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FORD > SEC Filings for FORD > Form 10-K on 14-Jan-2014All Recent SEC Filings

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Form 10-K for FORWARD INDUSTRIES INC


14-Jan-2014

Annual Report


ITEM 7. MANAGEMENT'S 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 Fiscal 2013 with those for Fiscal 2012, 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 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 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 Management's 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 June 2012, the Company made the strategic decision to focus solely on its 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 (see Note 12 in our Notes to our Consolidated Financial Statements) and rationalizing our fixed operating expenses, including office closures and headcount reductions. Our financial results for Fiscal 2013, reflect the impact of these restructuring measures.

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. As an example, the diabetic products sector seems to be undergoing significant changes that, we believe, present us with meaningful opportunities if managed proactively.

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 to our investments to grow and diversify our business organically, we are beginning an active search process to identify potential acquisition targets that would be complementary to our existing business and allow us to further leverage our operating infrastructure. We anticipate that this search process will be ongoing with the goal of identifying prospective target companies that, if acquired, would be accretive to our organic results.

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. Our dedicated Asia-based sourcing agent has made meaningful progress in areas such as quality assurance and overall operational performance during Fiscal 2013, which has better positioned us to negotiate such cost increases with our customers. Our sourcing agent also made progress in expanding our supplier base during Fiscal 2013. However, we believe such expansion may not be sustainable during the fiscal year ending September 30, 2014 and anticipate that our supplier base may become more concentrated. As a result, our ability to effectively push back against such rising material costs may diminish.

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 GAAP, with no need for management's 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 "Management's 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, see "Item
8. Financial Statements and Supplementary Data" in this Annual Report. Our preparation of our Consolidated Financial Statements requires us to make estimates and assumptions that are believed to be reasonable under the circumstances. There can be no assurance that actual results will not differ from those estimates and such differences could be significant.

Cash and Cash Equivalents

Cash and cash equivalents consist primarily of cash on deposit and highly liquid money market accounts, short-term bonds, and certificates of deposit with original contractual maturities of three months or less, predominately in U.S. dollar denominated instruments. We may purchase these short-term bonds with anticipated maturity of 90 days or less at a premium or discount. We record these investments as cash and cash equivalents net of amortization of premium or discount. We minimize our 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. We hold cash and cash equivalents at major financial institutions in the United States, at which cash amounts may significantly exceed the Federal Deposit Insurance Corporation's insured limits. At September 30, 2013 and 2012, this amount was approximately $6.5 million (which includes $1.4 million in a foreign bank) and $4.4 million, respectively. Historically, we have not experienced any losses due to such cash concentrations.

Marketable Securities

At September 30, 2013, we have investments in marketable securities that are classified as trading and are recorded at fair value with the corresponding unrealized holding gains or losses 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, we classified our 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, net of taxes, recorded as a separate component of "Accumulated Other Comprehensive Loss" within shareholders' equity. We classify our realized and unrealized gains and losses as non-operating income (expense) in our consolidated statements of operations and comprehensive loss. In addition, we classify the cash flows from the trading of these marketable securities as investing activities in our consolidated statements of cash flows.

Accounts Receivable

Accounts receivable consist of unsecured trade accounts with customers or their contract manufacturers. We perform periodic credit evaluations of its customers including an evaluation of days outstanding, payment history, recent payment trends and perceived creditworthiness, and believe that adequate allowances for any uncollectible receivables are maintained. Credit terms to customers generally range from net thirty (30) days to net ninety (90) days. We have not historically experienced significant credit or collection problems with our OEM customers or their contract manufacturers. At September 30, 2013 and 2012, no allowance for doubtful accounts relating to our continuing operations was deemed necessary.


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 management's 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 in our consolidated statements of operations and comprehensive loss. As reserved inventory is disposed of, we charge off the associated allowance. In determining the adequacy of the allowance, management's estimates are based upon several factors, including analyses of inventory levels, historical loss trends, sales history and projections of future sales demand. Our estimates of the allowance may change from time to time based on management's assessments, and such changes could be material. At September 30, 2013, no allowance for obsolete inventory relating to our continuing operations was deemed necessary. At September 30, 2012, the allowance for obsolete inventory of our continuing operations was approximately $99 thousand.

Income Taxes

We account for income taxes in accordance with GAAP, 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 carry-forwards 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 9 to our Consolidated Financial Statements. Our policy is to account for interest and penalties relating to income taxes, if any, in "income tax expense" in our consolidated statements of operations and comprehensive loss and include accrued interest and penalties within the "accrued liabilities" in our consolidated balance sheets, if applicable. For Fiscal 2013 and Fiscal 2012, no income tax related interest or penalties were assessed or recorded.

6% Senior Convertible Preferred Stock

Temporary Equity

In accordance with Accounting Standards Codification ("ASC") 480-10-s99 and Accounting Series Release ("ASR") 268, equity securities are required to be classified out of permanent equity and classified as temporary equity, as the redemption of the convertible preferred stock is not solely within our control since it is at the option of the holder.

Warrants

In accordance with ASC 815-40, our warrants have been classified as a liability, at fair value, as a result of a related registration rights agreement that contains certain requirements for registering the underlying common shares, but have no provision for penalties upon the failure to register. The fair value of the warrants is determined using a Black-Scholes closed-form call option pricing model. At each balance sheet date the fair value of the warrant liability is marked-to-market each reporting period with the change in fair value reported in the Company's Consolidated Statements of Operations and Comprehensive Loss.

Preferred Stock Accretion

The carrying amount of the convertible preferred stock is less than the redemption value. As a result of our determination that redemption is probable, the carrying value will be increased by periodic accretions so that the carrying value will equal the redemption amount at the earliest redemption date. Such accretion is recorded as a preferred stock dividend.

Preferred Stock Beneficial Conversion Feature

On the date of issuance, the fair value, or carrying amount, of the securities could be converted into common stock at a discount to the market price of the underlying common stock at the conversion date. Such embedded "beneficial conversion feature", which is equal to the difference between the accounting conversion price and the fair value of the common stock, is analogous to a dividend and has been recorded as a return to preferred stockholders as of the date of issuance, which is the earliest possible conversion date. As a result of the dividend being recorded upon issuance, there will be no future impact on the Company's consolidated financial statements.


Revenue Recognition

We generally recognize revenue from product sales to our 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.

Fair Value of Financial Instruments

For certain of our 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. We record our financial instruments that are accounted for under ASC 320, "Investments-Debt and Equity Securities" ("ASC 320") at fair value. The determination of fair value is based upon the fair value framework established by ASC 820. ASC 820 provides that a fair value measurement assumes that the transaction to sell an asset or transfer a liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. The fair value hierarchy is broken down into three levels based on the source of inputs as follows: (a) Level 1 - valuations based on unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities; (b) Level 2 - valuations based on quoted prices in markets that are not active, or financial instruments for which all significant inputs are observable; either directly or indirectly; and (c) Level 3 - valuations based on prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable, thus, reflecting assumptions about the market participants.

Share-Based Payment Expense

We recognize share-based compensation in our consolidated statements of operations and comprehensive loss at the grant-date fair value of stock options and other equity-based compensation. The determination of grant-date fair value is estimated using the Black-Scholes option-pricing model, which includes variables such as the expected volatility of our share price, the exercise behavior of its grantees, 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 changes 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, we have 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. See Note 8, Share-Based Compensation, in our Notes to our Consolidated Financial Statements. In addition, we recognize share-based compensation to non-employees based upon the fair value, using the Black-Scholes option pricing model, determined at the deemed measurement dates over the related contract service period.

RESULTS OF OPERATIONS FOR FISCAL 2013 COMPARED TO FISCAL 2012

Income (Loss) from Continuing Operations

Income from continuing operations was $5 thousand in Fiscal 2013 compared to a loss of $3.3 million in Fiscal 2012. The improvement is primarily due to increased gross profit on a higher sales base and reduced general and administrative expenses, which were offset, in part, by an increase in Other Expense, net, as reflected in the table below:


                                     Main Components of Net Loss from Continuing Operations
                                                                                                  (thousands of dollars)
                                                                                                                      Increase
                                                                                           Fiscal 2013  Fiscal 2012  (Decrease)
Net sales.................................................................................      $30,911      $29,403      $1,508

Gross profit............................................................................         $6,377       $3,890      $2,487
Sales and marketing expenses............................................                        (2,187)      (1,592)         595
General and administrative expenses................................                             (3,484)      (5,562)     (2,078)
Other expense.......................................................................              (700)         (34)         666
 Income taxes expense (benefit).........................................                             --         (15)        (15)
Income (loss) from continuing operations......................                                       $5     $(3,313)    $(3,319)


Loss from continuing operations per basic and diluted share was $(0.07) and
$(0.41) for Fiscal 2013 and 2012, respectively.

Net Sales

Net sales increased $1.5 million, or 5%, to $30.9 million in Fiscal 2013 from
$29.4 million in Fiscal 2012 due to higher sales of Diabetic Products, which
increased $2.6 million. The increase in sales of Diabetic products was offset,
in part, by lower sales of Other Products, which decreased $1.0 million. The
tables below set forth sales by channel, product line and geographic location of
our customers for the periods indicated.

                        Net Sales for Fiscal 2013
                           (millions of dollars)
                                               APAC  Americas Europe Total
Diabetic products...........................    $8.7     $7.2   $8.4 $24.3
Other products................................   2.1      3.8    0.8   6.7
Total net sales.....................           $10.8    $11.0   $9.2 $30.9

                        Net Sales for Fiscal 2012
                           (millions of dollars)
                                               APAC  Americas Europe Total
Diabetic products...........................   $10.6     $5.0   $6.1 $21.7
Other products................................   1.0      5.6    1.1   7.7
Total net sales....................            $11.6    $10.6   $7.2 $29.4

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 $2.6 million to $24.3 million in Fiscal 2013 from $21.7 million in Fiscal 2012. 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 Fiscal 2013 from a new major Diabetic Products customer (Diabetic Customer D), which had just begun to contribute in Fiscal 2012. 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).


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

                                                                              (millions of dollars)
                                                                                                Increase
                                                                       Fiscal 2013 Fiscal 2012 (Decrease)
Diabetic Customer A...............................................            $7.6        $9.7     ($2.1)
Diabetic Customer B...............................................             4.0         3.7        0.3
Diabetic Customer C...............................................             7.3         4.6        2.7
Diabetic Customer D...............................................             4.4         2.4        2.0
All other Diabetic Product Customers.................                          1.0         1.3      (0.3)
Totals................................................................       $24.3       $21.7       $2.6

Sales of Diabetic Products represented 78% of our total net sales in Fiscal 2013 compared to 74% of our total net sales in Fiscal 2012.

Other Product Sales

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

Sales of Other Products decreased $1.0 million to $6.7 million in Fiscal 2013 from $7.7 million in Fiscal 2012. This decrease was primarily driven by lower sales to a long-standing cellular customer, which decreased $1.0 million in Fiscal 2013, as well as the loss of a firearms customer, a GPS customer, and a laptop customer in Fiscal 2013, which in the aggregate contributed $1.3 million of sales to our Other Products line in Fiscal 2012. A decrease in sales of $0.4 million in Fiscal 2013 from a tablet customer also contributed to the overall decrease in sales of Other Products. Lesser fluctuations in several other customer accounts between Fiscal 2013 and Fiscal 2012 were not individually material.

Sales of Other Products represented 22% of our net sales in Fiscal 2013 compared to 26% of our total net sales in Fiscal 2012.

Gross Profit

Gross profit increased $2.5 million, or 64%, to $6.4 million in Fiscal 2013 from $3.9 million in Fiscal 2012. As a percentage of sales, our gross profit improved to 21% in Fiscal 2013, compared to 13% in Fiscal 2012.

This improvement was driven primarily by cost savings realized in Fiscal 2013 from the restructuring of our Asia-based sourcing and quality assurance operations (refer to Note 12, "Buying Agency and Supply Agreement," to our Consolidated Financial Statements), which were initiated in March 2012 and substantially completed as of September 30, 2012. Such sourcing and quality assurance costs represented 4% of our net sales in Fiscal 2013 compared to 8% of net sales in Fiscal 2012.

In addition, during Fiscal 2012, 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 3% in Fiscal 2012. We experienced no such quality issues during Fiscal 2013. As a result, during Fiscal 2013, our inspection, warehousing, handling and freight costs returned to levels consistent with those included in results reported prior to Fiscal 2012.

To a lesser extent, program shifts relative to several customers within the Other Products division also contributed to the improvement in our gross profit margin.

These improvements to our gross profit margin were offset, in part, by a decline in the overall gross profit margin of our Diabetic Products business, where our average sales prices to Diabetic Customer A and B, in respect of certain new and replacement programs for these customers, were significantly lower than the average sales prices of predecessor programs in Fiscal 2012. In addition, although our gross profit margin with Diabetic Customer D improved in Fiscal . . .

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