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FORD > SEC Filings for FORD > Form 10-Q on 12-Aug-2013All Recent SEC Filings

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Form 10-Q for FORWARD INDUSTRIES INC


12-Aug-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis should be read in conjunction with our unaudited consolidated financial statements, and the notes thereto, and other financial information appearing elsewhere in this Quarterly Report on Form 10-Q and the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2012. The following discussion and analysis compares our consolidated results of operations for the three months ended June 30, 2013 (the "2013 Quarter"), with those for the three months ended June 30, 2012 (the "2012 Quarter") and our consolidated results of operations for the nine-months ended June 30, 2013 (the "2013 Period") with the nine-months ended June 30, 2012 (the "2012 Period"). All figures in the following discussion are presented on a consolidated basis. All dollar amounts and percentages presented herein have been rounded to approximate values.

Cautionary statement for purposes of the "Safe Harbor" provisions of the Private Securities Litigation Reform Act of 1995

The following management's discussion and analysis includes "forward-looking statements", as such term is used within the meaning of the Private Securities Litigation Reform Act of 1995. These "forward-looking statements" are not based on historical fact and involve assessments of certain risks, developments, and uncertainties in our business looking to the future. Such forward-looking statements can be identified by the use of forward-looking terminology such as "may", "will", "should", "expect", "anticipate", "estimate", "intend", "continue", or "believe", or the negatives or other variations of these terms or comparable terminology. Forward-looking statements may include projections, forecasts, or estimates of future performance and developments. Forward-looking statements contained in this Quarterly Report on Form 10-Q are based upon assumptions and assessments that we believe to be reasonable as of the date of this Quarterly Report on Form 10-Q. 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 Management's Discussion and Analysis of Financial Condition and Results of Operations and those identified in "Risk Factors" in Item 1A of Forward's Annual Report on Form 10-K for the fiscal year ended September 30, 2012, 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 June 2012, the Company made the strategic decision to focus solely on our core OEM business. Initially, we implemented several key restructuring measures in order to improve our operating performance and return the Company to profitability. These actions included replacing our legacy sourcing and quality assurance infrastructure with a variable, lower cost, solution through our use of an exclusive, Asia-based sourcing agent (refer to Note 10 in our Notes to Consolidated Financial Statements) and rationalizing our fixed operating expenses, including office closures and headcount reductions. The impact of these restructuring measures continues to be more fully reflected in our financial results as we make our way through Fiscal 2013.


Forward Industries, Inc.

With the restructuring behind us, we have turned our focus to protecting the strong competitive position we have built across several key product categories, especially our Diabetic Products line. We have reinvested a portion of the savings generated by the restructuring towards expanding and better incentivizing our sales, design and sales support teams, which we believe has improved our ability to provide proactive and responsive support to our existing customer base. We also believe that these investments are expanding our ability to provide innovative and differentiated solutions to our existing and prospective customers.

We remain challenged by a highly concentrated customer base and product offering, especially with respect to our Diabetic products line, where we operate in a price sensitive environment in which we continue to experience volatility in demand and downward pricing pressure from our major Diabetic Products customers. We believe that the investments we are making in our sales, design and sales support teams increase our ability to expand and diversify our customer base, which we believe, is essential to overcoming these challenges and the impact they have on our gross margins. In addition, the Diabetic Products sector seems to be undergoing significant changes that, we believe, present us with meaningful opportunities if managed proactively.

In addition to reducing customer concentration, we believe that supplier diversification is a key component to achieving our objective of restoring our gross margins to levels consistent with those realized in fiscal 2010. We continue to be challenged by rising costs from our China-based supplier base, which causes our gross margins to narrow when we are not able to fully pass cost increases through to customers. However, our dedicated Asia-based sourcing agent is making meaningful progress in diversifying our supplier base, as well as in other areas such as quality assurance and overall operational performance, which we believe will better position us to overcome these challenges.

In connection with the exit of our retail business, we entered into a definitive Settlement Agreement and General Release ("Settlement Agreement") with G-Form on July 3, 2013, which replaces the second Memorandum of Understanding entered into with G-Form in June 2012. Pursuant to the Settlement Agreement, G-Form has agreed to pay us approximately $0.3 million in exchange for certain retail inventories, our cooperation with certain administrative matters, and a mutual general release.

Variability of Revenues and Results of Operations

Because a high percentage of our sales revenues is highly concentrated in a few large customers, and because the volumes of these customers' order flows to us are highly variable, with short lead times, our quarterly revenues, and consequently our results of operations, are susceptible to significant variability over a relatively short period of time.

Critical Accounting Policies and Estimates

This management's discussion and analysis of financial condition and results of operations is based upon or derived from the unaudited consolidated financial statements included in this Quarterly Report on Form 10-Q, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and 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.

We discuss the material accounting policies that are critical in making these estimates and judgments in our Annual Report on Form 10-K for the fiscal year ended September 30, 2012, under the caption "Management's Discussion and Analysis-Critical Accounting Policies and Estimates". There has been no material change in critical accounting policies or estimates since September 30, 2012, except those described below.


Forward Industries, Inc.

Marketable Securities

At June 30, 2013, the Company has investments in marketable securities that are classified as trading and are recorded at fair value with the corresponding unrealized holding gains or losses, net of taxes, recognized in earnings. The fair value of marketable securities is determined based on quoted market prices at the consolidated balance sheet dates. The cost of marketable securities sold is determined by the specific identification method. At September 30, 2012, the Company classified its investments in marketable securities as "available-for-sale". Securities that are classified as available-for-sale are recorded at fair value with the corresponding unrealized holding gains and losses are recorded as a separate component of "Accumulated Other Comprehensive Loss" within shareholders' equity. Refer to Note 4 "Marketable Securities" to our consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

The notes to our audited consolidated financial statements contained in our Annual Report on Form 10-K for the year ended September 30, 2012, and the notes to our unaudited consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q contain additional information related to our accounting policies and should be read in conjunction with the following discussion and analysis relating to our overall financial performance, operations and financial position.

RESULTS OF OPERATIONS FOR THE 2013 QUARTER COMPARED TO THE 2012 QUARTER

Loss from Continuing Operations

Loss from continuing operations was $0.2 million in the 2013 Quarter compared to
$0.6 million in the 2012 Quarter. The improvement is primarily due to increased
gross profit on a higher sales base, which was offset, in part, by an increase
in Other Expense, net, as reflected in the table below:

                                                                                            Main Components of Net Loss from
                                                                                                  Continuing Operations
                                                                                                  (millions of dollars)
                                                                                                                        Increase
                                                                                         2013 Quarter   2012 Quarter   (Decrease)
Net                                                                                              $8.6           $7.7
Sales.................................................................................                                        0.9

Gross                                                                                             1.8            0.8
Profit.............................................................................                                           1.0
Sales and Marketing Expenses............................................                        (0.6)          (0.3)          0.3
General and Administrative Expenses................................                             (0.8)          (1.1)        (0.3)
Other Expense, net.................................................................             (0.7)             --          0.7
Income Tax Expense..............................................................                   --             --           --
Loss from Continuing Operations*..................................                             $(0.2)         $(0.6)        (0.3)

* Table may not total due to rounding.

Loss from continuing operations per basic and diluted share was $(0.03) and $(0.08) for the 2013 Quarter and 2012 Quarter, respectively.

Net Sales

Net sales of $8.6 million in the 2013 Quarter increased $0.9 million from $7.7 million in the 2012 Quarter primarily due to higher sales of Diabetic products, and to a lesser extent, higher sales of Other products. The tables below set forth sales by channel, product line, and geographic location of our customers for the periods indicated.


Forward Industries, Inc.

                        Net Sales for 2013 Quarter
                           (millions of dollars)
                                                APAC Americas Europe Total*
Diabetic products............................   $3.4     $1.7   $1.7   $6.8
Other products.................................  0.4      1.2    0.1    1.8
Total net sales.............................    $3.8     $2.9   $1.8   $8.6

                        Net Sales for 2012 Quarter
                           (millions of dollars)
                                                APAC Americas Europe Total*
Diabetic products............................   $3.1     $2.0   $1.0   $6.1
Other products.................................  0.2      1.2    0.3    1.6
Total net sales.............................    $3.3     $3.2   $1.2   $7.7

* 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 OEM's blood glucose testing and monitoring kits, or to a lesser extent, sell them through their retail distribution channels.

Sales of Diabetic products increased $0.7 million to $6.8 million in the 2013 Quarter, from $6.1 million in the 2012 Quarter. This increase was primarily due to higher sales in respect of new and replacement programs with two long-standing, major, Diabetic products customers (Diabetic Customers A and C). These increases were offset, in part, by sales declines from several newer programs with Diabetic Customer D that were launched in Fiscal 2012. To a lesser extent, shifts from long-standing to successor programs with Diabetic Customer B resulted in lower sales to such customer in the 2013 Quarter.

The following table sets forth our sales by Diabetic Products customer for the periods indicated.

                                                               (millions of dollars)
                                                        2013        2012      Increase
                                                       Quarter    Quarter    (Decrease)
Diabetic Customer A...............................        $3.0        $2.6         $0.4
Diabetic Customer B................................        0.9         1.0        (0.1)
Diabetic Customer C................................        1.8         0.9          0.9
Diabetic Customer D................................        0.6         1.2        (0.6)
All other Diabetic Customers.................              0.5         0.5           --
Totals*...............................................    $6.8        $6.1         $0.7

* Table may not total due to rounding.

Sales of carrying cases for blood glucose monitoring kits represented 79% of our total net sales in the 2013 and 2012 Quarters.

Other Product Sales

We design and sell cases and protective solutions to OEMs for a diverse array of portable electronic devices (such as smartphones, tablets, GPS devices, and bar code scanners), as well as a variety of other products (such as firearms, sporting, and other recreational products) on a made-to-order basis that are customized to fit the products sold by our OEM customers.


Forward Industries, Inc.

Sales of Other Products increased $0.2 million to $1.8 million in the 2013 Quarter from $1.6 million in the 2012 Quarter. This increase was primarily due to $0.6 million in higher sales contributed by several new programs with a long-standing, sports and recreational customer, our largest within our "Other" product lines, in the 2013 Quarter. This increase was offset, in part, by the loss of a firearm customer and laptop customer, each of which had contributed $0.2 million to "Other" products sales in the 2012 Quarter. Decreases in several other customer accounts, of which none were individually material also served to dampen the overall increase in sales of Other products in the 2013 Quarter.

Sales of Other Products represented 21% of our net sales in the 2013 Quarter and 2012 Quarter.

Gross Profit

Gross profit increased $1.0 million, or 143%, to $1.8 million in the 2013 Quarter from $0.8 million in the 2012 Quarter. As a percentage of sales, our gross profit improved to 21.5% in the 2013 Quarter from 9.9% in the 2012 Quarter.

This margin improvement was driven primarily by cost savings realized in the 2013 Quarter from the restructure of our Asia-based sourcing and quality assurance operations (refer to Note 10 to our consolidated financial statements
- "Buying Agency and Supply Agreement"), which were initiated in March 2012 and substantially completed as of September 30, 2012. Such sourcing and quality assurance costs were 4.6% of our net sales in the 2013 Quarter compared to 9.2% of net sales in the 2012 Quarter.

In addition, during the 2012 Quarter, we experienced several quality issues with two of our major Diabetic Products customers. In our efforts to remediate these quality issues, we incurred significantly higher inspection, warehousing, handling, and freight costs that, in the aggregate, negatively impacted our gross profit margin by approximately 4% in the 2012 Quarter. We experienced no such quality issues during the 2013 Quarter. As a result, during the 2013 Quarter, our inspection, warehousing, handling and freight costs returned to levels consistent with those included in quarterly results reported prior to the 2012 Quarter.

To a lesser extent, a combination of factors, including cost reductions and shifts in product mix from program successions, impacting our four major Diabetic Customers, resulted in an overall improvement in gross margin from our Diabetic Products line.

These improvements were offset, in part, by lower gross profit margin contributed by our "Other" Products division in the 2013 Quarter, which is primarily due to the loss of a firearm customer and laptop customer, and to a lesser extent shifts in programs with several of such customers whereby certain new and replacement programs contributed less gross profit margin in the 2013 Quarter than their predecessor programs in the 2012 Quarter.

Sales and Marketing Expenses

Sales and marketing expenses increased $0.3 million, or 113%, to $0.6 million in the 2013 Quarter compared to $0.3 million in the 2012 Quarter due primarily to higher personnel costs. Personnel costs increased $0.3 million in the 2013 Quarter primarily as a result of expanding and restructuring our sales and sales support departments, including their respective compensation schemes. Increases in other components of "Sales and Marketing Expenses" were not material individually or in the aggregate.

General and Administrative Expenses

General and administrative expenses decreased $0.3 million, or 27% to $0.8 million in the 2013 Quarter from $1.1 million in the 2012 Quarter due primarily to lower personnel costs. Personnel costs decreased $0.2 million resulting primarily from restructuring our finance and information technology departments, which included headcount reductions and salary decreases made in conjunction with the relocation of our corporate headquarters from California to Florida. Fluctuations in other components of "General and Administrative Expenses" were not material individually or in the aggregate.


Forward Industries, Inc.

Other Expense, net

Other expense, net, consisting primarily of realized and unrealized gains and losses on investments in marketable securities, was $0.7 million of expense in the 2013 Quarter compared to $20 thousand of expense in the 2012 Quarter. This fluctuation was due primarily to $2.0 million of realized and unrealized losses on investments in marketable securities, which were offset in part by realized and unrealized gains on investments in marketable securities of $1.3 million in the 2013 Quarter. There was no such investing activity in marketable securities in the 2012 Quarter.

RESULTS OF DISCONTINUED OPERATIONS FOR THE 2013 QUARTER COMPARED TO THE 2012 QUARTER

On June 21, 2012, we determined to exit our global Retail business and focus solely on growing our OEM business. The decision to eliminate the Retail division was primarily driven by the longer than estimated path to bring it to profitability and the strong top line growth and cost rationalizations in the OEM business. Accordingly, the results of operations for the Retail division have been recorded as discontinued operations in the accompanying consolidated financial statements for the fiscal years presented.

Loss from Discontinued Operations

Loss from discontinued operations was $19 thousand in the 2013 Quarter compared to $2.7 million in the 2012 Quarter. This improvement was due primarily to a $1.5 million reduction in gross loss combined with a $1.1 million decrease in operating expenses in the 2013 Quarter. Loss from discontinued operations per basic and diluted share was $(0.00) for the 2013 Quarter and $(0.33) 2012 Quarter, respectively.

Net Sales

Net sales from discontinued operations consisted of $10 thousand in sales returns in the 2013 Quarter. Net sales from discontinued operations consisted of $0.4 million, net of sales returns, discounts, markdowns, and co-op advertising programs of $1.0 million in the aggregate in the 2012 Quarter.

Gross Loss

Gross loss from discontinued operations of $10 thousand in the 2013 Quarter reflects sales returns of retail products, which we deem to be unsaleable. Gross loss from discontinued operations was $1.5 million in the 2012 Quarter.

Operating Expenses

Operating expenses of discontinued operations decreased $22 thousand in the 2013 Quarter from Operating expenses of $1.1 million in the 2012 Quarter.

Other Expense

Operating income (expense) from discontinued operations was not material in the 2013 or 2012 Quarter.

RESULTS OF OPERATIONS FOR THE 2013 PERIOD COMPARED TO THE 2012 PERIOD

Income (loss) from Continuing Operations

Income from continuing operations was $0.2 million in the 2013 Period compared to a loss from continuing operations of $1.6 million in the 2012 Period. The improvement is primarily due to increased gross profit on a higher sales base, lower general and administrative expenses, and higher other income, which were offset, in part, by higher selling and marketing expenses, as reflected in the table below:


Forward Industries, Inc.





                                                                         Main Components of Net Income (Loss)
                                                                              from Continuing Operations
                                                                                 (millions of dollars)
                                                                                                      Increase
                                                                         2013 Period   2012 Period   (Decrease)
Net                                                                            $23.3         $20.0
Sales..................................................................                                     3.3

Gross                                                                            4.9           3.1
Profit.............................................................                                         1.8
Sales and Marketing Expenses............................                       (1.6)         (0.9)          0.7
General and Administrative Expenses................                            (2.7)         (3.8)        (1.1)
Other Expense, net.................................................            (0.4)            --          0.4
Income Tax Expense..............................................                  --            --           --
Income (loss) from continuing operations*...............                        $0.2        $(1.6)          1.8

* Table may not total due to rounding.

Income (loss) from continuing operations per basic and diluted share was $0.03 and $(0.20) for the 2013 Period and 2012 Period, respectively.

Net Sales

Net sales of $23.3 million in the 2013 Period increased $3.4 million from $20.0
million in the 2012 Period due to higher sales of Diabetic products, which
increased $3.5 million. The increase in sales of Diabetic products was offset,
in part, by lower sales of Other products, which decreased $0.1 million. The
tables below set forth sales by channel, product line, and geographic location
of our customers for the periods indicated

                         Net Sales for 2013 Period
                            (millions of dollars)
                                                 APAC Americas Europe Total*
Diabetic products.............................   $6.6     $5.5   $6.2  $18.3
Other products..................................  1.5      3.2    0.4    5.1
Total net sales.............................     $8.1     $8.7   $6.6  $23.4

                         Net Sales for 2012 Period
                            (millions of dollars)
                                                 APAC Americas Europe Total*
Diabetic products.............................   $8.3     $3.4   $3.2  $14.8
Other products..................................  0.6      3.7    0.9    5.2
Total net sales.............................     $8.9     $7.0   $4.1  $20.0

* Tables may not total due to rounding.

Diabetic Product Sales

Sales of Diabetic products increased $3.5 million to $18.3 million in the 2013 Period from $14.8 million in the 2012 Period. This increase was primarily due to higher sales in respect of new and replacement programs with a long-standing, major, Diabetic products customer (Diabetic Customer C), as well as a larger sales contribution in the 2013 Period from a new major Diabetic products customer (Diabetic Customer D), which had just begun to contribute in the 2012 Period. To a lesser extent, higher sales in respect of new and replacement programs from a second long-standing, major Diabetic products customer (Diabetic Customer B), also contributed to the overall sales increase. These increases were offset, in part, by lower sales to our historically largest Diabetic products customer (Diabetic Customer A).

. . .

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