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 June
30, 2011.
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
|
13-1950672
|
(State or other jurisdiction of
|
(I.R.S.
Employer Identification No.)
|
incorporation or organization)
|
|
3110 Main St., Suite 400, Santa Monica, CA 90405
(Address of principal executive offices, including zip
code)
(310) 526-3005
(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 August 10, 2011, was
8,087,886
shares.
1
Forward Industries, Inc.
INDEX
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.;
"Forward US" refers to Forward Industries wholly owned subsidiary
Forward Industries (IN), Inc. (formerly 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 Switzerland refers to Forward Industries wholly owned subsidiary Forward
Industries (Switzerland) GmbH (formerly Forward Innovations GmbH), a Swiss
corporation;
Forward
JAFZA refers to Forward Industries registered branch office in the Jebel Ali
Free Zone of the United Arab Emirates;
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 June 30, 2011;
2010
Quarter refers to the three months ended June 30, 2010;
2011
Period refers to the nine months ended June 30, 2011;
2010
Period refers to the nine months ended June 30, 2010;
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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June 30
,
|
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September 30
,
|
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2011
|
|
2010
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Assets
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(Unaudited)
|
|
(Note 1)
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Current assets:
|
|
|
|
Cash and cash equivalents...........................................................................................
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$15,459,220
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$18,471,520
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Accounts receivable, net ..............................................................................................
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4,932,793
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4,621,181
|
Inventories, net...............................................................................................................
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1,287,553
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|
1,036,386
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Notes receivable.............................................................................................................
|
1,218,269
|
|
--
|
Prepaid expenses and other current
assets................................................................
|
481,485
|
|
240,651
|
Total current assets
..........................................................................................
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23,379,320
|
|
24,369,738
|
|
|
|
|
Property and equipment, net.........................................................................................
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206,846
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|
115,205
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Other assets.....................................................................................................................
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108,601
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|
46,032
|
Total Assets
........................................................................................................................
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$23,694,767
|
|
$24,530,975
|
|
|
|
|
Liabilities and shareholders equity
|
|
|
|
Current liabilities:
|
|
|
|
Accounts payable...........................................................................................................
|
$2,850,614
|
|
$2,439,273
|
Accrued expenses and other current liabilities...........................................................
|
587,028
|
|
885,332
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Total liabilities
...................................................................................................
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3,437,642
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|
3,324,605
|
|
|
|
|
Commitments and contingencies
....................................................................................
|
|
|
|
|
|
|
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Shareholders equity:
|
|
|
|
Preferred stock, par value
$0.01 per share; 4,000,000 shares authorized;
no shares issued and outstanding.......................................................................
|
--
|
|
--
|
Common stock, par value
$0.01 per share; 40,000,000 shares authorized,
8,794,296 and 8,761,629 shares
issued; and
8,087,886 and 8,055,219 shares outstanding,
respectively........................
|
87,943
|
|
87,616
|
Capital in excess of par value........................................................................................
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16,739,607
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|
16,469,142
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Retained earnings............................................................................................................
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4,689,632
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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)
|
|
(1,260,057)
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Total shareholders equity
...............................................................................................
|
20,257,125
|
|
21,206,370
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Total liabilities and shareholders equity
......................................................................
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$23,694,767
|
|
$24,530,975
|
The accompanying notes are an integral part of the
consolidated financial statements.
4
CONSOLIDATED
STATEMENTS OF
OPERATIONS
(UNAUDITED)
|
|
|
|
|
Three Months Ended
June 30
,
|
|
Nine Months Ended
June 30
,
|
|
2011
|
|
2010
|
|
2011
|
|
2010
|
Net
sales
.........................................................................
|
$6,156,543
|
|
$5,058,392
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$17,121,017
|
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$13,604,845
|
Cost of goods sold
.........................................................
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4,717,260
|
|
3,787,101
|
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13,150,934
|
|
10,415,616
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Gross profit
...................................................................
|
1,439,283
|
|
1,271,291
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3,970,083
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3,189,229
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|
|
|
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|
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Operating expenses:
|
|
|
|
|
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Sales
and marketing..............................................
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950,328
|
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556,749
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2,053,767
|
|
1,548,307
|
General
and administrative..................................
|
1,258,564
|
|
690,163
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3,270,475
|
|
1,901,698
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Total operating expenses
............................
|
2,208,892
|
|
1,246,912
|
|
5,324,242
|
|
3,450,005
|
|
|
|
|
|
|
|
|
(Loss) income from
operations
.................................
|
(769,609)
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|
24,379
|
|
(1,354,159)
|
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(260,776)
|
|
|
|
|
|
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|
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Other income (expense):
|
|
|
|
|
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Interest
income.....................................................
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33,798
|
|
6,927
|
|
69,201
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|
35,959
|
Other
(expense) income, net..............................
|
(2,963)
|
|
(14,306)
|
|
8,871
|
|
(57,363)
|
Total other income (expense)
...................
|
30,835
|
|
(7,379)
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78,072
|
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(21,404)
|
|
|
|
|
|
|
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Net (loss) income before
taxes
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(738,774)
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17,000
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(1,276,087)
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(282,180)
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Benefit from income
taxes
|
56,050
|
|
--
|
|
56,050
|
|
--
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Net (loss) income
......................................................
|
$(682,724)
|
|
$17,000
|
|
$(1,220,037)
|
|
$(282,180)
|
|
|
|
|
|
|
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Net (loss) income per common and common equivalent
share
|
|
|
|
|
|
|
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Basic
and diluted...............................................
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($0.08)
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$0.00
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($0.15)
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($0.04)
|
|
|
|
|
|
|
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Weighted average number of common and common
equivalent shares outstanding
|
|
|
|
|
|
|
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Basic
.................................................................
|
8,087,139
|
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7,987,285
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8,077,803
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7,964,070
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Diluted..............................................................
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8,087,139
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8,149,837
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8,077,803
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7,964,070
|
The accompanying notes are an integral part of the
consolidated financial statements.
5
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(UNAUDITED)
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|
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Nine Months Ended
June 30,
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|
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2011
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|
2010
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Operating activities:
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Net
loss....................................................................................................................................
|
|
($1,220,037)
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($282,180)
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Adjustments to reconcile net loss to net cash used
in operating activities:
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Share-based compensation...............................................................................................
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270,792
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165,908
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Depreciation and amortization..........................................................................................
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45,415
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40,990
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Provision for obsolete inventory.....................................................................................
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15,692
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16,913
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Loss on disposal of property and equipment................................................................
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15,373
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2,227
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Provision for bad debts.....................................................................................................
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1,222
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|
8,875
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Changes
in operating assets and liabilities:
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|
|
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Accounts
receivable..........................................................................................................
|
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(312,834)
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(916,765)
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Inventories...........................................................................................................................
|
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(266,859)
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(397,676)
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Prepaid
expenses and other current assets....................................................................
|
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(269,103)
|
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(89,832)
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Other
assets.........................................................................................................................
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(62,569)
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13,500
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Accounts
payable..............................................................................................................
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411,341
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864,995
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Accrued
expenses and other current liabilities..............................................................
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(298,304)
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279,620
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Net cash
used in operating activities
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(1,669,871)
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(293,425)
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Investing activities:
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|
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|
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Issuance of notes
receivable................................................................................................
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|
(1,190,000)
|
|
--
|
Purchases of property and
equipment................................................................................
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(152,429)
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|
--
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Net cash used in
investing activities
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(1,342,429)
|
|
--
|
|
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|
|
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Financing activities:
|
|
|
|
|
Proceeds from exercise of
stock options.. .................
|
|
--
|
|
67,000
|
Net cash provided by
financing activities
|
|
--
|
|
67,000
|
Net decrease in cash and
cash equivalents...............
|
|
(3,012,300)
|
|
(226,425)
|
Cash and
cash equivalents at beginning of period
...........................................................
|
|
18,471,520
|
|
20,103,502
|
|
|
|
|
|
Cash and
cash equivalents at end of period
.......................................................................
|
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$15,459,220
|
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$19,877,077
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|
|
|
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Supplemental Disclosures
of Cash Flow Information:
|
|
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Cash
paid for:
|
|
|
|
|
Income
Taxes.................................................................................................................
|
|
$77,104
|
|
$2,052
|
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 as a manufacturer of specialty promotional items. 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. The Company 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. The Company is currently developing retail
distribution channel capability for products broadly similar to those
distributed to its OEM clients.
In the
opinion of management, the accompanying consolidated financial statements
presented in this Quarterly Report on Form 10-Q reflect all normal recurring
adjustments necessary to present fairly the financial position and results of
operations and cash flows for the interim periods presented herein, but are not
necessarily indicative of the results of operations for the 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 the audited consolidated
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, the amounts of which may significantly
exceed FDIC insured limits, and in Europe. At June 30, 2011, this amount was
approximately $15.3 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 customers or their contract
manufacturers. 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 62% and 75% of the Companys
accounts receivable at June 30, 2011 and September 30, 2010, respectively. At June
30, 2011 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 June 30, 2011 and September 30, 2010, the
allowances for obsolete inventory were approximately $41,000 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 June 30, 2011 and 2010, the Company recorded
approximately $17,000 and $13,000 of depreciation and amortization expense,
respectively. For the nine-month periods ended June 30, 2011 and 2010, the
Company recorded approximately $45,000 and $41,000 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 net tax 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 6 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 and nine-month periods ended June 30, 2011 and
2010 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) collection of the related accounts receivable is reasonably assured.
Shipping and
Handling Costs
The
Company classifies shipping and handling costs (including inbound and outbound freight
charges, purchasing and receiving costs, inspection costs, warehousing costs,
internal transfer costs, and other costs associated with the Companys Hong
Kong distribution facility and network) as a component of cost of goods sold in
the accompanying consolidated statements of operations.
Advertising
Expenses
Advertising
costs, consisting primarily of samples, tradeshow fees and expenses, and
website development costs, are expensed as incurred. Advertising costs are
included in selling expenses in the accompanying consolidated statements of
operations and amounted to approximately $42,000 and $35,000 for the
three-month periods ended June 30, 2011 and 2010, respectively, and $125,000
and $84,000 for the nine-month periods ended June 30, 2011 and 2010,
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 income
(expense), net in the accompanying consolidated statements of operations. Foreign
currency transaction results were approximately $11,000 and ($14,000) in gains
(losses) for the three-month periods ended June 30, 2011 and 2010,
respectively, and approximately $21,000 and ($57,000) in gains (losses) for the
nine-month periods ended June 30, 2011 and 2010, respectively. The Companys
foreign currency transaction gains and losses are primarily the result of Euro
denominated sales to certain customers.
Comprehensive
Loss
For the
three and nine-month periods ended June 30, 2011 and 2010, 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, accounts receivable, 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 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. In the case of awards with multiple vesting periods,
the Company has elected to use the graded vesting attribution method, which recognizes
compensation cost on a straight-line basis over each separately vesting portion
of the award as if the award was, in-substance, multiple awards. Refer to Note
5 Share-Based Compensation.
Recent
accounting pronouncements
In June 2011, the Financial
Accounting Standards Board (FASB) issued Comprehensive Income (Topic 220)
Presentation of Comprehensive Income (Accounting Standards Update (ASU) No.
2011-05), which updates the Codification to require the presentation of the
components of net income, the components of other comprehensive income (OCI)
and total comprehensive income in either a single continuous statement of
comprehensive income or in two separate, but consecutive statements of net
income and comprehensive income. These updates do not affect the items reported
in OCI or the guidance for reclassifying such items to net income. These
updates to the Codification are effective for interim and annual periods
beginning after December 15, 2011. The Company does not expect the
implementation of this guidance to have a material impact on its consolidated
financial statements.
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, 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. The
adoption did not have an impact on the Companys financial position and results
of operations.
10
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
NOTE 2 ACCOUNTING POLICIES (CONTINUED)
Recent accounting pronouncements (Continued)
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.
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 NOTES
RECEIVABLE
In connection with
the Companys letter of intent to acquire Flash Ventures, Inc. (Flash), see
Note 11 to these Notes to Financial Statements, on January 5, 2011, the Company
entered into a loan agreement with Flash Ventures to provide a credit facility
of up to $1,000,000. Pursuant to the agreement Flash 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
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, which was terminated on April 14, 2011.
11
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
NOTE 3 RECEIVABLE (CONTINUED)
On June 22, 2011, the Company loaned $190,000 to a prospective joint venture
partner, a developer of protective cases for the consumer electronics industry, in consideration of its issuance of an unsecured, short-term promissory note in
such principal amount.. The promissory note bears interest at 9% per annum on
any unpaid principal. The principal amount, together with accrued and unpaid
interest, is payable in full on or before maturity on September 22, 2011.
Based on the representation of the prospective partner, proceeds of the loan are
being used for working capital purposes related to the proposed joint venture.
See Note 12 Subsequent Events.
NOTE 4 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 June 30, 2011, the Company had repurchased an
aggregate of 172,603 shares at a cost of approximately $403,000, but none
during the three and nine-month periods ended June 30, 2011 and 2010.
Changes in
Shareholders Equity
Changes in shareholders equity for the nine-month
period ended June 30, 2011 are 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.............
|
327
|
|
270,465
|
|
--
|
|
--
|
Net loss..............................................
|
--
|
|
--
|
|
(1,220,037)
|
|
--
|
Balance at June 30, 2011
|
$87,943
|
|
$16,739,607
|
|
$4,689,632
|
|
($1,260,057)
|
12
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
NOTE 5 SHARE BASED
COMPENSATION
2011 Long Term
Incentive Plan
In
March 2011 shareholders of the Company approved the 2011
Long Term Incentive Plan (the 2011 Plan), which authorizes 850,000 shares of
common stock for grants of various types of equity awards to officers,
directors, and employees. In March 2011, the Compensation Committee of
the Companys Board of Directors (the Compensation Committee) approved awards
of stock options to purchase an aggregate of 305,000 shares of common stock to
certain of the Companys current executive officers and certain employees
(245,000 shares) and to current non-employee directors (60,000 shares). As of
June 30, 2011, the total shares of common stock available for grants of equity
awards under the 2011 Plan was 565,000. The prices at which equity awards may
be granted and the exercise prices of stock options granted may not be less
than the fair market value of the common stock as quoted at the close on the
Nasdaq Stock Market on the grant date. The Compensation Committee administers
the plan. Options generally expire ten years after the date of grant and vest
one year from the date of grant for non-employee directors, and, in the case of
initial grants to officers and employees, vest over five years with 50%, 25%
and 25% vesting on the third, fourth, and fifth anniversary of the grant date,
respectively.
2007 Equity
Incentive Plan
The
2007 Equity Incentive Plan (the 2007 Plan), which was approved by
shareholders of the Company in May 2007, and, as amended, in February 2010,
authorizes an aggregate of 800,000 shares of common stock for grants of
restricted common stock and stock options to officers, employees, and
non-employee directors of the Company. As of June 30, 2011, the total shares of
common stock available for grants of equity awards under the 2007 Plan was 20,366.
The prices 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 as quoted at the close on the Nasdaq Stock Market on the grant
date. The Compensation Committee administers the 2007 Plan. Options generally
expire ten years after the date of grant, and in the case of non-employee
directors, vest on the first anniversary of the date of grant. In the case of
officers and employees, options either vest in equal amounts over three to five
years or vest over five years with 50%, 25% and 25% vesting on the third,
fourth, and fifth anniversary of the grant date, respectively. Restricted stock
grants generally vest in equal proportions over three years.
During
the quarter ended March 31, 2011, the Compensation Committee modified an option
grant of 200,000 shares to an executive in 2010 by adjusting the vesting
schedule to be consistent with options granted to other executives and
employees of the Company in March 2011. Accordingly, said option grant, which
previously contained a vesting provision of 20% per year, has been modified to
50% in year 3, 25% in year 4 and 25% in year 5. This modification has no
impact on total compensation recorded on these grants.
1996 Stock
Incentive Plan
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. In general, options
under this plan expire ten years after the date of grant and generally vest in
equal proportions over three years. Unexercised options granted prior to 1996
Plan expiration remain outstanding until the earlier of exercise or option
expiration. Under the 1996 Plan 30,000 fully vested common stock options are
the only awards that remain outstanding and unexercised, all at exercise prices
higher than the fair market value of the common stock at June 30, 2011.
13
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
NOTE 5 SHARE BASED
COMPENSATION (CONTINUED)
Stock Option
Awards
Under the 2011 and 2007 Plans, the
Compensation Committee has approved awards of stock options to purchase an aggregate
of 957,500 shares of common stock to the Companys current (except for a
director newly elected in May 2011) and certain former non-employee directors,
and to current and certain former Company officers, of which awards covering 40,000
shares from the 2007 Plan and 20,000 shares from the 2011 Plan of common stock
expired unexercised, with such shares reverting to the respective plans and
eligible for grant. Of these awards grants covering 685,000 shares were made
during the nine-month period ended June 30, 2011. The exercise prices of the
awards granted was, in each case equal, to the closing market value of the
Companys common stock on the Nasdaq Stock Market on the various grant dates.
The
Company recognized approximately $132,000 and $30,000 of compensation expense
for stock option awards in its consolidated statements of operations for the
three-month periods ended June 30, 2011 and 2010, respectively, and $272,000
and $78,000 for the nine-month periods ended June 30, 2011 and 2010,
respectively. As of June 30, 2011, there was approximately $1,179,000 of total
unrecognized compensation cost related to 690,000 shares of unvested stock
option awards granted under the 2007 and 2011 Plans. That cost is expected to
be recognized over the remainder of the weighted average vesting period
(extending to March 2016).
The
following table summarizes stock option activity under the 2011 Plan, 2007
Plan, from September 30, 2010 through June 30, 2011 (there was no activity
during such period in respect of 1996 Plan grants):
|
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...........................................
|
685,000
|
3.67
|
9.2
|
|
Exercised........................................
|
--
|
--
|
--
|
|
Forfeited.........................................
|
30,000
|
3.73
|
--
|
|
Expired............................................
|
--
|
--
|
--
|
|
Outstanding at June 30, 2011
|
842,500
|
$3.67
|
9.1
|
$47,300
|
|
|
|
|
|
Options
expected to vest....................
|
842,500
|
$3.67
|
9.1
|
$47,300
|
|
|
|
|
|
Options
vested and exercisable at
June
30, 2011................................
|
152,500
|
$3.69
|
7.3
|
$44,100
|
14
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
NOTE 5 SHARE BASED
COMPENSATION (CONTINUED)
Stock Option
Awards (Continued)
During the nine-month periods ended June 30, 2011 and 2010, the Company granted
685,000 and 87,500 stock options at weighted average grant date fair values of
$2.09 and $2.35, respectively.
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 Nine-Month Periods Ended June 30,
|
|
|
2011
|
|
2010
|
Expected
term (in years)....................................................
|
|
5.0
|
|
5.0
|
Risk-free
interest rate........................................................
|
|
0.3% to 2.2%
|
|
2.26% to 2.33%
|
Expected
volatility.............................................................
|
|
66% to 69%
|
|
74% to 78%
|
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.
Restricted Stock Awards
Under the
2007 Plan, as of June 30, 2011, the Compensation Committee has approved and
granted awards of 183,500 shares of
restricted stock, in the aggregate, to certain key employees. Of these awards,
133,335 have vested and 16,366 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 nine months ended June 30, 2011. 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 of the grant date, typically commencing on the
first such anniversary date. The fair value of the awards granted was equal to
the closing market value of the Companys common stock as quoted on the Nasdaq
Stock Market on the grant date. During the three-month periods ended June 30,
2011 and 2010, the Company recognized approximately ($15,000) and $28,000,
respectively, of compensation in its consolidated statements of operations
related to restricted stock awards. During the nine-month periods ended June 30,
2011 and 2010, the Company recognized approximately ($1,000) and $87,000,
respectively, of compensation cost in its consolidated statements of operations
related to restricted stock awards. The compensation recognized in the
three - month period ended June 30, 2011 reflects a forfeiture adjustment, which
has reduced the amount of expense.
15
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
NOTE 5 SHARE BASED COMPENSATION (CONTINUED)
Restricted Stock Awards
(continued)
The following table summarizes restricted stock activity under the 2007
Plan from September 30, 2010, through June 30, 2011.
|
|
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..........................................................................
|
|
32,667
|
|
2.08
|
Shares forfeited.......................................................................
|
|
14,866
|
|
2.12
|
Non-vested balance at June 30, 2011...........................................
|
|
31,799
|
|
$2.04
|
As of June 30, 2011, there was
approximately $18,000 of total unrecognized compensation cost related to 31,799
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 (approximately 18 months).
Warrants
As
of June 30, 2011, warrants to purchase 75,000 shares of the Companys common
stock at an exercise price of $1.75 issued in fiscal 1999 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 June 30, 2011,
no such registration statement has been filed with the Securities and Exchange
Commission.
NOTE 6 INCOME TAXES
The Companys provision (benefit) for income taxes consists of the
following United States Federal and State, and foreign components:
|
For the Three-Month Periods
Ended June 30,
|
|
For the Nine-Month Periods
Ended June 30,
|
|
2011
|
|
2010
|
|
2011
|
|
2010
|
U.S.
Federal and State
|
|
|
|
|
|
|
|
Current...................................
|
($56,050)
|
|
$ --
|
|
($56,050)
|
|
$ --
|
Deferred.................................
|
(271,354)
|
|
35,378
|
|
(511,677)
|
|
(35,034)
|
|
|
|
|
|
|
|
|
Foreign:
|
|
|
|
|
|
|
|
Current...................................
|
|
|
|
|
--
|
|
|
Deferred.................................
|
10,056
|
|
(1,527)
|
|
30,027
|
|
(9,768)
|
|
|
|
|
|
|
|
|
Change
in valuation allowance
|
261,298
|
|
(33,851)
|
|
481,650
|
|
44,802
|
Benefit
from income taxes
|
($56,050)
|
|
$ --
|
|
($56,050)
|
|
$ --
|
The
benefit from income taxes of $56,050 recorded in the three-month period ended
June 30, 2011 is attributable to income taxes recoverable in respect of
Fiscal 2010. As of June 30, 2011, and September 30, 2010, the Company has no
unrecognized tax benefits related to U.S. Federal and state income tax matters.
16
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
NOTE 6 INCOME TAXES
(CONTINUED)
At June
30, 2011, the Company had available net operating loss carryforwards for U.S.
federal and state income tax purposes of approximately $1,692,000 and $2,637,000,
respectively, expiring through 2030, resulting in deferred tax assets in
respect of U.S. federal and state income taxes of approximately $575,000 and
$99,000, respectively. In addition, at June 30, 2011, the Company had available
net operating loss carryforwards for foreign income tax purposes of approximately
$1,012,000 resulting in a deferred tax asset of approximately $89,000, expiring
through 2017. Total deferred tax assets, before valuation allowances, was
$883,000 and $401,000 at June 30, 2011 and September 30, 2010, respectively. As
of September 30, 2010, the undistributed earnings of the Companys Swiss subsidiary
of $970,000 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 June 30, 2011, as part of
its periodic evaluation of the necessity 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; as of June 30, 2011 and September
30, 2010, the valuation allowances were approximately $883,000 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 Provision (benefit) for Income Taxes line item
of the Companys consolidated statements of operations.
As of June 30, 2011 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 to
net operating losses generated in prior fiscal years.
17
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
NOTE 7 (LOSS) /
INCOME 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. Loss per share data for the three and nine-month periods ended June 30,
2011 and the nine-months ended June 30, 2010, exclude 539,299 and 108,798,
respectively, of outstanding common equivalent shares as inclusion of such
shares would be anti-dilutive. Calculation of basic and diluted earnings per
share for the three-month period ended June 30, 2010 is as follows:
|
June 30, 2010
|
Numerator:
|
|
|
Net income
|
|
$17,000
|
Denominator:
|
|
|
Denominator for basic earnings per share - weighted
average shares
|
|
7,987,285
|
Dilutive stock options and
warrants - treasury stock method
|
|
54,054
|
Dilutive unvested restricted
stock
|
|
108,498
|
Denominator for diluted
earnings per share - weighted average shares
|
|
8,149,837
|
|
|
|
Net income per common share:
|
|
|
Basic
|
|
$0.00
|
Diluted
|
|
$0.00
|
Shares excluded due to anti-dilution
|
|
30,000
|
18
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
NOTE 8 OPERATING
SEGMENT INFORMATION
The Company
operates in a single segment: the supply of carrying/protective 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 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
June 30,
|
|
Nine Months Ended
June 30,
|
|
2011
|
|
2010
|
|
2011
|
|
2010
|
APAC.....................................................
|
$2,744
|
|
$1,804
|
|
$7,944
|
|
$5,755
|
Americas................................................
|
1,768
|
|
1,876
|
|
5,054
|
|
4,832
|
Europe ...................................................
|
1,643
|
|
1,378
|
|
4,122
|
|
3,018
|
Total net sales*....................................
|
$6,156
|
|
$5,058
|
|
$17,120
|
|
$13,605
|
*Totals may not total
due to rounding
NOTE 9 COMMITMENTS
AND CONTINGENCIES
Employment and Retention Agreements
Mr.
Brett M. Johnson, the Companys Chief Executive Officer, receives salary at the
rate of $250,000 per annum and serves in such capacity without a written
employment agreement. Until such time as the Company and Mr. Johnson enter into
a definitive written agreement, it is the parties understanding that the terms
of Mr. Johnsons compensation upon termination will be the equivalent of those
of his predecessor, which provided for severance payment equal to one years
salary in the event of termination without cause.
Pursuant
to an Employment Agreement, dated as of August 10, 2010, between the Company
and James O. McKenna, Mr. McKenna serves as the Companys Chief Financial
Officer and Treasurer.
Pursuant to a Retention Agreement, dated as of August
10, 2010, between the Company and Mr. McKenna, the Company paid $175,000 to Mr.
McKenna on March 1, 2011, upon the satisfactory completion of the performance
period. $125,000 of this amount is reflected in the General and administrative
expenses in the statement of operations for the nine month period ended June
30, 2011, but none in the three month period ended June 30, 2011.
On
March 7, 2011, the Compensation Committee approved changes in the terms of
compensatory arrangements with Mr. McKenna under his employment agreement with
the Company, subject to and effective upon his relocation to California in
connection with moving the Companys executive offices to Los Angeles, which
condition was subsequently satisfied. The changes relate to salary, housing
allowance/relocation, and termination, as described below. Other terms of the
executives employment agreement remain unchanged.
Salary:
increase of base salary to $225,000 per annum from $175,000 per annum.
Housing
Allowance/Relocation:
(i) Payment of a housing allowance of $7,500 per
month, or $90,000 per annum. The allowance will be phased out over time
according to a schedule approved by the Compensation Committee. (ii) Reimbursement
of the executives reasonable out-of-pocket costs incurred in the relocation, and
current monthly expense in respect of his existing lease of his house in
Florida up to July 2011.
19
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
NOTE 9 COMMITMENTS
AND CONTINGENCIES (CONTINUED)
Employment and Retention Agreements (Continued)
Termination
of Employment.
In case of termination for good reason or without cause, in
either case within the first 36 months after relocation, the Companys
reimbursement for out-of-pocket costs incurred in connection with a return to
Florida will not exceed 12 months of such expense.
The
foregoing summary is qualified in its entirety by the terms of executives new
employment agreement, which is attached as an exhibit to the Companys
Quarterly Report on Form 10-Q filed with the Commission on May 11, 2011.
Guarantee Obligation
In
February 2010, Forward Switzerland, a wholly owned subsidiary, 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 on 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 $109,000 as of June 30,
2011) 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 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
$929,000 at June 30, 2011). As of June 30, 2011, the Company had not incurred a
liability in connection with this guarantee.
20
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
NOTE 9 COMMITMENTS AND CONTINGENCIES (CONTINUED)
Lease Commitments
The Company rents certain of its facilities under
leases expiring at various dates through September 2016 as shown in the
following table:
For
the fiscal years ending September 30:
|
|
Amount
|
|
|
|
2011
(for the remaining three months).......................................................................................
|
|
$115,000
|
2012.................................................................................................................................................
|
|
486,000
|
2013.................................................................................................................................................
|
|
354,000
|
2014.................................................................................................................................................
|
|
354,000
|
2015.................................................................................................................................................
|
|
178,000
|
Thereafter.......................................................................................................................................
|
|
178,000
|
Total
lease commitments
........................................................................................................
|
|
$1,665,000
|
NOTE 10 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 June 30, 2011, 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 11 LETTER OF
INTENT
On November 16,
2010, the Company entered into a Letter of Intent to acquire Flash Ventures,
Inc. (Flash) a Delaware corporation and a distributor of consumer electronics
peripherals and accessories. The Company terminated the Letter of Intent on
April 14, 2011. The Company recorded approximately $449,000 in sales to Flash
under its customary terms of sale during the nine months ended June 30, 2011.
NOTE 12 SUBSEQUENT
EVENTS
On July 26,
2011, the Company loaned an additional $300,000 to the same prospective joint
venture partner referred to in Note 3 Notes Receivable in consideration of
its issuance of an unsecured, short term promissory note in such principal
amount. The promissory note bears interest at 9% per annum on any unpaid principal.
The principal amount, together with accrued and unpaid interest, is payable in
full on or before maturity on September 22, 2011, the same maturity date as the
loan made in June. Based on the representation of the entity, proceeds of the
loan are being used for working capital purposes related to the proposed joint
venture.
21
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 June 30, 2011 (the 2011 Quarter), with
those for the three months ended June 30, 2010 (the 2010 Quarter), and our
consolidated results of operations for the nine months ended June 30, 2011 (the
2011 Period) with those for the nine months ended June 30, 2010 (the (2010
Period). 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 and in Part II, Item
1.A 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 impact on our results of operations of greatly increased
selling, general, and administrative expenses resulting from implementation of
our strategy to develop internally a retail distribution capability and develop
products to sell through that channel; the timing of managements ability to
successfully execute its business plan and strategy such that gains in gross
profit arising from this strategy, if any, will eventually more than offset
increased operating expense incurred in executing the strategy; 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; the
adverse impact on gross profit of rising materials, labor and other costs of
goods sold charged by our China vendors coupled with constraints on our
inability to raise prices; 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; 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 or resumption of 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; the failure of borrowers Flash
Ventures and a prospective joint venture participant to repay amounts borrowed
under notes receivable owed us as and when due; 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 Quarterly 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.
22
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 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.
In addition to our OEM business, we are currently engaged in building a
multi-channel distribution capability to the retail, corporate, on-line, as
well as OEM markets. In our efforts to develop these channels, we have brought
considerable resources to bear in the hire of experienced sales, design,
logistics, and operations professionals. At the same time, we are working
with multiple prospective partners on multiple fronts to consummate joint
venture, licensing, or straight purchase arrangements to develop a broadly
diversified portfolio of intellectual property in the consumer electronics
accessories market. We seek to identify the Forward brand with innovation in
electronics accessories. In tandem with these efforts, we remain committed to our
OEM business and customer base.
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.
Trends and Economic Environment
In
executing the channel-building and product development elements of our
strategy, we have begun to incur, and we are likely to continue to incur,
significantly increased selling, general, and administrative expenses as we
devote resources to recruit, hire and compensate experienced sales, design,
operations, and administrative professionals and to develop and/or acquire new
product offerings. Insofar as most of our new personnel were not hired until
well into the 2011 Period, this and succeeding reporting periods will begin to
reflect more fully such investments in resources, while the anticipated benefits
of those hires in the form of increased sales and gross profit will take longer
to be realized. While the 2011 Quarter already reflects a significantly higher
level of operating expense, additional hires are contemplated, and we do not
believe that operating expenditure levels will peak until approximately the
middle of our next fiscal year, ending September 30, 2012. At the same time,
we are investing resources in bringing new products to market, particularly in
terms of funding product development activities with prospective partners. We
anticipate that the measure of success of our strategy as reflected in our
results of operations will be determined by the strength of new distribution
channels, by the speed in which we can bring new products to market, and by the
success and acceptance of these products in the marketplace. See Part II, Item
1.A., Risk Factors, of this Quarterly Report on Form 10-Q.
23
With
regard to our OEM business, we have recently been awarded several large
programs by two major customers. We anticipate that these programs will begin
to contribute meaningfully to revenues beginning in late fiscal 2012. While these new programs will increase our
sales volume, we anticipate that gross margins on certain of these new or
prospective programs will be lower than the gross margins seen in the first
part of Fiscal 2011. Our business remains highly concentrated by customer and
product type, especially in the diabetic case product line. However, as we
indicated in previous reports, we intended to build on the 10% growth in
revenue that was contributed by other products in Fiscal 2010, and thus far
in Fiscal 2011, we have exceeded such targets. Accordingly, even as diabetic
product sales continue to increase, we believe that we are making progress in
diversifying the customer base.
We
continue to operate in a very challenging pricing and gross margin environment
with our OEM customers. The global economy continues to face headwinds, and
our OEM customers remain very price sensitive. As reflected in the gross
profit discussions below, we are encountering higher costs from our China-based
suppliers due to materials and labor price increases, placing continuing
pressure on profit margins. We are actively looking at other geographic
regions to expand and diversify our manufacturing capabilities in order to
mitigate this trend.
Cost
pressures did not impact gross profit in diabetic product sales as
significantly as other products sales during the 2011 Period, because, among
other factors, suppliers did not push price increases as vigorously in mature
diabetic product programs, which constitute the large majority of our sales. In
subsequent reporting periods, however, as the expected launch of new and
replacement diabetic programs increasingly replace mature programs, we
anticipate that the impact of materials and labor cost increases from our
China-based suppliers will become more evident in this product line and gross
profit generally. Product mix factors may exacerbate this trend. In many
cases, we are not able to pass higher costs through to customers, particularly
when replacement program products resemble their predecessor or historically
similar products for which customers have become accustomed to a narrow price
range.
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 estimates and judgments 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.
24
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 5
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 (loss)
income
We
recorded a net loss of $0.7 million in the 2011 Quarter, compared to net income
of $17 thousand in the 2010 Quarter. The $0.7 million swing from net income to
a net loss in the 2011 Quarter resulted from higher operating expenses, offset,
in small part, by higher gross profit on higher sales, income tax benefit, and
higher other income, as shown in the table below:
Main Components of Net Loss For Three
Months Ended June 30
|
|
(thousands of dollars)
|
|
2011
Quarter
|
2010
Quarter
|
Increase
(Decrease)
|
Net Sales.....................................................................................................
|
$6,157
|
$5,058
|
$1,098
|
|
|
|
|
Gross Profit.................................................................................................
|
1,439
|
1,271
|
168
|
Sales and Marketing Expenses................................................................
|
(950)
|
(557)
|
394
|
General and Administrative Expenses
|
(1,259)
|
(690)
|
568
|
Other Income (Expense)............................................................................
|
31
|
(7)
|
38
|
Benefit from Income Taxes.......................................................................
|
56
|
--
|
56
|
Net (loss) income*....................................................................................
|
($683)
|
$17
|
($700)
|
* Table may not
total due to rounding.
Basic and diluted per share data was a loss $(0.08) for
the 2011 Quarter, compared to income of $0.00 for the 2010 Quarter.
Net Sales
OEM
net sales increased $1.1 million, or 22%, to $6.2 million in the 2011 Quarter
from $5.1 million in the 2010 Quarter, due to higher sales of Diabetic Products
and Other Products, which increased $0.8 million and $0.3 million, respectively,
in the 2011 Quarter compared to the 2010 Quarter. The tables below set forth
sales by product line and geographic location of our customers for the periods
indicated.
25
Net Sales for 2011 Quarter
3 Months ended
June 30, 2011
(millions of dollars)
|
|
APAC
|
Americas
|
Europe
|
Total*
|
Diabetic Products..................................
|
$2.3
|
$0.7
|
$1.3
|
$4.3
|
Other Products.......................................
|
0.4
|
1.1
|
0.4
|
1.9
|
Total*
|
$2.7
|
$1.8
|
$1.6
|
$6.2
|
Net Sales for 2010 Quarter
3 Months ended
June
30
, 2010
(millions of dollars)
|
|
APAC
|
Americas
|
Europe
|
Total*
|
Diabetic Products..................................
|
$1.6
|
$0.8
|
$1.1
|
$3.5
|
Other Products.......................................
|
0.2
|
1.1
|
0.3
|
1.6
|
Total*
|
$1.8
|
$1.9
|
$1.4
|
$5.1
|
* Tables may
not total due to rounding.
OEM 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 $0.8
million, or 21%, to $4.3 million in the 2011 Quarter, from $3.5 million in the
2010 Quarter. This increase was due primarily to higher sales to two of our
major diabetic product customers, offset, in part, by a decrease in sales to
our third major diabetic customer. The following table sets forth our sales by
diabetic product customer for the periods indicated.
|
Diabetic Sales By Customer for the Three
Months Ended June 30,
(millions of dollars)
|
|
2011 Quarter
|
2010 Quarter
|
Increase
(Decrease)
|
Diabetic Customer A......................................................
|
$2.0
|
$1.6
|
$0.4
|
Diabetic Customer B......................................................
|
0.9
|
1.2
|
(0.3)
|
Diabetic Customer C......................................................
|
1.1
|
0.6
|
0.5
|
All other Diabetic Customers.......................................
|
0.3
|
0.1
|
0.2
|
Totals*.....................................................................
|
$4.3
|
$3.5
|
$0.8
|
|
|
|
|
|
* Table may not total
due to rounding.
Sales
of carrying cases for blood glucose monitoring kits represented 69% of our
total net sales in the 2011 Quarter and the 2010 Quarter.
OEM 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.
26
Sales
of other products increased $0.3 million, or 22%, to $1.9 million in the 2011
Quarter from $1.5 million in the 2010 Quarter. This increase was due primarily to
higher sales to several major customers within this product line. Smaller
changes in a number of Other Product customers largely offset each other, none
of which changes individually was material.
Sales
of other products represented 31% of our net sales in both the 2011 Quarter and
the 2010 Quarter.
Gross Profit
Gross
profit increased $0.2 million, or 13%, to $1.4 million in the 2011 Quarter from
$1.3 million in the 2010 Quarter. The increase resulted primarily from the $1.1
million, or 22%, increase in sales revenues (refer to Net Sales section
above), and to a lesser extent, from a decrease in absolute terms in tooling
and packaging, and warehousing costs, and decreases in freight, duties and
customs costs and Hong Kong costs as a percentage of sales. These factors were
offset in significant part by increases in materials costs, as described below.
Gross
profit margin declined from 25% in the 2010 Quarter to 23% in the 2011 Quarter,
due primarily to a rise in material costs, which as a percentage of sales,
increased 4% in the 2011 Quarter compared to the 2010 Quarter. The increase in
material costs was attributable primarily to product sales in our Other
Products line, where we experienced lower average margins on sales to the four
largest customers for the current quarter. Beyond factors specific to certain
other products sales, we are, in general, experiencing increased materials,
labor, and other production costs from suppliers, especially in respect of new
and replacement programs for diabetic case products, but the impact of pricing
pressures on mature programs sales in this product line remained relatively
muted in the 2011 Quarter.
Sales and Marketing Expenses
Sales
and marketing expenses increased $0.4 million, or 71%, to $1.0 million in the
2011 Quarter compared to $0.6 million in the 2010 Quarter. The significantly
higher level of expense reflects our focus on growing sales generally,
developing our capability to sell into multiple channels, developing new
products (particularly for retail), and the ramp-up of necessary resources
applied to achieve these goals, and is primarily due to the following:
-
$0.2 million increase in personnel expense due to i)
restructuring and growth of our sales force and ii) higher sales commissions
incurred in respect of the higher sales levels achieved in the 2011 Quarter;
-
$0.1 million increase in travel and entertainment
expenses incurred by new sales and sales support personnel added globally
during Fiscal 2011 primarily in connection with development of our
prospective retail sales business.
-
$46 thousand increase in product development, design
costs, promotional and sampling costs; and
-
$43 thousand increase in general office and telecommunication expenses.
Lesser fluctuations in
other components of sales and marketing expenses were immaterial.
General
and Administrative Expenses
General
and administrative expenses increased $0.6 million, or 82%, to $1.3 million in
the 2011 Quarter from $0.7 million in the 2010 Quarter due primarily to the
following:
27
-
$0.5 million increase in personnel costs and related travel and
entertainment expenses resulting from: i) addition of information technology,
operations, and accounting personnel during Fiscal 2011; ii) salary increases
and retention inducements incurred to retain and relocate certain personnel to
the Companys executive office in California; iii) increased payroll taxes and benefits
attributable to such additional headcount and higher wage base; iv) associated
higher level of share based compensation awards; v) travel and entertainment
expenses associated with higher travel to establish offices in California and
coordination of global operations and sales teams;
-
$138 thousand increase in the aggregate in recurring telecommunications
costs (resulting from hosting and connectivity charges associated with the
Companys upgrade of its information technology infrastructure, as well as
cellular telephone charges), occupancy costs (resulting from higher rent and
related expense in respect of the Companys new executive offices in
California), and general office costs; and
-
$53 thousand increase in public and other costs (primarily
director fees and share based compensation to directors).
These increases were offset, in part, by a $85
thousand decrease in professional fees (primarily legal, and to a lesser
extent, financial and accounting) primarily reflecting 2010 Quarter expenses
incurred in connection with transactions leading to the August 2010 settlement
agreement with no analogous items in the 2011 Quarter.
The hire of additional and replacement personnel, in
part, support the anticipated increase in operations, finance, and information
technology function demands arising from anticipated sales from new distribution
channels and, in part, replace Florida personnel who were not retained in
connection with the relocation of our executive offices to California, at the
higher salaries prevailing in that market. Increased expense in the general
and administrative expense mirrors increases in selling expenses as the Company
transitions from an OEM business only.
Other Income (Expense)
Other
income (expense), consisting of interest income on cash and cash equivalent
balances and on short term notes receivable (refer to Note 3 Notes
Receivable), as well as foreign currency transaction gains and losses, improved
to $31 thousand of income in the 2011 Quarter from $7 thousand of expense in
the 2010 Quarter. This was primarily due to an increase in interest income of $27
thousand for the 2011 Quarter (primarily attributable to interest income
received in respect of the Flash promissory note), and to a lesser extent, a
$11 thousand change to foreign currency transactions gain in the 2011 Quarter
from a loss in the 2010 Quarter. Exchange rate changes on foreign currency cash
balances were not material in either the 2011 Quarter or the 2010 Quarter.
RESULTS OF OPERATIONS FOR THE 2011 PERIOD COMPARED TO THE 2010 PERIOD
Net Loss
We
recorded a net loss of $1.2 million in the 2011 Period, compared to a net loss
of $0.3 million in the 2010 Period. The widening of net loss in the 2011 Period
resulted from higher operating expenses, offset, in small part, by higher gross
profit on higher sales, higher other income, and a tax benefit in the 2011
Period, as shown in the table below:
28
Main Components of Net Loss for the Nine
Months Ended June 30
|
|
(thousands of dollars)
|
|
2011
Period
|
2010
Period
|
Increase
(Decrease)
|
Net Sales.......................................................................................................
|
$17,121
|
$13,605
|
$3,516
|
|
|
|
|
Gross Profit...................................................................................................
|
3,970
|
3,189
|
781
|
Selling and Marketing Expenses...............................................................
|
(2,054)
|
(1,548)
|
505
|
General and Administrative Expenses......................................................
|
(3,270)
|
(1,902)
|
1,368
|
Other Income (Expense).............................................................................
|
78
|
(21)
|
99
|
Benefit from Income Taxes.........................................................................
|
56
|
--
|
56
|
Net Loss*.....................................................................................................
|
($1,220)
|
($282)
|
$938
|
* Table may not
total due to rounding.
Basic and diluted per share data was a loss of ($0.15)
for the 2011 Period, compared to a loss of ($0.04) for the 2010 Period. The
decline in the 2011 Period compared to the 2010 Period was due to the increase
in net loss.
In large part, the higher level of operating expenses
in the 2011 Period reflects the ongoing increase in personnel and related
expense and ramp up in product development activities as the 2011 Period
progressed; as more hires were made, the 2011 Period was impacted
accordingly.
Net Sales
OEM
net sales increased $3.5 million, or 26%, to $17.1 million in the 2011 Period
from $13.6 million in the 2010 Period, due to higher sales of Diabetic Products
and Other Products, which increased $2.3 million and $1.2 million,
respectively, in the 2011 Period compared to the 2010 Period. The tables below
set forth sales by product line and geographic location of our customers for
the periods indicated.
Net Sales for 2011 Period
9 Months
ended
June 30, 2011
(millions of dollars)
|
|
APAC
|
Americas
|
Europe
|
Total*
|
Diabetic Products..................................
|
$7.1
|
$2.0
|
$3.3
|
$12.4
|
Other Products.......................................
|
0.8
|
3.1
|
0.8
|
4.7
|
Total*
|
$7.9
|
$5.1
|
$4.1
|
$17.1
|
Net Sales for 2010 Period
9 Months ended
June
30
, 2010
(millions of dollars)
|
|
APAC
|
Americas
|
Europe
|
Total*
|
Diabetic Products..................................
|
$5.1
|
$2.4
|
$2.6
|
$10.1
|
Other Products.......................................
|
0.7
|
2.4
|
0.4
|
3.5
|
Total*
|
$5.8
|
$4.8
|
$3.0
|
$13.6
|
* Tables may
not total due to rounding.
29
OEM Diabetic Product Sales
Sales
of cases and related accessories for blood glucose monitoring kits increased $2.3
million, or 23%, to $12.4 million in the 2011 Period, from $10.1 million in the
2010 Period. This increase was due primarily to higher sales to two of our major
diabetic product customers, and to a much lesser extent, smaller increases in
sales to a number of other diabetic customers. These increases were offset, in
part, by a small decrease in sales to our third major diabetic customer. The following
table sets forth our sales by diabetic product customer for the periods
indicated.
|
Diabetic Sales by Customer for the Nine
Months Ended June 30,
(millions of dollars)
|
|
2011
Period
|
2010
Period
|
Increase
(Decrease)
|
Diabetic Customer
A..................................................
|
$6.7
|
$5.2
|
$1.5
|
Diabetic Customer
B...................................................
|
2.7
|
3.0
|
(0.2)
|
Diabetic Customer
C...................................................
|
2.5
|
1.8
|
0.7
|
All other Diabetic
Customers....................................
|
0.5
|
0.1
|
0.3
|
Totals*..................................................................
|
$12.4
|
$10.1
|
$2.3
|
|
|
|
|
|
* Table may not total
due to rounding.
Sales
of carrying cases for blood glucose monitoring kits represented 73% of our
total net sales in the 2011 Period compared to 75% of our total net sales in
the 2010 Period.
OEM Other
Product Sales
Sales
of other products increased $1.2 million, or 35%, to $4.7 million in the 2011 Period
from $3.5 million in the 2010 Period. Included in this amount, and the largest
single sale of Other Products for the 2011 Period, is $0.4 million of sales to
Flash Ventures, Inc. (refer to Note 11 Letter of Intent), which we consider
as non-recurring business. The balance of the increase consisted of first time
sales to several new customers in the 2011 Period in the amount of $0.5 million,
in the aggregate, and fluctuations in existing customer sales in the 2011
Period resulting in an increase of $0.2 million compared to the 2010 Period.
Sales
of other products represented 27% of our net sales in the 2011 Period compared
to 25% of net sales in the 2010 Perio
d.
Gross Profit
Gross
profit increased $0.8 million, or 25%, to $4.0 million in the 2011 Period compared
to $3.2 million in the 2010 Period. The increase resulted primarily from the $3.5
million, or 26%, increase in sales revenues (refer to Net Sales section
above), and to a lesser extent, from decreases in absolute terms, in tooling
and packaging, and warehousing costs, as well as the expense of operating our
Hong Kong distribution and quality control center, compared to the 2010 Period.
In addition, all components of our costs of goods sold declined as a percentage
of sales relative to the 2010 Period with the exception of our cost of
materials. Increases in materials costs negatively impacted gross profit in
the 2011 Period, as described below.
Cost
of materials as a percentage of sales increased nearly 4% in the 2011 Period
compared to the 2010 Period, partly offsetting the factors that contributed to
improved gross profit. As a result, gross profit margin was 23% in the 2011
Period, the same as in the 2010 Period. The increase in materials costs was
attributable, in large part, to the Other Products line, where we experienced
lower average margins on sales to several of our largest customers in this
product line. Beyond factors specific to certain other products, in general,
in general we experienced a rise in materials, labor, and other production
costs from suppliers on new and replacement programs in the diabetic product
line. However, the impact of such pricing pressures on mature programs of
diabetic case products, which constitutes the majority of sales, was muted
during the 2011 Period as suppliers held off on price increases generally where
prices were relatively longstanding.
Sales and Marketing Expenses
Sales
and marketing expenses increased $0.5 million, or 33%, to $2.1 million in the
2011 Period from $1.5 million in the 2010 Period. The significantly higher
level of expense reflects our focus on growing sales generally, developing our
capability to sell into the retail channel, and developing new products
(particularly for retail), and the ramp-up of necessary resources applied to
achieve these goals, and is primarily due to the following:
30
-
$0.2 million increase in personnel expense due to: i) the
restructuring and growth of our sales force and ii) higher sales commissions
accrued in respect of the higher sales levels achieved in the 2011 Period;
-
$126 thousand increase in travel and entertainment expenses
incurred by new sales and sales support personnel added globally during Fiscal
2011 primarily in connection with development of prospective new sales
channels;
-
$79 thousand in the aggregate in product development, design,
promotional, and sampling costs; and
-
$73 thousand increase in the aggregate in occupancy,
telecommunication, and general office expenses (postage/shipping fees and
office supplies).
Lesser fluctuations in other
components of sales and marketing expenses were immaterial.
General
and Administrative Expenses
General
and Administrative expenses increased $1.4 million, or 73%, to $3.3 million in
the 2011 Period from $1.9 million in the 2010 Period due primarily to the
following:
-
$0.9 million increase in personnel expense resulting from: i) hires
of additional information technology, operations, and accounting personnel
during the period; ii) accrued retention bonus of $0.2 million payable to an
executive; iii) relocation expense and increased salary expenses associated
with the relocation of the Companys principal executive offices to California;
iv) recruitment and signing fees attributable to new hires; v) increased
payroll taxes and benefits attributable to personnel hires; and vi) associated
higher level of share based compensation awards.
-
$160 thousand increase travel and entertainment expenses
attributable in primarily to relocation-related travel in connection with
identification and establishment of new office space in California and related
personnel relocation travel, as well as travel by executives associated with
strategic and business development activities.
-
$157 thousand increase in the aggregate in recurring telecommunications
costs (resulting from hosting and connectivity charges associated with the
Companys upgrade of its IT infrastructure, as well as cellular telephone
charges) and general office costs;
-
$106 thousand increase in public costs (including $27 thousand of
consulting services for executive compensation analysis, $70 thousand in director
fees, share-based compensation, and expense reimbursements, and $9 thousand of
director and officer insurance expense);
-
$54 thousand increase in professional fees (primarily legal, and
to a lesser extent, financial and accounting) primarily in connection with the
Flash Ventures acquisition effort (refer to Note 11 to Notes to Financial
Statements).
Other Income (Expense)
Other
income (expense), consisting of interest income on cash and cash equivalent
balances and on short term notes receivable (refer to Note 3 Notes Receivable
in Notes to Financial Statements), as well as foreign currency transaction
gains and losses, improved $0.1 million to $78 thousand of income in the 2011
Period compared to $21 thousand of expense in the 2010 Period. We recognized
foreign currency transaction gains of $21 thousand in the 2011 Period compared
to $57 thousand of foreign currency transaction losses in the 2010 Period
because of Euro currency appreciation against the US Dollar during the period,
which had the effect of increasing, in US Dollar terms, amounts recognized on
our income statement attributable to Euro denominated sales to a diabetic customer.
Other income also benefited from an increase in interest income of $33 thousand
in the 2011 Period (resulting from interest income accrued in respect of the
Flash note receivable). Exchange rate changes on foreign currency cash
balances were not material in either the 2011 Period or the 2010 Period.
31
LIQUIDITY AND CAPITAL RESOURCES
During the 2011 Period, we used $1.7
million of cash in operations compared to a use of $0.3 million in the 2010 Period.
Net cash used in operating activities in the 2011 Period consisted of net loss
of $1.2 million, adjusted by $0.3 million for non-cash items (primarily share
based compensation), and a net use in working capital items of $0.8 million. As
to working capital items, cash used in operating activities consisted of increases
in accounts receivable, inventories and prepaid and other assets (current and
long-term) of $0.3 million, $0.3 million, and $0.3 million, respectively. A decrease
in accrued expenses and other current liabilities of $0.3 million also contributed
to uses of cash. These changes were offset, in part, by an increase in accounts
payable of $0.4 million, which had the effect of generating cash from operating
activities. The increase in accounts receivable is due to the higher sales
recorded in the 2011 Quarter compared to the three months ended September 30,
2010. The increases in inventories and accounts payable are due to higher
materials purchases made in the 2011 Quarter compared to the three months ended
September 30, 2010 and are in support of sales orders received. The increase in
prepaid and other assets (current and long term) is due primarily to prepaid
rents (for the Companys California office and its JAFZA branch office),
prepaid tooling and mold costs in support of firm purchase orders, prepaid information
technology costs and insurance fees. The decrease in accrued expenses and other
current liabilities is primarily due to payments made during the 2011 Period in
respect of items accrued as of September 30, 2010: (i) $125 thousand in severance
payments to a former officer of the Company under the August 2010 Settlement
Agreement; (ii) $142 thousand in settlement costs paid to a shareholder under
the August 2010 Settlement Agreement; (iii) $123 thousand in sales commissions;
and (iv) $150 thousand in wages.
In the 2010 Period, we used $0.3 million
of cash in operations, consisting of a net loss of $0.3 million (reduced by
$0.2 million for non-cash items), and a $0.3 million net use in working capital
items. Net cash used in operating activities consisted of changes in accounts
receivable, inventory, and prepaid and other current assets of $0.9 million,
$0.4 million, and $0.1 million, respectively. These uses were partially offset
by changes in accounts payable, accrued expenses and other current liabilities,
and other assets, which generated $0.9 million, $0.3 million, and $14 thousand,
respectively.
In the 2011 Period, net investing
activities used $1.3 million of cash, primarily in short-term loans of $1.2
million made to prospective strategic or joint venture entities (refer to Note
3 Notes Receivable in Notes to Financial Statements), and to a lesser
extent, in purchases of $0.2 million of property and equipment, primarily
computer and telecommunications hardware and software. There were no investing
activities in the 2010 Period.
There were no financing activities
in the 2011 Period. In the 2010 Period, financing activities generated $67
thousand in proceeds from the exercise of stock options.
At
June 30, 2011, our current ratio (current assets divided by current
liabilities) was 6.8; our quick ratio (current assets less inventories divided
by current liabilities) was 6.4; and our working capital (current assets less
current liabilities) was $19.9 million. As of such date, we had no short or
long-term debt outstanding.
32
Our
primary source of liquidity is our cash and cash equivalents on hand. The
primary demands on our working capital currently are: i) operating losses, ii)
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, and iii) notes receivable issued to prospective strategic
partners (refer to Note 3 Notes Receivable in Notes to Financial Statements). 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. The
termination of the proposed acquisition of Flash Ventures eliminated what we
anticipated would be substantial capital outlays (acquisition consideration)
in investment activities in the near term. However, we anticipate that the
building out of our product offerings and establishing a retail distribution
channel through internal growth and development of strategic partnerships in
lieu of the acquisition of such strategic assets may lengthen the period
required to increase net sales revenues expected to be generated by the new
channel and products. Results of operations for the 2011 Quarter and Period
reflect the increase in operating costs brought to bear to achieve these
goals. Accordingly, we anticipate significant uses of cash and capital
resources as a result of one or more of the following developments in future
periods: (i) continuation of accounting periods in which we report increases in
operating expenses in our implementation of managements strategy (see Trends
and Economic Environment above), in particular in increased selling and other
personnel expenses; and (ii) use of capital in financing strategic partnerships
in investing activities. We anticipate that our liquidity and financial
resources for the next twelve months will be adequate to manage our operating
and financial requirements.
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 June 30, 2011, 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 Period. We do not expect to use any of our financial resources to
further redeem our outstanding common stock in the next twelve months.
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.
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 June 30, 2011, 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.
33
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 20 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 paragraph sets forth risk factors that were not included in our
Annual Report on Form 10-K for the year ended September 30, 2010, or that are
updated for purposes of this Quarterly Report.
We previously announced our
intention to diversify our business by means of acquisition or other business
combination
.
Our
new management teams business strategy is to grow our OEM business, expand
product offerings and technology solutions, and develop or acquire retail
distribution capability. Consistent with this approach, in December
2010, we announced entry into a letter of intent to acquire Flash Ventures
Inc., a distributor of consumer electronics peripherals and accessories
(Flash). In April 2011 we elected to terminate such letter of intent and not
make such acquisition. The immediate consequence of this decision is that the
anticipated payments of some combination of cash and issuance of our equity
and/or debt securities will not be made, and the risks of potential dilution to
existing shareholders and the business risks that accompany any acquisition
should not arise.
However, the risks of not making such an acquisition to acquire a
retail channel and product development capability may be the increased time
required to accomplish such goals through internal growth and development.
There can be no assurance that we will be successful in our efforts to achieve
such goals through internal growth and development.
Management remains open to the possibility of an acquisition and believes
that, given the right acquisition target under satisfactory terms and
conditions, it will pursue a potential acquisition if it is in the best
interests of shareholders. There can be no assurance that we will be
successful in our efforts to make any acquisition, or that any business that we
do acquire or invest in will be profitable or accretive. 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 or not 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
.
We are pursuing 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 have incurred, and are likely to continue
to incur, increased selling, general, and administrative expense as we devote
increased resources to expanding product sales and development and to
establishing a retail distribution channel, 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 and gross profit, if
at all, which may materially and adversely affect our results of operations.
With the termination of the Flash letter of intent, the period of time during
which we incur higher operating expenses before we realize a higher level of
sales and/or gross profit resulting from the investment of our resources may be
longer than we would like. Realization of higher revenues that will result in
improvement in our results of operations will depend on managements ability to
execute successfully on its strategy and business plan, as to which there can
be no assurance.
34
In
pursuing strategic partnerships, we may find it opportune to fund third parties
in product development
We are aggressively
pursuing business relationships with unrelated third parties (via potential
joint sales, joint venture, licensing, or other arrangements) by which we are
seek to expand our sales base, access new customer markets, and/or develop new
products to distribute and sell. In certain cases, from time to time, we
may deem it in the Companys best interests to participate in the funding of
new product development by extending short-term loans for working capital,
product development, or related uses. In general, a significant ancillary
purpose of such loans might include enhancing the likelihood of our securing
the business relationship with such third party that we deem advantageous to
our business development efforts, as well as acceleration of the development
timetable for the product. Such lending may not, and has not to date,
been on a secured basis. Our business experience does not encompass bank lending
expertise in the assessment of the creditworthiness of borrowers, and such
lending on our part does not represent a core element of our business
expertise.
There
is a risk that the funds we loaned to a third parties will not be repaid.
In
January 2011, pursuant to the terms of the letter of intent to acquire Flash
referred to above, we agreed to make available a loan facility to Flash for
working capital purposes in a maximum amount of $1,000,000. The loan bears
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. Flash was late in
making the interest payment due March 31, 2011, eventually making payment in
full, and made timely payment on the second installment of interest due June
30, 2011.
In
addition, in June and July 2011, we advanced $190,000 and $300,000,
respectively, in funds to a prospective joint venture participant in
consideration for its issuance to us of a short term promissory note. The Note
bears interest at 9% per annum and matures September 22, 2011.
As with
any debt obligation, there is a risk that the borrower will default and we as
lender may not receive repayment in full of the funds loaned and interest thereon.
This risk is increased by virtue of the fact that these loans were made on an
unsecured basis. If this were to occur, it could have a material, adverse
effect on our financial condition and reduce the amount of funds available to
support our growth initiatives and other capital requirements.
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
In connection with its business and product development
activities, the Company has elected to enter into an arrangement with an
unrelated third party as follows:
35
On June 22, 2011 and on July 26, 2011,
the Company loaned $190,000 and $300,000, respectively, to a
prospective joint venture partner, a developer of innovative protective case
materials, in consideration of its issuances of unsecured, short term
promissory note in such principal amounts. Each promissory notes bears
interest at 9% per annum on any unpaid principal. The principal amount of each
note, together with accrued and unpaid interest, is payable in full on or
before maturity on September 22, 2011. Based on the representation of the
entity, proceeds of the loan are being used for working capital purposes
related to the proposed joint venture.
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
|
|
|
101.INS
|
XBRL
Instance Document
|
|
|
101.SCH
|
XBRL
Taxonomy Extension Schema Document
|
|
|
101.CAL
|
XBRL
Taxonomy Extension Calculation Linkbase Document
|
|
|
101.DEF
|
XBRL
Taxonomy Extension Definition Linkbase Document
|
|
|
101.LAB
|
XBRL
Taxonomy Extension Label Linkbase Document
|
|
|
101.PRE
|
XBRL
Taxonomy Extension Presentation Linkbase Document
|
36
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: August 11, 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)
|
|
37
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