UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
________________
FORM 10-Q
________________
[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December
31, 2010.
OR
[ ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
____ to ____.
Commission File Number: 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)
________________
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding twelve months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [
X
] Yes [
] No
Indicate by
check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (
§
232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
Yes [
X
] No
[ ]
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of large accelerated filer, accelerated
filer, and smaller reporting company in Rule 12b-2 of the Exchange Act.
[ ] Large accelerated filer
[
] 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
number of shares outstanding of the registrants common stock, par value $0.01
per share, at the latest practical date January 28, 2011, was 8,085,886 shares.
1
Forward Industries, Inc.
INDEX
PART
I.
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FINANCIAL
INFORMATION
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Page No.
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Item
1.
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Financial
Statements
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-
Consolidated Balance Sheets
as of December 31, 2010 (unaudited)
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and September 30, 2010............................................................................................................
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4
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-
Consolidated Statements of Operations
(unaudited) for the Three Months
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Ended December 31, 2010 and 2009.......................................................................................
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5
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-
Consolidated Statements of Cash Flows
(unaudited) for the Three Months
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Ended December 31, 2010 and 2009.......................................................................................
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6
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-
Notes to Consolidated Financial Statements
(unaudited)...............................................
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7
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Item
2.
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Managements
Discussion and Analysis of Financial Condition and Results of
Operations
.....................................................................................................................................
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19
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Item
3.
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Quantitative
and Qualitative Disclosures About Market Risk
...........................................
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25
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Item
4.
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Controls
and Procedures
............................................................................................................
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25
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PART
II.
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OTHER
INFORMATION
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Item
1.
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Legal
Proceedings
.......................................................................................................................
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26
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Item
1A.
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Risk
Factors
.................................................................................................................................
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26
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Item
2
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Unregistered
Sales of Equity Securities and Use of Proceeds
............................................
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27
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Item
3
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Defaults
Upon Senior Securities
..............................................................................................
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27
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Item
4.
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Removed
and Reserved
................................................................................................................
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27
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Item
5.
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Other
Information
........................................................................................................................
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27
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Item
6.
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Exhibits
..........................................................................................................................................
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27
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Signatures
.....................................................................................................................................
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28
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Certifications
................................................................................................................................
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29
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2
Note Regarding Use of Certain Terms
In
this Quarterly Report on Form 10-Q, unless the context otherwise requires, the following
terms have the meanings assigned to them as set forth below:
"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;
2011
Quarter refers to the three months ended December 31, 2010;
2010
Quarter refers to the three months ended December 31, 2009;
Fiscal
2011 refers to our fiscal year ending September 30, 2011;
Fiscal
2010 refers to our fiscal year ended September 30, 2010;
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. FINANCIAL INFORMATION
Item 1. Financial Statements
CONSOLIDATED BALANCE SHEETS
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December 31
,
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September 30
,
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2010
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2010
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Assets
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(Unaudited)
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(Note 1)
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Current assets:
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Cash and cash equivalents...........................................................................................
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$18,121,051
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$18,471,520
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Accounts receivable, net ..............................................................................................
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4,650,380
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4,621,181
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Inventories, net...............................................................................................................
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1,395,914
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1,036,386
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Prepaid expenses and other current
assets................................................................
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294,320
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240,651
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Total current assets
..........................................................................................
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24,461,665
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24,369,738
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Property and equipment, net.........................................................................................
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116,842
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115,205
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Other assets.....................................................................................................................
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46,032
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46,032
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Total Assets
........................................................................................................................
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$24,624,539
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$24,530,975
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Liabilities and shareholders equity
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Current liabilities:
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Accounts payable...........................................................................................................
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$2,772,204
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$2,439,273
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Accrued expenses and other current liabilities...........................................................
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535,128
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885,332
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Total liabilities
...................................................................................................
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3,307,332
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3,324,605
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Commitments and contingencies
....................................................................................
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Shareholders equity:
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Preferred stock, par value
$0.01 per share; 4,000,000 shares authorized;
no shares issued and outstanding.......................................................................
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--
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--
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Common stock, par value
$0.01 per share; 40,000,000 shares authorized,
8,791,296 and 8,761,629 shares
issued; and
8,084,886 and 8,055,219 shares outstanding,
respectively........................
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87,913
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87,616
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Capital in excess of par value........................................................................................
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16,562,207
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16,469,142
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Retained earnings............................................................................................................
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5,927,144
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5,909,669
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Treasury stock, 706,410 shares at cost........................................................................
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(1,260,057)
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(1,260,057)
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Total shareholders equity
...............................................................................................
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21,317,207
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21,206,370
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Total liabilities and shareholders equity
......................................................................
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$24,624,539
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$24,530,975
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The accompanying notes are an integral part of the
consolidated financial statements.
4
CONSOLIDATED STATEMENTS OF
OPERATIONS
(UNAUDITED)
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Three Months Ended
December 31
,
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2010
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2009
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Net
sales
..........................................................................................................................
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$5,968,208
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$4,126,772
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Cost of goods sold
..........................................................................................................
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4,591,675
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3,202,577
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Gross profit
.....................................................................................................................
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1,376,533
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924,195
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Operating expenses:
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Selling.......................................................................................................................
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440,992
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458,272
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General
and administrative....................................................................................
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912,320
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660,121
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Total operating expenses
..............................................................................
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1,353,312
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1,118,393
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Income (loss) from
operations
.....................................................................................
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23,221
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(194,198)
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Other (expense) income:
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Interest
income........................................................................................................
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5,654
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20,332
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Other
expense, net..................................................................................................
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(11,400)
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(13,120)
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Total other (expense) income
.......................................................................
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(5,746)
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7,212
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Net income (loss)
..........................................................................................................
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$17,475
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($186,986)
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Net income (loss) per common and common equivalent
share
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Basic.........................................................................................................................
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$0.00
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($0.02)
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Diluted......................................................................................................................
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$0.00
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($0.02)
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Weighted average number of common and common
equivalent shares
outstanding
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Basic.........................................................................................................................
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8,060,672
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7,940,257
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Diluted......................................................................................................................
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8,132,408
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7,940,257
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The accompanying notes are an integral part of the
consolidated financial statements.
5
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(UNAUDITED)
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Three Months Ended
December 31,
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2010
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2009
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Operating activities:
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Net
income (loss)....................................................................................................................
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$17,475
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($186,986)
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Adjustments to reconcile net income (loss) to net
cash used in operating activities:
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Share-based compensation...............................................................................................
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93,362
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49,963
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Depreciation and amortization..........................................................................................
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13,161
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14,935
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Provision for obsolete inventory.....................................................................................
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(7,392)
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17,437
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Changes
in operating assets and liabilities:
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Accounts
receivable..........................................................................................................
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(29,199)
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(287,890)
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Inventories...........................................................................................................................
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(352,136)
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(362,706)
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Prepaid
expenses and other current assets....................................................................
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(53,669)
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56,429
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Other
assets.........................................................................................................................
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--
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13,500
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Accounts
payable..............................................................................................................
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332,931
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1,896
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Accrued
expenses and other current liabilities..............................................................
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(350,204)
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15,982
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Net cash
used in operating activities
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(335,671)
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(667,440)
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Investing activities:
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Purchases of property and
equipment................................................................................
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(14,798)
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--
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Net cash used in
investing activities
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(14,798)
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--
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Net decrease in cash and
cash equivalents
.......................................................................
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(350,469)
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(667,440)
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Cash and
cash equivalents at beginning of period
...........................................................
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18,471,520
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20,103,502
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Cash and
cash equivalents at end of period
.......................................................................
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$18,121,051
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$19,436,062
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Supplemental Disclosures
of Cash Flow Information:
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Cash
paid for:
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Income
Taxes.................................................................................................................
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$15,000
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$--
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The accompanying notes are an integral part of the consolidated
financial statements.
6
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
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 (or the contract
manufacturing firms of these OEM customers), of these products that either
package our products as accessories in box together with their product
offerings or sell them through their retail distribution channels. OEM
customers are located in Europe, the APAC Region, and the Americas.
In the
opinion of management, the accompanying consolidated financial statements
reflect all normal recurring adjustments necessary to present fairly the
financial position and results of operations and cash flows for the interim
period presented herein, but are not necessarily indicative of the results of
operations for the fiscal year ending September 30, 2011. These financial
statements should be read in conjunction with the Company's audited
consolidated financial statements included in its annual report on Form 10-K
for the fiscal year ended September 30, 2010, and with the disclosures and risk
factors presented herein and therein, respectively. The September 30, 2010 balance
sheet has been derived from these financial statements.
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 of America
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 and Cash
Equivalents
Cash and
cash equivalents consist primarily of cash on deposit and highly liquid money
market accounts. 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. At December 31, 2010,
this amount was approximately $17.6 million. Historically, the Company has not
experienced any losses due to such cash concentrations.
7
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
NOTE
2 ACCOUNTING POLICIES (CONTINUED)
Accounts
Receivable
Accounts
receivable consist of unsecured trade accounts with various customers. The
Company performs periodic credit evaluations of its customers including an
evaluation of days outstanding, payment history, recent payment trends, and
perceived credit worthiness; 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 typically extends to its largest customers payment terms up to 90
days. The Company has not historically experienced significant credit or collection
problems with its OEM customers or their contract manufacturers. None of
these customers or their contract manufacturers is or has been in default to
the Company, and payments are generally received from them on a timely basis.
Two customers, including their affiliates and contract manufacturers, accounted
for approximately 71% and 75% of the Companys accounts receivable at December
31, 2010 and September 30, 2010, respectively. At December 31, 2010 and September
30, 2010, the allowance for doubtful accounts was approximately $19,000.
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 December 31, 2010 and September
30, 2010, the allowances for obsolete inventory were approximately $18,000 and $28,000,
respectively.
Property and
Equipment
Property 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 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
three-month periods ended December 31, 2010 and 2009, the Company recorded
approximately $13,000 and $15,000 of depreciation and amortization expense,
respectively. Depreciation and amortization for production related property 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 and equipment, is
included as a component of operating expenses in the accompanying consolidated
statements of operations.
8
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
NOTE
2 ACCOUNTING POLICIES (CONTINUED)
Income Taxes
The
Company accounts for its income taxes in accordance with accounting principles
generally accepted in the United States of America 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 5 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 the three-month periods ended
December 31, 2010 and 2009 presented in the accompanying consolidated statements
of operations no income tax related interest or penalties were assessed or
recorded.
Revenue
Recognition
We
generally recognize revenue from product sales to customers when:
(1) title and risk of loss are transferred. In general, these conditions
occur at either point of shipment or point of destination, depending on the
terms of sale; (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 reasonably assured.
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.
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 $21,000 and
$25,000 for the three-month periods ended December 31, 2010 and 2009,
respectively.
Foreign Currency
Transactions
The
functional currency of the Company and each of 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
expense, net in the accompanying consolidated statements of operations. The
net losses from foreign currency transactions were approximately $11,000 and
$13,000 for the three-month periods ended December 31, 2010 and 2009,
respectively.
Comprehensive
Loss
For the
three-month periods ended December 31, 2010 and 2009, the Company did not have
any material components of comprehensive loss other than net loss.
9
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
NOTE
2 ACCOUNTING POLICIES (CONTINUED)
Fair
value of financial instruments
For
certain of the Companys financial instruments, including cash and cash
equivalents, receivables, accounts payable, and other accrued liabilities, the
carrying amount approximates fair value due to the short-term maturities of
these instruments.
Share-Based Payment
Expense
The
Company recognizes share-based equity compensation in its consolidated
statements of operations at the grant-date fair value of our stock options and
other equity-based compensation. The determination of grant-date fair value is
estimated using an option-pricing model, which includes variables such as the
expected volatility of the Companys share price, the exercise behavior of its
grantees, interest rates, and dividend yields. These variables are projected based
on the Companys historical data, experience, and other factors. Changes in any
of these variables could result in material increases to the valuation of
options granted in future periods and increases in the expense recognized for
share-based payments. The Company has elected to recognize compensation cost
for its awards on a straight-line basis over the requisite service period for
each separately vesting portion of the award as if the award was, in-substance,
multiple awards. Refer to Note 4 Share-Based Compensation.
Recent
accounting pronouncements
In
February 2010, the FASB issued ASU No. 2010-09 Subsequent Events (ASC Topic
855) Amendments to Certain Recognition and Disclosure Requirements (ASU No.
2010-09). ASU No. 2010-09 requires an entity that is an SEC filer to evaluate
subsequent events through the date that the financial statements are issued and
removes the requirement for an SEC filer to disclose a date, in both issued and
revised financial statements, through which the filer had evaluated subsequent
events. The adoption did not have an impact on the Companys financial position
and results of operations.
In
January 2010, the FASB issued an amendment to ASC 820, Fair Value Measurements
and Disclosure, to require reporting entities to separately disclose the
amounts and business rationale for significant transfers in and out of Level 1
and Level 2 fair value measurements and separately present information
regarding purchase, sale, issuance, and settlement of Level 3 fair value
measures on a gross basis. This standard, for which the Company is
currently assessing the impact, is effective for interim and annual reporting
periods beginning after December 15, 2009 with the exception of disclosures
regarding the purchase, sale, issuance, and settlement of Level 3 fair value
measures which are effective for fiscal years beginning after December 15,
2010.
In October 2009, FASB issued an
amendment to the accounting standards related to the accounting for revenue in
arrangements with multiple deliverables including how the arrangement
consideration is allocated among delivered and undelivered items of the
arrangement. Among the amendments, this standard eliminated the use of the
residual method for allocating arrangement considerations and requires an
entity to allocate the overall consideration to each deliverable based on an
estimated selling price of each individual deliverable in the arrangement in
the absence of having vendor-specific objective evidence or other third party
evidence of fair value of the undelivered items. This standard also provides
further guidance on how to determine a separate unit of accounting in a
multiple-deliverable revenue arrangement and expands the disclosure
requirements about the judgments made in applying the estimated selling price
method and how those judgments affect the timing or amount of revenue
recognition. This standard, which became effective on October 1, 2010 has not
had a material impact on the Companys financial position and results of
operations.
10
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
NOTE
2 ACCOUNTING POLICIES (CONCLUDED)
Recent
accounting pronouncements (Concluded)
In
December 2010, the Financial Accounting Standards Board (FASB) issued
Accounting Standards Update (ASU) 2010-29, Business Combinations (ASC Topic
805): Disclosure of Supplementary Pro Forma Information for Business
Combinations. The amendments in this ASU affect any public entity as defined
by ASC Topic 805 that enters into business combinations that are material on an
individual or aggregate basis. The amendments in this ASU specify that if a
public entity presents comparative financial statements, the entity should
disclose revenue and earnings of the combined entity as though the business
combination(s) that occurred during the current year had occurred as of the
beginning of the comparable prior annual reporting period only. The amendments
also expand the supplemental pro forma disclosures to include a description of
the nature and amount of material, nonrecurring pro forma adjustments directly
attributable to the business combination included in the reported pro forma
revenue and earnings. The amendments are effective prospectively for business
combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after December 15, 2010. Early
adoption is permitted. This guidance will be effective for the Company in the
first quarter of fiscal 2012. Accordingly, the effects of the Companys
adoption of this guidance will depend upon the extent and magnitude of business
combinations the Company enters into after September 30, 2011.
NOTE 3 SHAREHOLDERS
EQUITY
Anti-takeover
Provisions
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 December 31, 2010, the Company had
repurchased an aggregate of 172,603 shares at a cost of approximately $403,000,
but none during the three-month periods ended December 31, 2010 and 2009.
11
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
Changes in
Shareholders Equity
Changes in shareholders equity for the three month
period ended December 31, 2010 is summarized below:
|
Common
Stock
|
|
Capital In
Excess of Par
Value
|
|
Retained
Earnings
|
|
Treasury
Stock
|
Balance at September 30, 2010
|
$87,616
|
|
$16,469,142
|
|
$5,909,669
|
|
($1,260,057)
|
Share based compensation.............
|
297
|
|
93,065
|
|
--
|
|
--
|
Net income........................................
|
--
|
|
--
|
|
17,475
|
|
--
|
Balance at December 31, 2010
|
$87,913
|
|
$16,562,207
|
|
$5,927,144
|
|
($1,260,057)
|
NOTE 4 SHARE
BASED COMPENSATION
In
May 2007 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.
In February 2010 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 December 31, 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 168,000. 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 Compensation Committee of the Companys Board of Directors
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 common
stock at December 31, 2010.
Stock Option
Awards
Under the 2007 Plan, the Compensation
Committee of the Companys Board of Directors has approved awards of stock
options to purchase an aggregate of 480,000 shares of common stock to the Companys
current and certain former non-employee directors, and to current and certain former
Company officers, of which awards covering 30,000 shares of common stock
expired unexercised, with such shares reverting to the 2007 Plan and eligible
for grant. Of these awards grants covering 207,500 shares were made during the three-month
period ended December 31, 2010. Awards to current non-employee directors and
(in respect of awards prior to the 2011 Quarter) current officers are subject
to a continued service condition and vest on the first anniversary of the date
the awards were granted, and awards to two current officers made during the
2011 Quarter vest in equal amounts over three to five years commencing on the
first anniversary of the grant. 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.
The
Company recognized approximately $84,000 and $19,000 of compensation expense
for stock option awards in its consolidated statements of operations for the
three-month periods ended December 31, 2010 and 2009, respectively.
12
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
NOTE 4 SHARE
BASED COMPENSATION (CONTINUED)
Stock Option
Awards (continued)
The
following table summarizes stock option activity under the 2007 Plan and the
1996 Plan from September 30, 2010 through December 31, 2010:
|
Shares
|
|
Weighted
Average
Exercise
Price
|
|
Weighted
Average
Remaining
Contractual
Term (Years)
|
|
Aggregate
Intrinsic
Value
|
Outstanding at September 30, 2010
|
187,500
|
|
$3.66
|
|
8.3
|
|
|
Granted..............................................
|
207,500
|
|
3.54
|
|
9.9
|
|
|
Exercised............................................
|
--
|
|
--
|
|
--
|
|
|
Forfeited............................................
|
--
|
|
--
|
|
--
|
|
|
Expired...............................................
|
--
|
|
--
|
|
--
|
|
|
Outstanding at December 31, 2010
|
395,000
|
|
$3.60
|
|
9.0
|
|
$117,000
|
|
|
|
|
|
|
|
|
Options expected
to vest.......................
|
395,000
|
|
$3.60
|
|
9.0
|
|
$117,000
|
|
|
|
|
|
|
|
|
Options
vested and exercisable at
December
31, 2010.........................
|
112,500
|
|
$4.14
|
|
7.3
|
|
$79,000
|
During the three month periods ended December 31, 2010 and 2009, the Company granted
207,500 and 22,400 stock options at a weighted average grant date fair value of
$2.16 and $1.28, respectively.
Stock Option
Awards
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 Three-Month Periods Ended
December
31,
|
|
|
2010
|
|
2009
|
Expected term (in years)...................................................
|
|
5.0
|
|
5.0
|
Risk-free
interest rate........................................................
|
|
1.2% to 2.0%
|
|
2.3%
|
Expected
volatility.............................................................
|
|
68% to 69%
|
|
77.7%
|
Expected dividend yield...................................................
|
|
0%
|
|
0%
|
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 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.
13
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
NOTE 4 SHARE
BASED COMPENSATION (CONTINUED)
Restricted Stock Awards
Under the
2007 Plan as of December 31, 2010, the Compensation Committee of the Companys
Board of Directors had approved and granted awards of 183,500 shares of restricted stock, in the aggregate, to
certain key employees. Of these awards, 132,335 have vested and 1,500 shares of
restricted stock were forfeited and reverted to, and are eligible for re-grant
under, the 2007 Plan. No awards of restricted stock were made during the three
months ended December 31, 2010. Vesting of restricted stock awards is
generally subject to a continued service condition with one-third of the awards
vesting each year on the three successive anniversary dates 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 three-month periods ended December
31, 2010 and 2009, the Company recognized approximately $10,000 and $31,000,
respectively, of compensation cost in its consolidated statements of operations
related to restricted stock awards.
The following table summarizes restricted stock activity under the 2007
Plan from September 30, 2010, through December 31, 2010.
|
|
Shares
|
|
Weighted
Average
Grant Date
Fair Value
|
Non-vested balance at September 30,
2010.......................................
|
|
79,332
|
|
$2.07
|
Changes during the period:
|
|
|
|
|
Shares granted...............................................................................
|
|
--
|
|
--
|
Shares vested.................................................................................
|
|
(29,667)
|
|
$2.05
|
Shares forfeited..............................................................................
|
|
--
|
|
--
|
Non-vested balance at December 31, 2010........................................
|
|
49,665
|
|
$2.08
|
As
of December 31, 2010, there was approximately $38,000 of total unrecognized
compensation cost related to 49,665 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)
periods.
Warrants
As
of December 31, 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 December 31, 2010, no such
registration statement has been filed with the Securities and Exchange
Commission.
14
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
NOTE 5 INCOME TAXES
The Companys provision (benefit) from income taxes consists of the
following United States Federal and State, and foreign components:
|
For the Three-Month Periods
Ended December
31,
|
|
2010
|
|
2009
|
U.S.
Federal and State
|
|
|
|
Current......................................................................................................
|
$
--
|
|
$
--
|
Deferred....................................................................................................
|
(30,336)
|
|
(49,460)
|
|
|
|
|
Foreign:
|
|
|
|
Current......................................................................................................
|
--
|
|
--
|
Deferred....................................................................................................
|
10,018
|
|
(4,144)
|
|
|
|
|
Change in valuation
allowance...................................................................
|
20,318
|
|
53,604
|
Benefit from income taxes
|
$
--
|
|
$
--
|
As of December 31, 2010, and September 30, 2010, the
Company has no unrecognized tax benefits related to U.S. federal and state
income tax matters. As of December 31, 2010 and September 30, 2010, the
Company has not accrued any 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.
All fiscal years prior to the fiscal year ended September 30, 2007 are closed
to Federal and State examination, except with respect ot net operating losses
generated in prior fiscal years.
At December
31, 2010, the Company had available net operating loss carryforwards primarily for
state income tax purposes of approximately $1,423,000 expiring through 2030 and
resulting in a deferred tax asset of approximately $115,000. In addition, at
December 31, 2010, the Company had available net operating loss carryforwards
for foreign income tax purposes of approximately $1,239,000 resulting in a
deferred tax asset of approximately $109,000, expiring through 2017. Total deferred tax assets,
before reserve for valuation allowances, was $421,000 and $401,000 at December
31, 2010 and September 30, 2009, respectively. As of September 30, 2010, the
undistributed earnings of the Companys Swiss subsidiary of $928,000 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 December 31, 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 (except in respect of United States income taxes in the
event the Company elects to effect the repatriation of certain foreign source
income of its Swiss subsidiary, which income is currently considered to be
permanently invested and for which no United States tax liability has been
accrued). Accordingly, the Company has determined to maintain a full valuation
allowance against its deferred tax assets; accordingly, as of December 31, 2010
and September 30, 2010, the valuation allowances were approximately $421,000
and $401,000, 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 Income tax benefit line item of the
Companys consolidated statements of operations.
15
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
NOTE 6 EARNINGS
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 period. Dilutive
common-equivalent shares consist of shares that would be issued upon the
exercise of stock options and warrants, computed using the treasury stock
method. A total of 60,000 common stock equivalents have been excluded from the
calculation of earnings per share for the three-month period ended December 31,
2010, because their inclusion would be anti-dilutive. Loss per share data for
the three-month period ended December 31, 2009, excludes all outstanding common
equivalent shares as inclusion of such shares would be anti-dilutive.
Calculation of basic and diluted earnings per share is as follows:
|
Three Months Ended December 31,
|
|
2010
|
|
2009
|
Numerator:
|
|
|
|
Net income (loss)
|
$17,475
|
|
($186,986)
|
Denominator:
|
|
|
|
Denominator for basic earnings per share - weighted average shares
|
8,060,672
|
|
7,940,257
|
Dilutive stock options and warrants -
treasury stock method
|
32,599
|
|
--
|
Dilutive unvested restricted stock
|
39,137
|
|
--
|
Denominator for diluted earnings per share -
weighted average shares
|
8,132,408
|
|
7,940,257
|
Net
income per common share:
|
|
|
|
Basic
|
$0.00
|
|
($0.02)
|
Diluted
|
$0.00
|
|
($0.02)
|
Shares excluded due to antidilution
|
60,000
|
|
290,665
|
NOTE 7 OPERATING
SEGMENT INFORMATION
The Company
operates in a single segment: the supply of carrying solutions for portable
electronic devices and other consumer products. This carrying-solution segment includes
the design, marketing, and distribution of products to its customers that include
manufacturers of consumer hand held medical monitoring and diagnostic kits, bar
code scanners, GPS and location devices, and cellular telephones as well as laptop
computers, MP3 players, firearms, sporting, recreational, and aeronautical
products. The Companys carrying solution segment operates in geographic
regions that include primarily the APAC, the Americas, and Europe. Geographic
regions are defined by reference primarily to the location of the customer or
its contract manufacturer. The following table presents net sales related
to these geographic segments:
|
(all amounts in thousands of dollars)
|
|
Three Months Ended
December 31,
|
|
2010
|
|
2009
|
APAC...........................................................................................................
|
$2,734
|
|
$1,871
|
Americas......................................................................................................
|
1,936
|
|
1,601
|
Europe .........................................................................................................
|
1,298
|
|
655
|
Total net sales............................................................................................
|
$5,968
|
|
$4,127
|
16
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
NOTE 8 COMMITMENTS
AND CONTINGENCIES
Employment and Retention Agreements
Pursuant
to an Employment Agreement, dated as of August 10, 2010, between the Company and
James O. McKenna, the Company agreed to employ Mr. McKennas as its Chief
Financial Officer and Treasurer at a salary of $175,000 per annum until
expiration of the term on December 31, 2011. 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 agreement is renewable for successive one year periods unless
either party gives notice of non-renewal not less than 90 days prior to expiration.
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).
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. This expense in the amount of $75,000 is reflected in the
statement of operations for the three month period ended December 31, 2010.
NOTE 8 COMMITMENTS
AND CONTINGENCIES (CONTINUED)
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 $100,000 as of December 31, 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 $928,000 at December 31, 2010). As of December 31, 2010, the
Company had not incurred a liability in connection with this guarantee.
17
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
Letter of Intent
During
the first fiscal quarter of 2011 the Company entered into a Letter of Intent to
acquire Flash Ventures, Inc., (Flash Ventures) a Delaware corporation and a
distributor of consumer electronics peripherals and accessories specializing in
accessory products bearing professional team and college team sports logos
acquired under license. The Company intends to use commercially
reasonable efforts to reach a definitive merger agreement, subject to
satisfaction of due diligence review, regulatory approvals, financing, employee
retention, and other closing conditions, as well as subject to approval of the
parties respective boards of directors of any such definitive agreement.
If any such agreement is consummated, as to which there can be no
assurance, it is anticipated that consideration paid by the Company may involve
one or more of the issuance of shares of its capital stock, cash payments at
closing, post-closing contingent payments, and/or the incurrence of
indebtedness.
In
connection with a closing of any acquisition pursuant to the letter of intent
the Companys investment banker, Morgan Joseph & Co., Inc. will be entitled
to payment by the Company of a fee of $225,000 pursuant to the Companys
engagement letter with Morgan Joseph entered into in October 2009, as
subsequently amended, in
addition to reimbursement of Morgan Joseph's out of pocket expenses.
Depending on the valuation of Flash Ventures pursuant to any
definitive agreement, the fee payable to Morgan Joseph may be greater than the
above amount. Under the engagement letter, the Company may under certain
circumstances be required to indemnify Morgan Joseph in respect of certain
liabilities arising under the Federal Securities Act of 1933.
In
November 2010, prior to entering into the letter of intent, the Company
recorded approximately $377,000 in sales to Flash Ventures under its customary
terms of sale.
NOTE 9 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 December 31, 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.
NOTE 10 SUBSEQUENT
EVENTS
In
connection with the Companys letter of intent to acquire Flash Ventures (refer
to Note 8 Commitments and Contingencies above) on January 5, 2011, the Company
entered into a loan agreement with Flash Ventures to loan it up to $1,000,000.
Pursuant to the agreement Flash Ventures executed an unsecured, unsubordinated
term note in favor of the Company, bearing interest at 11% per annum on any
unpaid principal, payable quarterly commencing March 31, 2011. Principal
of the note is payable upon maturity on December 1, 2011 (subject to
acceleration in case of an event of default, as specified in the agreement),
together with unpaid interest and any fees, expenses, and other amounts owing
to the Company. On January 6, 2011, and January 19, 2011, Flash Ventures
drew $600,000 and $400,000, respectively, in funds under the note, leaving no
further funding available. Repayment of the amounts borrowed under the
agreement and note are not contingent on reaching a definitive acquisition
agreement pursuant to the letter of intent.
18
ITEM
2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The
following discussion and analysis should be read in conjunction with our
unaudited consolidated financial statements, and the notes thereto, and other
financial information appearing elsewhere in this Quarterly Report on Form 10-Q
and the audited consolidated financial statements and notes thereto included in
our Annual Report on Form 10-K for the fiscal year ended September 30, 2010.
The following discussion and analysis compares our consolidated results of
operations for the three months ended December 31, 2010 (the 2011 Quarter),
with those for the three months ended December 31, 2009 (the 2010 Quarter). 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 looking to the future. 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 Quarterly Report are based upon
assumptions and assessments that we believe to be reasonable as of the date of
this Quarterly 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 of this Quarterly
Report on Form 10-Q and those identified in Risk Factors in Item 1A of
Forwards Annual Report on Form 10-K for the fiscal year ended September 30,
2010, 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 and whether gains in net sales arising from this strategy, if any,
will be adequate to offset increased operating expense incurred in executing
the strategy; variability in order flow from our OEM customers; OEM customers
decisions to reduce or eliminate their practice of including our 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 contained herein or in our
Annual Report on Form 10-K for the fiscal year ended September 30, 2010, can be
realized or that actual returns, results, or business prospects will not differ
materially from those set forth in any forward looking statement.
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.
BUSINESS OVERVIEW
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.
In August 2010, we appointed a new chairman of the board and a new
chief executive officer who, respectively, succeeded the outgoing acting
chairman of the board and chief executive officer under the terms of a Settlement
Agreement, as more fully described in our recently filed proxy statement under
the caption Security Ownership of Certain Beneficial Owners and Management and
Related Shareholder MattersSettlement Agreement and in our Current Report on
Form 8-K filed with the Commission on August 16, 2010.
Trends and Economic Environment
Our
new management team has stated its commitment to growing our OEM business and
to its pursuit of a more marketing- and product development-driven business
model. The second part of this strategy involves initiatives to expand
our product offerings and to develop a retail distribution channel, in addition
to our OEM channel. In executing the second part of this strategy, we are
likely to incur significantly increased selling, general, and administrative
expenses as we devote resources to develop and/or acquire new product offerings
and a retail sales capability and to the related recruitment of experienced
sales and marketing professionals. 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.
With
regard to our OEM business, we believe that the recent level of net sales
appears to be sustainable, subject always to material changes in order flow
from our major OEM diabetic product customers, where our business remains
highly concentrated. We continue to operate in a very challenging pricing and
gross margin environment with these customers. We continue to make
progress in building sales and diversifying our OEM customer base in our other
products sales line. We believe that we can build on the 10% growth in
revenue that was contributed by other products in Fiscal 2010.
Previously,
we disclosed our intention to expand and/or diversify our business by means of
acquisition. In December we announced the entry into a letter of intent
to acquire a private distributor and developer of consumer electronics
peripherals and accessories. If an acquisition under this letter of intent were
to be consummated, as to which there can be no assurance, 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 Note 8 of Notes to Financial Statements set forth elsewhere in this
Quarterly Report and our Current Report on Form 8-K as filed with the
Commission on December 9, 2010.
20
Variability of Revenues
and Results of Operations
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.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
This
managements discussion and analysis of financial condition and results of
operations is based upon or derived from the unaudited consolidated financial
statements included in this Quarterly Report on Form 10-Q, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements requires
us to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues, and expenses, and related disclosure of contingent
liabilities. We base these judgments and estimates on our historical experience
and on various other assumptions that we believe to be reasonable under the
circumstances, and these judgments form the basis for our estimates concerning
the carrying values of assets and liabilities that are not readily apparent
from other sources. We periodically re-evaluate these estimates and judgments
based on available information and experience. Actual results could differ from
our estimates under different assumptions and conditions. If actual results
significantly differ from our estimates, our financial condition and results of
operations could be materially impacted.
We
discuss the material accounting policies that are critical in making these
estimates and judgments in our Annual Report on Form 10-K for the fiscal year
ended September 30, 2010, under the caption Managements Discussion and
AnalysisCritical Accounting Policies and Estimates. There has been no
material change in critical accounting policies or estimates since September
30, 2010, except those described below.
The
notes to our audited consolidated financial statements contained in our Annual
Report on Form 10-K for the year ended September 30, 2010, and the notes to our
unaudited consolidated financial statements included in Part I, Item 1 of this Quarterly
Report on Form 10-Q contain additional information related to our accounting
policies and should be read in conjunction with the following discussion and
analysis relating to our overall financial performance, operations and
financial position.
Share-Based Payment
Expense
We
recognize share-based equity compensation in our consolidated statements of
operations at the grant-date fair value of our stock options and other
equity-based compensation. The determination of grant-date fair value is
estimated using an option-pricing model, which includes variables such as the
expected volatility of our share price, the exercise behavior of our employees,
interest rates, and dividend yields. These variables are projected based on our
historical data, experience, and other factors. Changes in any of these variables
could result in material increases to the valuation of options granted in
future periods and increases in the expense recognized for share-based
payments. Refer to Note 4 Share-Based Compensation to our consolidated
financial statements included in Part I, Item 1 of this Quarterly Report on
Form 10-Q.
RESULTS OF
OPERATIONS FOR THE 2011 QUARTER COMPARED TO THE 2010 QUARTER
Net income
We
recorded net income of $17 thousand in the 2011 Quarter, compared to a net loss
of $0.2 million in the 2010 Quarter. The improvement in the 2011 Quarter
resulted from higher gross profit on higher sales, offset in part by higher
operating expenses, as shown in the table below:
21
Main Components of Net Loss
|
|
(thousands of dollars)
|
|
2011
Quarter
|
2010
Quarter
|
Increase
(Decrease)
|
Net
Sales...................................................................................................
|
$5,968
|
$4,127
|
1,841
|
|
|
|
|
Gross
Profit...............................................................................................
|
1,377
|
924
|
452
|
Selling, General and Administrative
Expenses....................................
|
(1,353)
|
(1,118)
|
235
|
Other (Expense)
Income..........................................................................
|
(6)
|
7
|
(13)
|
Benefit from Income
Taxes.....................................................................
|
--
|
--
|
|
Net Income (Loss)*.................................................................................
|
$17
|
($187)
|
204
|
* Table may not
total due to rounding.
Basic and diluted per share data was income of $0.00
for the 2011 Quarter, compared to a loss of ($0.02) for the 2010 Quarter. The improvement
in the 2011 Quarter compared to the 2010 Quarter was due to the increase in operating
income.
Net Sales
Net
sales increased $1.8 million, or 45%, to $6.0 million in the 2011 Quarter from
$4.1 million in the 2010 Quarter, due to higher sales of Diabetic Products and
Other Products, which increased $1.1 million and $0.7 million, respectively,
in the 2011 Quarter. The tables below set forth sales by product line and
geographic location of our customers for the periods indicated.
Net Sales for 2011 Quarter
3 Months
ended
December 31, 2010
(millions of dollars)
|
|
APAC
|
Americas
|
Europe
|
Total*
|
Diabetic Products..................................
|
$2.5
|
$0.7
|
$1.0
|
$4.2
|
Other Products.......................................
|
0.2
|
1.2
|
0.3
|
1.7
|
Total*
|
$2.7
|
$1.9
|
$1.3
|
$6.0
|
Net Sales for 2010 Quarter
3 Months ended
December
31
, 2009
(millions of dollars)
|
|
APAC
|
Americas
|
Europe
|
Total*
|
Diabetic Products..................................
|
$1.6
|
$0.8
|
$0.7
|
$3.1
|
Other Products.......................................
|
0.3
|
0.8
|
--
|
1.0
|
Total*
|
$1.9
|
$1.6
|
$0.7
|
$4.1
|
* 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) of these electronic, diagnostic
kits made for use by diabetics. 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 in certain programs
furnishes them as promotional items.
Sales
of cases and related accessories for blood glucose monitoring kits increased
$1.1 million, or 38%, to $4.2 million in the 2011 Quarter, from $3.1 million in
the 2010 Quarter. This increase was due primarily to higher sales to one major
diabetic product customer as well as smaller increases to our two other
principal OEM diabetic customers, as presented in the table below, which sets
forth our sales by diabetic product customer for the periods indicated.
22
|
(millions of dollars)
|
|
2011 Quarter
|
2010 Quarter
|
Increase
(Decrease)
|
Diabetic Customer
A.....................................................
|
$2.5
|
$1.7
|
0.8
|
Diabetic Customer
B.....................................................
|
1.0
|
0.8
|
0.2
|
Diabetic Customer
C.....................................................
|
0.7
|
0.5
|
0.2
|
All other Diabetic
Customers......................................
|
0.1
|
0.1
|
--
|
Totals*....................................................................
|
$4.2
|
$3.1
|
$1.1
|
* Table may not total
due to rounding.
Sales
of carrying cases for blood glucose monitoring kits represented 71% of our
total net sales in the 2011 Quarter compared to 75% of our total net sales in
the 2010 Quarter.
Other
Product Sales
We
design and 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.
Sales
of other products increased $0.7 million, or 64%, to $1.7 million in the 2011
Quarter from $1.0 million in the 2010 Quarter. This increase was due primarily to
several new customers, for which we recorded first time sales in the 2011
Quarter of $0.9 million, in the aggregate. Included in this amount, and the
largest single sale for the 2010 Quarter, is $0.4 million of non-recurring
sales to Flash Ventures, Inc., the company that we are proposing to acquire
pursuant to a letter of intent (refer to Note 8 Commitments and Contingencies
in the footnotes to the Unaudited Consolidated Financial Statements herein).
These new customer sales were partially offset by lower sales to a number of existing
customers. None of these declines are individually material.
Sales
of other products represented 29% of our net sales in the 2011 Quarter compared
to 25% of net sales in the 2010 Quarter.
Gross Profit
Gross
profit of $1.4 million in the 2011 Quarter increased $0.5 million, or 49%, from
$0.9 million in the 2010 Quarter. This improvement resulted primarily from the
45% increase in sales revenues (refer to Net Sales section above), offset in
part by relatively higher materials costs and higher freight costs. Cost
of goods sold as a percentage of sales was 77% in the 2011 Quarter, compared to
78% the 2010 Quarter, which is primarily a net result of a 3.6% decrease in the
costs of our Hong Kong based operations as a percentage of sales (due primarily
to lower local freight costs incurred) nearly offset by a 3.5% increase in our
materials costs as a percentage of sales due to the introduction of certain
products for new other product customers into our product mix.
Gross
profit as a percentage of net sales was 23% in the 2011 Quarter compared to 22%
in the 2010 Quarter.
Selling Expenses
Selling
expenses of $0.4 million in the 2011 Quarter decreased $17 thousand, or 4%,
from the 2010 Quarter due primarily to a $32 thousand decrease in personnel
costs and related travel and entertainment expenses and auto expense, and to a
lesser extent, a decrease in sampling costs. These decreases were offset, in
part, by small increases in utilities, office, and other selling expenses.
23
General
and Administrative Expenses
General
and Administrative expenses increased $0.3 million, or 38%, to $0.9 million in
the 2011 Quarter from $0.7 million in the 2010 Quarter due primarily to a $0.2
million increase in personnel costs, including $75 thousand of bonus to retain
a current Company officer (refer to Note 8 Commitments and Contingencies
Employment and Retention Agreements) and a $40 thousand increase in share-based
compensation, primarily due to the 200,000 stock option award to a current
Company officer in the 2011 Quarter (refer to Note 4 Share Based
Compensation). Increases in other general and administrative,
professional fees, travel and entertainment, and office expenses of $66
thousand, $27 thousand, $26 thousand, and $14 thousand, respectively, also
contributed to the increase. These increases were offset, in part, by a
decrease in rent expense of $47 thousand.
Other (Expense) Income
Other
(expense) income, consisting primarily of interest income on cash and cash
equivalent balances and foreign currency transaction gains and losses, declined
$13 thousand to $6 thousand of expense in the 2011 Quarter, from $7 thousand of
income in the 2010 Quarter. This resulted from a $15 thousand decline in
interest income in the 2011 Quarter, due primarily to lower average interest
rates in the 2011 Quarter on slightly lower cash balances compared to the 2010
Quarter. Exchange rate changes on foreign currency cash balances were not
material in either the 2011 Quarter or the 2010 Quarter.
Net Income (Loss)
Net
income improved to $17 thousand in the 2011 Quarter compared to a net loss of $0.2
million in the 2010 Quarter as a result of the changes as described above.
LIQUIDITY AND CAPITAL
RESOURCES
During
the 2011 Quarter, we used $0.3 million of cash in operations compared to a use
of $0.7 million in the 2010 Quarter. Net cash used in operating activities in
the 2011 Quarter consisted of net income of $17 thousand, adjusted by $0.1
million for non-cash items, reduced by changes in working capital items of $0.5
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 $29 thousand, $0.4 million, and $54 thousand, respectively.
A decrease in accrued expenses and other current liabilities of $0.4 million
also contributed to uses of cash. These changes were offset, in part, by an
increase of $0.3 million in accounts payable, which generated cash in operating
activities. The increases in inventories and accounts payable are a result of
purchases made in support of sales orders received and also reflect the ramping
up of production in anticipation of the Chinese New Year. The decrease in
accrued expenses and other current liabilities is primarily due to payments
made during the 2011 Quarter in respect of items accrued as of September 30,
2010: (i) $83 thousand in severance payments to a former officer of the Company
under the August 2010 Settlement Agreement; (ii) $140 thousand in shareholder
settlement costs under the August 2010 Settlement Agreement; and (iii) $175
thousand in sales commissions.
In
the 2010 Quarter, operating activities used $0.7 million of cash, consisting of
a net loss of $0.2 million (reduced by $82,000 for non-cash items), and $0.6
million for net changes in working capital items. Changes in inventories and
accounts receivable of $0.3 million and $0.4 million, respectively, contributed
to the net cash used by operating activities. These uses of working capital
were partially offset by changes in prepaid expenses and other current assets,
accrued expenses and other current liabilities, other assets, and accounts
payable.
In
the 2011 Quarter, net investing activities used $15 thousand for purchases of
property and equipment, primarily computer and telecommunications hardware and
software. There were no investing activities in the 2010 Quarter. There were no
financing activities in the 2010 Quarter or the 2009 Quarter.
24
In
January 2011, and not reflected in the above analysis of the 2011 Quarter, we
loaned $1,000,000 to Flash Ventures pursuant to a note and loan agreement,
maturing in December 2011. The Company and Flash Ventures have entered
into a letter of intent pursuant to which it is proposed that the Company will
acquire Flash. See Notes 8 and 10 to Notes to Unaudited Consolidated
Financial Statements. We believe these funds were borrowed by Flash to
refinance indebtedness that was used for working capital
requirements.
At
December 31, 2010, our current ratio (current assets divided by current
liabilities) was 7.4; our quick ratio (current assets less inventories divided
by current liabilities) was 7.0; and our working capital (current assets less
current liabilities) was $21.2 million. As of such date, we had no short
or long-term debt outstanding.
Our
primary source of liquidity is our cash and cash equivalents on hand. The
primary demands on our working capital are: operating losses to the extent they
occur 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. Managements recently announced business strategy includes (i)increasing
the Companys existing OEM business and (ii) expanding its product offerings
and diversifying its distribution by moving into the retail channel. An acquisition
of Flash Ventures pursuant to the letter of intent referred to above, if
consummated, would form an integral part of such strategy. 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, as well as the assumption (or modification) of
commitments to certain employees of Flash. See Note 8 to Notes to
Financial Statements, Commitments and ContingenciesLetter of Intent. We
anticipate that our liquidity and financial resources for the next twelve
months will be adequate to manage our operating and financial requirements. However,
in contrast to prior periods when the maintenance of cash balances and cost
containment were primary objectives, we anticipate significant use of our
capital resources as a result of one or more of the following developments in
future periods: (i) cash payments as consideration arising out of a definitive
agreement to acquire Flash Ventures or another transaction; (ii) increases in
operating expenses in our implementation of managements strategy (see Trends
and Economic Environment above); and (iii) varying scenarios in repayment of
the loan referred to above depending on the outcome of such acquisition.
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 December 31, 2009, we had repurchased an aggregate of
172,603 shares at a cost of approximately $0.4 million but none during Fiscal
2010 or the 2011 Quarter.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
Not
applicable.
ITEM
4. 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.
25
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 fiscal
quarter covered by this Quarterly Report. 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 2011 Quarter, 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.
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 2011 Quarter. 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 2011
Quarter that has materially affected, or is reasonably likely to materially
affect, the Company's internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM
1. LEGAL PROCEEDINGS
From
time to time, the Company may become a party to legal actions or proceedings in
the ordinary course of its business. As of December 31, 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
1A. RISK FACTORS
Please
review our Annual Report on Form 10-K for the fiscal year ended September 30,
2010, for a complete statement of Risk Factors that pertain to our business.
Please refer to ITEM 2. CAUTIONARY STATEMENT FOR PURPOSES OF THE SAFE HARBOR PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995 on page 19 of this Quarterly
Report on Form 10-Q as well as Managements Discussion and Analysis of
Financial Condition and Results of Operations for further discussion of certain
of such risk factors.
The
following paragraphs set forth two risk factors from our Annual Report on Form
10-K for the year ended September 30, 2010, that are updated for purposes of
this Quarterly Report.
We
have previously announced our intention to diversify our business by means of
acquisition or other business combination
.
Our
new management team has announced a business strategy to grow our OEM business,
expand product offerings and technology solutions, and develop or acquire retail
distribution capability. Management stated that an acquisition
within the technology accessories business might, in the right circumstances,
be complementary with the strategy it has identified. In December 2010,
we announced entry into a letter of intent to acquire Flash Ventures Inc., a distributor
of consumer electronics peripherals and accessories specializing in accessory
products bearing professional team and college team sports logos acquired under
license with a significant retail presence. If such 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 such acquisition,
or a different one, 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.
Our
business strategy is to develop and grow our existing business and to expand
into retail; to the extent that operating expenses trend significantly higher
before we realize higher revenues, our operating results may be adversely and
materially affected
.
26
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 and a retail presence, including resources to recruit and
compensate experienced sales and marketing professionals. 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.
ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
During the 2011 Quarter we did not issue or sell any
securities that were not registered under the Securities Act of 1933.
During the 2011 Quarter we did not purchase any common stock or other equity
securities pursuant to publicly announced plans or programs or
otherwise.
ITEM
3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM
4. REMOVED AND RESERVED
ITEM
5. OTHER INFORMATION
None
ITEM 6. EXHIBITS
31.1
Certification of the Chief Executive
Officer under Section 302 of the Sarbanes-Oxley Act of 2002
31.2
Certification of the Chief Financial
Officer under Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification
of the Chief Executive Officer and Chief Financial Officer under Section 906 of
the Sarbanes-Oxley Act of 2002
27
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: February 9, 2011
|
|
|
FORWARD
INDUSTRIES, INC.
|
|
(Registrant)
|
|
|
|
|
|
By:
/s/ Brett M.
Johnson
|
|
|
|
Brett
M. Johnson
|
|
Chief
Executive Officer
|
|
(Principal
Executive Officer)
|
|
|
|
|
|
By:
/s/James O. McKenna
|
|
|
|
James
O. McKenna
|
|
Chief
Financial Officer
|
|
(Principal
Financial and Accounting Officer)
|
28
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