UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[
X
] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For
the fiscal year ended September 30, 2011
[ ] TRANSITION REPORT PURSUANT
TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For
the transition period from
to
Commission
File Number: 0-6669
FORWARD INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
New York
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13-1950672
|
(State or other jurisdiction of
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(I.R.S.
Employer Identification No.)
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incorporation or organization)
|
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3110 Main Street, Suite 400, Santa Monica, CA 90405
(Address of principal executive offices, including zip
code)
(954) 419-9544
(Registrants telephone number, including area code)
Securities registered pursuant to Section 12(b) of the
Act:
None
Securities registered pursuant to Section 12(g) of the
Act:
Common Stock, $0.01 par value per share
Indicate by check mark if the
registrant is a well-known seasoned issuer, as defined in Rule 405 of the
Securities Act.
[
] Yes [
X
] No
Indicate by check mark if the
registrant is not required to file reports pursuant to Section 13 or Section
15(d) of the Act.
[
] Yes [
X
] No
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [
X
] Yes [
] No
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Website, if any, every Interactive Data File required to be
submitted and posted pursuant to Rue 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to
submit and post such files). [
X
] Yes [
] No
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of Registrants knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this form 10-K. [
X
]
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company.
See the definitions of large accelerated filer, accelerated filer, and
smaller reporting company in Rule 12b-2 of the Exchange Act).
[ ] Large accelerated filer
[
] Non-accelerated filer (Do not check if a smaller
reporting company)
|
[ ] Accelerated filer
[
X
] Smaller reporting company
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). [
] Yes [
X
] No
The
aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the price at which the common equity
was last sold, as of the last business day of the Registrants most recently
completed second fiscal quarter was: $22,912,322.
As of December 1, 2011, 8,087,886 shares of the Registrants common stock were
outstanding.
Documents
Incorporated by Reference
The registrant intends to file, not
later than January 28, 2012, a definitive proxy statement pursuant to
Regulation 14A, promulgated under the Securities Exchange Act of 1934, as
amended, to be used in connection with the registrants annual meeting of
stockholders. The information required in response to Part III (Items 10-14) of
this Annual Report on Form 10-K is hereby incorporated by reference to such
proxy statement.
1
Forward Industries, Inc
.
Table of Contents
2
Note Regarding Use of Certain Terms
In
this Annual Report on Form 10-K, unless the context otherwise requires, the
following terms have the meanings assigned to them as set forth below:
"we", "our", and the "Company" refers 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., an Indiana corporation (formerly Koszegi
Industries, Inc.);
Forward HK refers to Forward Industries wholly
owned subsidiary Forward Industries HK, Ltd., a limited company of Hong Kong;
Forward Switzerland refers to Forward Industries
wholly owned subsidiary Forward Industries (Switzerland) GmbH, a limited
company of Switzerland (formerly Forward Innovations GmbH);
Forward APAC refers to Forward Industries wholly
owned subsidiary Forward Asia Pacific Limited, a limited company of Hong Kong;
Forward UK refers to Forward Industries wholly
owned subsidiary Forward Ind. (UK) Limited, a limited company of England and
Wales;
Forward JAFZA refers to Forward Industries
registered branch office in the Jebel Ali Free Zone of Dubai, United Arab
Emirates (UAE);
GAAP refers to accounting principles generally
accepted in the United States;
Commission refers to the United States Securities
and Exchange Commission;
Exchange Act refers to the United States Securities
Exchange Act of 1934, as amended;
Fiscal 2011 refers to our fiscal year ended
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
ITEM 1.
BUSINESS
General
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.
In addition to our existing OEM
business, we are currently engaged in building a multi-channel distribution
capability to the retail, corporate and on-line markets, as well as expanding
our OEM business. In our efforts to develop these channels, we have
devoted considerable resources in the hiring of experienced sales, design,
logistics, and operations professionals. At the same time, we are
working with a number of
prospective partners on multiple fronts to consummate licensing, distribution
or straight purchase arrangements to develop a broadly diversified portfolio of
intellectual property in the consumer electronics accessories market. We seek
to identify the Companys brand with innovation in electronics accessories.
In executing the channel-building and
product development elements of our strategy, we have incurred 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 hired in the second half of
Fiscal 2011, the fourth quarter begins, and succeeding quarters will begin, to
reflect more fully such investments in resources, while the anticipated benefits
of those hires in the form of increased sales and profit will
take significantly longer to be realized, if at all. 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.
We do not manufacture any of the
products that we design, market, and distribute. We source substantially all
products we market and distribute from independent suppliers in China. Our
suppliers custom manufacture our carrying solutions and related products to our
order, based on our designs and know-how, and to our customers specifications.
Corporate History
Forward Industries, Inc. was
incorporated in 1961 under the laws of the State of New York as a manufacturer
and distributer of advertising specialty and promotional products. In 1989, we
acquired Forward US (then known as Koszegi Industries, Inc.), a manufacturer of
soft-sided carrying cases. The carrying case business became our predominant
business, and in September 1997, we sold the assets relating to the production
of advertising specialty and promotional products, ceasing to operate in that
segment.
In May 1994, we formed Forward HK to
facilitate a more nimble and robust carrying case procurement and quality
control infrastructure, and to enhance our foreign sourcing capabilities.
Thereafter we determined that our domestic production capability was
unnecessary, sold the related assets, and we now source substantially all our
products from suppliers in the APAC Region. See "Product Supply".
In May 2001, we formed Forward
Switzerland to facilitate distribution of aftermarket products under our
licenses for cell phone cases with a major North American multinational and to
further develop our OEM European business presence. After the expiration of
the last of these licenses in March 2009, staff at Forward Switzerland was
significantly reduced and in recent years has primarily served our OEM European
customers. As part of our strategy to develop a global retail distribution
capability, we are reinvesting in both staff and infrastructure at Forward
Switzerland and have established it as our EMEA headquarters from which we are
coordinating our sales and marketing activities throughout the EMEA region.
4
In April 2011, we formed Forward JAFZA
to facilitate the development of our business presence and retail distribution
channel in the Middle East and India region.
In July 2011, we formed Forward UK to
facilitate a more capable and robust administrative and sales support
infrastructure that is dedicated to supporting the development of our retail
distribution strategy in the EMEA region and our EMEA based sales and marketing
personnel.
Products
We design and market to our customers
order, carry and protective solutions for hand held consumer electronics and
other products, including soft-sided carrying cases, bags, clips, hand straps,
protective plates, and other accessories made of leather, nylon, vinyl,
plastic, PVC and other synthetic materials. Our products are used by consumers
for protecting and carrying or transporting portable electronic and other
products such as blood glucose monitoring kits, bar code scanners, GPS and
location devices, cellular telephones, laptop computers, MP3 players, firearms,
sporting and recreational products, and aeronautical products. Our carrying
cases are designed to enable these devices to be stowed in a pocket, handbag,
briefcase, or backpack, clipped to a belt or shoulder strap, or strapped to an
arm, while protecting the consumer electronic or other product from scratches,
dust, and mishandling.
At the same time, we are working with
multiple prospective partners on multiple fronts to consummate licensing,
distribution or straight purchase arrangements to develop a broadly diversified
portfolio of intellectual property in the consumer electronics accessories
market.
Diabetic Products
We sell carrying cases for blood glucose
diagnostic kits directly to OEMs (or their contract manufacturers) of these
electronic, monitoring kits made for use by diabetics. We typically sell these
cases at prices ranging from approximately $0.50 to $3.00 per unit. Unit
volumes are sold predominantly at the lower end of this price range. The OEM
customer or its contract manufacturer packages our carry cases in box as a
custom accessory for the OEMs blood glucose testing and monitoring kits, or to
a much lesser extent, sells them through their retail distribution channels.
The kits typically include a small, electronic blood glucose monitor, testing
strips, lancets for drawing a drop of blood and our carrying case, customized
with the manufacturers logo and designed to fit and secure the glucose
monitor, testing strips, and lancets in separate straps, pouches, and holders.
As the kits and technology change, our carrying case designs change to
accommodate the changes in size, shape and layout of the electronic monitoring
device, strips and lancet. Since the end of 2007, OEMs have sought to reduce
the cost of these cases by simplifying their design.
Other Products
We also sell carrying and protective
solutions to OEMs for a diverse array of other portable electronic and other
products, including bar code scanners, GPS and location devices, cellular
telephones, laptop computers, MP3 players, firearms, sporting and recreational
products, and aeronautical products on a made-to-order basis that are
customized to fit the products sold by our OEM customers. Our selling prices
for these products also vary across a broad range, depending on the size and
nature of the product for which we design and sell the carry solution.
Product Development
In our OEM business, the product life
cycle in distributing and selling our technology solutions to our OEM customers
is as follows. We typically receive requests to submit product designs in
connection with a customers introduction and rollout to market of a new
product that the customer has determined to accessorize and customize with a
carry solution. Our OEM customers furnish the desired functionality, size and
other basic specifications for the carrying solutions or other product,
including the OEMs identifying logo imprint on the product. Our in-house
design and production staff develops more detailed product specifications and
design options for our customers evaluation. We then furnish the customer
with product samples. Working with our suppliers and the customer, samples are
modified and refined. Once approved for commercial introduction and order by
our customer, we work with our suppliers to ensure conformity of commercial
production to the definitive product samples and specifications. Manufacture
and delivery of products in production quantities are coordinated with the
customers manufacturing and shipment schedules so that our carry solution
products are available with the OEMs product (and included in box, as the
case may be) prior to shipment and sale, or to a lesser extent sold by the OEM
through its retail distribution channels.
5
We are currently developing new products
for our retail channel business. The focus of such product development is on
cases and accessories for consumer electronic devices. In furtherance thereof,
on August 30, 2011, we entered into a binding Memorandum of Understanding (MOU) with
G-Form LLC, a manufacturer of consumer and athletic products incorporating
proprietary extreme protective technology. The MOU contemplates that we will
launch new distinctive Forward branded products exclusively utilizing the
licensed technology for sale to consumer electronics retailers, original
equipment manufacturers and other business to business channels other than
sport related or lifestyle stores and military or military channels. Prior to
launch of our own products, we may sell current G-Form branded electronic
protection products in the Companys territory.
Marketing, Distribution, and Sales
Geographic Sales Distribution
Through our wholly owned subsidiaries,
Forward US and Forward Switzerland, we distribute and sell our products
globally. The approximate percentages of net sales to customers by their
geographic location for Fiscal 2011 and 2010 are as follows:
|
Net Sales
Fiscal Years
Ended September 30,
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Geographic
Location:
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2011
|
|
2010
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APAC.......................................................................................................................
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46%
|
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43%
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Americas..................................................................................................................
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28%
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33%
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Europe......................................................................................................................
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26%
|
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24%
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Totals
...................................................................................................................
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100%
|
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100%
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The
importance of the APAC region is attributable to the fact that certain of our
key customers outsource product manufacture to contract manufacturers located
in China or elsewhere in Asia. In these instances, we ship product to, and
product is packaged in box at, such contract manufacturers facility. If
payment to us is due from the contract manufacturer, we identify the sale to
its geographic location rather than that of the customer for whom the contract
manufacturer is supplying product. The increase in APAC contribution to net
sales in Fiscal 2011 compared to Fiscal 2010 was due to the increase in revenue
from our largest diabetic case customer, which uses such a contract
manufacturer. See Note 14 to the audited consolidated financial statements
included in Item 8 of this Annual Report.
Channels of
Distribution
We primarily ship our products directly
to our OEM customers or their contract manufacturers, who package our carry
solutions products in box with the OEM customers products. Certain OEMs
that became our customers in Fiscal 2011 or 2010 also purchase our carry and
protective solution products and offer them for sale as stand-alone accessories
to complement their product offerings.
In addition to expanding our existing
OEM business, we are currently engaged in building a multi-channel distribution
capability to the retail, corporate and on-line markets, although there is no
assurance that we will be successful.
6
Sales by
Product Line
Sales of carry and protective solutions
for Diabetic Products and for Other Products, i.e., all products other than
diabetic carry cases for blood glucose monitor kits, accounted for
approximately the following percentages of total net sales in Fiscal 2011 and
2010:
|
Fiscal Year Ended
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Sales:
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2011
|
|
2010
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Diabetic Products...................................................................................................
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73%
|
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74%
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Other Products .......................................................................................................
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27%
|
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26%
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Totals
...................................................................................................................
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100%
|
|
100%
|
Sales
Concentration
We have approximately 80 active
customers. Of these, three customers, including their affiliates and contract
manufacturers, accounted for approximately 69% of our net sales in Fiscal 2011
and 73% in Fiscal 2010. All three are OEMs of diabetic monitoring kits. These
customers package our carry and protective solutions in box with their
branded products, or to a lesser extent, sell them through their retail
distribution channels. The approximate percentages of net sales contributed by
each of these three customers for Fiscal 2011 and Fiscal 2010 are as follows:
|
Fiscal Year Ended
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Customer:
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2011
|
|
2010
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Diabetic Customer A............................................................................................
|
37%
|
|
39%
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Diabetic Customer B.............................................................................................
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16%
|
|
19%
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Diabetic Customer C.............................................................................................
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16%
|
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15%
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Totals*
................................................................................................................
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69%
|
|
73%
|
* Tables may not
total due to rounding.
Sales Force
During Fiscal 2011 and 2010, all net
sales were made directly by our employees, which are assigned key accounts or
defined geographic sales territories. See Risk Factors in Item 1A. of this
Annual Report -
Our business could suffer if the services of key sales
personnel we rely on were lost to us.
OEM
Distribution Hubs
We have distribution hub arrangements
with three OEM customers. These arrangements obligate us to supply our
products to the customers distribution hubs (may be multiple locations) where
its products are manufactured and/or warehoused pending sale and where our
products are packaged in-box with the OEM customers products or, to a much
lesser extent, distributed for retail sale. The product quantities we are
required to supply to each distribution hub are based on the OEM customers
forecasts. We do not recognize revenue for product shipped to a hub until we
have been advised by our customer that product has been withdrawn from the
distribution hub to be placed in box. Hub arrangements have
had the general effect of extending financing for our customers inventory
build by extending the time between our placement of orders to our suppliers in
order to ship and supply the hubs and the time that we are able to recognize
revenue. The corollary effect is an increase in our inventory levels.
Credit Risk
We generally sell our OEM products on
60- to 90-day credit terms customary in the industry. Historically, we have
not had significant credit problems with our customers. Our significant OEM
customers are large, multi-national companies with good credit histories. None
of these customers is or has been in default to us, and payments from all
customers are generally received from them on a timely basis. Three customers,
including their affiliates or contract manufacturers, accounted for
approximately 71% of our accounts receivable at September 30, 2011. Three
customers, including their affiliates or contract manufacturers, accounted for
approximately 75% of our accounts receivable at September 30, 2010.
7
When we ship products to our OEM
customers designated contract manufacturer and invoice such manufacturer (and
not the OEM customer), even though our order flows originate with and depend on
our relationship with the OEM, our accounts receivable credit risk lies with
the contract manufacturer. Our OEM customer does not guarantee the credit of
the contract manufacturer to whom the OEM requests us to ship our carrying case
products, and such order volumes may be significant from time to time. In most
cases, these contract manufacturers are themselves major multinational
enterprises with good credit. See Item 1A of this Annual Report on Form 10-K:
Risk Factors.
Product Supply
Manufacturing
The manufacture of custom carrying cases
and other carry and protective solutions generally consists of die cutting
fabrics and heat sealing, gluing, sewing, and decorating (affixing logos to)
the cut-outs by means of silk screening, hot-stamping, embroidering or
embossing. The principal materials used in the manufacture of our products are
vinyl, nylon, leather, metal and plastic parts (for clips, buckles, loops,
hinges and other hardware), foam padding and cardboard, all of which are
obtained according to our specifications from suppliers. We do not believe
that any of the component materials or parts used by our suppliers in the
manufacture of our products is supply constrained. We believe that there are
adequate available alternative sources of supply for all of the materials used
to manufacture, package, and ship our products.
Suppliers
We procure substantially all our supply
of carrying solutions products from independent suppliers in China. We
purchased approximately 90% of our products from four such suppliers in Fiscal
2011 and 88% from four such suppliers in Fiscal 2010. One China supplier
accounted for approximately 58% and 67% of our product purchases in Fiscal 2011
and 2010. Depending on the product, we may require several different suppliers
to furnish component parts or pieces. During Fiscal 2011 and currently we are
experiencing higher price quotes, which we believe are attributable in
significant degree to inflationary impacts on the suppliers labor and
materials costs that they are attempting to pass on to us.
We place orders with one or more
suppliers at the time we receive firm orders from our OEM customers for a
particular product. Accordingly, we do not have minimum supply requirement
agreements with our suppliers to guarantee us supply of finished product, nor
have we made purchase commitments to purchase minimum amounts from any of our
suppliers. However, from time to time, we may order products from our suppliers
in anticipation of receiving a customer order to meet required delivery times.
Quality
Assurance
To ensure that product manufacturing by
our Chinese suppliers meets our quality assurance standards, products we sell
and distribute are inspected by independent contractors in China, which may be
affiliated with one or more of our suppliers. These contractors are subject to
the control and supervision of our quality assurance employees based in Hong
Kong.
Quality assurance and sourcing-related
expenses are reflected in cost of goods sold in our results of operations. In
January 2009, our Hong Kong inspection facility renewed its ISO 9001:2000
quality certification.
Logistics
Once our products are approved for
shipment by our inspection and quality control procedures, the products are
typically shipped to our customers destination port on ocean-going container
vessels. In certain cases, at the customers request, we will ship products by
air freight or ground transport to a customers location in China or Hong Kong. Most ocean-going shipments bound for the United States are off-loaded at the
port of Los Angeles or San Francisco, but certain customers arrange for
shipments to East coast ports, such as Miami or Philadelphia. European
shipments generally are routed via Rotterdam. See Item 1A. in this Annual
Report Risk Factors
Our shipments of products via container freight to
customers in the United States and Europe may become subject to delays or
cancellation at port facilities due to work stoppages or slowdowns, damage
caused by weather or terrorism and congestion due to inadequacy of equipment
and other causes.
8
We ship our products to our customers by
common carrier.
Insurance
We maintain commercial loss and
liability, business interruption, and general claims and other insurance
customary for our business. We do not maintain credit insurance for our trade
accounts receivable.
Competition
The business in which we engage is
highly competitive in terms of product pricing, design, delivery terms, and
customer service. In the production of carry and protective solutions for OEM
products, we compete with numerous United States and foreign producers and
distributors. Some of our competitors are substantially larger than we are and
have greater financial and other resources. We believe that we sustain our
competitive position through maintenance of an effective product design
capability, rapid response time to customer requests for proposals and product
shipment, competitive pricing, reliable product delivery, and product quality.
We believe that our ability to compete based on product quality assurance
considerations is enhanced by the local presence of our Hong Kong and
outsourced Chinese based quality control and shipment capabilities. See Item
1A. in this Annual Report on Form 10-K: Risk Factors -
The carrying solutions
business is highly competitive and does not pose significant barriers to
entry.
Employees
At September 30, 2011, we had 45
full-time employees, of whom two are employed in executive capacities, nine are
employed in administrative and clerical capacities, thirteen are employed in
sales and sales support, six are employed in design and product development
capacities, and fifteen are employed in sourcing, quality control, and
warehouse capacities. We consider our employee relations to be satisfactory. None
of our employees are covered by a collective bargaining agreement. Of these
employees, fifteen have been hired in connection with our potential retail
channel business.
Since June 2003, we have employed our
U.S. employees through a co-employment agreement with ADP Total Source, a
Professional Employer Organization. The objective of this arrangement is for
ADP Total Source to assume many of the legal and administrative
responsibilities of human resources management, health benefits, workers'
compensation, payroll, payroll tax compliance, 401(K) plan administration and
unemployment insurance and to perform these functions at lesser expense than if
we were to perform them directly.
Regulation and Environmental
Protection
Our business is subject to various
regulations in various jurisdictions, including the United States and member
states of the European Community, that restrict the use or importation of
products manufactured with compounds deemed to be hazardous. We work with our
suppliers to ensure compliance with such regulations. In addition, from time
to time one or more customers may require testing of our products to ensure
compliance with applicable consumer safety rules and regulations or the
customers safety or packaging protocols. Because we do not manufacture the
products that we sell and distribute, compliance with federal, state and local
laws and regulations pertaining to the discharge of materials into the
environment, or otherwise relating to the protection of the environment, has
not had, and is not anticipated to have, any direct material effect upon our
capital expenditures, earnings, or competitive position. However, compliance
with such laws and regulations on the part of our suppliers may result in
increased costs of supply to us, particularly if domestic environmental
regulation in China becomes more prevalent.
We have not been engaged in any
environmental litigation or incurred any material costs related to compliance
with environmental or other regulations. From time to time we incur chemical
and/or safety laboratory testing expense in order to address customer requests
regarding our product materials or method of manufacture or regarding their
packaging methods and standards.
9
ITEM 1A.
RISK FACTORS
Please read the note regarding
"Cautionary statement for purposes of the Safe Harbor provisions of the
Private Securities Litigation Reform Act of 1995" that appears on pages 17
of this Annual Report on Form 10-K.
We previously announced our intention
to diversify our business by means of merger, acquisition or other business
combination.
Our 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.
Without completing such a merger or acquisition
to acquire a retail channel and product development capability, the time
required to implement our growth strategy is likely to increase. This growth
strategy represents a significant shift in the Companys strategy, and there can
be no assurance that we will be successful in our efforts to achieve our goals.
Management continues to evaluate
potential merger and acquisition targets, and given the right strategic opportunity
pursuant to satisfactory terms and conditions, it will pursue a potential merger
or 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 continue to trend significantly higher before we realize
higher revenues, our operating results may continue to be adversely and
materially affected
.
We are pursuing a more marketing-driven
and product development-driven business model to grow our existing business and
expand product offerings. 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 establish a retail distribution channel, including resources
to recruit and compensate experienced sales and marketing professionals. Such
increased expenses are likely to continue to impact our income statement and
reduce cash and equivalents before such efforts result in increased revenues
and profit, if at all, which may continue to materially and adversely affect
our results of operations. We have hired 15 employees in connection with the
potential retail channel business and have invested significant resources in
bringing new products to market, particularly in terms of funding product
development. As of September 30, 2011, no new products were available for
market and there had been no sales in connection with the potential retail
business. Realization of higher revenues and resulting 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.
The cash investment required to
execute our growth strategy is likely to be substantial relative to our cash
resources.
We have recently invested and expect to
continue to invest substantial incremental cash resources to execute our growth
strategy to fund (i) operating losses reflecting the investment in our sales
and distribution capabilities; (ii) investments in product development and
other joint venture arrangements; and (iii) investments in working capital
required to support new products and channels. While we believe that our
existing cash resources are sufficient to support our growth strategy, there
can be no assurances that our growth strategy will be successful or that we
will earn a return on these investments.
10
In pursuing strategic partnerships,
we may decide to advance funds to third parties for 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 seeking 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 be 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 or advanced to third parties will not be repaid.
On January 5, 2011, the Company entered
into a loan agreement with Flash Ventures, Inc., an unrelated entity, to
provide a credit facility of up to $1,000,000, due December 1, 2011. 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. 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. Flash was late in making
the interest payment due March 31, 2011, eventually making payment in full, and
made timely payment thereafter. Effective December 1, 2011, the terms of the
loan were amended to, among other things, extend the maturity date to April 1,
2012 and to provide for the loan to be secured. In connection with such
amendment Flash made a principal payment of $250,000 on December 1, 2011.
As of September 30, 2011, we had
advanced $500,000, in funds to a prospective joint venture
participant in consideration as a prepaid royalty.
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 many of 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.
Our business remains highly
concentrated in our OEM - Diabetic Products line, posing risks to our financial
condition and results of operations compared to periods when revenue from
customers from two principal product lines were more balanced. If our OEM -
Diabetic Products line were to suffer the loss of a principal customer or a
material decline in or loss of sales, our business would be materially and
adversely affected.
Sales of diabetic cases to OEM customers
accounted for approximately 73% of net revenues in Fiscal 2011. While OEM
sales of other products reflect new customer adds and improved revenues in
recent years, our business remains characterized by high product line as well
as customer concentration. In such circumstances, our financial condition and
results of operations are subject to higher risk from the loss of a OEM
diabetic case customer or from changes in the business practices of OEMs of
blood glucose monitors, for example, a decision to reduce or eliminate
inclusion of cases in box with the electronic device or a decision to focus on
insulin pumps instead of insulin by injection.
Our business is and has been
characterized by a high degree of customer concentration. Our three largest
customers accounted for approximately 70% and 73% of net sales in Fiscal 2011
and Fiscal 2010, respectively; the loss of, or material reduction in orders
from, any of these customers would materially and adversely affect our results
of operations and financial condition.
At present the predominant percentage of
our sales revenues is concentrated in three large OEM customers for our
diabetic blood glucose carry cases, including their affiliates and/or their
contract manufacturers. The loss of any of these customers, whether as a
result of its purchase of its carry solution requirements from another vendor,
its decision to manufacture its own carrying cases, its decision to award its
orders to one of our competitors, or otherwise, would have a material adverse
effect on our financial condition, liquidity and results of operations.
11
If any one or more of our OEM
customers elect to reduce or discontinue inclusion of cases in-box, our
results of operations and financial condition would be materially and adversely
affected.
The predominant percentage of our
revenues is derived from sales of case accessories to our OEM customers who
package our cases in-box with their electronics. With the global recession
and weak recovery, OEMs have sought continuously to reduce expenses. If one or
more of our OEM customers generally begin to reduce or discontinue the practice
of including carry case accessories in-box, we would incur a significant
decline in revenues and our results of operations and financial condition would
be materially and adversely affected.
At any time,
a significant percentage of our accounts receivable risk may be concentrated in
a small number of customers.
Three customers accounted for
approximately 71% of our accounts receivable at September 30, 2011, and three
customers accounted for approximately 75% of our accounts receivable at
September 30, 2010. The failure to receive or collect such amounts when and as
due could have a material adverse effect on our financial condition, liquidity,
and results of operations.
We continue to encounter pressures
from our largest OEM customers to maintain or even roll back prices or to
supply lower priced carry solutions, and expect such pressure to persist. The
effects of such price constraints on our business may be exacerbated by
inflationary pressures that affect our costs of supply.
During Fiscal 2011 and 2010, we
experienced significant pricing pressure from our largest OEM customers to
maintain or even reduce the prices we charge them. When we are unable to
extract comparable concessions from our suppliers on prices they charge us,
product sales margins erode.
In addition to margin compression from
customers, from time to time we may encounter increased prices from our Chinese
suppliers who are reacting to inflationary increases in materials and labor
costs incurred by them. We believe that Fiscal 2011 and the present represent
a period of such inflationary pressures. In addition, prices that our Chinese
vendors charge to us may reflect appreciation of the Chinese currency against
the US dollar, which can be passed through to us in the form of higher US
dollar prices. This in turn will tend to reduce gross profit percentage if we
are unable to raise prices. We anticipate that constraints on our ability to
maintain or increase prices to our major customers will continue to exert
downward pressure on our gross profit percentage in the fiscal year ending
September 30, 2012. This is particularly the situation with respect to our
large diabetic customers for existing as well as new programs.
Our results
of operations are subject to the risks of fluctuations in the values of foreign
currencies relative to the U.S. Dollar.
Our results of operations are expressed
in U.S. Dollars. When the U.S. Dollar appreciates or depreciates in value
against a currency in which all or a significant portion of revenues or other
accounts receivable are denominated, such as the Euro, our results of
operations can be adversely affected or benefited, respectively. For Fiscal
2011, there was not a significant depreciation of the Euro to affect our
results of operations. The degree of impact is proportional to the amount of
foreign currency expense or revenue, as the case may be, and the fluctuations
in exchange rates over the period in which the effect is measured on our
financial statements.
Future revenues are difficult to
predict and are likely to show significant variability as a consequence of
customer concentration.
Because our revenues are highly
concentrated in a few large customers, and because the volumes of these
customers' order flows to us can fluctuate markedly in a short period of time,
our quarterly revenues, and consequently our results of operations, may be
highly variable and subject to significant changes over a relatively short
period of time.
Our largest OEM customers may keep
consumer products with which our carry solutions are packaged "in-box"
in active promotion for many months, or for a very short period of time,
depending on various factors, including sales trends for the product, product
development cycles, new product introductions, and our customers' competitors'
product offerings. As demand for the consumer product relating to the in-box
program matures and decreases, we may be forced to accept significant price
and/or volume reductions in customer orders for our carry solutions, which will
adversely affect revenue.
12
These factors tend to lead to a high
degree of variability in our quarterly revenue levels. Significant, rapid
shifts in our operating results may occur if and when one or more of these
customers increase or decrease the size(s) of, or eliminate, their orders from us
by amounts that are material to our business.
Our gross margins, and therefore our
profitability, vary considerably by sales channel, customer and by product
type, and if the revenue contribution from one or more OEM customers changes
materially, relative to total revenues, our gross profit percentage may
fluctuate or decline.
Our gross profit margins on the products
we sell can vary widely depending on the sales channel, product type, customer,
order size, and market in which the customer's products are sold. Because of
the broad variability in price ranges and product types, we anticipate that
gross margins, and accordingly their impact on operating income or loss, may
fluctuate depending on the relative revenue contribution from each customer or
product.
Product manufacture is often
outsourced by our OEM customers to contract manufacturing firms in China and in
these cases it is the contract manufacturer to which we must look for payment.
Such firms are performing manufacturing,
assembly, and product packaging functions, including the bundling of our
product accessories with the OEM customer's product. As a consequence of this
business practice, we often sell our carry solution products to the contract
manufacturing firm. This is particularly significant in the case of diabetic
product sales to certain customers. In these cases, we invoice the contract
manufacturing firm and not the OEM customer. Therefore, it is the contract
manufacturing firm's credit to which we must look for payment in such cases and
not that of our OEM customer. This may alter the credit profile of our
customer base and may involve significant purchase order volumes. In some, but
not all cases, the manufacturing firm is itself a large, multinational entity
with significant financial resources.
Our dependence on foreign
manufacturers creates quality control and other risks to our business. From
time to time we may experience certain quality control, on-time delivery, cost,
or other issues that may jeopardize customer relationships.
Our reliance on foreign suppliers,
manufacturers, and other contractors involves significant risks, including risk
of product quality issues and reduced control over quality assurance,
manufacturing yields and costs, pricing, timely delivery schedules, the
potential lack of adequate manufacturing capacity and availability of product,
the lack of capital, and potential misappropriation of our designs.
Our shipments of products via
container may become subject to delays or cancellation due to work stoppages or
slowdowns, piracy, damage to port facilities caused by weather or terrorism,
and congestion due to inadequacy of port terminal equipment and other causes.
To the extent that there are disruptions
or delays in loading container cargo in ports of origin or off-loading cargo at
ports of destination as a result of labor disputes, work-rules related
slowdowns, tariff or World Trade Organization-related disputes, piracy,
physical damage to port terminal facilities or equipment caused by severe
weather or terrorist incidents, congestion in port terminal facilities,
inadequate equipment to load, dock and offload container vessels or
energy-related tie-ups or otherwise, or for other reasons, product shipments to
our customers will be delayed. In any such case, our customer may cancel or
change the terms of its purchase order, resulting in a cancellation or delay of
payments to us. A closure or partial closure of port facilities or other causes
of delays in the loading, importation, offloading or movement of our products
to the shipping destination agreed with our customer could result in increased
expenses, as we try to avoid such delays, delayed shipments or cancelled
orders, or all of the above. Depending on the severity of such consequences,
this may have an adverse effect on our financial condition and results of
operations.
The OEM carrying solutions business
is highly competitive and does not pose significant barriers to entry.
There are many competitors in the sale
of carry solutions products to OEMs, and competition is intense. Since little
or no significant proprietary technology is involved in the design, production,
or distribution of the types of products we sell, others may enter the business
with relative ease and compete against us. Such competition may result in the
diminution of our market share or the loss of one or more major OEM customers,
thereby adversely affecting our net sales, results of operations, and financial
condition. Many of our competitors are larger, better capitalized, and more diversified
than we are and may be better able to withstand a downturn in the general
economy or in the product areas in which we specialize. These competitors may
also have less sales concentration than we do and be better able to withstand
the loss of a key customer or diminution in its orders.
13
Our business could suffer if the
services of key sales personnel we rely on were lost to us.
We are highly dependent on the efforts
and services of certain key sales representatives who have account
responsibility for, and have longstanding relationships with one or more of our
largest customers. Our business could be materially and adversely affected if
we lost the services of any such individual. If we lost the services of a key
sales representative, we might experience a material reduction in orders from
his customers, resulting in a loss of revenues, which would materially and
adversely affect our results of operations and financial condition.
We do not pay
dividends on our common stock.
We have not paid any cash dividends on
our common stock since 1987. The payment in the future of cash dividends by
us, if any, will depend upon our results of operations, short-term and
long-term cash availability, working capital, working capital needs, and other
factors, as determined by our Board of Directors. We do not anticipate that cash
dividends will be paid in the foreseeable future. The absence of dividend
payments on a common stock might make such stock susceptible to greater market
price swings.
We have in
place anti
-
takeover measures and charter provisions that may
prevent a hostile or unwanted effort to acquire Forward.
Our Board of Directors is authorized to
issue up to 4,000,000 shares of "blank check" preferred stock. Our
Board of Directors has the authority, without shareholder approval, to issue
such preferred stock in one or more series and to fix the relative rights and
preferences thereof including their redemption, dividend and conversion rights.
Our ability to issue the authorized but unissued shares of preferred stock
could be used to impede takeovers of our company. Under certain circumstances,
the issuance of the preferred stock could make it more difficult for a third
party to gain control of Forward, discourage bids for the common stock at a
premium, or otherwise adversely affect the market price of our common stock. In
addition, our certificate of incorporation requires the affirmative vote of
two-thirds of the shares outstanding to approve a business combination such as
a merger or sale of all or substantially all assets. Such provision and blank
check preferred stock may discourage attempts to acquire Forward. Applicable
laws that impose restrictions on, or regulate the manner of, a takeover attempt
may also have the effect of deterring any such transaction. We are not aware
of any attempt to acquire Forward.
We maintain cash balances in our bank accounts
that exceed the FDIC insurance limitation.
We maintain our cash assets at commercial
banks in the U.S. in amounts in excess of the Federal Deposit Insurance
Corporation insurance limit of $250,000 and in Europe in amounts that may
exceed any applicable deposit insurance limits. In the event of a failure at a
commercial bank where we maintain our deposits or uninsured losses on money
market or other cash equivalents in which we maintain cash balances, we may
incur a loss to the extent such loss exceeds the insurance limitation, which
could have a material adverse effect upon our financial conditions and our
results of operations.
ITEM 1B.
UNRESOLVED STAFF COMMENTS
Not Applicable
ITEM 2.
PROPERTIES
We sub-leased approximately 5,300
square feet of office and warehouse space at 1801 Green Road, Pompano Beach,
Florida on a month-to-month basis from a tenant at the same premises. We used
this office space as our executive office and our United States sales office
until April 2011. This sub-lease expired on November 30, 2011.
In April 2011, the Company relocated its
executive offices from Pompano Beach, Florida to offices in Santa Monica,
California, which consists of approximately 3,400 square feet for which the
Company rents at $13,500 per month under lease agreements, which expire in
October 2016.
In May 2011, the Company, under a
license granted by the Jebel Ali Free Zone Authority (JAFZA), established a
registered branch office in the Jebel Ali Free Zone (JAFZ) of the United Arab
Emirates. Under the license, the Company rents approximately 638 square feet of
office space at annual rate of AED118,580 (approximately $32,300 at September
30, 2011) through May 2012. We use this office space to facilitate product
sales in the Middle-East and India region.
14
In July 2011, Forward HK renewed its
lease for approximately 4,400 square feet of office space in Kowloon, Hong
Kong, which extends through October 2014 at a monthly rate of $15,000. We use
this office space as our APAC headquarters from which we coordinate and conduct
our Asia-based sourcing, quality assurance, and logistics activities.
In October 2011, the Company, entered
into a lease for approximately 1,000 square feet of office space in London,
England at $8,000 per month, which extends through September 2012. We use this
office space to perform administrative and sales support (such as accounting,
operational, and customer service functions) to our EMEA based sales team.
Forward Innovations sub-leases
approximately 1,300 square feet of office space in Cham, Switzerland on a
month-to-month basis from a tenant at the same location. We use this office as
our EMEA headquarters from which we coordinate our sales and marketing
activities throughout the EMEA region.
We believe that each of the foregoing
leased properties is adequate for the purposes for which it is used. All leases
are with independent third parties. We believe that the loss of any lease
would not have a material adverse effect on our operations as we believe that
we could identify and lease comparable facilities upon approximately equivalent
terms.
ITEM 3.
LEGAL
PROCEEDINGS
Targus Group International, Inc., et
al. v., Forward Industries, Johnson, et al.
On September 19, 2011, the Company,
Brett Johnson (our President and Chief Executive Officer), and one of our
employees were named in a Complaint filed in Orange County Superior Court by
Targus Group International, Inc. and two of its affiliates. The Complaint
alleged a claim for breach of contract against Mr. Johnson. The Complaint
further alleged a "breach of fiduciary duty/duty of loyalty" against
the employee, and it asserted claims against Mr. Johnson and the Company for
allegedly aiding and abetting that breach. The Complaint also asserted a
cause of action against all Defendants for unfair competition. An Amended
Complaint was filed on October 11, 2011. In addition to the claims
asserted the in the original Complaint, the Amended Complaint added an
additional Targus affiliate as a plaintiff and named an additional employee of
the Company as a defendant. The Amended Complaint asserted a claim
against that employee for breach of contract and for "breach of fiduciary
duty/duty of loyalty," and it added new claims against the Company and Mr.
Johnson for allegedly inducing the breach of and interfering with that
employee's contract and for allegedly aiding and abetting his breach of
duty. The claim for unfair competition in the Amended Complaint relies on
these new allegations as well. All of the claims asserted in this action arise
out of the decisions of former employees of one or more of the plaintiffs to
accept offers of employment with the Company. The amount of damages
sought is not specified. The Company believes it has substantial defenses
to these claims and intends to vigorously defend the action.
Other Litigation
From time to time, the Company may
become a party to other legal actions or proceedings in the ordinary course of
its business. As of September 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.
15
ITEM 4.
RESERVED
PART II
ITEM 5.
MARKET
FOR REGISTRANTS COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
Market for
Common Stock
The principal market for our common
stock is the NASDAQ SmallCap Market. Our common stock is traded under the
symbol "FORD". The following table sets forth the high and low
closing bid quotations for our common stock on the NASDAQ SmallCap Market for
each quarter in the last two fiscal years.
|
Bid Price Information for Common Stock*
|
|
Fiscal 2011
|
|
Fiscal 2010
|
|
High Bid
|
Low Bid
|
|
High Bid
|
Low Bid
|
|
First Quarter
|
$4.06
|
$2.89
|
|
$2.15
|
$1.69
|
|
Second Quarter
|
$4.10
|
$3.02
|
|
$3.20
|
$1.96
|
|
Third
Quarter
|
$4.59
|
$2.52
|
|
$5.60
|
$2.96
|
|
Fourth
Quarter
|
$3.11
|
$2.01
|
|
$4.59
|
$2.90
|
|
_______________________________
*
High and low bid price information as furnished
by The NASDAQ Stock Market Inc.
On December 1, 2011, the closing bid quotation for our
common stock was $1.62
Holders of common stock
.
As of December 1, 2011, there were
approximately 115 holders of record of our common stock, excluding
approximately 8,720 beneficial holders of common stock whose shares are held in
street name.
Dividends
We have not paid any cash dividends on
our common stock since 1987 and do not plan to pay cash dividends in the
foreseeable future. The payment of dividends in the future, if any, will depend
upon our results of operations, as well as our short-term and long-term cash
availability, working capital, working capital needs, and other factors, as
determined by our Board of Directors. Currently, except as may be provided by
applicable laws, there are no contractual or other restrictions on our ability
to pay dividends if we were to decide to declare and pay them.
Recent sales of unregistered
securities
During Fiscal 2011, we did not sell any
shares of common stock, or securities exercisable for or exchangeable into
common stock, or any other securities that were not registered under the
Securities Act of 1933.
Securities
authorized for issuance under equity compensation plans
.
For information relating to this topic,
see Part III, Item 11 of this Annual Report. Executive CompensationSecurities
Authorized for Issuance under Equity Compensation Plans, which is incorporated
in this Annual Report on Form 10-K by reference to our 2011 Proxy Statement.
Purchase of
Equity Securities
No repurchase of any shares of our
common stock or other equity security was made by or on behalf of the Company
during Fiscal 2011.
16
In September 2002 and January 2004, our
Board of Directors authorized the repurchase of up to an aggregate of 486,200
shares of our common stock. Under those authorizations, as of September 30,
2011, we have repurchased an aggregate of 172,603 shares at a cost of
approximately $0.4 million, leaving a balance of 313,597 shares (approximately
3.9% of the shares outstanding at September 30, 2011) under those
authorizations, but none during Fiscal 2011 or Fiscal 2010. Separate from the
foregoing authorizations, in Fiscal 2010 in connection with exercises of stock
options to purchase 50,000 shares in the aggregate of common stock by two
non-employee directors and an officer, such persons received, net, an aggregate
of 24,030 shares in transactions valuing such shares at market on the
respective dates of exercise in lieu of payment of the exercise price of such
options. Under applicable authority, such transactions are not deemed to
constitute purchases by us of our common stock.
ITEM 6.
SELECTED
FINANCIAL DATA
Not applicable.
ITEM 7.
MANAGEMENTS DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis
should be read in conjunction with our audited Consolidated Financial
Statements and the notes thereto and other financial information appearing in
Item 8 of this Annual Report on Form 10-K. This discussion and analysis
compares our consolidated results of operations for the Fiscal year ended September
30, 2011 ("Fiscal 2011"), with those for the Fiscal year ended
September 30, 2010 ("Fiscal 2010"), and is based on or derived from
the audited Consolidated Financial Statements included in Item 8 in this Annual
Report. All figures in the following discussion are presented on a consolidated
basis. All dollar amounts and percentages presented herein have been rounded to
approximate values.
Cautionary statement for purposes of the Safe Harbor
provisions of the Private Securities Litigation Reform Act of 1995
The following managements discussion
and analysis includes forward-looking statements, as such term is used within
the meaning of the Private Securities Litigation Reform Act of 1995. These
forward-looking statements are not based on historical fact and involve
assessments of certain risks, developments, and uncertainties in our business
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 Annual Report are based upon assumptions and assessments that we believe
to be reasonable as of the date of this Annual Report. Whether those
assumptions and assessments will be realized will be determined by future
factors, developments, and events, which are difficult to predict and may be
beyond our control. Actual results, factors, developments, and events may
differ materially from those we assumed and assessed. Risks, uncertainties,
contingencies, and developments, including those discussed in this Managements
Discussion and Analysis of Financial Condition and Results of Operations and
those identified in Risk Factors in Item 1A of this Annual Report on Form
10-K, could cause our future operating results to differ materially from those
set forth in any forward looking statement. There can be no assurance that any
such forward looking statement, projection, forecast or estimate contained can
be realized or that actual returns, results, or business prospects will not
differ materially from those set forth in any forward looking statement.
Given these uncertainties, readers are
cautioned not to place undue reliance on such forward-looking statements. The
Company disclaims any obligation to update any such factors or to publicly
announce the results of any revisions to any of the forward-looking statements
contained herein to reflect future results, events or developments.
Business Overview
Trends and Economic Environment
In executing the channel-building and product
development elements of our strategy, during Fiscal 2011 we have incurred, and
we intend 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 hired in the second half
of Fiscal 2011, with further investment in personnel planned for the first
quarter of Fiscal 2012, the fourth quarter of Fiscal 2011, and succeeding
reporting periods will begin to reflect more fully our investments in resources,
while the anticipated benefits of such hires in the form of increased sales and profit will take significantly longer to be realized,
if at all. 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.
17
With regard to our OEM business, we have
recently been awarded several large programs by two major diabetic 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 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. 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. See Risk Factors in Item 1.A of this Annual Report. We
are actively looking at alternative sources of supply, as well as other
geographic regions to expand and diversify our manufacturing capabilities in
order to mitigate this trend.
Variability
of Revenues and Results of Operation
Because a high percentage of our sales
revenues is highly concentrated in a few large customers, and because the
volumes of these customers order flows to us are highly variable, with short
lead times, our quarterly revenues, and consequently our results of operations,
are susceptible to significant variability over a relatively short period of time.
Critical
Accounting Policies and Estimates
We have identified the accounting
policies and significant estimation processes below as critical to our business
operations and the understanding of our results of operations. The discussion
below is not intended to be comprehensive. In many cases, the accounting
treatment of a particular transaction is specifically dictated by accounting
principles generally accepted in the United States, with no need for
managements judgment of a particular transaction. In other cases, management
is required to exercise judgment in the application of accounting principles
with respect to particular transactions. The impact and any associated risks
related to these policies on our business operations are discussed throughout
this Managements Discussion and Analysis of Financial Condition and Results
of Operations where such policies affect reported and expected financial
results. For a detailed discussion of the applications of these and other
accounting policies, refer to Item 8. Financial Statements and Supplementary
Data in this Annual Report. Our preparation of our consolidated financial
statements requires us to make estimates and assumptions that are believed to
be reasonable under the circumstances. There can be no assurance that actual
results will not differ from those estimates and such differences could be
significant.
18
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 September 30, 2011, this amount was approximately
$10.5 million. Historically, the Company has not experienced any losses due to
such cash concentrations.
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. Three
customers, including their affiliates and contract manufacturers, accounted for
approximately 71% and 75% of the Companys accounts receivable at September 30,
2011 and 2010, respectively. At September 30, 2011 and 2010, the allowance for
doubtful accounts was approximately $14,000 and $19,000, respectively.
Inventory Valuation
Inventories consist
primarily of finished goods and are stated at the lower of cost (determined by
the first-in, first-out method) or market. Based on managements estimates, an
allowance is made to reduce excess, obsolete, or otherwise un-saleable inventories
to net realizable value. The allowance is established through charges to cost
of goods sold on the Companys consolidated statements of operations. As
reserved inventory is disposed of, the Company charges off the associated
allowance. In determining the adequacy of the allowance, managements
estimates are based upon several factors, including analyses of inventory
levels, historical loss trends, sales history, and projections of future sales
demand. The Companys estimates of the allowance may change from time to time
based on managements assessments, and such changes could be material. At
September 30, 2011, the Company did not record an allowance for obsolete
inventory. At September 30, 2010, the allowances for obsolete inventory was
approximately $28,000.
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. The Company recorded
approximately $74,000 and $54,000 of depreciation and amortization expense in
Fiscal 2011 and 2010, 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.
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.
19
Shipping and
Handling Costs
We classify 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 our Hong Kong distribution facility and network) as a
component of cost of goods sold in the accompanying consolidated statements of
operations. This classification may not
be comparable to similar companies within our industry.
Income Taxes
We account 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. We periodically
evaluate the realizability of our net deferred tax assets. See Note 8 to the
Notes to Consolidated Financial Statements. Our policy is to account for
interest and penalties
relating to income taxes, if any, in income tax expense in the statement of
operations. For the fiscal years presented in the accompanying consolidated
statements of operations no income tax related interest or penalties were
assessed or recorded.
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 7 Share-Based
Compensation of this Annual Report.
Results of Operations for Fiscal 2011
compared to Fiscal 2010
Net loss
We incurred a net loss of $2.9 million
in Fiscal 2011 compared to net loss of $1.7 million in Fiscal 2010. The
increase in net loss is primarily the result of higher sales and marketing
expenses, as well as higher general and administrative expenses, which were
offset, in part, by an increased gross profit on higher sales and other
income (primarily interest income) in Fiscal 2011, as reflected in the table
below:
(thousands of dollars)
|
|
Fiscal
2011
|
Fiscal
2010
|
Increase
(Decrease)
|
Net sales...............................................................................................
|
$22,777
|
$18,997
|
3,780
|
|
|
|
|
Gross profit...........................................................................................
|
5,065
|
4,232
|
833
|
Sales and marketing expenses...........................................................
|
(3,391)
|
(2,167)
|
1,224
|
General and administrative expenses................................................
|
(4,688)
|
(3,636)
|
1,052
|
Other income
|
58
|
10
|
48
|
Income taxes
|
56
|
(124)
|
1
80
|
Net loss*................................................................................................
|
($2,900)
|
($1,686)
|
1,214
|
* Table may not total due to rounding.
Basic and diluted loss per share was ($0.36) for
Fiscal 2011, compared to ($0.21) for Fiscal 2010. The increase in loss per
share in Fiscal 2011 was due to the increase in net loss, which was offset, in
small part, by the increase in weighted average shares outstanding in Fiscal
2011.
20
Net Sales
Net sales increased $3.8 million, or 20%,
to $22.8 million in Fiscal 2011 from $19.0 million in Fiscal 2010 due to higher
sales of diabetic products, which increased $2.5 million, or 18%, and higher
sales of Other Products, which increased $1.2 million, or 26%. The tables
below set forth net sales by product line and geographic location of our
customers for the periods indicated.
Net
Sales for Fiscal 2011
(millions of
dollars)
|
|
APAC
|
Americas
|
Europe
|
Total*
|
Diabetic Products..................................................
|
$9.1
|
$2.6
|
$5.0
|
$16.7
|
Other Products.......................................................
|
1.4
|
3.8
|
1.0
|
6.1
|
Totals*
..............................................................
|
$10.4
|
$6.4
|
$5.9
|
$22.8
|
Net
Sales for Fiscal 2010
(millions of
dollars)
|
|
APAC
|
Americas
|
Europe
|
Total*
|
Diabetic Products..................................................
|
$7.4
|
$3.0
|
$3.8
|
$14.1
|
Other Products.......................................................
|
0.9
|
3.2
|
0.8
|
4.9
|
Totals*
..............................................................
|
$8.2
|
$6.2
|
$4.6
|
$19.0
|
* Tables may not
total due to rounding.
Diabetic Product Sales
We design to the order of, and sell
carrying cases for blood glucose diagnostic kits directly to, OEMs (or their
contract manufacturers). The OEM customer or its contract manufacturer
packages our carry cases in box as a custom accessory for the OEMs blood
glucose testing and monitoring kits, or to a lesser extent, sell them through
their retail distribution channels.
Sales of cases and related accessories
for blood glucose monitoring kits increased $2.5 million, or 18%, to $16.7 million
in Fiscal 2011 from $14.1 million in Fiscal 2010. This increase was due
primarily to higher sales to two of our major diabetic customers, as presented
in the table below, which sets forth our sales by diabetic customer for the
periods indicated.
(millions of dollars)
|
|
Fiscal
2011
|
Fiscal
2010
|
Increase
(Decrease)
|
Diabetic Customer A.........................................................................
|
$8.4
|
$7.4
|
$1.0
|
Diabetic Customer B.........................................................................
|
3.7
|
3.6
|
0.1
|
Diabetic Customer C.........................................................................
|
3.7
|
2.8
|
0.9
|
All other Diabetic Customers...........................................................
|
0.8
|
0.3
|
0.5
|
Totals*.........................................................................................
|
$16.7
|
$14.1
|
$2.5
|
* Table may
not total due to rounding.
Sales of carrying cases for blood
glucose monitoring kits represented 73% of our total net sales in Fiscal 2011
compared to 74% of our total net sales in Fiscal 2010.
Other Product Sales
We design and sell carrying solutions
primarily to OEMs for a diverse array of other portable electronic and other
products, including bar code scanners, GPS and location devices, cellular
telephones, laptop computers, MP3 players, firearms, sporting and recreational
products, and aeronautical products.
Sales of other products increased $1.2
million, or 26%, to $6.2 million in Fiscal 2011 from $4.9 million in Fiscal
2010. Included in the Fiscal 2011 amount is $0.4 million of sales to Flash Ventures, Inc.
(refer to Note 3 Note Receivable in the Notes to Financial Statements), which
we consider as non-recurring business. The balance of the increase was
primarily driven by higher sales to five existing customers, which totaled $1.5
million in the aggregate and individually accounted for 10% or more of total
increase in other products. Smaller increases in several other customer
accounts, totaling $0.3 million in the aggregate, also contributed to the
higher sales of Other Products in Fiscal 2011. These sales increases were
offset, in part, by decreases in sales to several customers, most of which were
individually immaterial, except to two customers, which each decreased $0.2
million, respectively.
21
Sales of other products represented 27%
of our net sales in Fiscal 2011 compared to 26% of net sales in Fiscal 2010.
Gross Profit
Gross profit increased $0.8 million, or
20%, to $5.1 million in Fiscal 2011 from $4.2 million in Fiscal 2010. The
increase resulted primarily from the $3.8 million, or 20%, increase in net
sales in Fiscal 2011 and, to a much lesser extent, from decreases from Fiscal
2010, in absolute
terms, in tooling, packaging and warehousing costs, as well as the cost of
operating our Hong Kong sourcing and quality control functions. In addition, as a percentage of sales, all components of our Cost of
Goods Sold, with the exception of our Material Costs, were lower in Fiscal
2011, which improved our gross margin from Fiscal 2010. However, the increase
in Material Costs, as a percentage of sales, offset the factors that improved
our gross margin in Fiscal 2011. As a result, our gross margin was 22% in both
Fiscal 2011 and 2010.
The increase in material costs, which as
a percentage of sales, increased 2% in Fiscal 2011 was attributable primarily
to our Other Products line, where we experienced lower average margins due
partly to changes in product mix, and partly to increased materials, labor, and
other production costs from our Hong Kong based suppliers. These pricing
pressures are presently more evident in our Other Products line, where the
product life cycles are generally much shorter than those included in our
Diabetic Products line. We are also experiencing increased costs of materials
with regard to our Diabetic Products line, 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 Fiscal 2011.
Sales and Marketing Expenses
Sales and marketing expenses increased
$1.2 million, or 56%, to $3.4 million in Fiscal 2011 from $2.2 million in
Fiscal 2010. 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:
-
$0.6 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 Fiscal 2011;
-
$0.3 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
prospective new sales channels;
-
$140 thousand increase in product
development and design costs; and
-
$180 thousand increase in the
aggregate in occupancy, telecommunication, and general office expenses.
In connection with the potential retail
channel business we have hired 15 employees. To date, these employees have not
generated any revenue.
Lesser fluctuations in other components
of sales and marketing expenses were immaterial.
22
General and Administrative Expenses
General and administrative expenses
increased $1.1 million, or 29%, to $4.7 million in Fiscal 2011 from $3.6
million in Fiscal 2010 due primarily to the following:
-
$0.6 million increase in personnel
expense resulting from: i) hires of additional information technology,
operations, and accounting personnel during the period; ii) retention bonus to
an executive; iii) relocation expense and increased salary expenses associated
with the relocation of the Companys headquarters 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 in
travel and entertainment expenses attributable 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.
-
$250 thousand increase in the
aggregate in telecommunications costs (resulting from hosting and connectivity
charges associated with the Companys IT infrastructure, as well as cellular
telephone charges) and general office costs (primarily computer expenses and
office supplies);
-
$160 thousand increase in
professional fees including: i) legal, taxation, and accounting consulting fees
incurred in connection with the proposed Flash Ventures transaction, as well as
other strategic and business development activities; ii) consulting fees
relating to the Companys internal control environment; and iii) legal fees
resulting from the Targus matter (refer to Note 12).
Other Income (Expense)
Other income (expense), consisting
primarily of interest income on cash and cash equivalent balances and on short
term notes receivable (refer to Note 3 Notes Receivable in our Notes to
Financial Statements), as well as foreign currency transaction gains and
losses, improved to $58 thousand of income in Fiscal 2011 from $10 thousand of
income in Fiscal 2010. This improvement resulted from a $65 thousand increase
in interest income in Fiscal 2011, due primarily to the Flash note receivable,
and to a lesser extent, interest bearing short-term investments.
Liquidity and Capital
Resources
During Fiscal 2011, we used $1.8 million of cash in operations
compared to a use of $1.7 million in Fiscal 2010. Net cash used in operating
activities in Fiscal 2011 consisted of net loss of $2.9 million, adjusted by
$0.5 million for non-cash items (primarily share based compensation), and offset
by net cash provided by working capital items of $0.6 million. As to working
capital items, cash provided by operations consisted of an increase in prepaid
and other assets (current and long-term) of $0.8 million and a decrease in
accrued expenses and other current liabilities of $0.3 million. These changes
were offset, in part, by decreases in accounts receivables and inventory of
$0.7 million and $20 thousand, respectively, and an increase in accounts
payable of $0.5 million. The increase in prepaid and other assets (current and
long term) is due primarily to advanced royalties paid to a strategic partner
(refer to Note 11 License Agreement in Notes to Financial Statements), prepaid
rents (for the Companys California headquarters and its JAFZA branch office),
prepaid tooling and mold costs in support of firm purchase orders, prepaid telecommunication
and IT costs, and insurance premiums. The decrease in accrued expenses and
other current liabilities is primarily due to payments made during the Fiscal
2011 in respect of items accrued as of September 30, 2010: (i) $229 thousand in
severance payments to a former officer of the Company; (ii) $142 thousand in
settlement costs paid to a shareholder (iii) $225 thousand in sales
commissions; and (iv) $130 thousand in wages. The decrease in accounts
receivable is due to an improvement in our days sales outstanding and timing
differences in cash payments received immediately prior to the close of our
fiscal year. The increase in accounts payable is due to higher materials purchases
made in the fourth quarter of Fiscal 2011 compared to the fourth quarter of
Fiscal 2010 and are primarily in support of sales orders received in our OEM
channel.
During Fiscal 2010, we used $1.7 million of cash in
operations consisting of a net loss of $1.7 million, reduced by $0.4 million
for non-cash items, and increased by net changes in working capital items of
$0.4 million. As to working capital items, uses of cash in operating activities
in respect of increases in accounts receivable, inventories, and prepaid and
other current assets were $1.4 million, $0.4 million, and $12 thousand,
respectively. These changes were offset, in part, by increases in accounts
payable and accrued expenses and other current liabilities of $0.6 million and
$0.8 million, respectively, and a decrease in other assets of $14 thousand,
which provided cash to operating activities.
23
In Fiscal 2011, net investing activities used $1.8
million of cash, primarily in short-term loans of $1.5 million made to
prospective strategic partners (refer to Note 3 Notes Receivable in Notes
to Financial Statements), of which $0.5 million was converted to advanced
royalties (refer to Note 11 License Agreement in Notes to Financial
Statements). In addition, net investing activities consisted of purchases of
$0.3 million of property and equipment, primarily computer and
telecommunications hardware and software. In Fiscal 2010, investing activities
used $9 thousand in purchases of property and equipment.
There were no financing activities in Fiscal 2011.
In Fiscal 2010, financing activities generated $67 thousand in proceeds from
the exercise of stock options.
At September 30, 2011, our current ratio (current
assets divided by current liabilities) was 6.1; our quick ratio (current assets
less inventories divided by current liabilities) was 5.8; and our working
capital (current assets less current liabilities) was $18.3 million. As of
such date, we had no short or long-term debt outstanding.
Our primary source of liquidity is our cash and cash
equivalents on hand. The primary demands on our working capital 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) development of strategic
partnerships. 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. We
anticipate that the building out of our product offerings and establishing a
retail distribution channel through internal growth and development of
strategic partnerships may lengthen the period required to increase net sales
revenues expected to be generated by the new channel and products. Results of
operations for Fiscal 2011 reflect the increase in operating costs brought to
bear to achieve these goals. Accordingly, we anticipate significant uses of
cash and capital resources going forward as a result of one or more of the
following developments in future periods: (i) continued operating losses due to
the investments incurred in conjunction with our implementation of managements
strategy (see Trends and Economic Environment above), in particular in
increased selling and other personnel expenses; (ii) use of capital in
financing strategic partnerships in investing activities; and (iii) investments
in working capital required to support new products and sales channels. We
anticipate that our liquidity and financial resources for the next twelve
months will be adequate to meet our operating and financial requirements.
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and notes
thereto included in this Annual Report may be found at pages [28 to 45] of this
Annual Report on Form 10-K.
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None
ITEM 9A.
CONTROLS AND PROCEDURES
Our management is responsible for
establishing and maintaining a system of disclosure controls and procedures (as
defined in Rule 13a-15(e) under the Exchange Act) that is designed to ensure
that information required to be disclosed by the Company in the reports that we
file or submit under the Exchange Act is recorded, processed, summarized and
reported, within the time periods specified in the Commission's rules and
forms. Disclosure controls and procedures include, without limitation, controls
and procedures designed to ensure that information required to be disclosed by
an issuer in the reports that it files or submits under the Exchange Act is
accumulated and communicated to the issuer's management, including its
principal executive officer or officers and principal financial officer or
officers, or persons performing similar functions, as appropriate to allow
timely decisions regarding required disclosure.
24
In accordance with Exchange Act
Rule 13a-15(b), our management, under the supervision and with the
participation of our Principal Executive Officer and Principal Financial
Officer, performed an evaluation of the effectiveness of the Company's
disclosure controls and procedures as of the end of the period covered by this
Report (the fourth quarter of the Fiscal year ended September 30, 2011, in the
case of this Annual Report on Form 10-K). Based on that evaluation, the Company's
Principal Executive Officer and Principal Financial Officer concluded that the
Company's disclosure controls and procedures were effective, as of the end of
the period covered by this Report (the fourth quarter of the Fiscal year ended
September, 30, 2011, in the case of this Annual Report on Form 10-K), to
provide reasonable assurance that information required to be disclosed in the
Company's reports filed or submitted under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the
Commission's rules and forms.
Managements Report on Internal Control Over Financial
Reporting
Our Principal Executive Officer and our
Principal Financial Officer are responsible for establishing and maintaining
adequate internal control over financial reporting. Internal control over
financial reporting is defined in Rule 13a-15(f) and 15d-15(f) under the
Exchange Act as a process designed by, or under the supervision of, our
principal executive and principal financial officers and effected by our board
of directors, management and other personnel, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external reporting purposes in accordance with generally
accepted accounting principles and includes those policies and procedures that:
-
pertain to the maintenance of
records that in reasonable detail accurately and fairly reflect the
transactions and dispositions of our assets;
-
provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and
that our receipts and expenditures are being made only in accordance with
authorizations of management and our directors; and
-
provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use or
disposition of our assets that could have a material effect on the financial
statements.
Because of its inherent limitations, our
internal control over financial reporting may not prevent or detect
misstatements. Therefore, even those systems determined to be effective can
provide only reasonable assurance with respect to financial statement
preparation and presentation. Projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
Our Principal Executive Officer and our
Principal Financial Officer assessed the effectiveness of our internal control
over financial reporting as of September 30, 2011. In making this
assessment, management used the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO) in Internal
Control Integrated Framework.
Based on this assessment, our Principal
Executive Officer and our Principal Financial Officer believe that, as of
September 30, 2011, our internal control over financial reporting is effective
based on those criteria.
This annual report does not include an
attestation report of the Companys independent registered public accounting
firm regarding internal control over financial reporting. Managements report
was not subject to attestation by the Companys independent registered public
accounting firm pursuant to rules of the Securities and Exchange Commission
that permit the Company to provide only managements report in this annual
report.
25
This report shall not be deemed to be
filed for purposes of Section 18 of the Exchange Act or otherwise subject to
the liabilities of that section, unless the registrant specifically states that
the report is to be considered filed under the Exchange Act or incorporates
it by reference into a filing under the Securities Act or the Exchange Act.
Changes in Internal Control
Our management, with the participation
of our Principal Executive Officer and Principal Financial Officer, performed
an evaluation required by Rule 13a-15(d) of the Exchange Act as to whether any
change in our internal control over financial reporting (as defined in Rule
13a-15(f) under the Exchange Act) occurred during the last Fiscal quarter of
the Fiscal year ended September 30, 2011. Based on that evaluation, our Principal
Executive Officer and our Principal Financial Officer concluded that no change
occurred in the Company's internal control over financial reporting during the
last Fiscal quarter of the Fiscal year ended September 30, 2011 that has
materially affected, or is reasonably likely to materially affect, the
Company's internal control over financial reporting.
ITEM 9B.
OTHER
INFORMATION
None
PART III
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this item
regarding directors and executive officers is incorporated to this Annual
Report on Form 10-K by reference to our Definitive Proxy Statement to be filed
with the Securities and Exchange Commission not later than January 28, 2012, in
connection with our Annual Meeting of Stockholders (the 2011 Proxy Statement)
under the headings Election of Directors, Structure and Practices of the
Board of Directors, and Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters;Section 16(a) Beneficial Ownership
Reporting Compliance. Information regarding executive officers is also
incorporated to this Annual Report on Form 10-K by reference to the 2011 Proxy
Statement under the caption Executive Officers. The information required by
this item relating to Corporate Governance, including Code of Ethics, is
incorporated to this Annual Report on Form 10-K by reference to the 2011 Proxy
Statement under the heading Structure and Practices of the Board of
Directors.
ITEM 11.
EXECUTIVE COMPENSATION
The information required by this item is
incorporated to this Annual Report on Form 10-K by reference to the 2011 Proxy
Statement under the heading Executive Compensation and Related Information.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
The information required by this item is
incorporated to this Annual Report on Form 10-K by reference to the 2011 Proxy
Statement under the headings Executive Compensation and Related InformationSecurities
Authorized for Issuance Under Equity Compensation Plans and Security
Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this item is
incorporated to this Annual Report on Form 10-K by reference to the 2011 Proxy
Statement under the headings Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder MattersCertain Relationships, Director
Independence, and Related Transactions and Structure and Practices of the
Board of Directors;Board of Directors and Director Independence.
ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item is
incorporated to this Annual Report on Form 10-K by reference to the 2011 Proxy
Statement under the heading Matters Relating to Independent Registered Public
Accountants;Principal Accountant Fees and Services.
26
PART IV
ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
|
|
a.
|
Financial Statements
|
|
|
Reports of Independent
Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Shareholders Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
|
|
b.
|
Exhibits
|
|
|
3.
|
Articles of Incorporation and By-Laws
|
|
|
|
|
|
|
|
3(i)
|
Amended and Restated Certificate of
Incorporation (incorporated by reference to Exhibit 3 to the Company's Annual
Report on Form 10-K, as filed with the Commission on December 8, 2010).
|
|
|
|
|
|
|
|
|
3(ii)
|
Third Amended and Restated By-Laws of Forward
Industries, Inc., as of August 10, 2010 (incorporated by reference to Exhibit 3
to the Company's Annual Report on Form 10-K, as filed with the Commission on
December 8, 2010).
|
|
|
|
|
|
|
|
4.
|
Instruments Defining the Rights of Security Holders
|
|
|
|
|
|
|
|
4.1
|
Shareholder Protection Rights Agreement, dated as of June
9, 2010, by and between Forward Industries, Inc. and American Stock Transfer
& Trust Company LLC, as Rights Agent (incorporated by reference to Exhibit
4.1 to the Companys Current Report on Form 8-K, as filed with the Commission
on June 15, 2010)
|
|
|
|
|
|
|
|
|
4.2
|
Amendment, dated as of August 10, 2010, to Shareholder
Protection Rights Agreement, dated as of June 9, 2010, by and between Forward
Industries, Inc. and American Stock Transfer & Trust Company LLC, as Rights
Agent (incorporated by reference to Exhibit 4.1 to the Companys Current Report
on Form 8-K, as filed with the Commission on August 16, 2010), which amendment
terminated the Right Agreement
|
|
|
|
|
|
|
|
10.
|
Material Contracts
|
|
|
|
|
|
|
|
10.1
|
1996 Stock Incentive Plan of Forward Industries, Inc.
(incorporated by reference to Exhibit 4 to the Registration Statement on Form
S-8 of the Company, as filed on April 25, 2003).
|
|
|
|
|
|
|
|
|
10.2
|
Forward Industries, Inc. 2007 Equity Incentive Plan, as
amended (incorporated by reference to Exhibit 4.1 to the Registration Statement
on Form S-8 of the Company, Reg. File No. 333-165075, as filed with the
Commission on February 25, 2010).
|
|
|
|
|
|
|
|
|
10.3
|
Settlement Agreement, dated as of August 10, 2010, by and
among Forward Industries, Inc., LaGrange Capital Partners, L.P., and certain
Affiliates of LaGrange Capital Partners, L.P. (incorporated by reference to
Exhibit 10.1 to the Companys Current Report on Form 8-K, as filed with the
Commission on August 16, 2010).
|
|
|
|
|
|
|
|
|
10.4
|
Severance and Release Agreement, dated as of August 10,
2010, by and between Douglas W. Sabra and Forward Industries, Inc.
(incorporated by reference to Exhibit 10.2 to the Companys Current Report on
Form 8-K, as filed with the Commission on August 16, 2010).
|
|
|
|
|
|
|
|
|
10.5
|
Retention Agreement, dated as of August 10, 2010, between
Forward Industries, Inc. and James O. McKenna, (incorporated by reference to
Exhibit 10.4 to the Companys Current Report on Form 8-K, as filed with the
Commission on August 16, 2010).
|
27
|
|
10.6
|
Amended
Employment Agreement, dated as of April 1, 2011, between Forward
Industries, Inc. and James O. McKenna, (incorporated by reference to
Exhibit 10.7 to the Company's Quarterly Report on Form 10-Q, as filed
with the Commission on May 11, 2011).
|
|
|
|
|
|
|
10.7
|
Letter
Agreement, dated October 31, 2011, between Forward Industries, Inc. and RGJR Capital Partners LLC, (incorporated by reference to
Exhibit 99.1 to the Companys Current Report on Form 8-K, as filed with the
Commission on November 7, 2011).
|
|
|
|
|
|
|
10.8†
|
Memorandum
of Understanding, dated August 30, 2011, between Forward Industries,
Inc. and G-Form LLC.
|
|
|
|
|
|
21.
|
Subsidiaries of the Registrant
|
|
|
|
|
|
21.1
|
List of Subsidiaries of Forward Industries, Inc.
|
|
|
|
|
|
23.
|
Consent of Independent Registered Public
Accounting Firm
|
|
|
|
|
|
23.1
|
Consent of J.H. Cohn LLP
|
|
|
|
|
|
|
23.2
|
Consent of Kaufman, Rossin & Co., P.A.
|
|
|
|
|
|
31.
|
Certifications Pursuant to Rule
13a-14(a) (Section 302 of Sarbanes-Oxley)
|
|
|
|
|
|
31.1
|
Certification of Brett M. Johnson
|
|
|
|
|
|
|
31.2
|
Certification of James O. McKenna
|
|
|
|
|
|
32.
|
Certifications Pursuant to Rule
13a-14(b) and 18 U.S.C.
Section 1350 (Section 906 of Sarbanes-Oxley)
|
|
|
|
|
|
32.1
|
Certifications of Brett M. Johnson and James O. McKenna (furnished
herewith)
|
†
Portions have been omitted pursuant to request for confidential
treatment and the omitted portions have been separately filed with the
Commission.
28
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
The
Board of Directors and Shareholders of Forward Industries, Inc.
We have audited the accompanying
consolidated balance sheet of Forward Industries, Inc. as of September 30, 2011
and the related consolidated statements of operations, shareholders' equity and
cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance
with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated
financial statements referred to above present fairly, in all material
respects, the financial position of Forward Industries, Inc. as of September
30, 2011 and its results of operations and cash flows for the year then ended,
in conformity with accounting principles generally accepted in the United
States of America.
New York, New York
December 15, 2011
29
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
The
Board of Directors and Shareholders of Forward Industries, Inc.
We have audited the accompanying
consolidated balance sheet of Forward Industries, Inc. (the Company) as of
September 30, 2010 and the related consolidated statements of operations,
shareholders' equity and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance
with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated
financial statements referred to above present fairly, in all material
respects, the financial position of Forward Industries, Inc. as of September 30,
2010 and the results of its operations and its cash flows for the year then
ended, in conformity with accounting principles generally accepted in the
United States of America.
KAUFMAN, ROSSIN & CO., P.A.
|
Miami, Florida
December 8, 2010
30
FORWARD INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2011 AND 2010
|
|
|
|
|
|
|
|
|
September 30,
|
|
September 30,
|
|
2011
|
|
2010
|
Assets
|
|
|
|
Current assets:
|
|
|
|
Cash and cash
equivalents...................................................................................
|
$14,911,844
|
|
$18,471,520
|
Accounts receivable, net ......................................................................................
|
3,894,118
|
|
4,621,181
|
Inventories...............................................................................................................
|
1,045,219
|
|
1,036,386
|
Prepaid expenses and other current assets.........................................................
|
1,018,227
|
|
240,651
|
Note receivable........................................................................................................
|
1,000,000
|
|
--
|
Total current assets
..........................................................................................
|
21,869,408
|
|
24,369,738
|
|
|
|
|
Property and equipment,
net.....................................................................................
|
302,158
|
|
115,205
|
Other
assets.................................................................................................................
|
88,716
|
|
46,032
|
Total assets
..................................................................................................................
|
$22,260,282
|
|
$24,530,975
|
|
|
|
|
Liabilities and
shareholders equity
|
|
|
|
Current liabilities:
|
|
|
|
Accounts payable.....................................................................................................
|
$2,947,562
|
|
$2,439,273
|
Accrued expenses and other current liabilities....................................................
|
630,031
|
|
885,332
|
Total current liabilities
....................................................................................
|
3,577,593
|
|
3,324,605
|
|
|
|
|
Commitments and
contingencies
.............................................................................
|
|
|
|
|
|
|
|
Shareholders equity:
|
|
|
|
Preferred stock, par value $0.01 per share; 4,000,000 shares
authorized;
no shares issued..........................................................................................
|
--
|
|
--
|
Common stock, par value $0.01 per share; 40,000,000
shares authorized,
8,794,296 and 8,761,629 shares issued (including
706,410 held in
treasury at both dates) ...............................................................................
|
87,943
|
|
87,616
|
Capital in excess of par value.............................................................................
|
16,845,673
|
|
16,469,142
|
Treasury stock, 706,410 shares at cost ............................................................
|
(1,260,057)
|
|
(1,260,057)
|
Retained earnings................................................................................................
|
3,009,130
|
|
5,909,669
|
Total shareholders' equity
.........................................................................................
|
18,682,689
|
|
21,206,370
|
Total liabilities and shareholders equity
..............................................................
|
$22,260,282
|
|
$24,530,975
|
The accompanying notes are an integral part of the
consolidated financial statements.
31
FORWARD INDUSTRIES, INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
For the Fiscal Years Ended
September 30,
|
|
2011
|
|
2010
|
Net sales
......................................................................................................................................
|
$22,777,040
|
|
$18,996,827
|
Cost of goods sold
......................................................................................................................
|
17,712,425
|
|
14,764,840
|
Gross profit
................................................................................................................................
|
5,064,615
|
|
4,231,987
|
|
|
|
|
Operating expenses:
|
|
|
|
Sales
and marketing...........................................................................................................
|
3,391,396
|
|
2,166,542
|
General
and administrative...............................................................................................
|
4,688,236
|
|
3,636,309
|
Total operating expenses
.........................................................................................
|
8,079,632
|
|
5,802,851
|
|
|
|
|
Loss from operations
...............................................................................................................
|
(3,015,017)
|
|
(1,570,864)
|
|
|
|
|
Other income (expense):
|
|
|
|
Interest
income...................................................................................................................
|
107,686
|
|
42,941
|
Other
expense, net.............................................................................................................
|
(49,258)
|
|
(32,868)
|
Total other income
....................................................................................................
|
58,428
|
|
10,073
|
|
|
|
|
Loss before income tax (benefit) expense
............................................................................
|
(2,956,589)
|
|
(1,560,791)
|
Income tax (benefit)
expense
..................................................................................................
|
(56,050)
|
|
124,032
|
Net loss
.....................................................................................................................................
|
$(2,900,539)
|
|
$(1,684,823)
|
|
|
|
|
Net loss per common and common equivalent share
|
|
|
|
Basic...........................................................................................................................
|
$(0.36)
|
|
$(0.21)
|
Diluted........................................................................................................................
|
$(0.36)
|
|
$(0.21)
|
|
|
|
|
Weighted average number of common and common
equivalent shares outstanding
|
[
|
|
|
Basic...........................................................................................................................
|
8,080,344
|
|
7,983,257
|
Diluted.......................................................................................................................
|
8,080,344
|
|
7,983,257
|
The accompanying notes are an integral part of the
consolidated financial statements.
32
FORWARD INDUSTRIES, INC.
CONSOLIDATED STATEMENTS
OF SHAREHOLDERS EQUITY
FOR THE FISCAL YEARS ENDED SEPTEMBER
30, 2011 AND 2010
|
|
Common Stock
|
|
|
Treasury Stock
|
|
Total
|
Number of Shares
|
Par Value
|
Additional Paid-in
Capital
|
Retained Earnings
|
Number of
Shares
|
Amount
|
Balance at September 30,
2009
|
$22,522,439
|
8,643,598
|
$86,436
|
$16,101,568
|
$7,594,492
|
706,410
|
$(1,260,057)
|
Common
stock issued
upon exercise of stock options
|
67,000
|
59,030
|
590
|
66,410
|
--
|
--
|
--
|
Share-based
compensation
|
301,754
|
59,001
|
590
|
301,164
|
--
|
--
|
--
|
Net
loss
|
(1,684,823)
|
--
|
--
|
--
|
(1,684,823)
|
--
|
--
|
Balance at September 30,
2010
|
21,206,370
|
8,761,629
|
87,616
|
16,469,142
|
5,909,669
|
706,410
|
(1,260,057)
|
Share-based compensation
|
376,858
|
32,667
|
327
|
376,531
|
--
|
--
|
--
|
Net loss
|
(2,900,539)
|
--
|
--
|
--
|
(2,900,539)
|
--
|
--
|
Balance at September 30,
2011
|
$18,682,689
|
8,794,296
|
$87,943
|
$16,845,673
|
$3,009,130
|
706,410
|
$(1,260,057)
|
The accompanying notes are an integral part of the
consolidated financial statements.
33
FORWARD INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
For the Fiscal Years Ended
September 30,
|
|
2011
|
|
2010
|
Operating activities:
|
|
|
|
Net loss.............................................................................................................................
|
$(2,900,539)
|
|
$(1,684,823)
|
Adjustments to reconcile net loss to net cash used
in operating activities:
|
|
|
|
Share-based
compensation..................................................................................
|
376,858
|
|
268,718
|
Depreciation and
amortization.............................................................................
|
74,307
|
|
53,602
|
Provision for obsolete
inventory........................................................................
|
11,525
|
|
29,796
|
Bad debt expense...................................................................................................
|
1,222
|
|
8,875
|
Loss on disposal of
property and equipment....................................................
|
15,373
|
|
2,227
|
Changes
in operating assets and liabilities:
|
|
|
|
Accounts receivable..............................................................................................
|
725,841
|
|
(1,370,594)
|
Inventories..............................................................................................................
|
(20,358)
|
|
(399,697)
|
Prepaid expenses and other
current assets........................................................
|
(287,576)
|
|
(11,713)
|
Other assets.............................................................................................................
|
(42,684)
|
|
13,500
|
Accounts payable..................................................................................................
|
508,289
|
|
615,182
|
Accrued expenses and other
current liabilities..................................................
|
(255,301)
|
|
784,511
|
Net cash used in
operating activities
...............................................................................
|
(1,793,043)
|
|
(1,690,416)
|
|
|
|
|
Investing activities:
Issuance of notes receivable............................................................................................
|
(1,490,000)
|
|
-
|
Purchases of property and
equipment..........................................................................
|
(276,633)
|
KC
|
(8,566)
|
Net cash used in
investing activities
.................................................................................
|
(1,766,633)
|
|
(8,566)
|
|
|
|
|
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
......................................................................
|
(3,559,676)
|
|
(1,631,982)
|
|
|
|
|
Cash and cash equivalents
at beginning of year
.............................................................
|
18,471,520
|
|
20,103,502
|
|
|
|
|
Cash and cash
equivalents at end of year
.........................................................................
|
$14,911,844
|
|
$18,471,520
|
|
|
|
|
Supplemental Disclosures
of Cash Flow Information:
|
|
|
|
Cash
paid during the Fiscal year for:
|
|
|
|
Income
Taxes..........................................................................................................
|
$514
|
|
$--
|
Supplemental Disclosures
of Non-Cash Operating and Investing Activities:
|
|
|
|
Conversion
of note receivable to advanced royalties is reflected in Prepaid expenses
and
other current assets (refer to Note 11)....................................................................
|
$490,000
|
|
$--
|
The accompanying notes are an integral part of the
consolidated financial statements.
34
FORWARD INDUSTRIES,
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 OVERVIEW
Forward Industries, Inc. was
incorporated under the laws of the State of New York and began operations in
1961 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.
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.
NOTE 2 ACCOUNTING POLICIES
Accounting Estimates
The preparation of the Company's
consolidated financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates and
assumptions.
Basis of Presentation
The accompanying consolidated financial
statements include the accounts of Forward Industries, Inc.
("Forward") and its wholly owned subsidiaries (Forward Industries
(IN), Inc., Forward Industries (Switzerland) GmbH (Forward Switzerland),
Forward Industries HK Ltd., Forward Asia Pacific Limited, and Forward Ind.
(UK), Ltd., together with Forward, the "Company"). All significant
intercompany transactions and balances have been eliminated in consolidation.
35
NOTE 2 ACCOUNTING
POLICIES (CONTINUED)
Cash and Cash Equivalents
Cash and cash
equivalents consist primarily of cash on deposit, highly liquid money market
accounts, short-term bonds, and certificates of deposit with original
contractual maturities of three months or less, predominantly in US dollar
denominated instruments. The Company minimizes its credit risk associated with
cash and cash equivalents by investing in high quality instruments and by
periodically evaluating the credit quality of the primary financial institution
issuers of such instruments. The Company holds cash and cash equivalents at
major financial institutions in the United States, at which cash amounts may
significantly exceed FDIC insured limits, and in Europe. At September 30, 2011,
this amount was approximately $10.5 million. Historically, the Company has not
experienced any losses due to such cash concentrations.
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 extends to certain customers, particularly its largest, 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. At September 30, 2011 and 2010, the allowance for doubtful
accounts was approximately $14,000 and $19,000, respectively.
Inventories
Inventories consist primarily of
finished goods and are stated at the lower of cost (determined by the first-in,
first-out method) or market. Based on managements estimates, an allowance is
made to reduce excess, obsolete, or otherwise un-saleable inventories to net
realizable value. The allowance is established through charges to cost of goods
sold on the Companys consolidated statements of operations. As reserved
inventory is disposed of, the Company charges off the associated allowance. In
determining the adequacy of the allowance, managements estimates are based
upon several factors, including analyses of inventory levels, historical loss
trends, sales history, and projections of future sales demand. The Companys
estimates of the allowance may change from time to time based on managements
assessments, and such changes could be material. At September 30, 2011 the
Company did not record an allowance for obsolete inventory. At September 30,
2010, the allowance for obsolete inventory was approximately and $28,000.
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, plant and equipment are retired or otherwise disposed
of, the cost and accumulated depreciation are removed from the accounts and any
resulting gain or loss is included in the results of operations for the
respective period. Depreciation is provided over the estimated useful lives of
the related assets using the straight-line method for financial statement
purposes. The estimated useful life for furniture, fixtures and equipment
ranges from three to ten years. Amortization of leasehold improvements is
computed using the straight-line method over the shorter of the remaining lease
term or the estimated useful lives of the improvements. For the fiscal years
ended September 30, 2011 and 2010, the Company recorded approximately $74,000
and $54,000 of depreciation and amortization expense, respectively.
Depreciation and amortization for production related property, plant and
equipment is included as a component of costs of goods sold in the accompanying
consolidated statements of operations. Depreciation and amortization for
selling and general and administrative related property and equipment, is
included as a component of operating expenses in the accompanying consolidated
statements of operations.
36
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 8 to these Notes to Consolidated Financial Statements. The Companys
policy is to account for interest and penalties relating to income taxes, if
any, in income tax expense in its consolidated statement of operations and
include accrued interest and penalties within the accrued liabilities in its
balance sheets, if applicable. For fiscal years presented in the accompanying
consolidated statements of operations no income tax related interest or
penalties were assessed or recorded.
Revenue Recognition
The Company generally recognizes 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) have no continuing obligations to the
customer; and (4) the collection of 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 and Promotion Costs
Advertising and promotion costs,
consisting primarily of samples, tradeshow costs, and website costs
are expensed as incurred. Advertising and promotion costs are included in sales
and marketing expenses in the accompanying consolidated statements of
operations and amounted to approximately $173,000 and $111,000 for the fiscal
years ended September 30, 2011 and 2010, respectively.
Foreign Currency Transactions
The functional currency of the Company
and its wholly owned foreign subsidiaries is the U.S. dollar. Foreign currency
transactions may generate receivables or payables that are fixed in terms of
the amount of foreign currency that will be received or paid. Fluctuations in
exchange rates between such foreign currency and the functional currency
increase or decrease the expected amount of functional currency cash flows upon
settlement of the transaction. These increases or decreases in expected
functional currency cash flows are foreign currency transaction gains or losses
that are included in other income (expense), net in the accompanying
consolidated statements of operations. The net loss from foreign currency
transactions and translations was approximately $37,000 and $33,000 for the
fiscal years ended September 30, 2011 and 2010, respectively.
Comprehensive Loss
For the fiscal years ended September
30, 2011 and 2010, the Company did not have any components of comprehensive
loss other than net loss.
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.
37
NOTE 2 ACCOUNTING
POLICIES (CONTINUED)
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 7 Share-Based
Compensation.
Recent Accounting Pronouncements
In May 2011, the FASB issued ASU
2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure
Requirements in U.S. GAAP and IFRSs, which provides a consistent
definition of fair value and ensures that the fair value measurement and
disclosure requirements are similar between U.S. GAAP and International
Financial Reporting Standards (IFRS). The guidance changes certain fair value
measurement principles and expands the disclosure requirements particularly for
Level 3 fair value measurements. The guidance is effective for the Company
beginning January 1, 2012 and is to be applied prospectively. The adoption
of this guidance, which relates primarily to disclosure, is not expected to have
a material impact on the Companys consolidated financial position, results of
operations or cash flows.
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.
38
NOTE 2 ACCOUNTING
POLICIES (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
On January 5, 2011, the Company entered
into a loan agreement with Flash Ventures, Inc. (Flash), an unrelated party, to
provide a credit facility of up to $1,000,000, due December 1, 2011. 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. 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. Effective December 1,
2011, the terms of the loan were amended to, among other things, extend the
maturity date to April 1, 2012. In connection with such amendment Flash made a
principal payment of $250,000 on December 1, 2011. Refer to Note 15 - Subsequent
Events. The Company recorded
approximately $449,000 in sales to Flash under its customary terms of sale
during the fiscal year ended September 30, 2011.
NOTE 4 PROPERTY
AND EQUIPMENT
Property and equipment and related
accumulated depreciation and amortization are summarized in the table below:
|
|
September 30,
|
|
|
2011
|
|
2010
|
Furniture,
fixtures and equipment...................................................................
|
|
$940,819
|
|
$772,511
|
Leasehold
improvements..................................................................................
|
|
188,492
|
|
159,948
|
Property and equipment,
cost....................................................................
|
|
1,129,311
|
|
932,459
|
Less
accumulated depreciation and amortization.........................................
|
|
(827,153)
|
|
(817,254)
|
Property and equipment, net
......................................................................
|
|
$302,158
|
|
$115,205
|
39
NOTE 5 ACCRUED EXPENSES AND
OTHER CURRENT LIABILITIES
Accrued expenses and other current
liabilities consist of the following:
|
|
September 30,
|
|
|
2011
|
|
2010
|
Accrued severance.........................................................
|
|
$100,000
|
|
$229,167
|
Accrued sales commission and bonuses....................
|
|
216,183
|
|
224,772
|
Accrued shareholder settlement costs........................
|
|
-
|
|
142,043
|
Accrued wages and benefits.........................................
|
|
118,541
|
|
130,241
|
Accrued taxes..................................................................
|
|
19,152
|
|
90,997
|
Accrued other..................................................................
|
|
176,155
|
|
68,112
|
Accrued expenses and other current liabilities
..
|
|
$630,031
|
|
$885,332
|
NOTE 6 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
September 30, 2011, the Company had repurchased an aggregate of 172,603 shares
at a cost of approximately $403,000, but none during the fiscal years ended
September 30, 2011 and 2010.
NOTE 7 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. During the fiscal year ended
September 30, 2011, the Compensation Committee of the Companys Board of
Directors (the Compensation Committee) approved awards of stock options to
purchase an aggregate of 545,000 shares of common stock to certain of the
Companys current executive officers and certain employees (470,000 shares) and
to current non-employee directors (75,000 shares). Of these awards, 95,000
shares were forfeited and reverted to, and are eligible for re-grant under, the
2011 Plan. As of September 30, 2011, the total shares of common stock available
for grants of equity awards under the 2011 Plan was 400,000. 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.
40
NOTE 7 ACCOUNTING
POLICIES (CONTINUED)
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. During the fiscal year ended September 30, 2011, the Compensation
Committee of the Companys Board of Directors (the Compensation Committee)
approved awards of stock options to purchase an aggregate of 380,000 shares of
common stock to certain of the Companys current executive officers and certain
employees. Of these awards, 10,000 shares were forfeited and reverted to, and
are eligible for re-grant under, the 2007 Plan. As of September 30, 2011, the
total shares of common stock available for grants of equity awards under the
2007 Plan was 26,366. 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.
In March 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 during the fiscal year ended September
30, 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 September 30, 2011.
Stock Option Awards
Under the 2011 and 2007 Plans, the
Compensation Committee has approved awards of stock options to purchase an
aggregate of 1,197,500 shares of common stock to the Companys current and
certain former non-employee directors, and to current and certain former
Company officers. Of these awards grants covering 925,000 shares were made
during the fiscal year ended September 30, 2011. As of September 30, 2011,
awards covering 40,000 shares from the 2007 Plan and 95,000 shares from the
2011 Plan of common stock were forfeited, with such shares reverting to the
respective plans and were eligible for grant. 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
$382,000 and $141,000 of compensation expense for stock option awards in its
consolidated statements of operations for the fiscal years ended September 30,
2011 and 2010, respectively. As of September 30, 2011, there was approximately
$1,251,000 of total unrecognized compensation cost related to 825,000 shares of
unvested stock option awards granted under the 2007 and 2011 Plans, which is
expected to be recognized over the remainder of the weighted average vesting
period (extending to August 2016).
41
NOTE 7 SHARE BASED COMPENSATION
(CONTINUED)
Stock Option Awards (Continued)
The following table summarizes stock
option activity under the 2011 Plan and 2007 Plan, as amended, during the
fiscal year ended September 30, 2011 (there was no activity during such period
in respect of the 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..........................................................
|
925,000
|
|
$3.44
|
|
8.4
|
|
|
Exercised.......................................................
|
--
|
|
--
|
|
--
|
|
|
Forfeited........................................................
|
(105,000)
|
|
$3.73
|
|
--
|
|
|
Expired...........................................................
|
--
|
|
--
|
|
--
|
|
|
Outstanding
at September 30, 2011
|
1,007,500
|
|
$3.45
|
|
9.1
|
|
$31,275
|
|
|
|
|
|
|
|
|
Options vested and exercisable at
September
30, 2011...........
|
182,500
|
|
$3.71
|
|
7.3
|
|
$10,575
|
Options expected to vest at
September
30, 2011........................
|
825,000
|
|
$3.39
|
|
9.5
|
|
$1,150
|
The table below provides additional
information regarding stock option awards that were outstanding and exercisable
at September 30, 2011.
|
Stock Options Outstanding and Exercisable
|
Range of Exercise Prices
|
Outstanding at
September 30, 2011
|
|
Weighted
Average
Remaining
Contractual
Term (Years)
|
|
Weighted Average
Exercise Price
|
$1.80 to $2.43
|
112,500
|
|
7.8
|
|
$2.27
|
$2.85 to $3.79
|
40,000
|
|
8.2
|
|
$3.56
|
$6.02
|
20,000
|
|
4.6
|
|
$6.02
|
$15.91
|
10,000
|
|
3.6
|
|
$15.91
|
|
182,500
|
|
7.3
|
|
$3.71
|
During the fiscal years ended September
30, 2011 and 2010, the Company granted 925,000 and 117,500 stock options at
weighted average grant date fair values of $3.44 and $2.72, 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 Fiscal Years Ended September
30,
|
|
|
2011
|
|
2010
|
Expected term (in years)...................................................................
|
|
5.0
|
|
5.0
|
Risk-free interest rate........................................................................
|
|
0.1% to 2.2%
|
|
1.41% to 2.33%
|
Expected volatility.............................................................................
|
|
62% to 72%
|
|
71% to 78%
|
Expected
dividend yield...................................................................
|
|
0%
|
|
0%
|
42
NOTE 7 SHARE BASED COMPENSATION
(CONTINUED)
Stock Option Awards (Continued)
The expected term represents the period
over which the stock option awards are expected to be outstanding. The Company
based the risk-free interest rate used in its assumptions on the implied yield
currently available on U.S. Treasury zero-coupon issues with a remaining term
equivalent to the awards expected term. The volatility factor used in the
Companys assumptions is based on the historical price of its common stock over
the most recent period commensurate with the expected term of the award. The
Company historically has not paid any dividends on its common stock and had no
intention to do so on the date the share-based awards were granted.
Accordingly, the Company used a dividend yield of zero in its assumptions. The
Company estimates the expected term, volatility and forfeitures of share-based
awards based upon historical data.
Restricted Stock Awards
Under the 2007 Plan, the Compensation
Committee of the Companys Board of Directors approved and granted awards of
183,500 shares of restricted stock, in the aggregate, to certain present and former
executive officers and key employees. Of these awards 22,366 shares of
restricted stock have been forfeited and reverted to, and are eligible for
re-grant under the 2007 Plan. No awards of restricted stock were made during
the fiscal year ended September 30, 2011. Vesting of the restricted stock is
generally subject to a continued service condition with one-third of the awards
vesting each year on the anniversary date the awards were granted typically
commencing on the first such anniversary date. The fair value of the awards
granted was equal to the market value of the Companys common stock on the
grant date. During the fiscal years ended September 30, 2011 and 2010, the
Company recognized approximately ($5,000) and $128,000, respectively, of compensation
in its consolidated statements of operations related to restricted stock
awards.
The following table summarizes
restricted stock activity under the 2007 Plan during the fiscal year ended
September 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 forfeited...................................................................................
|
|
(20,866)
|
|
$2.09
|
Shares vested......................................................................................
|
|
(32,667)
|
|
$2.08
|
Non-vested balance at September 30, 2011...........................................
|
|
25,799
|
|
$2.04
|
As of September 30, 2011, there was approximately
$10,000 of total unrecognized compensation cost related to 25,799 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) period (approximately 15 months). The total fair
value of shares vested during the fiscal years ended September 30, 2011 and
2010 was approximately $68,000 and $128,000, respectively.
Warrants
As of September 30, 2011, warrants to purchase 75,000
shares of the Companys common stock at an exercise price of $1.75 were
outstanding. By their terms these warrants expire 90 days after a registration
statement registering common stock (other than pursuant to employee benefit
plans) is declared effective by the Securities and Exchange Commission. As of
September 30, 2011, no such registration statement has been filed with the
Securities and Exchange Commission.
43
NOTE 8 INCOME TAXES
The Companys provision (benefit) for
income taxes consists of the following United States and foreign components:
|
For the Fiscal Years Ended
September
30,
|
|
2011
|
|
2010
|
U.S. Federal and State
|
|
|
|
Current.......................................................................................................................
|
$(56,050)
|
|
$124,032
|
Deferred.....................................................................................................................
|
(996,876)
|
|
210,910
|
|
|
|
|
Foreign:
|
|
|
|
Current.......................................................................................................................
|
--
|
|
--
|
Deferred.....................................................................................................................
|
16,849
|
|
(13,431)
|
|
|
|
|
Change in valuation allowance...................................................................................
|
980,027
|
|
(197,479)
|
(Benefit)
provision for income taxes.........................................................................
|
$(56,050)
|
|
$124,032
|
The benefit from income taxes of $56,050
recorded in the fiscal year ended September 30, 2011 is attributable to income
taxes recoverable in respect of Fiscal 2010. As of September 30, 2011 and 2010,
the Company has no unrecognized tax benefits related to U.S. Federal and state
income tax matters.
The deferred tax expense (benefit) is
the change in the deferred tax assets and liabilities representing the tax
consequences of changes in the amounts of temporary differences, net operating
loss carry forwards and changes in tax rates during the fiscal year. The
Companys deferred tax assets and liabilities are comprised of the following:
|
As of September 30,
|
|
2011
|
|
2010
|
Deferred tax assets:
|
|
|
|
Net operating losses...............................................................................................
|
$1,185,053
|
|
$191,592
|
Share-based compensation....................................................................................
|
130,493
|
|
115,010
|
Alternative minimum tax credit..............................................................................
|
99,757
|
|
99,757
|
Excess tax over book basis in inventory..............................................................
|
28,717
|
|
48,056
|
Depreciation.............................................................................................................
Allowance for doubtful accounts.........................................................................
|
9,116
5,086
|
|
--
6,872
|
|
1,458,222
|
|
461,287
|
Valuation allowance................................................................................................
|
(1,380,769)
|
|
(400,741)
|
Net deferred tax assets.........................................................................................
|
77,453
|
|
60,546
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
Prepaid insurance...................................................................................................
|
(77,453)
|
|
(56,239)
|
Depreciation............................................................................................................
|
--
|
|
(4,307)
|
|
(77,453)
|
|
(60,546)
|
|
|
|
|
Total
|
$--
|
|
$--
|
44
NOTE 8 INCOME TAXES (CONTINUED)
At September 30,
2011, the Company had available net operating loss carryforwards for U.S.
Federal and state income tax purposes of approximately $2,811,000 and
$3,756,000, respectively, expiring through 2031, resulting in deferred tax
assets in respect of U.S. Federal and state income taxes of approximately
$956,000 and $127,000, respectively. In addition, at September 30, 2011, the
Company had available net operating loss carryforwards for foreign income tax
purposes of approximately $1,160,000 resulting in a deferred tax asset of
approximately $102,000, expiring through 2017. Total net deferred tax assets,
before valuation allowances, was $1,381,000 and $401,000 at September 30, 2011
and 2010, respectively. As of September 30, 2011, the undistributed earnings of
the Companys Swiss subsidiary of $821,000 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 September 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 September 30, 2011 and 2010,
the valuation allowances were approximately $1,381,000 and $401,000,
respectively. If the Company determines in a future reporting period that it
will be able to use some or all of its deferred tax assets, the adjustment to
reduce or eliminate the valuation allowance would reduce its tax expense and
increase after-tax income. Changes in deferred tax assets and valuation
allowance are reflected in the Income Taxes line item of the Companys
consolidated statements of operations.
As of September 30, 2011 and 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, 2008 and
2005 are closed with regard to U.S. Federal and State examination, and Swiss federal
taxes, respectively, except with respect to net operating losses generated in
prior fiscal years.
The significant elements contributing
to the difference between the United States Federal statutory tax rate and the
Companys effective tax rate are as follows:
|
For the Fiscal Years Ended
September
30,
|
|
2011
|
|
2010
|
Statutory U.S. Federal income tax rate.................................................................
|
34.0%
|
|
34.0%
|
State taxes, net of Federal
benefit...................................................................
|
1.9%
|
|
1.7%
|
Permanent
differences......................................................................................
|
(3.3%)
|
|
(53.4%)
|
Foreign tax rate
differential..............................................................................
|
1.8%
|
|
(3.0%)
|
Valuation
allowance..........................................................................................
|
(34.4%)
|
|
(1.8%)
|
Other....................................................................................................................
|
2.0%
|
|
14.6%
|
Effective
tax rate
|
2.0%
|
|
(7.9%)
|
45
NOTE 9 LOSS
PER SHARE
Basic per share
data for each fiscal year presented is computed using the weighted-average
number of shares of common stock outstanding during each such period. Diluted
per share data is computed using the weighted-average number of common and
dilutive common-equivalent shares outstanding during each such period. Dilutive
common-equivalent shares consist of shares that would be issued upon the
exercise of stock options, stock rights and warrants, computed using the
treasury stock method. Loss per share data for the Fiscal years ended September
30, 2011 and 2010, excludes 668,299 and 61,500, respectively, of outstanding
common equivalent shares as inclusion of such shares would be anti-dilutive.
Calculation of basic and diluted per share data for the fiscal years ended
September 30, 2011 and 2010 is as follows:
|
|
For the Fiscal Years Ended
September
30,
|
|
|
2011
|
|
2010
|
Numerator:
|
|
|
|
|
Net loss
|
|
$(2,900,539)
|
|
$(1,684,823)
|
Denominator:
|
|
|
|
|
Denominator for basic earnings per share - weighted
average shares
|
|
8,080,344
|
|
7,983,257
|
Dilutive stock options and
warrants - treasury stock method
|
|
--
|
|
--
|
Dilutive unvested restricted
stock
|
|
--
|
|
--
|
Denominator for diluted
earnings per share - weighted average shares
|
|
8,080,344
|
|
7,983,257
|
Net income per common share:
|
|
|
|
|
Basic
|
|
($0.36)
|
|
($0.21)
|
Diluted
|
|
($0.36)
|
|
($0.21)
|
|
|
|
|
|
Shares excluded from denominator
used to calculate diluted earnings per share due to anti-dilution
|
|
668,299
|
|
61,500
|
NOTE 10 COMMITMENTS
AND CONTINGENCIES
Employment and Agreements
On August 10, 2010, the Companys Board
of Directors appointed Brett M. Johnson as the Companys President and Chief
Executive Officer, on an at-will basis an annual salary of $250,000, pending
his negotiation of a long-term employment agreement with the Compensation
Committee of the Companys Board of Directors. Mr. Johnson is entitled to
receive customary benefits including health, life and disability insurance,
auto allowances and participation in the Company's 401(k) retirement plan.
James O. McKenna serves as the
Companys Chief Financial Officer, Treasurer and Assistant Secretary pursuant
to an Amended Employment Agreement, dated as of April 1, 2011 (the Employment
Agreement), between the Company and Mr. McKenna. The Employment Agreement
provides for an annual salary of $225,000 and Mr. McKenna will be eligible to
earn bonus compensation based on achievement of targets set by the Boards
Compensation Committee in respect of each fiscal year during the term. Under
the Employment Agreement, Mr. McKenna is entitled to reimbursement of
reasonable out-of-pocket costs incurred in relocation to the Los Angeles area,
and payment of a housing allowance of $7,500 per month, to be phased out over
time. The term of the Employment Agreement expires on December 31, 2012, with
automatic renewal for successive terms of one year each. Pursuant to the
Employment Agreement, Mr. McKenna is entitled to a payment equal to one year of
his salary as severance in the event of his termination without cause and
termination for good reason (as such terms are defined in the Employment
Agreement). In addition, in case of termination for good reason or without
cause, in either case within the first 36 months after relocation to the Los
Angeles area, Mr. McKenna is entitled to reimbursement of reasonable
out-of-pocket costs incurred in connection with relocation of his primary
residence back to Florida.
46
NOTE 10 COMMITMENTS
AND CONTINGENCIES (CONTINUED)
Guarantee Obligation
In February 2010, Forward Switzerland
and its European logistics provider (freight forwarding and customs agent)
entered into a Representation Agreement whereby, among other things, the
European logistics provider agreed to act as such subsidiary's Fiscal
representative in The Netherlands for the purpose of providing services in
connection with any value added tax matters. As part of this agreement, which
succeeds a substantially similar agreement (except as to the amount and term of
the undertaking) between the parties that expired December 31, 2009, the
subsidiary agreed to provide an undertaking (in the form of a bank letter of
guarantee) to the logistics provider with respect to any value added tax
liability arising in The Netherlands that the logistics provider is required to
pay to Dutch tax authorities on the subsidiary's behalf. As of February 1,
2010, such subsidiary entered into a guarantee agreement with a Swiss bank
relating to the repayment of any amount up to €75,000 (equal to approximately
$102,000 as of September 30, 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
initial term of the bank letter of guarantee expired February 28, 2011, but was
renewed for one year and may 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
$947,000 at September 30, 2011). As of September 30, 2011, the Company had not
incurred a liability in connection with this guarantee.
Lease Commitments
The Company rents certain of its
facilities under leases expiring at various dates through September 2016. Total
rent expense for the years ended September 30, 2011 and 2010, amounted to
approximately $336,000 and $281,000, respectively. The following table
summarizes the future minimum lease payments required under these leases.
Fiscal
Year Ended September 30, 2011
|
|
Amount
|
|
|
|
2012............................................................................................................
|
|
$422,000
|
2013............................................................................................................
|
|
337,000
|
2014............................................................................................................
|
|
321,000
|
2015............................................................................................................
|
|
179,000
|
2016............................................................................................................
|
|
|
Total lease commitments
...................................................................
|
|
$1,444,000
|
47
NOTE 11
BINDING MEMORANDUM OF UNDERSTANDING
On August 30,
2011, the Company entered into a binding Memorandum of Understanding (MOU)
with G-Form LLC (G-Form), a manufacturer of consumer and athletic products
incorporating proprietary extreme protective technology. Under the MOU, the
Company is granted the exclusive right to use G-Forms protective technology in
the Companys designated territory, subject to meeting certain minimum annual
sales levels (or at the Companys option, the making of royalty payments at
corresponding levels) commencing with the twelve-month period after shipment of
the first licensed product, with the minimum levels increasing in the
subsequent second and third twelve-month periods. After the first twelve-month
period, the Company may terminate the MOU by providing six months notice,
provided that the Company has paid all royalties and other charges incurred.
The Agreement may be terminated by G-Form if there is an uncorrected, material
breach by the Company of the terms of The Agreement.
As of September 30, 2011, the Company
has paid G-Form a $490,000 non-refundable advance against the first years
royalties to be offset by cancellation of the $490,000 of loans made by the
Company to G-Form in its capacity as a prospective joint venture partner. The
$490,000 of advanced royalties is included in Prepaid expenses and other
current assets on the Companys balance sheet at September 30, 2011. As of
September 30, 2011, there have been no sales of G-Form product subject to
royalty. The MOU is a binding agreement but the parties have agreed to use
commercially reasonable efforts to replace the MOU with a mutually agreeable
long-form license agreement reflecting the terms of the MOU and other customary
terms and conditions.
NOTE 12 LEGAL PROCEEDINGS
Targus Group
International, Inc., et al. v., Forward Industries, Johnson, et al.
On September 19, 2011, the Company,
Brett Johnson (our President and Chief Executive Officer), and one of our
employees were named in a Complaint filed in Orange County Superior Court by
Targus Group International, Inc. and two of its affiliates. The Complaint
alleged a claim for breach of contract against Mr. Johnson. The Complaint
further alleged a "breach of fiduciary duty/duty of loyalty" against
the employee, and it asserted claims against Mr. Johnson and the Company for
allegedly aiding and abetting that breach. The Complaint also asserted a
cause of action against all Defendants for unfair competition. An Amended
Complaint was filed on October 11, 2011. In addition to the claims
asserted the in the original Complaint, the Amended Complaint added an
additional Targus affiliate as a plaintiff and named an additional employee of
the Company as a defendant. The Amended Complaint asserted a claim
against that employee for breach of contract and for "breach of fiduciary
duty/duty of loyalty," and it added new claims against the Company and Mr.
Johnson for allegedly inducing the breach of and interfering with that
employee's contract and for allegedly aiding and abetting his breach of duty.
The claim for unfair competition in the Amended Complaint relies on these new
allegations as well. All of the claims asserted in this action arise out
of the decisions of former employees of one or more of the plaintiffs to accept
offers of employment with the Company. The amount of damages sought is
not specified. The Company believes it has substantial defenses to these
claims and intends to vigorously defend the action. The Company has not
recorded a loss provision for these complaints as of September 30, 2011.
Other
Litigation
From time to time, the Company may
become a party to other legal actions or proceedings in the ordinary course of
its business. As of September 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 13 401(K)
PLAN
The Company maintains a 401(k) benefit
plan allowing eligible United States-based employees to contribute a portion of
their salary in an amount up to the annual maximum amounts as set periodically
by the Internal Revenue Service. In accordance with applicable Safe Harbor
provisions, the Company has elected to match 100% on the first 6% of eligible
contributions by its employees. The Company's matching contributions were
approximately $69,000 and $57,000 for the years ended September 30, 2011 and
2010, respectively, and are reflected in the accompanying consolidated
statements of operations. The Company's contributions vest immediately.
48
NOTE 14 OPERATING
SEGMENT INFORMATION
The Company operates in a single
segment: the supply of carry and protective solutions for portable electronic
devices. This carrying-solution segment includes the design, marketing, and
distribution of two primary product categories; 1) carry and protective
solutions for blood glucose meters, and 2) carry and protective solutions for
other products. The Companys carrying solution segment operates in geographic
regions that include primarily the APAC, the Americas, and Europe. Geographic
regions are determined based primarily on the location of the customer or its
contract manufacturer.
Revenues from External Customers
The following table presents net sales
by geographic region.
|
(dollars in thousands)
|
|
Year Ended September 30,
|
|
2011
|
|
2010
|
Americas:
United
States....................................................................................
Other..................................................................................................
Total
Americas.................................................................................
|
$2,310
6,399
|
|
$2,401
6,191
|
APAC:
Hong
Kong.......................................................................................
Other..................................................................................................
Total
APAC......................................................................................
|
8,347
10,445
|
|
7,236
8,219
|
Europe:
Germany............................................................................................
Other..................................................................................................
Total
Europe.....................................................................................
|
3,712
$5,933
|
|
2,580
$4,587
|
Total
net sales
...........................................................................................
|
$22,777
|
|
$18,997
|
Long-Lived
Assets (Net of Accumulated Depreciation and Amortization)
Identifiable long-lived assets,
consisting entirely of property, plant and equipment, by geographic region are
as follows:
|
(dollars in thousands)
|
|
Year Ended September 30,
|
|
2011
|
|
2010
|
APAC.................................................................................................................
|
$54
|
|
$76
|
Americas............................................................................................................
|
235
|
|
39
|
Europe................................................................................................................
|
|
|
|
Total
long-lived assets (net)
.....................................................................
|
$302
|
|
$115
|
Supplier
Concentration
The Company procures substantially all
of its supply of products from independent suppliers in China. Primary
suppliers are Chinese business entities located in China. Depending on the
product, the Company may require several different suppliers to furnish component
parts or pieces. The Company purchased approximately 90% of its products from
four such suppliers in the Fiscal year ended September 30, 2011, and 88% of its
products from four Chinese suppliers in the Fiscal year ended September 30,
2010. One such supplier accounted for approximately 58% and 67% of the
Companys product purchases in the Fiscal years ended September 30, 2011 and
2010, respectively.
49
NOTE 14 OPERATING
SEGMENT INFORMATION (CONTINUED)
Major
Customers
The following
customers or their affiliates or contract manufacturers accounted for more than
ten percent of the Companys net sales, by geographic region.
|
Fiscal Year Ended September 30, 2011
|
|
Americas
|
|
Europe
|
|
APAC
|
|
Total
Company
|
Diabetic Customer A................................
|
3%
|
|
1%
|
|
80%
|
|
37%
|
Diabetic Customer B.................................
|
36%
|
|
21%
|
|
2%
|
|
16%
|
Diabetic Customer C.................................
|
0%
|
|
63%
|
|
0%
|
|
16%
|
Other Customer A.....................................
|
0%
|
|
13%
|
|
0%
|
|
3%
|
Other Customer B......................................
|
7%
|
|
12%
|
|
0%
|
|
8%
|
|
|
|
Fiscal Year Ended September 30, 2010
|
|
Americas
|
|
Europe
|
|
APAC
|
|
Total
Company
|
Diabetic Customer A ..............................
|
3
%
|
|
1%
|
|
88%
|
|
39%
|
Diabetic Customer B ...............................
|
39%
|
|
24%
|
|
2%
|
|
19%
|
Diabetic Customer C................................
|
3%
|
|
56%
|
|
0%
|
|
15%
|
Other Customer A....................................
|
0%
|
|
13%
|
|
0%
|
|
3%
|
Three customers (including their
affiliates or contract manufacturers) accounted for approximately 72% of the
Company's accounts receivable at September 30, 2011. Three customers, including
their affiliates or contract manufacturers, accounted for approximately 75% of
the Company's accounts receivable at September 30, 2010.
NOTE 15 SUBSEQUENT
EVENTS
Consultancy Agreement
On November 1, 2011, the Company
entered into an agreement with RGJR Capital Partners LLC (RGJR) to provide
Robert Garrett, Jr. as a consultant for a term of up to six months to assist
management in implementation of its growth strategy pursuant to a letter agreement,
effective as of October 1, 2011, between the Company and RGJR (the RGJR
Agreement). RGJR and Mr. Garrett will report to the Executive Committee
of the Companys Board of Directors. RGJR will receive a consulting fee
of $30,000 per month and Mr. Garrett has been awarded options to purchase up to
160,000 shares of common stock of the Company at an exercise price of $2.05,
the closing fair market value on November 3, 2011, the grant date. Such
options have a three year term and vest in six equal installments beginning
November 15, 2011 and then on the last day of each month commencing November
30, 2011 through March 31, 2012, subject to RGJRs and Mr. Garretts continued
involvement with the Company.
Amended Note Receivable
On January 5, 2011, the Company entered
into a loan agreement with Flash to provide a credit facility of up to
$1,000,000, due December 1, 2011. Effective December 1, 2011, the loans maturity date was extended to April 1, 2012.
In connection with such amendment Flash made a principal payment of $250,000 on December
1, 2011.
50
SIGNATURES
Pursuant to the requirements of the
Securities Exchange Act of 1934, as amended, the registrant has duly caused
this report to be signed on its behalf by the undersigned, hereunto duly
authorized.
Dated: December 15, 2011
FORWARD INDUSTRIES, INC.
|
(Registrant)
|
|
|
By:
/s/ Brett M. Johnson
|
|
Brett
M. Johnson
|
President
and Chief Executive Officer
|
(Principal
Executive Officer)
|
|
By:
/s/James O. McKenna
|
|
James
O. McKenna
|
Vice
President and Chief Financial Officer
|
(Principal
Financial and Accounting Officer)
|
|
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that
each person whose signature appears below constitutes and appoints jointly and
severally, Frank LaGrange Johnson and Owen P.J. King, or either of them as his
or her true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him or her and in his or her name, place
and stead, in any and all capacities, to sign any and all amendments (including
post-effective amendments) to this Report on Form 10-K, and to file the same,
with all exhibits thereto, and other documents in connection therewith, with
the Securities and Exchange Commission, granting unto said attorneys-in-fact
and agents, and each of them, full power and authority to do and perform each
and every act and thing requisite and necessary to be done in connection
therewith, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, or any of them, or their or his substitute or substitutes, may lawfully
do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, each of the
undersigned has executed this Power of Attorney as of the date indicated.
In accordance with the Securities
Exchange Act of 1934, as amended, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated:
December 15, 2011
|
/s/Brett
M. Johnson
|
|
Brett
M. Johnson
|
|
President
and Chief Executive Officer
|
|
(Principal
Executive Officer)
|
|
|
December 15, 2011
|
/s/James
O. McKenna
|
|
James
O. McKenna
|
|
Vice President and
Chief Financial Officer
|
|
(Principal Financial Officer and
|
|
Principal
Accounting Officer)
|
|
|
December 15, 2011
|
/s/
Ciara Burnham
|
|
Ciara
Burnham
|
|
Director
|
51
December 15, 2011
|
/s/John
Chiste
|
|
John Chiste
|
|
Director
|
|
|
December 15, 2011
|
/s/Fred
Hamilton
|
|
Fred
Hamilton
|
|
Director
|
|
|
December 15, 2011
|
/s/
Frank Johnson
|
|
Frank
LaGrange Johnson
|
|
Chairman of the
Board
|
|
|
December 15, 2011
|
/s/Stephen
Key
|
|
Stephen
Key
|
|
Director
|
|
|
December 15, 2011
|
/s/Owen
King
|
|
Owen P.J. King
|
|
Director
|
|
|
December 15, 2011
|
/s/Louis
Lipschitz
|
|
Louis Lipschitz
|
|
Director
|
52
Exhibit Index
3.
|
Articles of Incorporation and By-Laws
|
|
|
|
|
|
|
3(i)
|
Amended and Restated
Certificate of Incorporation (incorporated by reference to Exhibit 3 to the
Company's Annual Report on Form 10-K, as filed with the Commission on December
8, 2010)
|
|
|
|
|
3(ii)
|
Third Amended and Restated
By-Laws of Forward Industries, Inc., as of August 10, 2010 (incorporated by
reference to Exhibit 3 to the Company's Annual Report on Form 10-K, as filed
with the Commission on December 8, 2010).
|
|
|
|
|
|
4.
|
Instruments Defining the Rights of Security Holders
|
|
|
|
|
4.1
|
Shareholder Protection Rights Agreement,
dated as of June 9, 2010, by and between Forward Industries, Inc. and American
Stock Transfer & Trust Company LLC, as Rights Agent (incorporated by
reference to Exhibit 4.1 to the Companys Current Report on Form 8-K, as filed
with the Commission on June 15, 2010)
|
|
|
|
|
4.2
|
Amendment, dated as of August 10, 2010, to
Shareholder Protection Rights Agreement, dated as of June 9, 2010, by and
between Forward Industries, Inc. and American Stock Transfer & Trust
Company LLC, as Rights Agent (incorporated by reference to Exhibit 4.1 to the
Companys Current Report on Form 8-K, as filed with the Commission on August
16, 2010), which amendment terminated the Right Agreement
|
|
|
|
10.
|
Material Contracts
|
|
|
|
|
10.1
|
|
1996 Stock Incentive Plan of Forward Industries, Inc.
(incorporated by reference to Exhibit 4 to the Registration Statement on Form
S-8 of the Company, as filed on April 25, 2003).
|
|
|
|
|
|
|
|
10.2
|
|
Forward Industries, Inc. 2007 Equity Incentive Plan, as
amended (incorporated by reference to Exhibit 4.1 to the Registration Statement
on Form S-8 of the Company, Reg. File No. 333-165075, as filed with the
Commission on February 25, 2010).
|
|
|
|
|
|
|
|
10.3
|
|
Settlement Agreement, dated as of August 10, 2010, by and
among Forward Industries, Inc., LaGrange Capital Partners, L.P., and certain
Affiliates of LaGrange Capital Partners, L.P. (incorporated by reference to
Exhibit 10.1 to the Companys Current Report on Form 8-K, as filed with the
Commission on August 16, 2010).
|
|
|
|
|
|
|
|
10.4
|
|
Severance and Release Agreement, dated as of August 10,
2010, by and between Douglas W. Sabra and Forward Industries, Inc.
(incorporated by reference to Exhibit 10.2 to the Companys Current Report on
Form 8-K, as filed with the Commission on August 16, 2010).
|
|
|
|
|
|
|
|
10.5
|
|
Retention Agreement, dated as of August 10, 2010, between
Forward Industries, Inc. and James O. McKenna, (incorporated by reference to
Exhibit 10.4 to the Companys Current Report on Form 8-K, as filed with the
Commission on August 16, 2010).
|
|
|
|
|
|
|
|
10.6
|
|
Amended Employment Agreement, dated as of April 1, 2011,
between Forward Industries, Inc. and James O. McKenna, (incorporated by
reference to Exhibit 10.7 to the Companys Quarterly Report on Form 10-Q, as
filed with the Commission on May 11, 2011).
|
|
|
|
|
|
|
|
10.7
|
|
Letter Agreement, dated October 31, 2011, between Forward
Industries, Inc. and RGJR Capital Partners LLC, (incorporated by reference to
Exhibit 99.1 to the Companys Current Report on Form 8-K, as filed with the
Commission on November 7, 2011).
|
|
|
|
|
|
|
|
10.8†
|
|
Memorandum of Understanding, dated August 30, 2011, between
Forward Industries, Inc. and G-Form LLC.
|
|
|
|
|
|
21.
|
Subsidiaries of the Registrant
|
|
|
|
21.1
|
List of Subsidiaries of Forward Industries,
Inc.
|
53
23.
|
Consent of Independent Registered Public
Accounting Firm
|
|
|
|
23.1
|
Consent of J.H. Cohn LLP
|
|
|
|
|
23.2
|
Consent of Kaufman, Rossin & Co., P.A.
|
|
|
|
31.
|
|
Certifications Pursuant to Rule 13a-14(a)
(Section 302 of Sarbanes-Oxley)
|
|
|
|
|
31.1
|
Certification of Brett M. Johnson
|
|
|
|
|
31.2
|
Certification of James O. McKenna
|
|
|
|
32.
|
|
Certifications
Pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350 (Section 906 of
Sarbanes-Oxley)
|
|
|
|
|
32.1
|
Certifications of Brett M. Johnson and James
O. McKenna (furnished herewith)
|
†
Portions have been omitted pursuant to request for confidential
treatment and the omitted portions have been separately filed with the
Commission.
54
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