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FORD > SEC Filings for FORD > Form 10-Q on 13-Feb-2014All Recent SEC Filings

Show all filings for FORWARD INDUSTRIES INC

Form 10-Q for FORWARD INDUSTRIES INC


13-Feb-2014

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, 2013. The following discussion and analysis compares our consolidated results of operations for the three months ended December 31, 2013 (the "2014 Quarter"), with those for the three months ended December 31, 2012 (the "2013 Quarter"). All figures in the following discussion are presented on a consolidated basis. All dollar amounts and percentages presented herein have been rounded to approximate values.

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

The following 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, 2013, 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 10 in our Notes to our Consolidated Financial Statements) and rationalizing our fixed operating expenses, including office closures and headcount reductions. Our financial results for the 2014 Quarter 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 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 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, 2013, 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, 2013.


The notes to our audited consolidated financial statements contained in our Annual Report on Form 10-K for the year ended September 30, 2013, 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.

Marketable Securities

At December 31, 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 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. 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.

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 Income.

Preferred Stock Accretion

The carrying amount, at the date of issue 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.

Results of Operations for the 2014 Quarter compared to the 2013 Quarter

Income from Continuing Operations

Income from continuing operations increased $0.2 million, or 91%, to $0.3 million in the 2014 Quarter compared to $0.2 million in the 2013 Quarter. The improvement is primarily due to increased gross profit on a higher sales base, and, to a lesser extent, lower general and administrative expenses. These improvements were offset, in part, by a change in Other expense (income), net, as reflected in the table below:


                                                                 Main Components of Income from Continuing
                                                                                Operations
                                                                           (thousands of dollars)
                                                                                                 Increase
                                                                  2014 Quarter   2013 Quarter   (Decrease)
Net                                                                     $8,415         $6,973
sales...........................................................                                    $1,442

Gross                                                                    1,845          1,500
profit.......................................................                                          345
Sales and marketing expenses.......................                        617            477          140
General and administrative expenses............                            856          1,074        (218)
Other expense (income), net...........................                      25          (233)          258
Income tax expense..........................................                --             --           --
Income from Continuing Operations..........                               $347           $181         $166

Income from continuing operations per basic and diluted share was $0.04 and $0.02 for the 2014 Quarter and 2013 Quarter, respectively.

Net Sales

Net sales in the 2014 Quarter increased $1.4 million, or 21%, to $8.4 million from $7.0 million in the 2013 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.

                        Net Sales for 2014 Quarter
                           (millions of dollars)
                                                 APAC Americas EMEA Total*
Diabetic products.............................   $2.6     $1.7 $2.1   $6.4
Other products..................................  0.8      0.8  0.5    2.0
Total net sales.............................     $3.4     $2.5 $2.5   $8.4

                        Net Sales for 2013 Quarter
                           (millions of dollars)
                                                 APAC Americas EMEA Total*
Diabetic products.............................   $1.6     $1.8 $1.8   $5.2
Other products..................................  0.5      1.1  0.2    1.8
Total net sales.............................     $2.1     $2.9 $2.0   $7.0

* 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 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 $1.2 million to $6.4 million in the 2014 Quarter, from $5.2 million in the 2013 Quarter. This increase was primarily due to higher sales in respect of three legacy programs with Diabetic Customer A. To a lesser extent, higher sales in respect of one new program and one legacy program with Diabetic Customer B also contributed to the increase in Diabetic products sales in the 2014 Quarter. These increases were offset, in part, by a decline in the aggregate sales to all other Diabetic products customers, none of which were individually material.


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

                                                             (millions of dollars)
                                                2014 Quarter   2013 Quarter    Increase
                                                                              (Decrease)
Diabetic Customer A........................             $2.2           $1.2         $1.0
Diabetic Customer B........................              1.2            1.0          0.2
Diabetic Customer C........................              1.5            1.5           --
Diabetic Customer D........................              1.1            1.1           --
All other Diabetic Customers.........                    0.3            0.4        (0.1)
Totals.........................................         $6.4           $5.2         $1.2

Sales of carrying cases for blood glucose monitoring kits represented 76% and 74% of our total net sales in the 2014 Quarter and 2013 Quarter, respectively.

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.

Sales of Other Products increased approximately $0.2 million to $2.0 million in the 2014 Quarter from $1.8 million in the 2013 Quarter. This increase was primarily due to $0.2 million in higher sales contributed by several new programs with a larger, long-standing, sports and recreational customer, which contributed $0.4 million to our Other Products sales in the 2014 Quarter. This increase was offset, in part, by a $0.1 million decline in sales to a GPS customer, which had contributed $0.4 million to Other Products sales in the 2014 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 2014 Quarter.

Sales of Other Products represented 24% and 26% of our net sales in the 2014 Quarter and 2013 Quarter, respectively.

Gross Profit

Gross profit increased $0.3 million, or 23%, to $1.8 million in the 2014 Quarter from $1.5 million in the 2013 Quarter primarily as a result of the higher sales level achieved in the 2014 Quarter. As a percentage of sales, our gross profit was 22% in the 2014 Quarter and 2013 Quarter.

Sales and Marketing Expenses

Sales and marketing expenses increased $0.1 million, or 29%, to $0.6 million in the 2014 Quarter compared to $0.5 million in the 2013 Quarter due primarily to higher personnel costs. Personnel costs increased $0.1 million, or 27%, in the 2014 Quarter primarily as a result of expanding and restructuring our sales and sales support departments. 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 $0.2 million, or 20% to $0.9 million in the 2014 Quarter from $1.1 million in the 2013 Quarter due primarily to lower personnel costs, travel and entertainment costs, and professional fees. Personnel costs decreased $0.1 million, or 20%, primarily due to incentive bonuses and contract employee fees incurred in the 2013 Quarter as part of our restructuring. Also, as a result of our restructuring, travel and entertainment costs were higher in the 2013 Quarter. Professional fees decreased $0.1 million, or 24%, in the 2014 Quarter due primarily to legal fees incurred in connection with certain litigation incurred in the 2013 Quarter. Fluctuations in other components of "General and Administrative Expenses" were not material, individually, or in the aggregate.


Other Expense (income), net

Other expense (income), net, consisting primarily of realized and unrealized gains and losses on investments in marketable securities, was $25 thousand of expense in the 2014 Quarter compared to $0.2 million of income in the 2013 Quarter. This fluctuation was due primarily to $0.5 million of realized and unrealized losses on investments in marketable securities in the 2014 Quarter, which were offset in part by realized and unrealized gains on investments in marketable securities of $0.4 million in the 2014 Quarter. In the 2013 Quarter investments in marketable securities resulted in $0.4 million of realized and unrealized gains on investments in marketable securities, which were offset in part by $0.1 million of realized and unrealized losses on investments in marketable securities.

RESULTS OF DISCONTINUED OPERATION FOR THE 2014 QUARTER COMPARED TO THE 2013 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 net sales 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. We have substantially completed our exit of our Retail business as of March 31, 2013, and have not had, and do not expect to have, any continuing involvement in the Retail business after this date.

Income (loss) from Discontinued Operations

Income from discontinued operations was $5 thousand in the 2014 Quarter compared to a loss of $(42) thousand in the 2013 Quarter.

In the 2014 Quarter, discontinued operations consisted of $10 thousand in customs and duties costs incurred in connection with the sale of certain retail inventory to G-Form, which were offset by $14 thousand in recoveries of accounts receivable previously deemed uncollectable. In the 2013 Quarter, discontinued operations generated $0.2 million of gross profit on $0.4 million of net sales and incurred $0.2 million of operating expenses.

Income (loss) from discontinued operations per basic and diluted share was $0.00 for the 2014 Quarter and $(0.00) 2013 Quarter, respectively.

Liquidity and Capital Resources

During the 2014 Quarter, we used $1.0 million of cash in operations, which consisted of net income of $0.4 million, adjusted by $0.1 million for non-cash items (primarily realized and unrealized losses on marketable securities and share based compensation, offset by a change in the fair value of the warrant liability), and a net use in working capital items of $1.4 million. As to working capital items, cash used in operating activities consisted of increases in accounts receivable and inventory of $1.7 million and $16 thousand, respectively, as well as a decrease in accrued expenses and other current liabilities of $0.1 million.

These changes were offset, in part, by cash generated from operating activities consisting of an increase in accounts payable and a decrease in prepaid and other current assets of $0.3 million and $41 thousand, respectively.


The increase in accounts receivable is primarily due to the timing and higher volume of sales recorded in the 2014 Quarter compared to the 2013 Quarter. The decrease in accrued expenses and other current liabilities is primarily due to bonuses paid in the 2014 Quarter that were accrued for as of September 30, 2013. The increase in accounts payable is primarily due to higher purchases of inventory in the 2014 Quarter compared to the three month period ended September 30, 2013.

During the 2013 Quarter, we used $0.3 million of cash in operations, which consisted of net income of $0.1 million adjusted by $0.1 million for non-cash items and a net use in working capital items of $0.3 million. As to working capital items, cash used in operating activities consisted of decreases in accounts payable and accrued expenses and other current liabilities of $2.5 million and $0.8 million, respectively. These changes were offset, in part, by decreases in accounts receivable, inventories, and prepaid and other current assets of $2.6 million, $0.1 million, and $0.3 million, respectively.

In the 2014 Quarter, net investing activities used $0.2 million, which consisted of $4.1 million used for purchases of marketable equity securities, $3.9 million generated from sales of marketable equity securities, and $11 thousand used for purchases of property and equipment. In the 2013 Quarter, net investing activities used $0.6 million of cash, which consisted of $6.1 million used for purchases of marketable equity securities, $5.5 million generated from sales of marketable equity securities, and $8 thousand used for purchases of property and equipment.

In the 2014 Quarter, net financing activities used $19 thousand to pay dividends on the 6% Senior Convertible Preferred Stock. There were no financing activities in the 2013 Quarter.

At December 31, 2013, our current ratio (current assets divided by current liabilities) was 3.07 ; our quick ratio (current assets less inventories divided by current liabilities) was 2.66; and our working capital (current assets less current liabilities) was $10.3 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, and marketable securities on hand. The primary demands on our working capital currently are: i) operating losses, should they occur, and ii) accounts payable arising in the ordinary course of business, the most significant of which arise when we order products from our suppliers. Historically, our sources of liquidity have been adequate to satisfy working capital requirements arising in the ordinary course of business. We anticipate that our liquidity and financial resources for the next twelve months will be adequate to manage our operating and financial requirements.

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