 9, 2010, by and between Forward
Industries, Inc. and American Stock Transfer & Trust Company LLC, as Rights
Agent (incorporated by reference to Exhibit 4.1 to the Companys Current Report
on Form 8-K, as filed with the Commission on August 16, 2010), which amendment
terminated the Right Agreement
|
|
|
|
|
|
10.
|
Material Contracts
|
|
|
|
|
|
|
10.1
|
1996 Stock Incentive Plan of Forward Industries, Inc.
(incorporated by reference to Exhibit 4 to the Registration Statement on Form
S-8 of the Company, as filed on April 25, 2003).
|
|
|
|
|
|
|
10.2
|
Forward Industries, Inc. 2007 Equity Incentive Plan, as
amended (incorporated by reference to Exhibit 4.1 to the Registration Statement
on Form S-8 of the Company, Reg. File No. 333-165075, as filed with the
Commission on February 25, 2010).
|
|
|
|
|
|
|
10.3
|
Settlement Agreement, dated as of August 10, 2010, by and
among Forward Industries, Inc., LaGrange Capital Partners, L.P., and certain
Affiliates of LaGrange Capital Partners, L.P. (incorporated by reference to
Exhibit 10.1 to the Companys Current Report on Form 8-K, as filed with the
Commission on August 16, 2010)
|
|
|
|
|
|
|
10.4
|
Severance and Release Agreement, dated as of August 10, 2010,
by and between Douglas W. Sabra and Forward Industries, Inc. (incorporated by
reference to Exhibit 10.2 to the Companys Current Report on Form 8-K, as filed
with the Commission on August 16, 2010)
|
|
|
|
|
|
|
10.5
|
Employment Agreement, dated as of August 10, 2010, between
Forward Industries, Inc. and James O. McKenna, (incorporated by reference to
Exhibit 10.3 to the Companys Current Report on Form 8-K, as filed with the
Commission on August 16, 2010)
|
|
|
|
|
|
|
10.6
|
Retention Agreement, dated as of August 10, 2010, between
Forward Industries, Inc. and James O. McKenna, (incorporated by reference to
Exhibit 10.4 to the Companys Current Report on Form 8-K, as filed with the
Commission on August 16, 2010)
|
|
|
|
|
|
21.
|
Subsidiaries of the Registrant
|
|
|
|
|
|
|
21.1
|
List of Subsidiaries of Forward Industries, Inc.
|
|
|
|
|
|
23.
|
Consent of Independent Registered Public Accounting Firm
|
|
|
|
|
|
|
23.1
|
Consent of Kaufman, Rossin & Co., P.A. relating to
1996 Stock Incentive Plan
|
|
|
|
|
|
|
23.1
|
Consent of Kaufman, Rossin & Co., P.A. relating to
2007 Equity Compensation Plan
|
|
|
|
|
|
31.
|
Certifications Pursuant to Rule 13a-14(a) (Section 302 of
Sarbanes-Oxley)
|
|
|
|
|
|
|
31.1
|
Certification of Brett M. Johnson
|
|
|
|
|
|
|
31.2
|
Certification of James O. McKenna
|
|
|
|
|
|
32.
|
Certifications Pursuant to Rule 13a-14(b) and 18 U.S.C.
Section 1350 (Section 906 of Sarbanes-Oxley)
|
|
|
|
|
|
|
32.1
|
Certifications of Brett M. Johnson and James O. McKenna
(furnished herewith)
|
27
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
The
Board of Directors and Shareholders of Forward Industries, Inc.
We have audited the accompanying
consolidated balance sheets of Forward Industries, Inc. (the Company) as of
September 30, 2010 and 2009, and the related consolidated statements of
operations, shareholders' equity and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in
accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated
financial statements referred to above present fairly, in all material respects,
the financial position of Forward Industries, Inc. at September 30, 2010 and
2009, and the results of its operations and its cash flows for the years then ended,
in conformity with accounting principles generally accepted in the United
States of America.
KAUFMAN, ROSSIN & CO., P.A.
Miami, Florida
December 8, 201028
28
FORWARD INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2010 AND 2009
|
|
|
|
|
|
|
|
|
September 30,
|
|
September 30,
|
|
2010
|
|
2009
|
Assets
|
|
|
|
Current assets:
|
|
|
|
Cash and cash equivalents.......................................................................................
|
$18,471,520
|
|
$20,103,502
|
Accounts receivable, net .........................................................................................
|
4,621,181
|
|
3,259,462
|
Inventories, net..........................................................................................................
|
1,036,386
|
|
666,485
|
Prepaid expenses and other current
assets............................................................
|
240,651
|
|
228,938
|
Total current assets
......................................................................................
|
24,369,738
|
|
24,258,387
|
|
|
|
|
Property, plant, and equipment, net............................................................................
|
115,205
|
|
162,468
|
Other assets....................................................................................................................
|
46,032
|
|
59,532
|
Total assets
.....................................................................................................................
|
$24,530,975
|
|
$24,480,387
|
|
|
|
|
Liabilities and shareholders equity
|
|
|
|
Current liabilities:
|
|
|
|
Accounts payable.......................................................................................................
|
$2,439,273
|
|
$1,824,091
|
Accrued expenses and other current
liabilities......................................................
|
885,332
|
|
133,857
|
Total current liabilities
................................................................................
|
3,324,605
|
|
1,957,948
|
|
|
|
|
Commitments and contingencies
...............................................................................
|
|
|
|
|
|
|
|
Shareholders equity:
|
|
|
|
Preferred stock, par value
$0.01 per share; 4,000,000 shares authorized;
no shares issued............................................................................................
|
--
|
|
--
|
Common stock, par value $0.01 per share;
40,000,000 shares authorized,
8,761,629 and 8,643,598 shares issued,
respectively (including
706,410 held in treasury at both dates) ....................................................................
|
87,616
|
|
86,436
|
Capital in excess of par value...............................................................................
|
16,469,142
|
|
16,101,568
|
Treasury stock, 706,410 shares at cost,
respectively ......................................
|
(1,260,057)
|
|
(1,260,057)
|
Retained earnings..................................................................................................
|
5,909,669
|
|
7,594,492
|
Total shareholders' equity
...........................................................................................
|
21,206,370
|
|
22,522,439
|
Total liabilities and shareholders equity
.................................................................
|
$24,530,975
|
|
$24,480,387
|
The accompanying notes are an integral part of the
consolidated financial statements.
29
FORWARD INDUSTRIES, INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
For the Fiscal Years Ended
September 30,
|
|
2010
|
|
2009
|
Net
sales
......................................................................................................
|
$18,996,827
|
|
$17,440,425
|
Cost of goods sold
..........................................................................................................................
|
14,764,840
|
|
13,858,122
|
Gross profit
.....................................................................................................................................
|
4,231,987
|
|
3,582,303
|
|
|
|
|
Operating expenses:
|
|
|
|
Selling.......................................................................................................................................
|
2,166,542
|
|
2,615,685
|
General
and administrative....................................................................................................
|
3,636,309
|
|
2,316,072
|
Total operating expenses
..............................................................................................
|
5,802,851
|
|
4,931,757
|
|
|
|
|
Loss from operations
....................................................................................................................
|
(1,570,864)
|
|
(1,349,454)
|
|
|
|
|
Other income (expense):
|
|
|
|
Interest
income........................................................................................................................
|
42,941
|
|
284,475
|
Other
(expense), net................................................................................................................
|
(32,868)
|
|
(28,647)
|
Total other income
.........................................................................................................
|
10,073
|
|
255,828
|
|
|
|
|
Loss before income tax expense
..................................................................................................
|
(1,560,791)
|
|
(1,093,626)
|
Income tax expense
........................................................................................................................
|
124,032
|
|
300,499
|
Net loss
...........................................................................................................................................
|
($1,684,823)
|
|
($1,394,125)
|
|
|
|
|
Net loss per common and common equivalent share
|
|
|
|
Basic.................................................................................................................................
|
($0.21)
|
|
($0.18)
|
Diluted..............................................................................................................................
|
($0.21)
|
|
($0.18)
|
|
|
|
|
Weighted average number of common and common equivalent
shares outstanding
|
|
|
|
Basic.................................................................................................................................
|
7,983,257
|
|
7,926,277
|
Diluted..............................................................................................................................
|
7,983,257
|
|
7,926,277
|
The accompanying notes are an integral part of the
consolidated financial statements.
30
FORWARD INDUSTRIES, INC.
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS EQUITY
FOR THE FISCAL YEARS ENDED
SEPTEMBER 30, 2010 AND 2009
|
|
Common Stock
|
|
|
Treasury Stock
|
|
Total
|
Number of
Shares
|
Par Value
|
Additional
Paid-in Capital
|
Retained
Earnings
|
Number of
Shares
|
Amount
|
Balance at September 30,
2008
|
$23,708,259
|
8,621,932
|
$86,219
|
$15,893,480
|
$8,988,617
|
706,410
|
($1,260,057)
|
Share-based compensation
|
194,357
|
21,666
|
217
|
194,140
|
--
|
--
|
--
|
Disgorgement
of short-swing profits
|
13,948
|
--
|
--
|
13,948
|
--
|
|
|
Net
loss
|
(1,394,125)
|
--
|
--
|
--
|
(1,394,125)
|
--
|
--
|
Balance at September 30,
2009
|
22,522,439
|
8,643,598
|
86,436
|
16,101,568
|
7,594,492
|
706,410
|
(1,260,057)
|
Common
stock issued upon exercise of stock options
|
67,000
|
59,030
|
590
|
66,410
|
--
|
--
|
--
|
Share-based compensation
|
301,754
|
59,001
|
590
|
301,164
|
--
|
--
|
--
|
Net loss
|
(1,684,823)
|
--
|
--
|
--
|
(1,684,823)
|
--
|
--
|
Balance at September 30,
2010
|
$21,206,370
|
8,761,629
|
$87,616
|
$16,469,142
|
$5,909,669
|
706,410
|
($1,260,057)
|
The accompanying notes are an integral part of the
consolidated financial statements.
31
FORWARD INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
For the Fiscal Years Ended September 30,
|
|
2010
|
|
2009
|
Operating activities:
|
|
|
|
Net
loss..................................................................................................
|
($1,684,823)
|
|
($1,394,125)
|
Adjustments to reconcile net loss to net cash (used
in) provided by operating activities:
|
|
|
|
Share-based
compensation................................................................
|
268,718
|
|
194,357
|
Depreciation and
amortization.............................................................
|
53,602
|
|
75,585
|
Provision for obsolete
inventory............................................................
|
29,796
|
|
(39,817)
|
Bad debt
expense..............................................................................
|
8,875
|
|
23,401
|
Loss on disposal of property, plant, and
equipment...............................
|
2,227
|
|
11,759
|
Deferred income
taxes.......................................................................
|
--
|
|
409,130
|
Changes
in operating assets and liabilities:
|
|
|
|
Accounts receivable....................................................................................................
|
(1,370,594)
|
|
376,690
|
Inventories.....................................................................................................................
|
(399,697)
|
|
737,194
|
Prepaid expenses and other
current assets..............................................................
|
(11,713)
|
|
357,694,
|
Other assets...................................................................................................................
|
13,500
|
|
38,727
|
Accounts payable........................................................................................................
|
615,182
|
|
(382,539)
|
Accrued expenses and other
current liabilities........................................................
|
784,511
|
|
(55,970)
|
Net cash
(used in) provided by operating activities
..............................................................
|
(1,690,416)
|
|
352,086
|
|
|
|
|
Investing activities:
|
|
|
|
Purchases of property,
plant, and equipment....................................................................
|
(8,566)
|
|
(124,958)
|
Net cash
used in investing activities
......................................................................................
|
(8,566)
|
|
(124,958)
|
|
|
|
|
Financing activities:
|
|
|
|
Proceeds from disgorgement
of short-swing profits........................................................
|
--
|
|
13,948
|
Proceeds from exercise of
stock options............................................................................
|
67,000
|
|
--
|
Net
cash provided by financing activities
..............................................................................
|
67,000
|
|
13,948
|
|
|
|
|
Net (decrease) increase
in cash and cash equivalents
........................................................
|
(1,631,982)
|
|
241,076
|
|
|
|
|
Cash and
cash equivalents at beginning of period
...............................................................
|
20,103,502
|
|
19,862,426
|
|
|
|
|
Cash and
cash equivalents at end of period
...........................................................................
|
$18,471,520
|
|
$20,103,502
|
|
|
|
|
Supplemental Disclosures
of Cash Flow Information:
|
|
|
|
Cash
paid during the fiscal year for:
|
|
|
|
Income
Taxes...............................................................................................................
|
$--
|
|
$26,283
|
|
|
|
|
The accompanying notes are an integral part of the
consolidated financial statements.
32
FORWARD INDUSTRIES,
INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
NOTE 1 OVERVIEW
Forward Industries, Inc. was incorporated
under the laws of the State of New York and began operations in 1961. The
Company designs, markets, and distributes carry and protective solutions primarily
for hand held electronic devices, including soft-sided carrying cases, bags,
clips, hand straps, protective plates and skins, and other accessories for
medical monitoring and diagnostic kits, bar code scanners, GPS and location
devices, and cellular telephones. It also designs, markets, and distributes
carry and protective solutions for other consumer products such as laptop
computers, MP3 players, firearms, sporting, recreational, and aeronautical
products. The Companys principal customer market is original equipment
manufacturers, or OEMs, of these products that either package our products as
accessories in box together with their product offerings (or the contract
manufacturing firms of these OEM customers) or sell them through their retail
distribution channels. Sales to OEM customers are made in Europe, the APAC
Region, and the Americas.
NOTE 2 ACCOUNTING POLICIES
Accounting Estimates
The preparation of the Company's
consolidated financial statements in conformity with accounting principles
generally accepted in the United States 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 consolidated
financial statements include the accounts of Forward Industries, Inc.
("Forward") and its wholly owned subsidiaries (together with Forward,
the "Company"). All significant intercompany transactions and
balances have been eliminated in consolidation.
Cash Equivalents
Cash and cash equivalents consist
primarily of cash on deposit, highly liquid money market accounts, and certificates
of deposit with original contractual maturities of three months or less,
predominantly in US dollar denominated instruments. The Company minimizes its
credit risk associated with cash and cash equivalents by investing in high
quality instruments and by periodically evaluating the credit quality of the
primary financial institution issuers of such instruments. The Company holds
cash and cash equivalents at major financial institutions in the United States,
at which cash amounts may significantly exceed FDIC insured limits, and in
Europe. Historically, the Company has not experienced any losses due to such
cash concentrations.
Accounts Receivable
Accounts receivable consist of unsecured trade
accounts with various customers. The Company performs periodic credit
evaluations of its customers and believes that adequate allowances for any
uncollectible receivables are maintained. Credit terms to the majority of customers
are generally net thirty (30) days to net sixty (60) days; however, the Company
extends to certain customers, particularly its largest, payment terms up to 90
days. The Company has not historically experienced significant losses in
extending credit to customers. At September 30, 2010 and 2009, the allowance for
doubtful accounts was approximately $19,000 and $25,000, respectively.
33
NOTE 2 ACCOUNTING
POLICIES (CONTINUED)
Inventories
Inventories consist
primarily of finished goods and are stated at the lower of cost (determined by
the first-in, first-out method) or market. Based on managements estimates, an
allowance is made to reduce excess, obsolete, or otherwise un-saleable
inventories to net realizable value. The allowance is established through
charges to cost of goods sold on the Companys consolidated statements of
operations. As reserved inventory is disposed of, the Company charges off the
associated allowance. In determining the adequacy of the allowance, managements
estimates are based upon several factors, including analyses of inventory
levels, historical loss trends, sales history, and projections of future sales
demand. The Companys estimates of the allowance may change from time to time
based on managements assessments, and such changes could be material. At
September 30, 2010 and 2009, the allowances for obsolete inventory were
approximately $28,000 and $33,000, respectively.
Property, Plant and Equipment
Property, plant and equipment consist of
furniture, fixtures and equipment, and leasehold improvements and are recorded
at cost. Expenditures for major additions and improvements are capitalized, and
minor replacements, maintenance, and repairs are charged to expense as
incurred. When property, plant and equipment are retired or otherwise disposed
of, the cost and accumulated depreciation are removed from the accounts and any
resulting gain or loss is included in the results of operations for the
respective period. Depreciation is provided over the estimated useful lives of
the related assets using the straight-line method for financial statement
purposes. The estimated useful life for furniture, fixtures and equipment
ranges from three to ten years. Amortization of leasehold improvements is
computed using the straight-line method over the shorter of the remaining lease
term or the estimated useful lives of the improvements. For the fiscal years
ended September 30, 2010 and 2009, the Company recorded approximately $54,000 and
$76,000 of depreciation and amortization expense, respectively. Depreciation
and amortization for production related property, plant and equipment is
included as a component of costs of goods sold in the accompanying consolidated
statements of operations. Depreciation and amortization for selling and general
and administrative related property, plant and equipment, is included as a
component of operating expenses in the accompanying consolidated statements of
operations.
Income Taxes
The Company accounts for its income taxes
in accordance with accounting principles generally accepted in the United States
which requires, among other things, recognition of 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
tax net operating loss carryforwards to the extent that realization of these
benefits is more likely than not. The Company periodically evaluates the
realizability of its net deferred tax assets. See Note 8 to these Notes to
Consolidated Financial Statements. The Companys policy is to account for interest
and penalties relating to income taxes, if any, in income tax expense in its
consolidated statement of operations. For fiscal years presented in the
accompanying consolidated statements of operations no income tax related
interest or penalties were assessed or recorded.
Revenue Recognition
In accordance with
generally accepted accounting principles in the U.S., we generally recognize
revenue from product sales to customers when: (1) title and risk of loss
are transferred; (2) persuasive evidence of an arrangement exists;
(3) we have no continuing obligations to the customer; and (4) the
collection of related accounts receivable is probable.
Shipping and Handling Costs
The Company expenses shipping and handling
costs (including inbound freight charges, purchasing and receiving costs,
inspection costs, warehousing costs, internal transfer costs, and other costs
associated with the Companys distribution network) as a component of cost of
goods sold in the accompanying consolidated statements of operations.
34
NOTE 2 ACCOUNTING
POLICIES (CONTINUED)
Advertising Expenses
Advertising costs, consisting
primarily of samples and product brochures, are expensed as incurred.
Advertising costs are included in selling expenses in the accompanying
consolidated statements of operations and amounted to approximately $111,000
and $102,000 for the years ended September 30, 2010 and 2009, respectively.
Foreign Currency Transactions
The functional currency of the
Company and its wholly owned foreign subsidiaries is the U.S. dollar. Foreign
currency transactions may generate receivables or payables that are fixed in
terms of the amount of foreign currency that will be received or paid.
Fluctuations in exchange rates between such foreign currency and the functional
currency increase or decrease the expected amount of functional currency cash
flows upon settlement of the transaction. These increases or decreases in
expected functional currency cash flows are foreign currency transaction gains
or losses that are included in other income (expense), net in the
accompanying consolidated statements of operations. The net loss from foreign
currency transactions and translations was approximately $33,000 and $23,000
for the fiscal years ended September 30, 2010 and 2009, respectively.
Comprehensive Loss
For the fiscal years ended
September 30, 2010 and 2009, the Company did not have any components of
comprehensive loss other than net loss.
NOTE 3 PROPERTY,
PLANT AND EQUIPMENT
Property, plant and equipment and related
accumulated depreciation and amortization are summarized in the table below:
|
|
For the Fiscal Years Ended
September 30,
|
|
|
2010
|
|
2009
|
Furniture, fixtures and
equipment.......................................................................
|
|
$772,511
|
|
$772,911
|
Leasehold improvements......................................................................................
|
|
159,948
|
|
159,948
|
Property,
plant and equipment, cost.............................................................
|
|
932,459
|
|
932,859
|
Less accumulated
depreciation and amortization.............................................
|
|
(817,254)
|
|
(770,391)
|
Property, plant and
equipment, net
...............................................................
|
|
$115,205
|
|
$162,468
|
35
NOTE 4 ACCRUED EXPENSES AND
OTHER CURRENT LIABILITIES
Accrued expenses and other current
liabilities consist of the following:
|
|
For the Fiscal Years Ended
September
30,
|
|
|
2010
|
|
2009
|
Accrued severance...............................................................................................
|
|
$229,167
|
|
$ --
|
Accrued sales commission and bonuses..........................................................
|
|
224,772
|
|
80,047
|
Accrued shareholder settlement costs..............................................................
|
|
142,043
|
|
--
|
Accrued wages and benefits...............................................................................
|
|
130,241
|
|
25,335
|
Accrued taxes........................................................................................................
|
|
90,997
|
|
--
|
Accrued other........................................................................................................
|
|
68,112
|
|
28,475
|
Accrued expenses and other current liabilities
........................................
|
|
$885,332
|
|
$133,857
|
NOTE 5 DEBT
In 2003, Forwards wholly-owned Swiss
subsidiary, Forward Innovations GmbH (Forward Innovations), established a
credit facility with a Swiss bank that provided for an uncommitted line of
credit in the maximum amount of $400,000. The facility was established
primarily to provide for a letter of credit in favor of the Companys freight
forwarder in The Netherlands to satisfy the Companys obligations under the
parties representation agreement. In connection with this facility, Forward
Innovations agreed to certain customary financial covenants, with which Forward
Innovations has been in compliance with all material respects. Such covenants
did not include any financial ratios or other financial tests. As of December
31, 2009, the credit facility expired in accordance with its terms. See Note
10 to these Notes to Consolidated Financial Statements.
NOTE 6 SHAREHOLDERS
EQUITY
Anti-takeover Provisions
On June 9, 2010 the Company adopted
a temporary Shareholder Protection Rights Plan (the Rights Plan) and declared
a distribution of one right on each outstanding share of common stock of the
Company to shareholders of record at the close of business on June 21, 2010.
Upon a triggering event, as defined in the Rights Plan, each right would have entitled
its holder to purchase, for the exercise price, the number of shares of the
Companys common stock having a market value of twice the exercise price of
each Right. On August 10, 2010, pursuant to the terms of the Settlement Agreement
(refer to Note 10: Commitments and Contingencies) the Rights Plan was amended
by the Companys Board of Directors such that the Rights Plan expired on such
date, effectively canceling the rights issuable under the Rights Plan.
The Company is authorized to issue
up to 4,000,000 shares of "blank check" preferred stock. The Board of
Directors has the authority and discretion, without shareholder approval, to
issue preferred stock in one or more series for any consideration it deems
appropriate, and to fix the relative rights and preferences thereof including
their redemption, dividend and conversion rights.
Stock Repurchase
In September 2002 and January 2004,
the Companys Board of Directors authorized the repurchase of up to an
aggregate of 486,200 shares of outstanding common stock. Under those authorizations,
as of September 30, 2010, the Company had repurchased an aggregate of 172,603
shares at a cost of approximately $403,000, but none during Fiscal 2010 or
Fiscal 2009.
36
NOTE 7 STOCK
BASED COMPENSATION
In May 2007 at the annual
shareholders meeting, shareholders of the Company approved the 2007 Equity
Incentive Plan (as amended, as described in the next sentence, the 2007 Plan),
which authorized the issuance of up to 400,000 shares of common stock to
officers, employees, and non-employee directors of the Company in connection
with awards of restricted common stock and stock options to such persons. At
the February 2010 annual shareholders meeting, shareholders of the Company
approved an amendment to the 2007 Plan to increase the number of shares of
common stock authorized for grants by an additional 400,000 shares. As of
September 30, 2010, the total shares of common stock available for grants of
awards of restricted stock and options to purchase common stock under the 2007
Plan was 375,500. The price at which restricted common stock may be granted and
the exercise price of stock options granted may not be less than the fair
market value of the common stock at the date of grant. The Companys
Compensation Committee administers the plan. Options generally expire ten
years after the date of grant and restricted stock grants generally vest in equal
proportions over three years.
The Companys 1996 Stock Incentive
Plan (the 1996 Plan) expired in accordance with its terms in November 2006.
The exercise price of incentive options granted under the 1996 Plan to
officers, employees, and non-employee directors of the Company was required by
1996 Plan provisions to be equal at least to the fair market value of the
common stock at the date of grant. Options expire ten years after the date of
grant and generally vest in equal proportions over three years. Unexercised
options granted pursuant to the 1996 Plan prior to expiration remain
outstanding until the earlier of exercise or option expiration.
Under the 1996 Plan 30,000 fully
vested common stock options remain outstanding and unexercised, all at exercise
prices higher than the fair market value of the stock at September 30, 2010.
Stock Option Awards
Under the 2007 Plan, the Compensation
Committee of the Companys Board of Directors has approved awards of stock
option to purchase an aggregate of 272,500 shares of common stock to the
Companys current and certain former non-employee directors and to certain
Company officers, of which awards covering 117,500 shares were granted during
the fiscal year ended September 30, 2010. Awards to current non-employee
directors and officers are subject to a continued service condition and vest on
the first anniversary of the date the awards were granted in the case of the
Companys current non-employee directors, and vest in equal amounts over three
years commencing on the first anniversary of the grant in the case of one
current Company officer. The exercise prices of the awards granted was, in each
case equal, to the market value of the Companys common stock on the various
grant dates.
On August 10, 2010, pursuant to the
Settlement Agreement (refer to Note 10: Commitments and Contingencies), and in
connection with the resignations from the Board of Directors of two
non-employee directors, the Compensation Committee; (i) accelerated the vesting
date in respect of options held by each such director to purchase 15,000 shares
of Common Stock (30,000 in the aggregate) at a price of $2.43 per share, originally
scheduled to vest on February 10, 2011, to August 10, 2010; and (ii) waived the
provision under the 2007 Plan that otherwise would have resulted in the
expiration of all their outstanding stock options 90 days after termination of
service. These options may be exercised at any time prior to their expiration.
On August 10, 2010, pursuant to the
Settlement Agreement (refer to Note 10: Commitments and Contingencies), and in
connection with a former officers Severance and Release Agreement (refer also
to Note 10), the Compensation Committee of the Board of Directors: (i)
accelerated the vesting date in respect of options to purchase 10,000 shares of
Common Stock of the Company at $2.02 per share, previously granted to the
officer under the 2007 Plan, to August 10, 2010; and (ii) waived the provision
under the 2007 Plan that otherwise would have resulted in the expiration of all
his outstanding stock options 90 days after termination of service. Thus, these
options may be exercised at any time prior to their expiration.
The Company recognized
approximately $141,000 and $81,000 of compensation cost for stock option awards
in its consolidated statements of operations for the fiscal years ended
September 30, 2010 and 2009, respectively.
37
NOTE 7 STOCK
BASED COMPENSATION (CONTINUED)
Stock Option Awards (continued)
The
following table summarizes stock option activity under the 2007 Plan, as
amended, and the 1996 Plan during the fiscal year ended September 30, 2010:
|
Shares
|
|
Weighted
Average
Exercise
Price
|
|
Weighted
Average
Remaining
Contractual
Term (Years)
|
|
Aggregate
Intrinsic
Value
|
Outstanding at September 30, 2009
|
155,000
|
|
$3.52
|
|
8.3
|
|
|
Granted...........................................................
|
117,500
|
|
$2.72
|
|
9.5
|
|
|
Exercised.........................................................
|
(85,000)
|
|
$2.09
|
|
7.9
|
|
|
Forfeited..........................................................
|
--
|
|
|
|
|
|
|
Expired............................................................
|
--
|
|
|
|
|
|
|
Outstanding at September 30, 2010
|
187,500
|
|
$3.66
|
|
8.3
|
|
$182,000
|
|
|
|
|
|
|
|
|
Options
vested and exercisable at September 30, 2010..........................................................
|
110,000
|
|
$4.19
|
|
7.5
|
|
$117,000
|
The
table below provides additional information regarding stock option awards that
were outstanding and exercisable at September 30, 2010.
|
Stock Options Outstanding and
Exercisable
|
Range of Exercise Prices
|
Outstanding at
September 30, 2010
|
|
Weighted Average
Remaining
Contractual
Term (Years)
|
|
Weighted Average
Exercise Price
|
$1.80 to $2.85
|
80,000
|
|
8.3
|
|
$2.27
|
$6.02
|
20,000
|
|
5.6
|
|
$6.02
|
$15.91
|
10,000
|
|
4.6
|
|
$15.91
|
|
110,000
|
|
|
|
|
The
fair value of each stock option on the date of grant was estimated using a
Black-Scholes option-pricing formula applying the following assumptions for
each respective period:
|
|
For the Fiscal Years Ended September 30,
|
|
|
2010
|
|
2009
|
Expected term (in years)....................................................................
|
|
5.0
|
|
5.0
|
Risk-free interest rate........................................................................
|
|
1.41% to 2.33%
|
|
1.65%
|
Expected volatility.............................................................................
|
|
71% to 78%
|
|
79.8%
|
Expected dividend yield....................................................................
|
|
0%
|
|
0%
|
38
NOTE 7 STOCK
BASED COMPENSATION (CONTINUED)
Stock Option Awards (continued)
The expected term represents the period
over which the stock option awards are expected to be outstanding. The Company
based the risk-free interest rate used in its assumptions on the implied yield
currently available on U.S. Treasury zero-coupon issues with a remaining term
equivalent to the awards expected term. The volatility factor used in the
Companys assumptions is based on the historical price of its common stock over
the most recent period commensurate with the expected term of the award. 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.
Accordingly, the Company used a dividend yield of zero in its assumptions. The
Company estimates the expected term, volatility and forfeitures of share-based
awards based upon historical data.
Restricted Stock Awards
Under the 2007 Plan in the fiscal
year ended September 30, 2010, the Compensation Committee of the Companys
Board of Directors approved and granted awards of 183,500 shares of restricted
stock, in the aggregate, to certain present and former executive officers and
key employees. Of these awards 1,500 shares of restricted stock have been
forfeited and reverted to, and are eligible for re-grant under, the 2007 Plan.
Vesting of the restricted stock is generally subject to a continued service
condition with one-third of the awards vesting each year on the anniversary
date the awards were granted typically commencing on the first such anniversary
date. The fair value of the awards granted was equal to the market value of
the Companys common stock on the grant date. During the fiscal years ended
September 30, 2010 and 2009, the Company recognized approximately $128,000 and
$113,000, respectively, of compensation cost in its consolidated statements of
operations related to restricted stock awards.
On August 10, 2010, pursuant to the
Settlement Agreement (refer to Note 10: Commitments and Contingencies) in
connection with a former officers Severance and Release Agreement (refer Note
10), the Compensation Committee of the Board of Directors accelerated the
vesting of, and eliminated all restrictions on, 26,666 shares of restricted
Common Stock of the Company previously granted to such officer under the 2007
Plan.
The
following table summarizes restricted stock activity under the 2007 Plan during
the fiscal year ended September 30, 2010.
|
|
Shares
|
|
Weighted
Average
Grant
Date
Fair Value
|
Non-vested balance at September 30,
2009.......................................................
|
|
84,832
|
|
$2.16
|
Changes during the period:
|
|
|
|
|
Shares granted................................................................................................
|
|
53,500
|
|
$2.02
|
Shares vested..................................................................................................
|
|
(59,000)
|
|
$2.16
|
Non-vested balance at September 30, 2010.......................................................
|
|
79,332
|
|
$2.07
|
As of September 30,
2010, there was approximately $48,000 of total unrecognized compensation cost
related to 79,332 shares of unvested restricted stock awards (reflected in the
table above) granted under the 2007 Plan. That cost is expected to be
recognized over the remainder of the requisite service (vesting) period.
Warrants
As of September 30, 2010, warrants
to purchase 75,000 shares of the Companys common stock at an exercise price of
$1.75 were outstanding. By their terms these warrants expire 90 days after a
registration statement registering common stock (other than pursuant to
employee benefit plans) is declared effective by the Securities and Exchange
Commission. As of September 30, 2010, no such registration statement has been
filed with the Securities and Exchange Commission.
39
NOTE 8 INCOME
TAXES
The
Companys provision for income taxes consists of the following United States
and foreign components:
|
For the Fiscal Years Ended
September 30,
|
|
2010
|
|
2009
|
U.S.
Federal and State
|
|
|
|
Current.......................................................................................................................
|
$124,032
|
|
($95,069)
|
Deferred.....................................................................................................................
|
210,910
|
|
(164,796)
|
|
|
|
|
Foreign:
|
|
|
|
Current......................................................................................................................
|
--
|
|
--
|
Deferred....................................................................................................................
|
(13,431)
|
|
(37,856)
|
|
|
|
|
Change
in valuation allowance..................................................................................
|
(197,479)
|
|
598,220
|
Provision for income taxes.........................................................................................
|
$124,032
|
|
$300,499
|
The
Companys effective tax rate does not approximate the statutory United States
federal income tax rate primarily due to the establishment of the valuation
allowance and tax rate differentials in respect of United States state and
foreign taxes.
The deferred
tax expense (benefit) is the change in the deferred tax assets and liabilities
representing the tax consequences of changes in the amounts of temporary
differences, net operating loss carry forwards and changes in tax rates during
the fiscal year. The Companys deferred tax assets and liabilities are
comprised of the following:
|
As of September 30,
|
|
2010
|
|
2009
|
Deferred
tax assets:
|
|
|
|
Net
operating losses..............................................................................................
|
$191,592
|
|
$450,742
|
AMT
tax credit........................................................................................................
|
99,757
|
|
99,757
|
Share-based
compensation...................................................................................
|
115,010
|
|
56,849
|
Excess
tax over book basis in inventory.............................................................
|
48,056
|
|
37,655
|
Allowance
for doubtful accounts........................................................................
|
6,872
|
|
8,986
|
|
461,287
|
|
653,989
|
Deferred
tax liabilities:
|
|
|
|
Prepaid
insurance...................................................................................................
|
(56,239)
|
|
(47,133)
|
Depreciation............................................................................................................
|
(4,307)
|
|
(8,636)
|
|
(60,546)
|
|
(55,769)
|
|
|
|
|
Valuation
allowance.....................................................................................................
|
(400,741)
|
|
(598,220)
|
Net
deferred tax assets
|
$--
|
|
$--
|
As of September 30, 2010 and 2009,
the Company has no unrecognized tax benefits related to federal and state
income tax matters. As of September 30, 2010 and 2009, the Company has not
accrued for interest and penalties related to uncertain tax positions. It is
the Companys policy to recognize interest and/or penalties, if any, related to
income tax matters in income tax expense in the statement of operations. For
the periods presented in the accompanying statements of operations no income
tax related interest or penalties were assessed or recorded. The Company is
currently open to audit under the statute of limitations by the Internal
Revenue Service and certain state income taxing authorities for all years due
to the net operating loss carryovers from those years.
40
NOTE 8 INCOME
TAXES (continued)
During the fiscal year ended
September 30, 2010, the Company elected to effect the repatriation of $3,000,000
(net of withholding tax of approximately $158,000 imposed by the Swiss
government) of foreign source income of its Swiss subsidiary, Forward
Innovations, which had previously been considered to be permanently invested
and for which no United States tax liability had previously been accrued. The
Company was able to partially offset the taxability of this repatriation by
utilizing its net operating loss carryforwards, as well as the current year
operating loss such that the net impact was a tax liability of $124,000.
In addition, the Companys deferred tax assets were reduced by $211,000,
predominantly by the use of these net operating losses; however, the Company
also reduced the valuation allowance by an equivalent amount.
At September 30, 2010, the Company had
available net operating loss carryforwards for state income tax purposes of
approximately $1,306,000 expiring through 2029 and resulting in a deferred tax
asset of approximately $73,000. In addition, at September 30, 2010, the Company
had available net operating loss carryforwards for foreign income tax purposes
of approximately $1,353,000 resulting in a deferred tax asset of approximately $119,000.
At September 30, 2010 and September 30, 2009, the Company had total deferred
tax assets remaining after the repatriation of approximately $401,000 and
$598,000, respectively, before reserve for valuation allowances. As of
September 30, 2010, the undistributed earnings of the Companys Swiss
subsidiary of $629,000 remaining after the repatriation are considered to be
permanently invested; therefore, in accordance with generally accepted
accounting principles in the U.S., no provision for U.S. Federal and state
income taxes on those earnings has been provided.
As of September 30, 2010, as part
of its periodic evaluation of the need to maintain a valuation allowance
against its deferred tax assets, and after consideration of all factors, both
positive and negative (including, among others, projections of future taxable
income, current year net operating loss carryforward utilization and the extent
of the Companys cumulative losses in recent years), the Company determined
that, on a more likely than not basis, it would not be able to use its
remaining deferred tax assets. Accordingly, Company has determined to maintain
a full valuation allowance against its deferred tax assets; accordingly, as of
September 30, 2010 and September 30, 2009, the valuation allowances were
approximately $401,000 and $598,000, respectively. If the Company determines
in a future reporting period that it will be able to use some or all of its
deferred tax assets, the adjustment to reduce or eliminate the valuation
allowance would reduce its tax expense and increase after-tax income. Changes
in deferred tax assets and valuation allowance are reflected in the Provision
for income taxes line item of the Companys consolidated statements of
operations.
The
significant elements contributing to the difference between the United States
federal statutory tax rate and the Companys effective tax rate are as follows:
|
For the Fiscal Years Ended
September 30,
|
|
2010
|
|
2009
|
Statutory
U.S. federal income tax rate.........................................................................
|
34.0%
|
|
34.0%
|
State
taxes, net of federal benefit...........................................................................
|
1.7%
|
|
1.9%
|
Permanent
differences.............................................................................................
|
(53.4%)
|
|
(1.2%)
|
Foreign
tax rate differential.....................................................................................
|
(3.0%)
|
|
(10.7%)
|
Valuation
allowance.................................................................................................
|
(1.8%)
|
|
(54.7%)
|
Other..........................................................................................................................
|
14.6%
|
|
3.1%
|
Effective tax rate
|
(7.9%)
|
|
(27.5%)
|
41
NOTE 9 LOSS
PER SHARE
Basic 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 per share data is computed
using the weighted-average number of common and dilutive common-equivalent
shares outstanding during each such period. Dilutive common-equivalent shares
consist of shares that would be issued upon the exercise of stock options,
stock rights and warrants, computed using the treasury stock method. Loss per
share data for the fiscal years ended September 30, 2010 and 2009, excludes all
outstanding common equivalent shares as inclusion of such shares would be
anti-dilutive.
In accordance with generally
accepted accounting principles in the U.S., 79,332 and 84,832 shares of
service-based common stock awards (restricted stock) were excluded from the
weighted average shares outstanding calculation for the fiscal years ended
September 30, 2010 and 2009, respectively.
NOTE 10 COMMITMENTS
AND CONTINGENCIES
Settlement Agreement
On August 10, 2010,
the Board of Directors approved, and the Company entered into, that certain
Settlement Agreement, dated as of August 10, 2010 (the Settlement Agreement),
by and between the Company and LaGrange Capital Partners, L.P. and certain
affiliates of LaGrange Capital Partners, L.P. (collectively, the LaGrange
Group), which resulted in certain changes to the composition of the Board and
the Companys management.
As contemplated
by the terms of the Settlement Agreement, on August 10, 2010, two non-employee
directors resigned from the Board, and the Companys President (Chief Executive
Officer) and Acting Chairman of the Board resigned from those positions.
Thereafter, as also contemplated by the terms of the Settlement Agreement, the
Board appointed three new non-employee directors to fill the resulting
vacancies in the Board and appointed a new Chairman. Pursuant to the
Settlement Agreement, the Company entered into the commitments and
contingencies described below, as well as effected the acceleration of certain
equity awards, as referred to in Note 7: Stock Based Compensation, above.
Severance
and Release Agreement.
Pursuant to a Severance and Release
Agreement, dated as of August 10, 2010, between the Company and Douglas W.
Sabra, the Companys former President and Acting Chairman, the Company agreed to
pay Mr. Sabra $500,000, of which half was paid on August 10, 2010 and half is
to be paid in 12 equal monthly installments that commenced on September 1, 2010.
Employment
and Retention Agreements.
On August 10, 2010, the Companys
Board of Directors appointed Brett M. Johnson as the Companys President and
Chief Executive Officer, on an at-will basis an annual salary of $250,000,
pending his negotiation of a long-term employment agreement with the
Compensation Committee of the Companys Board of Directors. Mr. Johnson is
entitled to receive customary benefits including health, life and disability
insurance, auto allowances and participation in the Company's 401(k) retirement
plan.
Pursuant to an Employment
Agreement, dated as of August 10, 2010, between the Company and James O.
McKenna, the Companys currently serving Chief Financial Officer, the Company
agreed to employ Mr. McKennas its Chief Financial Officer and Treasurer at a
salary of $175,000 per annum. In connection with this agreement, the
Employment Agreement, dated August 12, 2008 between Mr. McKenna and the Company
was terminated. Under the new agreement, Mr. McKenna will be eligible to
earn bonus compensation based on achievement of targets set by the Boards
Compensation Committee in respect of each fiscal year during the term. The term
of the Employment Agreement expires on December 31, 2011, and either party may
give notice of non-renewal not less than 90 days prior to that date. If
the Company gives such notice, which is considered a termination without cause,
Mr. McKenna would be entitled to receive a payment from the Company equal to
one year of his salary. Mr. McKenna is also entitled to a payment equal
to one year of his salary as severance in the event of his termination without
cause in circumstances other than non-renewal and termination for good
reason (as such terms are defined in the Employment Agreement).
42
Pursuant to a Retention Agreement, dated
as of August 10, 2010, between the Company and Mr. McKenna, the Company agreed
to make a retention payment of $175,000 to Mr. McKenna if he continues to perform
his duties under his Employment Agreement (referred to above) in the capacities
set forth therein until at least March 1, 2011.
Guarantee Obligation
In February 2010, Forward Innovations and
its European logistics provider (freight forwarding and customs agent) entered
into a Representation Agreement whereby, among other things, the European
logistics provider agreed to act as such subsidiary's fiscal representative in
The Netherlands for the purpose of providing services in connection with any
value added tax matters. As part of this agreement, which succeeds a
substantially similar agreement (except as to the amount and term of the
undertaking) between the parties that expired December 31, 2009, the subsidiary
agreed to provide an undertaking (in the form of a bank letter of guarantee) to
the logistics provider with respect to any value added tax liability arising in
The Netherlands that the logistics provider is required to pay to Dutch tax
authorities on the subsidiary's behalf. As of February 1, 2010, such subsidiary
entered into a guarantee agreement with a Swiss bank relating to the repayment
of any amount up to €75,000 (equal to approximately $102,000 as of September
30, 2010) paid by such bank to the logistics provider in order to satisfy such
undertaking pursuant to the bank letter of guarantee. The subsidiary
would be required to perform under the guarantee agreement only in the event
that: (i) a value added tax liability is imposed on the Company's sales in The
Netherlands, (ii) the logistics provider asserts that it has been called upon
in its capacity as surety by the Dutch Receiver of Taxes to pay such taxes,
(iii) the subsidiary or the Company on its behalf fails or refuses to remit the
amount of value added tax due to the logistics provider upon its demand, and
(iv) the logistics provider makes a drawing under the bank letter of guarantee.
Under the Representation Agreement the subsidiary agreed that the letter of
guarantee would remain available for drawing for three years following the date
that its relationship terminates with the logistics provider to satisfy any
value added tax liability arising prior to expiration of the Representation
Agreement but asserted by The Netherlands after expiration. The term of the
bank letter of guarantee expires February 28, 2011, but will be renewed
automatically for one-year periods until February 28, 2014, unless the
subsidiary provides the Swiss bank with written notice of termination at least
60 days prior to the renewal date. It is the intent of the subsidiary and the
logistics provider that the bank letter of guarantee amount be adjusted
annually. In consideration of the issuance of the letter of guarantee, the
subsidiary has granted the Swiss bank a security interest on all of the
subsidiarys assets on deposit with, held by, or credited to the subsidiarys
accounts with, the Swiss bank (approximately $532,000 at September 30, 2010).
As of September 30, 2010, the Company had not incurred a liability in
connection with this guarantee.
Lease Commitments
The Company
rents certain of its facilities under leases expiring at various dates through
May 2012. Total rent expense for the years ended September 30, 2010 and 2009,
amounted to approximately $281,000 and $334,000, respectively.
Fiscal
Year Ended September 30, 2010
|
|
Amount
|
|
|
|
2011.......................................................................................................................................................
|
|
$159,312
|
2012.......................................................................................................................................................
|
|
--
|
2013.......................................................................................................................................................
|
|
--
|
2014.......................................................................................................................................................
|
|
--
|
2015.......................................................................................................................................................
|
|
--
|
Thereafter.............................................................................................................................................
|
|
--
|
Total
lease commitments
..............................................................................................................
|
|
$159,312
|
NOTE 11 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 September 30, 2010, there were no such actions or proceedings,
either individually or in the aggregate, that, if decided adversely to the
Companys interests, the Company believes would be material to its business.
43
NOTE 12 401(K)
PLAN
The Company maintains a 401(k)
benefit plan allowing eligible United States-based employees to contribute a
portion of their salary in an amount up to the annual maximum amounts as set
periodically by the Internal Revenue Service. In accordance with applicable
Safe Harbor provisions, the Company has elected to match 100% on the first 6%
of eligible contributions by its employees. The Company's matching
contributions were approximately $57,000 and $46,000 for the years ended
September 30, 2010 and 2009, respectively, and are reflected in the
accompanying consolidated statements of operations. The Company's
contributions vest immediately.
NOTE 13 OPERATING
SEGMENT INFORMATION
The Company operates in a single
segment: the supply of carry and protective solutions for portable electronic
devices. This carrying-solution segment includes the design, marketing, and
distribution of products to its customers that include manufacturers of
consumer hand held wireless telecommunications and medical monitoring devices.
The Companys carrying solution segment operates in geographic regions that
include primarily the APAC, the Americas, and Europe. Geographic regions are determined
based primarily on the location of the customer or its contract manufacturer.
Revenues from External Customers
The
following table presents net sales by geographic region.
|
(dollars in thousands)
|
|
Year Ended September 30,
|
|
2010
|
|
2009
|
Americas................................................................................................................
|
$6,191
|
|
$7,055
|
APAC.....................................................................................................................
|
8,219
|
|
6,656
|
Europe....................................................................................................................
|
4,587
|
|
3,729
|
Total
net sales
................................................................................................
|
$18,997
|
|
$17,440
|
Long-Lived
Assets (Net of Accumulated Depreciation and Amortization)
Identifiable long-lived assets,
consisting entirely of property, plant and equipment, by geographic region are
as follows:
|
(dollars in thousands)
|
|
Year Ended September 30,
|
|
2010
|
|
2009
|
APAC.....................................................................................................................
|
$76
|
|
$109
|
Americas................................................................................................................
|
39
|
|
51
|
Europe....................................................................................................................
|
-
|
|
2
|
Total
long-lived assets (net)
.........................................................................
|
$115
|
|
$162
|
Supplier
Concentration
The Company procures substantially
all of its supply of products from independent suppliers in China. Primary
suppliers are Chinese business entities located in China. Depending on the
product, the Company may require several different suppliers to furnish
component parts or pieces. The Company purchased approximately 88% of its
products from four such suppliers in the fiscal year ended September 20, 2010, and
90% of its products from seven Chinese suppliers in the fiscal year ended
September 30, 2009. One such supplier accounted for approximately 67% and 54%
of the Companys product purchases in the fiscal years ended September 30, 2010
and 2009, respectively.
44
NOTE 13 OPERATING
SEGMENT INFORMATION (CONTINUED)
Major
Customers
The following customers or their
affiliates or contract manufacturers accounted for more than ten percent of the
Companys net sales, by geographic region.
|
Fiscal Year Ended September 30, 2010
|
|
Americas
|
|
Europe
|
|
APAC
|
|
Total
Company
|
Diabetic Customer A.................................
|
3%
|
|
1%
|
|
88%
|
|
39%
|
Diabetic Customer B..................................
|
39%
|
|
24%
|
|
2%
|
|
19%
|
Diabetic
Customer C..................................
|
3%
|
|
56%
|
|
--
|
|
15%
|
Other
Customer A......................................
|
--
|
|
13%
|
|
--
|
|
3%
|
|
|
|
Fiscal Year Ended September 30, 2009
|
|
Americas
|
|
Europe
|
|
APAC
|
|
Total
Company
|
Diabetic Customer A ................................
|
2%
|
|
1%
|
|
87%
|
|
35%
|
Diabetic Customer B .................................
|
37%
|
|
25%
|
|
1%
|
|
21%
|
Diabetic
Customer C..................................
|
1%
|
|
47%
|
|
|
|
10%
|
Other
Customer B......................................
|
6%
|
|
23%
|
|
|
|
7%
|
Other
Customer C......................................
|
15%
|
|
1%
|
|
2%
|
|
7%
|
Three customers (including their
affiliates or contract manufacturers) accounted for approximately 75% of the
Company's accounts receivable at September 30, 2010. Two customers, including
their affiliates or contract manufacturers, accounted for approximately 63% of
the Company's accounts receivable at September 30, 2009.
45
SIGNATURES
Pursuant to the requirements of the
Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned, hereunto duly authorized.
Dated: December 8, 2010
|
FORWARD
INDUSTRIES, INC.
|
|
(Registrant)
|
|
|
|
|
|
By:
/s/ Brett M. Johnson
|
|
Brett
M. Johnson
|
|
President
and Chief Executive Officer
|
|
(Principal
Executive Officer)
|
|
|
|
By:
/s/James O. McKenna
|
|
James
O. McKenna
|
|
Vice
President and Chief Financial Officer
|
|
(Principal Financial and Accounting
Officer)
|
|
|
In accordance with the Securities
Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on the dates indicated:
|
|
December 8, 2010
|
/s/Brett
M. Johnson
|
|
Brett
M. Johnson
|
|
President
and Chief Executive Officer
|
|
(Principal
Executive Officer)
|
|
|
December 8, 2010
|
/s/James
O. McKenna
|
|
James
O. McKenna
|
|
Vice President and
Chief Financial Officer
|
|
(Principal Financial Officer and
|
|
Principal
Accounting Officer)
|
|
|
December 8, 2010
|
/s/John
Chiste
|
|
John Chiste
|
|
Director
|
|
|
December 8, 2010
|
/s/Fred
Hamilton
|
|
Fred
Hamilton
|
|
Director
|
|
|
December 8, 2010
|
/s/
Frank Johnson
|
|
Frank
LaGrange Johnson
|
|
Chairman of the
Board
|
|
|
December 8, 2010
|
/s/Stephen
Key
|
|
Stephen
Key
|
|
Director
|
|
|
December 8, 2010
|
/s/Owen
King
|
|
Owen P.J. King
|
|
Director
|
|
|
46
December 8, 2010
|
/s/Louis
Lipschitz
|
|
Louis Lipschitz
|
|
Director
|
47
Exhibit Index
3.
|
Articles of Incorporation and By-Laws
|
|
|
|
3(i)
|
Amended and Restated Certificate of
Incorporation (amendment as filed by the New York Department of State on
February 12, 2010)
|
|
|
|
|
3(ii)
|
Third Amended and Restated By-Laws of
Forward Industries, Inc., as of August 10, 2010
|
|
|
|
4.
|
Instruments Defining the Rights of Security Holders
|
|
|
|
4.1
|
Shareholder Protection Rights Agreement,
dated as of June 9, 2010, by and between Forward Industries, Inc. and American
Stock Transfer & Trust Company LLC, as Rights Agent (incorporated by reference
to Exhibit 4.1 to the Companys Current Report on Form 8-K, as filed with the
Commission on June 15, 2010)
|
|
|
|
|
4.2
|
Amendment, dated as of August 10, 2010, to
Shareholder Protection Rights Agreement, dated as of June 9, 2010, by and
between Forward Industries, Inc. and American Stock Transfer & Trust
Company LLC, as Rights Agent (incorporated by reference to Exhibit 4.1 to the
Companys Current Report on Form 8-K, as filed with the Commission on August
16, 2010), which amendment terminated the Right Agreement
|
|
|
|
10.
|
|
Material Contracts
|
|
|
|
|
10.1
|
1996 Stock Incentive Plan of Forward
Industries, Inc. (incorporated by reference to Exhibit 4 to the Registration
Statement on Form S-8 of the Company, as filed on April 25, 2003).
|
|
|
|
|
10.2
|
Forward Industries, Inc. 2007 Equity
Incentive Plan, as amended (incorporated by reference to Exhibit 4.1 to the
Registration Statement on Form S-8, Reg. File No. 333-165075, of the Company,
as filed with the Commission on February 25, 2010).
|
|
|
|
|
10.3
|
Settlement Agreement, dated as of August 10,
2010, by and among Forward Industries, Inc., LaGrange Capital Partners, L.P.,
and certain Affiliates of LaGrange Capital Partners, L.P. (incorporated by
reference to Exhibit 10.1 to the Companys Current Report on Form 8-K, as filed
with the Commission on August 16, 2010)
|
|
|
|
|
10.4
|
Severance and Release Agreement, dated as of
August 10, 2010, by and between Douglas W. Sabra and Forward Industries, Inc.
(incorporated by reference to Exhibit 10.2 to the Companys Current Report on
Form 8-K, as filed with the Commission on August 16, 2010)
|
|
|
|
|
10.5
|
Employment Agreement, dated as of August 10,
2010, between Forward Industries, Inc. and James O. McKenna, (incorporated by
reference to Exhibit 10.3 to the Companys Current Report on Form 8-K, as filed
with the Commission on August 16, 2010)
|
|
|
|
|
10.6
|
Retention Agreement, dated as of August 10,
2010, between Forward Industries, Inc. and James O. McKenna, (incorporated by
reference to Exhibit 10.4 to the Companys Current Report on Form 8-K, as filed
with the Commission on August 16, 2010)
|
|
|
|
21.
|
|
Subsidiaries of the Registrant
|
|
|
|
|
21.1
|
List of Subsidiaries of Forward Industries,
Inc.
|
|
|
|
23.
|
|
Consent of Independent Registered Public
Accounting Firm
|
|
|
|
|
23.1
|
Consent of Kaufman, Rossin & Co., P.A.
relating to 1996 Stock Incentive Plan
|
|
|
|
|
23.1
|
Consent of Kaufman, Rossin & Co., P.A.
relating to 2007 Equity Compensation Plan, as amended
|
48
31.
|
|
Certifications Pursuant to Rule 13a-14(a)
(Section 302 of Sarbanes-Oxley)
|
|
|
|
|
31.1
|
Certification of Brett M. Johnson
|
|
|
|
|
31.2
|
Certification of James O. McKenna
|
|
|
|
32.
|
|
Certifications
Pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350 (Section 906 of
Sarbanes-Oxley)
|
|
|
|
|
32.1
|
Certifications of Brett M. Johnson and James
O. McKenna (furnished herewith)
|
49
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