UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[ X ] x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 20132014
[ ]¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 0-6669
FORWARD INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
New York | 13-1950672 |
(State or other jurisdiction of | (I.R.S. Employer Identification No.) |
incorporation or organization) |
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477 Rosemary Ave., West Palm Beach, FL 33401
(Address of principal executive offices, including zip code)
(561) 456-0030465-0030
(Registrant’s 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 ]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 ]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 ]
xYes [ ¨ ] 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 [ x ] No
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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 Registrant’s 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. [Xx]
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).
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). [
¨] Yes [X] xNo
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 Registrant’s most recently completed second fiscal quarter was: $11,774,936.$11,422,633.
As of January 14,December 5, 2014, 8,236,4798,443,046 shares of the Registrant’s common stock were outstanding.
Documents Incorporated by Reference
None.The Proxy Statement for the 2014 Annual Meeting of Shareholders is incorporated by reference into Part III of this Annual Report on Form 10-K.
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Forward Industries, Inc.
Table of Contents
| PART I | Page No. |
Item 1. |
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Item 1A. |
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Item 1B. |
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Item 2. |
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Item 3. |
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Item 4. |
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| PART II |
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Item 5. |
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Item 6. |
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Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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Item 7A. |
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Item 8. |
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Item 9. | Changes in and Disagreements With Accountants on Accounting and Financial Disclosure |
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Item 9A. |
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Item 9B. |
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| PART III |
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Item 10. |
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Item 11. |
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Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
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Item 13. | Certain Relationships and Related Transactions, and Director Independence |
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Item 14. |
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| PART IV |
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Item 15. |
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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:
“Forward”, “Forward Industries”, “we”, “our”, and the “Company” refer to Forward Industries, Inc., a New York corporation, together with its consolidated subsidiaries;
“common stock”“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;
“Forward HK” refers to Forward Industries’ inactive wholly owned subsidiary Forward Industries HK, Ltd., a Hong Kong corporation;
“Forward Switzerland” refers to Forward Industries’ wholly owned subsidiary Forward Industries (Switzerland) GmbH, a Swiss corporation;
“Forward UK” refers to Forward Industries’ inactive wholly owned subsidiary Forward Ind. (UK) Limited, a limited company of England and Wales;
“Forward China” refers to Forward Industries Asia-Pacific Corporation (f/k/a Seaton Global Corporation), a British Virgin Islands registered corporation that is Forward’s exclusive sourcing agent in the Asia-Pacific region;
“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 2014” refers to our fiscal year ended September 30, 2014;
“Fiscal 2013” refers to our fiscal year ended September 30, 2013;
“Fiscal 2012” refers to our fiscal year ended September 30, 2012;
“Europe” refers to the countries included in the European Union;
“EMEA Region” means the geographic area encompassing Europe, the Middle East and Africa;
“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;
“Retail” refers to the retail distribution channel; and
“Corporate” refers to the corporate distribution channel.
Note Regarding Presentation of Financial Information
Certain figures included in this Annual Report on Form 10-K have been subject to rounding adjustments; accordingly, figures shown as totals in certain tables may not be an arithmetic aggregation of the figures that precede them.
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PART I
ITEM 1. | BUSINESS |
General
Forward Industries, Inc. was incorporated under the laws of the State of New York and began operations in 1961 as a manufacturer and distributor of specialty and promotional products. We design, market, and distribute carry and protective solutions, primarily for hand held electronic devices, 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 principal customer market is original equipment manufacturers, or “OEMs” (or the contract manufacturing firms of these OEM customers), that either package our products as accessories “in box” together with their branded product offerings, or sell them through their retail distribution channels. Our OEM products include carrying cases and other accessories for blood glucose monitoring kits and a variety of other portable electronic and non-electronic products (such as sporting and recreational products, bar code scanners, smartphones, GPS and location devices, tablets, firearms and other 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. Our OEM customers are located in the Americas, the EMEA Region, and the APAC Region. We do not manufacture any of our OEM products and source substantially all of our OEM products from independent suppliers in China.
On June 21, 2012, we determined to exit our global retail business (“discontinued operations”) and focus solely on growing our OEM business. Our 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. We have substantially completed the exit of our Retail business and have not had, and do not expect to have, any continuing involvement in the Retail business after this date.
Corporate History
Forward Industries 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 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 customers in Europe.
Products
Diabetic Products
We sell carrying cases for blood glucose diagnostic kits (“Diabetic Products”) 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 $6.00 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 OEM’s blood glucose testing and monitoring kits, or to a much lesser extent, sells them through their retail distribution channels. These 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 manufacturer’s 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. For Fiscal 2013,2014, our Diabetic Products accounted for approximately 78%79% of our total net sales.
Other Products
We also sell carrying and protective solutions to OEMs for a diverse array of other portable electronic and other products (“Other Products”), including sporting and recreational products, bar code scanners, smartphones, GPS and location devices, tablets, and firearms, 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. For Fiscal 2013,2014, our Other Products accounted for approximately 22%21% of our total net sales.
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Product Development
In our OEM business, the product life cycle in distributing and selling our technology solutions to our OEM customers is as described below. We typically receive requests to submit product designs in connection with a customer’s 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 OEM’s identifying logo imprint on the product. Our design and production resources develop more detailed product specifications and design options for our customer’s 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 customer’s manufacturing and shipment schedules so that our carry solution products are available with the customer’s product (and included “in box”, as the case may be) prior to shipment and sale, or to a lesser extent sold by our customer through its retail distribution channels.
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 OEM customers by their geographic location for Fiscal 20132014 and Fiscal 20122013 are as follows:
| Net Sales for Fiscal Years Ended September 30, | ||
Geographic Location: | 2013 |
| 2012 |
Americas................................................................. | 35% |
| 36% |
APAC Region........................................................ | 35% |
| 39% |
EMEA Region........................................................ | 30% |
| 25% |
Totals.................................................................. | 100% |
| 100% |
Net Sales for the Fiscal Years Ended September 30, | |||
| 2014 |
| 2013 |
Americas | 30% | 35% | |
APAC Region | 35% | 35% | |
EMEA Region | 35% |
| 30% |
Total | 100% |
| 100% |
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 manufacturer’s 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 decrease in the APACAmericas Region’s contribution to total net sales in Fiscal 20132014 compared to Fiscal 20122013 was primarily due to the decrease in revenue contribution from Diabetic Customer AD and a major customer in the Other Product line within the APACAmericas Region. The increase in the EMEA Region’s contribution to total net sales in Fiscal 20132014 compared to Fiscal 20122013 was primarily due to increased revenue contribution from Diabetic Customers C and D. See “Item 7. – Management’s Discussion and Analysis of Financial Condition and Results of Operations.” See Note 1615 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 accessory products “in box” with their branded products. Some of our customers also purchase certain of our products and offer them for sale as stand-alone accessories to complement their product offerings.
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Sales by Product Line
Sales of carry and protective solutions for Diabetic Products and for Other Products (all products other than diabetic carry cases for blood glucose monitor kits) accounted for approximately the following percentages of total net sales in Fiscal 20132014 and 2012:2013:
| Fiscal Year Ended | ||
Sales: | 2013 |
| 2012 |
Diabetic Products................................................................ | 78% |
| 74% |
Other Products .................................................................... | 22% |
| 26% |
Totals................................................................................ | 100% |
| 100% |
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| For the Fiscal Years Ended | ||
| September 30, | ||
Sales: | 2014 |
| 2013 |
Diabetic Products | 79% |
| 78% |
Other Products | 21% |
| 22% |
Totals | 100% |
| 100% |
Sales Concentration
We have approximately 6373 active OEM customers. Of these, four customers (including their affiliates and contract manufacturers) accounted for approximately 75%76% and 70%75% of our net sales from continuing operations in Fiscal 20132014 and 2012,2013, respectively. All four of these “major” customers 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 four customers to continuing operations for Fiscal 20132014 and Fiscal 20122013 are as follows:
| Fiscal Year Ended | ||
Customer: | 2013 |
| 2012 |
Diabetic Customer A........................................................... | 24% |
| 33% |
Diabetic Customer B.................................................... | 13% |
| 13% |
Diabetic Customer C.................................................... | 24% |
| 16% |
Diabetic Customer D.................................................... | 14% |
| 8% |
Totals................................................................................. | 75% |
| 70% |
| For the Fiscal Years Ended | ||
| September 30, | ||
Customer: | 2014 |
| 2013 |
Diabetic Customer A | 27% |
| 24% |
Diabetic Customer B | 14% |
| 13% |
Diabetic Customer C | 24% |
| 24% |
Diabetic Customer D | 11% |
| 14% |
Totals | 76% |
| 75% |
During Fiscal 20132014 and 2012,2013, all net sales of OEM products 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 fourall of our major customers and several of our other OEM customers. These arrangements obligate us to supply our products to our customer’s distribution hubs (may be multiple locations) where their products are manufactured, kitted, and/or warehoused pending sale, and where our products are packaged “in box” with the OEM customer’s 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 customer’s purchase orders and forecasts. We do not recognize revenue for product shipped to a hub until we have been notified by our customer that our product has been withdrawn from the distribution hub and “consumed”. 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 30- to 90-day120-day credit terms customary in the industry and without interest. Historically, we have not had significant credit problems with our customers. Our significant OEM customers are large, multi-nationalmultinational 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. Four OEM customers (including their affiliates or contract manufacturers) accounted for approximately 77% of our accounts receivable at September 30, 2014, whereas, four OEM customers accounted for approximately 73% of our accounts receivable at September 30, 2013, whereas, three OEM customers accounted for approximately 76% of our accounts receivable at September 30, 2012.2013.
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When we ship products to our OEM customer’s 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 payment obligations 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 “Risk Factors” in Item 1A of this Annual Report on Form 10-K- “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.”
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.
Sourcing Agent
On March 12, 2012, we entered into a Buying Agency and Supply Agreement (the “Agreement”) with Forward Industries Asia-Pacific Corporation (“China. On March 13, 2014, we entered into Amendment No. 1 to the Agreement with Forward China”), a British Virgin Islands corporation,China, dated as of March 7, 2012.11, 2014. The Agreement, as amended, provides that upon the terms and subject to the conditions set forth therein, Forward China will act as our exclusive buying agent and supplier of Products (as defined in the Agreement) in the APAC Region. We purchase products at Forward China’s cost and pay a service fee on the net purchase price.to Forward China. The Agreement, as amended, terminates on March 11, 2014,2015, subject to renewal. Terence Wise, a director of the Company, is a principal of Forward China.
Suppliers
We procure substantially all our supply of carrying solutions products from independent suppliers in China through Forward China. Depending on the product, we may require several different suppliers to furnish component parts or pieces. We purchased approximately 92%95% and 90%92% of our OEM products from five and four such suppliers in Fiscal 20132014 and Fiscal 2012,2013, respectively. The approximate percentages of purchases of OEM products from each of these four suppliers with respect to continuing operations for Fiscal 20132014 and Fiscal 20122013 are as follows:
| Fiscal Year Ended | ||
Supplier: | 2013 |
| 2012 |
OEM Supplier A..................................................................................... | 50% |
| 54% |
OEM Supplier B............................................................................. | 19% |
| 17% |
OEM Supplier C............................................................................. | 14% |
| 9% |
OEM Supplier D............................................................................. | 9% |
| 10% |
Totals................................................................................................... | 92% |
| 90% |
Fiscal Year Ended September 30, | |||
| 2014 | 2013 | |
Supplier: |
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OEM Supplier A | 66% | 0% | |
OEM Supplier B | 20% | 50% | |
OEM Supplier C | 5% | 19% | |
OEM Supplier D | 3% | 14% | |
OEM Supplier E | 1% |
| 9% |
Totals | 95% |
| 92% |
We place orders with one or more suppliers at the time we receive firm purchase orders and/or forecasts 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 advance of receiving a customer purchase order, or in quantities in excess of those forecasted to us by our customer, for which they are contractually obligated to us, in order to meet our customer’s delivery demands. While historically we have made purchases directly from suppliers, with the assistance of Forward China, startingStarting September 1, 2013 we began making purchases directly from Forward China, and we anticipate that at some point inChina. As of September 30, 2014, substantially allthe majority of our purchases will beare made directly fromthrough Forward China.
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Quality Assurance
To ensure that our products manufactured by our Chinese suppliers meet our quality assurance standards our products are inspected by independent contractors in China, which may be affiliated with one or more of our suppliers. These contractors wereare subject to the control and supervision of Forward China’s quality assurance employees based in Hong Kong (see “Item 1. Business – Product Supply – Sourcing Agent”). In July 2012, Forward China received its ISO 9001:2008 quality certification, which covers all ISO activities previously covered under Forward’s ISO quality certification.
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Logistics
Once our products are approved for shipment by our quality assurance procedures, our products are typically shipped to our customer’s destination port in the Americas and EMEA Region on ocean-going container vessels, or by ground transport to our APAC Region customer’s locations in China or Hong Kong. In certain cases, and primarily at our customer’s request, we will expedite the shipment of our products by using air transportation. 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. EMEA Region destined shipments generally are routed via Rotterdam. See “Item 1A. – 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.”
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 our 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, reliable product delivery and product quality, and competitive pricing. We believe that our ability to compete based on product quality assurance considerations is enhanced by Forward China’s local presence and their 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, 2013,2014, we had 1920 full-time employees, of whom two areone is employed in an executive capacities, ninecapacity, eleven are employed in sales and sales support capacities, three are employed in a design capacity, and five are employed in finance and administrative capacities. We consider our employee relations to be satisfactory. None of our employees are covered by a collective bargaining agreement.
Since June 2003, we have employed our U.S. employees through a co-employment agreement with a Professional Employer Organization (“PEO”). The objective of this arrangement is for the PEO 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 customer’s 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.
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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 expenses in order to address customer requests regarding our product materials or method of manufacture or regarding their packaging methods and standards.
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ITEM 1A. | RISK FACTORS |
Please read ”ItemItem 7. “Cautionary statement for purposes of the “Safe Harbor” provisions of the Private Securities Litigation Reform Act of 1995” that appears on page 1614 of this Annual Report on Form 10-K.
We have a history of losses and negative cash flow from operations. We cannot assure you that we will achieve or sustain profitability in the future.
We have incurred significant losses and negative cash flows from operations in recent years. We incurred net losses of approximately $0.2$0.8 million and $9.6$0.2 million for the fiscal years ended September 30, 20132014 and 2012,2013, respectively, and had net cash provided by operating activities of approximately $2.3$0.2 million and net cash used by operating activities of $10.8$2.3 million for the fiscal years ended September 30, 20132014 and 2012,2013, respectively. Further, we may incur net losses in future reporting periods as we incur expenses associated with the continuation of our business as well as its subsequent development, which development cannot be guaranteed. There is no assurance our future operations will be profitable. If we cannot generate sufficient revenues to operate profitably, we may be forced to cease or suspend operations, or we may be required to raise additional capital to maintain or grow our operations. There is no assurance that we will be able to raise such additional capital.
In June 2012 we announced our plans to exit the global retail business and focus solely on growing our OEM business. In connection with exiting the global retail business we also commenced a restructuring of our business and implemented a variable, lower cost sourcing and quality assurance solution through a third party Asia-based sourcing agent. These restructuring plans have been substantially completed. While we believe these measures, along with other steps to be taken, will be sufficient to return the Company to sustainable profitability, there can be no assurance that this will be the case, or that additional steps will not be required. If additional steps are required, there can be no assurance that they will be properly implemented or will be successful, or that we will realize the cost savings and other anticipated benefits from any such additional restructuring steps.
Our OEM growth strategy will continue to require additional capital investment.
We have recently invested and expect to continue to invest incremental cash resources to execute our OEM growth strategy. 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.
Our business remains highly concentrated in our Diabetic Products line, posing risks to our financial condition and results of operations compared to periods when revenue from customers from our two principal product lines were more balanced. If our 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 Products to OEM customers accounted for approximately 78%79% of net revenues from continuing operations in Fiscal 2013.2014. As a result, our financial condition and results of operations are subject to higher risk from the loss of a major diabetic customer or changes in their business practices, 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.
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Our business is and has been characterized by a high degree of customer concentration. Our four largest customers accounted for approximately 75%76% and 70%75% of net sales from continuing operations in Fiscal 20132014 and Fiscal 2012,2013, 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 four large diabetic customers, 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.
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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. During recent years, there have been numerous federal legislative and administrative actions that have affected government programs, including adjustments that have reduced or increased payments to healthcare providers and patients. For example, the federal healthcare reform legislation that was enacted in March 2010 (known as the Patient Protection and Affordable Care Act of 2010 (“ACA”)) may reduce reimbursement for some healthcare providers and patients while increasing reimbursement for others. In addition, ACA mandates the implementation of various programs and value and quality-based reimbursement incentives that may impact the amount of reimbursement for healthcare providers and patients. In addition and more significantly, third-party payers, including governmental health administration authorities, managed care providers and private health insurers, have increasingly challenged the price and examined the cost effectiveness of medical products and services, which has affected the reimbursement of such products to patients. Due to this uncertainty in medical reimbursements, OEMs have experienced reductions in demand and, as a result, 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.
Four customers accounted for approximately 77% of our accounts receivable at September 30, 2014, and four customers accounted for approximately 73% of our accounts receivable at September 30, 2013, whereas three customers accounted for approximately 76% of our accounts receivable at September 30, 2012, respectively. 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 20132014 and Fiscal 2012,2013, 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 in general, we are encountering increased pricing from our Chinese suppliers who are reacting to inflationary increases in materials and labor costs incurred by them. In addition, prices that our Chinese vendors charge to us may reflect appreciation of the Chinese currency against the U.S. dollar, which can be passed through to us in the form of higher U.S. dollar prices. This in turn will tend to reduce gross profit if we are unable to raise prices. See “Item 7. – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Business Overview – Trends and Economic Environment.”
We depend on a single exclusive buying agent who, in turn, depends on a limited number of key suppliers.
Although Forward China, our exclusive sourcing agent in the Asia Pacific region, has not made progress in expanding ourefforts to expand the supplier base during Fiscal 2013, we believe such expansion may not be sustainable during the fiscal year ending September 30, 2014 and anticipate that our2014. However, there was no contraction of supplier base may become more concentrated. In particular,during Fiscal 2014. Forward China has relied on a limited number of suppliers to supply the component parts and pieces necessary for the production of our carry and protective solutions products. As a result, our ability to effectively push back against rising material costs may diminish. In addition, any inability to obtain supplies from a single or limited number of suppliers may result in difficulty obtaining the supplies necessary for our business and may restrict our ability to produce our carry and protective solutions products. Where practical, we intend to establish alternative sources to mitigate the risk that the failure of any single supplier will adversely affect our business. Nevertheless, a prolonged inability to obtain certain components or the failure of one of our suppliers could impair our ability to ship products and generate revenues, which could adversely affect our operating results and damage our customer relationships. See also “Note 16,15, Operating Segment Information—Supplier Concentration” to our audited consolidated financial statements included in Item 8 of this Annual Report.
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In addition, we depend significantly on Forward China as our exclusive buying agent for substantially all of our component parts in the APAC region. As a result, we have limited visibility as to our supplier base, making it difficult to forecast future events and to plan our operations. In addition, if Forward China fails to satisfactorily perform its obligations, including payment obligations, to our suppliers or its duties to us as our exclusive buying agent as a result of financial or other difficulties or for any other reason, we could suffer irreparable harm resulting in reduced profits or, in some cases, significant losses for us.
8 |
If we fail to maintain an effective system of internal controls over financial reporting, we may not be able to accurately report our financial results. As a result, current and potential stockholders could lose confidence in our financial reporting, which could harm our business and the trading price of our stock.
Effective internal controls over financial reporting are necessary for us to provide reliable financial reports. If we cannot maintain effective controls and reliable financial reports, our business and operating results could be harmed. For example, our management determined that we had a material weakness related to the operation of our internal controls over financial reporting primarily associated with a complex non-routine financing transaction in the three-month period ended June 30, 2013, as well as a material weakness related to a failure in communication of significant financial matters through and including the year ended September 30, 2013. We continue to work on improvements to our internal controls over financial reporting and there can be no assurance that this or another material weaknesses will not occur in the future. Any failure to implement and maintain internal controls over our financial reporting or difficulties encountered in the implementation of improvements in our controls, could cause us to fail to meet our reporting obligations. Any failure to improve our internal controls over financial reporting or to address identified weaknesses in the future, if they were to occur, could also cause investors to lose confidence in our reported financial information, which could have a negative impact on the trading price of our stock.
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. 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. In addition, such currency fluctuations may affect the comparability of our results of operations between financial periods.
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. 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 customer and by product, and if the revenue contribution from one or more OEM customers or products changes materially, relative to total revenues, our gross profit percentage may fluctuate.
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Our gross profit margins on the products we sell can vary widely depending on the product type, customer, and order size. 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 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.
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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.
Our business could suffer if the services of key sales personnel we rely on were lost to us.
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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, net 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, of which 648,846 shares have been issued.issued as 6% convertible 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 the 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.
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In addition, on April 26, 2013, our Board of Directors adopted a Shareholder Rights Plan, as set forth in the Rights Agreement dated as of April 26, 2013 (the “Rights Agreement”), between the Company and American Stock Transfer & Trust Company, LLC, as Rights Agent, in order to encourage anyone seeking to acquire us to negotiate with our Board of Directors prior to attempting a takeover. While the plan is designed to guard against coercive or unfair tactics to gain control of us, the plan may have the effect of making more difficult or delaying any attempts by others to obtain control of us. See Note 7 to our audited consolidated financial statements included in Item 8 of this Annual Report. 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.
Our business could be negatively affected as a result of a potential proxy contest for the election of directors at our annual meeting, and such proxy contest could distract our management, divert our resources and impact the trading value of the Company’s securities.
On December 8, 2014, Terence Bernard Wise, a director of the Company, filed a definitive proxy statement nominating five director candidates for election to the Board of Directors at our 2014 annual meeting of shareholders (the “2014 Annual Meeting”). The Company believes Terence Bernard Wise, together with other participants (collectively, the “Wise Group”), failed to properly nominate its alternative slate of director candidates in compliance with the nomination procedures established in the Company’s Amended and Restated By-Laws. As a result, the Company believes that any purported nomination by the Wise Group at the 2014 Annual Meeting is invalid. The Company sought declaratory and injunctive relief from a New York State court to prevent the Wise Group’s invalid and improper solicitation. At a hearing on December 1, 2014, the court denied the Company’s request for preliminary injunctive relief. The Company has filed a Notice of Appeal with respect to the court’s ruling. Since the court determined the Wise Group nomination is valid, it is possible that the Wise-nominated directors could constitute a majority of the Board of Directors following the 2014 Annual Meeting.
A proxy contest would require us to incur significant legal fees and proxy solicitation expenses and require significant time and attention by management and the Board of Directors. Such activities could interfere with our ability to execute our strategic plan. The perceived uncertainties as to our future direction also could affect the market price and volatility of our securities, result in the loss of potential business opportunities and may make it more difficult to attract and retain qualified personnel and business partners, any of which could adversely affect our business and operating results.
We face risks related to litigation advanced by a current director and shareholder of ours and our former Chief Financial Officer.
On July 15, 2014, Terence Bernard Wise, a director of the Company, filed a derivative complaint in the Supreme Court of the State of New York, New York County, against directors Frank LaGrange Johnson, Robert Garrett, and John F. Chiste and then-directors (now former directors) Timothy Gordon and Owen P.J. King, also naming the Company as a nominal defendant, alleging breaches of fiduciary duty and seeking declaratory and injunctive relief (both preliminary and final), including a temporary restraining order (“TRO”), that would have prevented the Board of the Company from voting on proposals to raise capital or engage in any extraordinary transactions. The court rejected Mr. Wise’s request for a TRO and Mr. Wise then withdrew his request for preliminary injunctive relief. Mr. Wise then amended his complaint to add allegations of breach of fiduciary duties under various provisions of New York’s Business Corporation Law. On December 4, 2014, Mr. Wise brought a new application to the court, once again seeking a TRO and a preliminary injunction that would enjoin his fellow Company directors from causing the Company to issue any Series B Senior Convertible Preferred Stock (the “Preferred Stock”), or take any antecedent or preparatory steps to effectuate such issuance, prior to the Company’s 2014 annual meeting of shareholders (the “2014 Annual Meeting”). The court granted the TRO, in part, by prohibiting the Company from issuing—but not from taking antecedent or preparatory steps to issue—such Preferred Stock prior to December 8, 2014. At a hearing on December 8, 2014, the court then granted Mr. Wise’s motion for a preliminary injunction, enjoining the Company’s issuance of the Preferred Stock prior to the Company’s 2014 Annual Meeting. On December 8, 2014, the Company filed a notice of appeal of the court’s order to the Supreme Court of the State of New York, Appellate Division, First Department. On December 9, 2014, the Company moved, before such appellate court, to vacate the lower court’s injunction, which motion has not yet been decided. The case otherwise remains pending before the lower court.
11 |
On August 26, 2014, James McKenna, the Company’s former Chief Financial Officer, filed a lawsuit in the U.S. District Court for the Southern District of New York against the Company and directors Frank LaGrange Johnson, Robert Garrett and John F. Chiste and then-directors (now former directors) Timothy Gordon and Owen P.J. King, alleging purported claims of retaliation for whistleblowing under the Dodd-Frank Act, breach of contract and breach of the covenant of good faith and fair dealing all as against the Company, and a single claim for tortious interference with contract as against the individual defendants. The complaint seeks an unspecified amount of monetary consequential damages and punitive damages. The case currently is pending before the court.
Although we believe the claims to be without merit, our operating results and share price may be negatively impacted due to the negative publicity, expenses incurred in connection with our defense, management distraction, and/or other factors related to this litigation. In addition, litigation of this nature may negatively impact our ability to attract and retain customers and strategic partners, as well as qualified board members and management personnel.
One of our current directors is a significant shareholder, which makes it possible for him to have significant influence over the outcome of all matters submitted to our shareholders for approval and which influence may be alleged to conflict with our interests and the interests of our other shareholders.
One of our directors, Terence Bernard Wise, is a significant shareholder who beneficially owns approximately 19.1% of the outstanding shares of our common stock as of December 1, 2014. Mr. Wise will have substantial influence over the outcome of all matters submitted to our shareholders for approval, including the election of our directors and other corporate actions. This influence may be alleged to conflict with our interests and the interests of our other shareholders. Mr. Wise has also launched a proxy contest to elect a different slate of directors than what our Company proposed to shareholders. In addition, such influence by Mr. Wise could have the effect of discouraging potential business partners or create actual or perceived governance instabilities that could adversely affect the price of our common stock.
ITEM 1B. |
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Not Applicableapplicable.
ITEM 2. |
In September 2012, we relocated our executive offices from Santa Monica, California to West Palm Beach, Florida, which consists of approximately 2,815 square feet, which we rent for approximately $6,200 per month under a lease agreement scheduled to expire in September 2020.
In April 2011, we relocated our executive offices from Pompano Beach, Florida to offices in Santa Monica, California, which consists of approximately 3,400 square feet, which we rented during Fiscal 2013 atrent for approximately $14,000 per month under lease agreements, which expire in October 2016. Beginning in July 2013, we sub-leased this space for the remainder of our lease term at rates above those that we are contractually obligated to pay.
We sub-lease 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 Region headquarters from which we coordinate our sales and sales support activities throughout the EMEA Region.
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In October 2011,On February 1, 2014, we entered into a lease for approximately 1,000 square feet ofbegan leasing office space in London, EnglandNew York, New York for our Chief Executive Officer at $8,000a rate of $2,500 per month under afrom LaGrange Capital Administration, L.L.C. (“LCA”). This lease agreement that expired in September 2012. We used this office space to perform administrativeis month-to-month and sales support (such as accounting, operational, and customer service functions) primarily to our EMEA Region-based Retail sales team. Consequently, this lease was not renewed as partis cancellable by either us or LCA at any time. Effective April 1, 2014, LCA increased the monthly rental charge (inclusive of our exit from our Retail business (see Note 3 – “Discontinued Operations” to the audited consolidated financial statements included in Item 8 of this Annual Report). All OEM sales, sales support and administrative activities in the EMEA Region are coordinated from our branch office in Cham, Switzerland.
In April 2012, we renewed our license through the Jebel Ali Free Zone Authority (JAFZA) to maintain a registered branch office in the Jebel Ali Free Zone (JAFZ) of the United Arab Emirates. Under this license, we rent, approximately 638 square feetallocable share of office space at annual rate of $35,000 through March 2013. We used this office spaceassistant, and equipment leases) from $2,500 to facilitate sales of our Retail products in the Middle-East and India region through July 2012, at which time we shut down this office space as part of our exit from our Retail business ( See Note 3 – “Discontinued Operations” to the audited consolidated financial statements included in Item 8 of this Annual Report).
In July 2011, we renewed our 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 used this office space as our APAC Region headquarters from which we coordinated and conducted our Asia-based sourcing, quality assurance, and logistics activities. In September 2012, we vacated this office space in connection with our use of an exclusive sourcing agent in the APAC Region (see “Item 1. Business – Product Supply – Sourcing Agent).$12,700 per month.
We believe that each of the foregoing leased properties is adequate for the purposes for which it is used. All leases are with unaffiliated 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. |
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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, 2013,2014, there were no such actions or proceedings, either individually or in the aggregate, that, if decided adversely to the Company’s interests, the Company believes would be material to its business.
12 |
On July 15, 2014, Terence Bernard Wise, a director of the Company, filed a derivative complaint in the Supreme Court of the State of New York, New York County, against directors Frank LaGrange Johnson, Robert Garrett, and John F. Chiste and then-directors (now former directors) Timothy Gordon and Owen P.J. King, also naming the Company as a nominal defendant, alleging breaches of fiduciary duty and seeking declaratory and injunctive relief (both preliminary and final), including a temporary restraining order (“TRO”), that would have prevented the Board of the Company from voting on proposals to raise capital or engage in any extraordinary transactions. The court rejected Mr. Wise’s request for a TRO and Mr. Wise then withdrew his request for preliminary injunctive relief. Mr. Wise then amended his complaint to add allegations of breach of fiduciary duties under various provisions of New York’s Business Corporation Law. On December 4, 2014, Mr. Wise brought a new application to the court, once again seeking a TRO and a preliminary injunction that would enjoin his fellow Company directors from causing the Company to issue any Series B Senior Convertible Preferred Stock (the “Preferred Stock”), or take any antecedent or preparatory steps to effectuate such issuance, prior to the Company’s 2014 annual meeting of shareholders (the “2014 Annual Meeting”). The court granted the TRO, in part, by prohibiting the Company from issuing—but not from taking antecedent or preparatory steps to issue—such Preferred Stock prior to December 8, 2014. At a hearing on December 8, 2014, the court then granted Mr. Wise’s motion for a preliminary injunction, enjoining the Company’s issuance of the Preferred Stock prior to the Company’s 2014 Annual Meeting. On December 8, 2014, the Company filed a notice of appeal of the court’s order to the Supreme Court of the State of New York, Appellate Division, First Department. On December 9, 2014, the Company moved, before such appellate court, to vacate the lower court’s injunction, which motion has not yet been decided. The case otherwise remains pending before the lower court.
On July 16, 2014, the Company filed a lawsuit in the U.S. District Court for the Southern District of New York against Mr. Wise and his long-time business partner, Jenny P. Yu, alleging multiple violations of federal securities laws, including the filing with the Commission of deceptive and misleading Schedules 13D and proxy solicitation materials. Specifically, the Company alleged that Mr. Wise and Ms. Yu have been acting as an improperly undisclosed “group” engaged in an effort to replace the entire Board with Mr. Wise’s hand-picked candidates. The Company’s lawsuit seeks expedited injunctive and declaratory relief that would require Mr. Wise and Ms. Yu to comply with the federal securities laws and submit corrected, accurate disclosures in advance of any vote by the Company’s shareholders. On September 20, 2014, the Court granted Wise’s and Yu’s respective motions to dismiss the case, after which the Company filed an appeal to the United States Court of Appeals for the Second Circuit. The Company’s appeal currently is pending before the Court of Appeals.
On August 26, 2014, James McKenna, the Company’s former Chief Financial Officer, filed a lawsuit in the U.S. District Court for the Southern District of New York against the Company and directors Frank LaGrange Johnson, Robert Garrett and John F. Chiste and then-directors (now former directors) Timothy Gordon and Owen P.J. King, alleging purported claims of retaliation for whistleblowing under the Dodd-Frank Act, breach of contract and breach of the covenant of good faith and fair dealing all as against the Company, and a single claim for tortious interference with contract as against the individual defendants. The complaint seeks an unspecified amount of monetary consequential damages and punitive damages. The case currently is pending before the court.
On November 13, 2014, the Company filed a lawsuit in the Supreme Court of the State of New York, Kings County, against Terence Bernard Wise, a director of the Company, and the following six individuals whom Mr. Wise claims that he has purportedly nominated to stand for election as directors at the Company’s Annual Meeting: Howard Morgan, Michael Luetkemeyer, Eric Freitag, Sangita Shah, N. Scott Fine, and Darryl Keyes. The Company’s complaint seeks a judicial declaration that Mr. Wise’s purported nominations are invalid, as they were not received within the timeframe expressly provided by the Company’s Bylaws for such nominations. The complaint also seeks injunctive relief from the court, enjoining Mr. Wise from soliciting proxies for his purported nominees to stand for election as directors at the 2014 annual meeting of shareholders. At a hearing on December 1, 2014, the court denied the Company’s request for preliminary injunctive relief. On December 2, 2014, the Company filed a notice of appeal of the court’s order to the Supreme Court of the State of New York, Appellate Division, Second Department and on December 3, 2014, the Company moved before such appellate court for the preliminary injunctive relief denied below. That motion remains pending, as does the case before the lower court.
ITEM 4. |
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Not Applicable.applicable.
PART II
ITEM 5. |
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.years:
| Bid Price Information for Common Stock* |
| Bid Price Information for Common Stock* | ||||||||||||||
| Fiscal 2013 |
| Fiscal 2012 |
| Fiscal 2014 |
|
| Fiscal 2013 | |||||||||
| High Bid | Low Bid |
| High Bid | Low Bid |
|
| High Bid |
|
| Low Bid |
|
| High Bid |
|
| Low Bid |
First Quarter | $1.50 | $1.08 |
| $2.24 | $1.55 |
| $ | 1.89 | $ | 1.41 | $ | 1.50 | $ | 1.08 | |||
Second Quarter | $2.17 | $1.43 |
| $3.24 | $1.65 |
| $ | 2.10 | $ | 1.51 | $ | 2.17 | $ | 1.43 | |||
Third Quarter | $2.14 | $1.70 |
| $2.83 | $1.68 |
| $ | 1.93 | $ | 1.15 | $ | 2.14 | $ | 1.70 | |||
Fourth Quarter | $1.99 | $1.66 |
| $1.83 | $1.02 |
| $ | 1.73 | $ | 1.18 | $ | 1.99 | $ | 1.66 |
_______________________________
*High and low bid price information as furnished by The NASDAQ Stock Market Inc.
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On December 5, 2013,1, 2014, the closing bid quotation for our common stock was $1.65$1.15.
Holders of common stock.
As of December 5, 2013,November 24, 2014, there were approximately 110114 holders of record of our common stock, excluding approximately 6,9396,456 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, net 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. See “—Recent sales of unregistered securities” below.
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Recent sales of unregistered securities
On each of June 28, 2013, August 7, 2013 and August 14, 2013, the Company completed private placements to accredited investors of convertible preferred stock totaling 648,846 shares. See Note 7 to our audited consolidated financial statements. The first dividend payment with respect to such preferred stock was made on September 30, 2013.
Securities authorized for issuance under equity compensation plans.
For informationLong-term equity based compensation is accomplished under the Forward Industries, Inc. 2007 Equity Incentive Plan, as amended (the “2007 Plan”), adopted by the Company and by its shareholders in May 2007 and amended February 2009, and the Forward Industries, Inc. 2011 Long Term Incentive Plan (the “2011 Plan”), adopted by the Company and by its shareholders in March 2011. Under the 2007 Plan, 800,000 shares of Common Stock were authorized for grants of awards of stock options and restricted stock, of which 130,015 shares remain available for grant as of September 30, 2014. Under the 2011 Plan, 850,000 shares of Common Stock were authorized for grants of awards of stock options and restricted stock, of which 185,647 shares remain available for grant as of September 30, 2014. There are options to purchase 30,000 shares of Common Stock outstanding under the 1996 Stock Incentive Plan.
Information relating to this topic, see Part III, Item 11securities authorized for issuance under equity compensation plans as of this Annual Report, “Executive Compensation—Securities Authorized for Issuance under Equity Compensation Plans”.September 30, 2014, is as follows:
Plan Category | Number of securities to be issued upon exercise of outstanding options | Weighted-average exercise price of outstanding options | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a) | ||||
(a) | (b) | (c) | |||||
Equity compensation plans |
|
|
|
|
|
|
|
approved by security holders | 778,500 |
| $ | 3.12 |
| 315,662 | |
Equity compensation plans not |
|
|
|
|
|
|
|
approved by security holders | - |
| $ | - |
| - | |
Total |
| 778,500 |
| $ | 3.12 |
| 315,662 |
Purchase of Equity Securitiesequity 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 2013 or 2012.None.
ITEM 6. |
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Not applicable.
ITEM 7. |
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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 20132014 with those for Fiscal 2012,2013, 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.
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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.
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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 2014 and 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 beginningconducting an active search process to identify potentialattractive acquisition targets that would be complementary to our existing business and allow us to further leverage our operating infrastructure.targets. 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.earnings.
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 suchthere was no continued expansion may not be sustainable during the fiscal year ending September 30, 2014 and anticipate that our supplier base may become more concentrated.Fiscal 2014. As a result, our ability to effectively push back against such rising material costs may diminish.
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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.
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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 itsour 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)one hundred and twenty (120) days. We have not historically experienced significant credit or collection problems with our OEM customers or their contract manufacturers. At September 30, 20132014 and 2012,2013, no allowance for doubtful accounts relating to our continuing operations was deemed necessary.
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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 – Distinguishing Liabilities from Equity – Overall – SEC Materials and Accounting Series Release (“ASR”) 268 – Presentation in Financial Statements of “Redeemable Preferred Stock”, 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 – Derivatives and Hedging – Contracts in Entity’s Own Equity, our warrants have beenwere initially classified as a liability, at fair value, as a result of a related registration rights agreement that containscontained certain requirements for registering the underlying common shares, but havehas 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 consolidated balance sheet date, thethis liability’s fair value ofwas re-measured and adjusted with the warrant liability is marked-to-market each reporting period with thecorresponding change in fair value reportedrecorded in the Company's Consolidated Statementsconsolidated statements of Operationsoperations and Comprehensive Loss.comprehensive loss. After we met the requirements for registering the underlying common shares in the fiscal year ended September 30, 2014, the warrants were reclassified to equity (additional paid-in capital). The liability associated with the warrants was initially included in “Accrued expenses and other current liabilities” in the consolidated balance sheet at September 30, 2013.
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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'sour consolidated financial statements.
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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 employee and director 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 for stock option awards 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.
Recent Accounting Pronouncements
In July 2013, the FASB issued ASU 2013-11, “Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists." This ASU addresses the requirements regarding the financial statement presentation of an unrecognized tax benefit within ASC Topic 740 for the purpose of providing consistency between the financial reporting of U.S. GAAP entities. Generally, this ASU provides guidance for the preparation of financial statements and disclosures when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. This ASU is effective for annual periods and interim periods within those annual periods beginning after December 15, 2013 and is not expected to have a material impact on our consolidated financial statements or disclosures.
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In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers,” (“ASU 2014-09”). ASU 2014-09 supersedes the revenue recognition requirements in Accounting Standards Codification (“ASC”) 605 - Revenue Recognition and most industry-specific guidance throughout the ASC. The standard requires that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. ASU 2014-09 is effective for annual periods and interim periods within those annual periods beginning after December 15, 2016 and should be applied retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying ASU 2014-09 recognized at the date of initial application. We are currently evaluating the impact of the adoption of ASU 2014-09 on our consolidated financial statements.
In June 2014, the FASB issued ASU 2014-12, "Compensation - Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide that a Performance Target Could be Achieved after the Requisite Service Period," ("ASU 2014-12"). The amendments in ASU 2014-12 require that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. A reporting entity should apply existing guidance in ASC Topic No. 718, "Compensation - Stock Compensation" as it relates to awards with performance conditions that affect vesting to account for such awards. The amendments in ASU 2014-12 are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Early adoption is permitted. Entities may apply the amendments in ASU 2014-12 either: (a) prospectively to all awards granted or modified after the effective date; or (b) retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the financial statements and to all new or modified awards thereafter. We do not anticipate that the adoption of ASU 2014-12 will have a material impact on our consolidated financial statements.
RESULTS OF OPERATIONS FORFISCAL 20132014 COMPARED TO FISCAL 20122013
(Loss) Income (Loss) from Continuing Operations
IncomeLoss from continuing operations was $0.5 million in Fiscal 2014 compared to income of $5 thousand in Fiscal 2013 compared to a2013. The loss of $3.3 million in Fiscal 2012. The improvement is2014 was primarily due to increased gross profit on a higheran increase in sales base and reducedmarketing and general and administrative expenses, which were offset, in part, by an increaseimprovement in Other Expense, net,gross profit and a reduction in other expense, as reflected in the table below:
|
| (dollars in thousands) | ||||||
|
| For the Fiscal Years Ended | ||||||
| September 30, | |||||||
|
|
|
|
|
|
| Favorable | |
|
| 2014 |
|
| 2013 |
| (Unfavorable) | |
Net Sales | $ | 33,360 |
| $ | 30,911 |
| $ | 2,449 |
Gross profit |
| 6,555 |
|
| 6,377 |
|
| 178 |
Sales and marketing expenses |
| (2,806) |
|
| (2,187) |
|
| (619) |
General and administrative expenses |
| (3,848) |
|
| (3,484) |
|
| (364) |
Other expense |
| (375) |
|
| (700) |
|
| 325 |
Income tax expense |
| - |
|
| (1) |
|
| 1 |
(Loss) income from continuing operations | $ | (474) |
| $ | 5 |
| $ | (479) |
|
Main Components of Net Loss from Continuing Operations | |||
| (thousands of dollars) | ||
| Fiscal 2013 | Fiscal 2012 | Increase |
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 $(0.07)$(0.08) and $(0.41)$(0.07) for Fiscal 20132014 and 2012,2013, respectively.
Net Sales
Net sales increased $1.5$2.5 million, or 5%8%, to $33.4 million in Fiscal 2014 from $30.9 million in Fiscal 2013 from $29.4 million in Fiscal 2012 due to higher sales ofin both product lines. Sales in Diabetic Products which increased $2.6 million. The increase$2.0 million and sales in sales of Diabetic products was offset, in part, by lower sales of Other Products which decreased $1.0increased $0.5 million. The tables below set forth sales by channel, product line and geographic location of our customers for the periods indicated.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 |
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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 |
| Fiscal Year Ended September 30, 2014 | ||||||||||
| (millions of dollars) | ||||||||||
|
| APAC |
| Americas |
| Europe |
| Total | |||
Diabetic Products | $ | 9.9 |
| $ | 6.3 | $ | 10.1 |
| $ | 26.3 | |
Other Products |
| 1.8 |
|
| 3.5 |
|
| 1.8 |
|
| 7.1 |
Total net sales | $ | 11.7 |
| $ | 9.8 |
| $ | 11.9 |
| $ | 33.4 |
| Net Sales for the | ||||||||||
| Fiscal Year Ended September 30, 2013 | ||||||||||
| (millions of dollars) | ||||||||||
|
| APAC |
| Americas |
| Europe |
| Total | |||
Diabetic Products | $ | 8.7 |
| $ | 7.2 | $ | 8.4 |
| $ | 24.3 | |
Other Products |
| 2.1 |
|
| 3.8 |
|
| 0.7 |
|
| 6.6 |
Total net sales | $ | 10.8 |
| $ | 11.0 |
| $ | 9.1 |
| $ | 30.9 |
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 productsProducts increased $2.6$2.0 million to $26.3 million in Fiscal 2014 from $24.3 million in Fiscal 2013 from $21.7 million in Fiscal 2012.2013. This increase was primarily due to higher sales in respect of new and replacementlegacy programs with a long-standing, majorour 3 largest Diabetic Products customerProducts’ customers (Diabetic Customercustomers A, B, and 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. The increase was offset, in part, by lowera decline in sales of legacy programs to our historically largesta major Diabetic ProductsProducts' customer (Diabetic Customer A)customer D).
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The following table sets forth our sales by Diabetic Products customerProducts’ customers for the periods indicated.indicated:
| (millions of dollars) | ||
| Fiscal 2013 | Fiscal 2012 | Increase |
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 |
| (millions of dollars) | |||||||
| For the Fiscal Years Ended | |||||||
| September 30, | |||||||
|
|
|
|
|
|
| Increase | |
|
| 2014 |
|
| 2013 |
| (Decrease) | |
Diabetic Customer A | $ | 8.9 |
| $ | 7.6 |
| $ | 1.3 |
Diabetic Customer B |
| 4.5 |
|
| 4.0 |
|
| 0.5 |
Diabetic Customer C |
| 8.1 |
|
| 7.3 |
|
| 0.8 |
Diabetic Customer D |
| 3.7 |
|
| 4.4 |
|
| (0.7) |
All other Diabetic Product Customers |
| 1.1 |
|
| 1.0 |
|
| 0.1 |
Totals | $ | 26.3 |
| $ | 24.3 |
| $ | 2.0 |
Sales of Diabetic Products represented 79% of our total net sales in Fiscal 2014 compared to 78% of our total net sales in Fiscal 2013 compared to 74% of our total net sales in Fiscal 2012.2013.
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.
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Sales of Other Products decreased $1.0increased $0.5 million to $6.7$7.1 million in Fiscal 20132014 from $7.7$6.6 million in Fiscal 2012. This decrease2013. The increase was primarily driven by lower sales to a long-standing cellularnew camera customer which decreased $1.0 million in Fiscal 2013, as well as the lossprovided an addition of a firearms customer, a GPS customer, and a laptop customer in Fiscal 2013, which in the aggregate contributed $1.3$1.5 million of sales to our Other Products line in Fiscal 2012. A decrease2014. The increase was offset, in part, by a decline in sales of $0.4 million in Fiscal 2013 fromto a tabletlong-standing GPS customer also contributed to the overall decreaseand a decline in sales of Other Products.$0.3 million to a barcode scanner customer in Fiscal 2014. Lesser fluctuations in several other customer accounts between Fiscal 20132014 and Fiscal 20122013 were not individually material.
Sales of Other Products represented 22%21% of our net sales in Fiscal 20132014 compared to 26%22% of our total net sales in Fiscal 2012.2013.
Gross Profit
Gross profit increased $2.5$0.2 million, or 64%3%, to $6.6 million in Fiscal 2014 from $6.4 million in Fiscal 2013 from $3.9 million in Fiscal 2012.2013. As a percentage of sales, our gross profit improveddeclined to 20% in Fiscal 2014, compared to 21% in Fiscal 2013, compared to 13% in Fiscal 2012.2013.
This improvementThe gross profit increase was driven primarily by cost savings realizeda year over year increase in sales volume. 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 net2014 sales in Fiscal 2013 comparedEurope grew 29% to 8%$11.9 million from a combination of netnew camera customer sales and volume growth 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,Customer C. The sales growth in the aggregate, negatively impacted ourEurope contributed $0.4 million in incremental gross profit. This incremental 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 werewas partially offset in part, by a decrease of $0.2 million from a 10% decline in the overall gross profit margin of our Diabetic Products business, where ourAmericas sales, to $9.8 million, mostly due to competitive pricing that lead to lower 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 ourwith a long-standing GPS customer.
The aforementioned 1% gross profit margin with Diabetic Customer D improved in Fiscal 2013 over Fiscal 2012, it continues to be significantly lower than the average gross profit margin produced by the remainder of our Diabetic Products business. During Fiscal 2013, the gross profit contributed by Diabetic Customer D,decline as a percentage of sales was mostly due to lower average margins from the total gross profit contributednew camera and long-standing GPS customers, partially offset by ourthe margins on Diabetic Products business, more than doubled, which had the effect of diluting our overall Diabetic Products gross margin.
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Product sales.
Sales and Marketing Expenses
Sales and marketing expenses increased $0.6 million, or 37%28%, to $2.8 million in Fiscal 2014 compared to $2.2 million in Fiscal 2013, compared to $1.6 million in Fiscal 2012 due primarily to higher personnel costs. Personnel costs increased $0.5 million in Fiscal 20132014 primarily as a result of expanding and restructuring our sales and sales support departments, including their respective compensation schemes. Fluctuations 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 $2.1increased $0.3 million, or 38%10%, to $3.8 million in Fiscal 2014 from $3.5 million in Fiscal 2013, from $5.6 million in Fiscal 2012 due primarily to the following:
$
1.00.7 milliondecreaseincrease in professional fees (primarilyconsulting fees, expense reimbursements, and equity compensation) paid to our Chief Executive Officer prior to his appointment to such position while serving as a strategic consultantattorney’s fees) related to theCompany during Fiscal 2012, as well as lowerlegalfees.support and representation surrounding the proxy defense and other legal matters;$
0.80.2 million increase in professional fees (primarily consultants and attorneys) related to identifying and vetting targets for acquisition as part of management’s strategic vision; andOffset, in part, by a $0.5 million decrease in personnel costs
resulting primarily from restructuring our financedue to a reduction of accrued executive bonuses andinformation technology departments, which included headcount reductions and salary decreases madethe forfeiture of share-based awards granted to the former Chief Financial Officer as a result of his termination inconjunction withtherelocation4th quarter ofour corporate headquarters from California to Florida. These decreases were offset, in part, by higher accounting fees inFiscal2013.2014.
Fluctuations in other components of “General and Administrative Expenses” that aggregated a net decrease of $0.3$0.2 million were not individually not material.
Other Income (Expense)(Income) Expense
Other income (expense),(income) expense, net, consisting primarily of realized and unrealized gains and losses on investments in marketable securities and the change in the fair market value of warrant liabilities, was $(0.7)$0.4 million in Fiscal 2013 compared to $(34) thousand of expense in Fiscal 2012. This fluctuation was due primarily2014 compared to $3.9$0.7 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 $3.1 millionexpense in Fiscal 2013. There was no such investing activity in marketable securities in Fiscal 2012.
RESULTS OF DISCONTINUED OPERATIONS FOR FISCAL 20132014 COMPARED TO FISCAL 20122013
On June 21, 2012, we determined to exit our global Retailretail 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. We have substantially completed the exit of our Retail business and have not had, and do not expect to have, any continuing involvement in the Retail business after this date. 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.
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Loss from discontinued operations was $0.3 million in Fiscal 2014 compared to $0.2 million in Fiscal 2013 compared2013. The only remaining open item pertaining to $6.3 million in Fiscal 2012. This improvement was due primarily todiscontinued operations is the collection of a change in gross profit (loss)receivable of $2.1 million, combined with a $4.0 million decrease in operating expenses in Fiscal 2013. Loss$280 thousand which is presented as current assets from discontinued operations, per basic and diluted share was $(0.03) and $(0.78)against which we have recorded a full valuation allowance, on our accompanying audited consolidated financial statements. See Note 3 to our audited consolidated financial statements for Fiscal 2013 and Fiscal 2012, respectively.an update on our collection efforts
Net SalesLIQUIDITY AND CAPITAL RESOURCES
Net salesDuring Fiscal 2014, we generated $0.2 million of cash from discontinued operations, were $0.7 million in Fiscal 2013, which includedis derived from a net contributionloss of $42 thousand from adjustments$0.8 million, adjusted by $0.9 million for non-cash items (primarily bad debt expense, realized and unrealized losses on marketable securities, share based compensation and the change in sales returns, discounts, markdownsfair value of a warrant liability), and co-op advertising programs. In Fiscal 2012, net sales from discontinued operations were $2.2cash provided by working capital items of $0.1 million. As to working capital items, cash provided by operating activities consisted primarily of an increase in accounts payable (including due to Forward China) of $2.3 million offset, in part, by cash used in operating activities, which were netconsisted of increases in accounts receivable and inventories of $1.7 million and $0.3 million, respectively, and a decrease in accrued expenses and other current liabilities of $0.2 million.
The increase in accounts payable (including due to Forward China) is primarily due to the contraction of suppliers and more favorable payment terms. The increase in accounts receivable is primarily due to the timing and higher volume of sales returns, discounts, markdowns,recorded in the three-month period ended September 30, 2014 and co-op advertising programsthe extension of $2.8 million.
Gross Profit (Loss)
Gross profit from discontinued operations of $0.2 million in Fiscal 2013 reflects the liquidationpayment terms to one of our Retailmajor diabetic customers. The increase in inventories is primarily due to timing differences in inventory wherebyshipments enroute to and staged from our OEM customers’ distribution hubs. The decrease in certain casesaccrued expenses and other current liabilities is primarily due to the net realizable valuereduction of this inventory has exceeded its selling price in Fiscal 2013. Gross loss from discontinued operations was $1.9 million in Fiscal 2012.
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Operating Expenses
Operating expensesaccrued bonuses for executives and the reduction of discontinued operations were $0.4 million in Fiscal 2013 compared to $4.4 million in Fiscal 2012. This decrease was due primarily to:
lower personnel expenses, which decreased $2.7 million in Fiscal 2013;
lower travel and entertainment expenses, which decreased $0.4 million in Fiscal 2013;
lower royalty and commissions expenses, which decreased $0.2 million in Fiscal 2013;
lower product development and design costs, which decreased $0.1 million in Fiscal 2013; and
lower advertising, promotion, and sampling costs, which decreased $0.1 million in Fiscal 2013.
Lesser fluctuations in other components of operating expenses were not individually or in the aggregate material.
Other Expenseaccrued professional fees.
Other expense from discontinued operations was $7 thousand in Fiscal 2013 compared to $29 thousand of other expense from discontinued operations in Fiscal 2012, consisting of foreign currency losses in both periods.
Liquidity and Capital Resources
During Fiscal 2013, we generated $2.3 million of cash from operations, which is derived from a net loss of $0.2 million, adjusted by $1.3 million for non-cash items (primarily realized and unrealized losses on marketable securities and share based compensation), and net cash provided by working capital items of $1.2 million. As to working capital items, cash provided by operating activities consisted of decreases in accounts receivable, inventories, and prepaid expenses and other current assets of $2.9 million, $1.7 million, and $0.2 million, respectively. These changes were offset, in part, by cash used in operating activities, which consisted of decreases in accounts payable and accrued expenses and other current liabilities of $2.4 million and $1.1 million, respectively.
The decrease in accounts receivable is primarily due to: i) the timing and lower volume of sales recorded in the three-month period ended September 30, 2013 compared to the three-month period ended September 30, 2012; ii) our accounts receivable as of September 30, 2012 that related to our discontinued operations; and iii) an improvement in our cash collections cycle. The decrease in inventories is primarily due to: i) timing differences in inventory shipments enroute to and staged from our OEM customers’ distribution hubs and ii) liquidation of inventory related to our discontinued operations. The decrease in accounts payable is primarily due to the same factors that drove the decrease in inventories, in addition to lower average days payable outstanding inIn Fiscal 2013 resulting from changes in our payment terms with certain of our suppliers. The decrease in accrued expenses and other current liabilities is primarily due to payment of certain accrued expenses including professional fees incurred in connection with the settlement of the Targus lawsuit, and severances incurred in connection with our restructuring.
During Fiscal 2012, we used $10.8 million of cash in operations, which is derived from a2014, net loss of $9.6 million, adjusted by $0.4 million for non-cash items and a net use in working capital items of $1.6 million. As to working capital items, cash used in operatinginvesting activities was $0.3 million, which consisted of increases in accounts receivable$5.8 million used for purchases of marketable equity securities, $5.6 million generated from sales of marketable equity securities, and inventories$33 thousand used for purchases of $3.7 millionproperty and $2.7 million, respectively. These changes were offset, in part, by increases in accounts payable and accrued expenses and other current liabilities of $3.0 million and $1.3 million, respectively; and a decrease in prepaid expenses and other current assets of $0.4 million.
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equipment. In Fiscal 2013, net cash used byin investing activities was $1.4 million, which consisted of $88.6 million used for purchases of marketable equity securities, $87.3 million generated from sales of marketable equity securities, and $74 thousand used for purchases of property and equipment.
In Fiscal 2012,2014, net investingcash used in financing activities generated $0.5was $0.1 million, of cash, which consisted of $1.0 million in payments received on a loan made to a prospective strategic partner and $72$76 thousand used for purchases of propertyto pay dividends on 6% senior convertible preferred stock (see Note 7 to our Notes to Consolidated Financial Statements – “Shareholders Equity”) and equipment, net of $0.4 million used for purchases of marketable equity securities.
$47 thousand related to restricted stock that was repurchased and retired. In Fiscal 2013, net financing activities generated $1.2 million from the issuance of 6% senior convertible preferred stock and warrants, net of $15 thousand used to pay dividends on such senior convertible preferred stock (see Note 7 to our Notes to Consolidated Financial Statements – “Shareholders Equity”).stock. We raised these funds for general corporate purposes, including working capital, and in connection with potential acquisition targets that would be complementary to our existing business and allow us to further leverage our operating infrastructure, if any arewere identified and acquired. There were no financing activities in Fiscal 2012.
At September 30, 2013,2014, our current ratio (current assets divided by current liabilities) was 3.1;2.6; our quick ratio (current assets less inventories divided by current liabilities) was 2.6;2.2; and our working capital (current assets less current liabilities) was $10.0 million.million (excluding current assets of discontinued operations). As of such date, we had no short or long-term debt outstanding.
Our primary sources of liquidity are 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. We have substantially completed our exit of our Retail business, and have not had, and do not expect to have, any continuing involvement in the Retail business after this date.
ITEM 7A. |
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Not applicableapplicable.
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ITEM 8. |
The consolidated financial statements and notes thereto included in this Annual Report may be found beginning at pages 32 to 54page F-1 of this Annual Report on Form 10-K.
ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURENone.
None
ITEM 9A. |
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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.
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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, 2013)2014). Based on that evaluation, the Company’s Principal Executive Officer and Principal Financial Officer concluded that the Company’s disclosure controls and procedures were not effective for the matters described below, as of the end of the period covered by this Report (the fourth quarter of the Fiscal year ended September, 30, 2013)2014), 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.
Management’s Report on Internal Control Over Financial Reporting
Our Principal Executive Officer and our Principal Financial Officer areis 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 officersofficer 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 U.S. 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, 2013.2014. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) based on the 1992 framework in Internal Control — Integrated Framework.
A material weakness is a deficiency or combination of deficiencies, inFramework. Based on this evaluation, management concluded that our internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis.
Convertible Preferred Stock and Warrants
Based on this assessment, our Principal Executive Officer and our Principal Financial Officer believe that,was effective as of September 30, 2013, Forward did not maintain effective controls over the accounting and financial disclosures for its sale of Convertible Preferred Stock and Warrants (together, the “Securities”) to accredited investors through a private placement. Specifically, controls were not designed effectively to provide reasonable assurance that the purchase price of the Securities was allocated properly between the Convertible Preferred Stock and Warrants. The material weakness resulted in an error in the accounting and financial disclosure of the carrying value of the Convertible Preferred Stock and Warrants, as well as the embedded beneficial conversion features that resulted in a correction of Forward’s consolidated financial statements for the quarter ended June 30, 2013. Additionally, this material weakness could result in misstatements of the aforementioned accounts and disclosures that would result in a material misstatement of the consolidated financial statements that would not be prevented or detected.2014.
Communication of Significant Financial Matters
In addition, in December of 2013, the Management of the Company became aware of a failure in the operation of its designed internal controls to ensure that the communication of significant financial matters are made known to senior management, including the Company's Chief Financial Officer. This failure resulted in the omission of the accrual of a certain item of expense.
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Because of these material weaknesses, management concluded that Forward did not maintain effective internal control over financial reporting as of September 30, 2013 based on criteria in Internal Control - Integrated Framework (1992) issued by the COSO.
This annual report does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s independent registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this Annual Report.
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 of 1933, as amended, or the Exchange Act.
Remediation Steps Taken to Address Material Weaknesses
Forward has discussed these matters with its independent registered public accounting firm and its Audit Committee. Further, with oversight of management and its Audit Committee, Forward has initiated the following steps to address and remediate the material weaknesses:
Convertible Preferred Stock and Warrants
In the first quarter of our fiscal year ended September 30, 2014, we implemented additional controls related to the process for evaluating the impact of complex non-routine financing transactions, such as engaging outside experts to assist in determining the proper valuation and accounting treatment for securities through private placements. In addition, we restated our financial statements for the three- and nine-month periods ended June 30, 2013 to correct the error related to the material weakness.
Although the Company concluded that there was a material weakness regarding the valuation, accounting, and financial disclosure of the Securities, at September 30, 2013, Forward believes these steps have strengthened its controls over financial reporting and addressed the material weakness. Forward will test and evaluate these controls as part of Forward’s assessment of internal controls over financial reporting for its fiscal year ending September 30, 2014.
Communication of Significant Financial Matters
We intend to design and implement policies and procedures to remediate this material weakness in our internal control over financial reporting in Fiscal 2014. The development of these policies and procedures will ensure that members of senior management will be aware of all material financial events.
Management does not believe that any of our annual or interim financial statements issued to date contain a material misstatement as a result of the aforementioned material weakness in our internal controls over financial reporting.
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 Fiscalfiscal quarter of the Fiscal year ended September 30, 2013.2014. Based on that evaluation, our Principal Executive Officer and our Principal Financial Officer concluded that there were no change occurredchanges in the Company’sour internal control over financial reporting during the last Fiscalfiscal quarter of the Fiscal year ended September 30, 2013 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting. The material weakness associated with the financial reporting relating to the proper valuation and accounting treatment for the Company’s Securities discussed above was subsequently identified and resulted in remediation activities subsequent to September 30, 2013.2014.
ITEM 9B. |
ITEM 9B. OTHER INFORMATION
None
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Set forth below are the names and ages of the directors of the Company and their principal occupations at present and for the past five years. The directors of the Company are elected to serve until the next annual meeting of stockholders and until their respective successors have been duly elected and qualified. Our executive officers are appointed by the Board of Directors of the Company (the “Board”) and serve until their successors have been duly appointed and qualified. The Board has determined that each of Messrs. Chiste, Gordon, King and Morgan, who together comprise a majority of the Board, is independent in accordance with applicable NASDAQ standards, including without limitation, Marketplace Rule 5605(a)(2).None.
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The Board has an Audit Committee, Compensation Committee and Nominating and Governance Committee. Current committee membership is shown in the table below:
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Terry Wise
Robert Garrett, Jr.
Business Background and Qualifications of Executive Officers
The following table sets forth certain information with respect to each person who is currently an executive officer of Forward, and is based on our records and information furnished to us by such persons.
Name | Age | Position with Forward | Held |
Robert Garrett, Jr. | 47 | Chief Executive Officer | 2012 |
James O. McKenna III | 40 | Chief Financial Officer, Treasurer and Assistant Secretary | 2008 |
ROBERT GARRETT, JR., please see “—Directors and Officers of the Company” above, for biographical information for Mr. Garrett.
JAMES O. MCKENNA III has served as Chief Financial Officer, Treasurer, and Assistant Secretary since January 2008. Prior to that time he served as the Company’s Controller since December 2003. Prior to joining Forward, Mr. McKenna was employed as Assistant Controller with Medallist Developments Inc., a real estate development company, from January 2002 to December 2003. Mr. McKenna was employed as an auditor with Ernst & Young LLP from September 1996 to December 2001 and is a Certified Public Accountant.
Section 16(A) Beneficial Ownership Reporting Compliance
Under Section 16(a) of the Exchange Act, our directors and executive officers and persons who beneficially own more than ten percent of each class of our equity securities that is registered under the Exchange Act are required to file the following reports with the Commission: Form 3 initial reports of ownership and status as an officer or director; Form 4 reports of changes in ownership of our common stock and other equity securities of the Company; and Form 5 reports with respect to any fiscal year in which other reports may not have been filed. To our knowledge, based solely on review of the copies of Forms 3 and 4 and amendments thereto furnished to us during Fiscal 2013, and Form 5 reports and amendments thereto furnished to us with respect to that fiscal year, and based on written representations that no Form 5 or other reports were required with respect to Fiscal 2013, all Section 16(a) filing requirements applicable to our officers and directors and beneficial owners of more than ten percent of our common stock were complied with on a timely basis.
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The Board’s Leadership Structure
Our governing documents provide the Board with flexibility to determine the appropriate leadership structure for the Board and the Company, including but not limited to whether it is appropriate to separate the roles of Chairman of the Board and Chief Executive Officer. In making these determinations, the Board considers numerous factors, including the specific needs and strategic direction of the Company and the size and membership of the Board at the time.
Grange Johnson has served as non-executive Chairman of the Board since August 2010. Robert Garrett, Jr., a director since March 2012, has served as Chief Executive Officer since August 31, 2012, and as Co-Chief Executive Officer with Brett M. Johnson until the end of Mr. Brett Johnson’s employment with the Company on August 31, 2012. We believe that it remains in the best interest of the Company to continue to separate the roles of Chairman of the Board and Chief Executive Officer. This arrangement has allowed our Chairman to lead the Board, while our Chief Executive Officer focuses primarily on managing the daily operations of the Company. The separation of duties provides strong leadership for the Board while allowing the Chief Executive Officer to be the leader of the Company for customers, employees and operations. We do not have a Lead Independent Director. Rather, the Audit, Compensation, and Nominating and Governance Committees are each comprised solely of independent directors, and they provide strong independent leadership that influences the governance of the Company.
The Board’s Role in Risk Oversight
Senior management is responsible for assessing and managing the Company’s various exposures to risk on a day-to-day basis, including the creation of appropriate risk management programs and policies. The Board is responsible for overseeing management in the execution of its responsibilities and for assessing the Company’s approach to risk management. The Board exercises these responsibilities periodically as part of its meetings and also through the Board’s three committees, each of which examines various components of enterprise risk as part of its responsibilities. Members of each committee report to the full Board as necessary at Board meetings regarding risks discussed by such committee. In addition, an overall review of risk is inherent in the Board’s consideration of the Company’s long-term strategies and in the transactions and other matters presented to the Board, including capital expenditures, acquisitions and divestitures, and financial matters.
Code of Ethics
In November 2003, Forward adopted a Code of Business Conduct and Ethics that applies to all officers, directors and employees regarding standards of conduct relating to Company affairs. The Nominating and Governance Committee is charged with assessing the adequacy of and monitoring management and director compliance with the Code of Business Conduct and Ethics. The Code of Ethics is available for viewing at the Company’s web site at http://www.forwardindustries.com/corporate_governance.php.
Audit Committee
The Company has a separately standing Audit Committee established in accordance with Section 3(a) (58) (A) of the Exchange Act. Our Audit Committee is governed by a written Charter approved by the Board. A copy of the Charter, as amended, is available for viewing at our web site at: http://www.forwardindustries.com/corporate_governance.php. The members of the Audit Committee are Messrs. Chiste, King and Gordon. Each of Messrs. Chiste, King and Gordon is an independent director. The Audit Committee held four meetings during the fiscal year ended September 30, 2013.
Audit Committee Financial Expert. The Board has determined that Mr. Chiste, who is currently a member and the chairman of the Audit Committee of the Board, is an audit committee financial expert, as defined in Item 407(d)(5) of Regulation S-K under the Exchange Act.
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ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth certain summary information for the fiscal years ended September 30, 2013 and 2012, showing all compensation paid or earned for services rendered in all capacities for those years of service by (i) each person who served as our principal executive officer at any time during those periods, and (ii) our Chief Financial Officer, who was the only other executive officer whose total compensation exceeded $100,000 during such periods.
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All items of “All Other Compensation” in the table in note (5) above for Mr. McKenna were paid in accordance with the terms of the McKenna Employment Agreement (as defined below), with the exception of $15,000 of the Housing Allowance in 2013, which was incurred in connection with a housing deposit..
Employment Agreements
Employment Agreement with Robert Garrett, Jr., Chief Executive Officer (August 31, 2012 – present) and former Co-Chief Executive Officer (March 2012 through August 30, 2012)
Pursuant an employment agreement, effective as of March 1, 2012 (the “Garrett Employment Agreement”), between the Company and Robert Garrett, Jr., Mr. Garrett is employed as the Chief Executive Officer of the Company. The Garrett Employment Agreement provides for an annual salary of $250,000. In executing his employment agreement, Mr. Garrett received a signing bonus of $9,167. During Mr. Garrett’s first year of employment he received a bonus of not less than $50,000 cash, paid in four quarterly equal installments. During each year of his employment, Mr. Garrett is eligible to receive an annual bonus at the discretion of the Compensation Committee in a combination of cash or equity based compensation.
In connection with Mr. Garrett’s appointment as Chief Executive Officer, Mr. Garrett was granted options to purchase 140,000 shares of common stock pursuant to the Company’s 2011 Long Term Incentive Plan. The grant date of this award is April 4, 2012 and the exercise price is $3.00 per share for the first 100,000 options, and $3.77 per share for the second 40,000 options. The vesting schedule is as follows: (i) 66,666 of the options shall vest on first anniversary of the grant date; (ii) 66,666 of the options shall vest on second anniversary of the grant date; and (iii) the remainder shall vest on the third anniversary of the grant date. In addition, pursuant to Mr. Garrett’s employment agreement, he was granted options to purchase an additional 60,000 shares of common stock, on October 1, 2012, with an exercise price equal to $3.77 per share, for the first 10,000 options, and $5.31 per share for the second 50,000 options. The additional 60,000 options become exercisable on April 3, 2015 and shall vest on the third anniversary of the grant date.
In November 2011, pursuant to the Consulting Agreement, Mr. Garrett was awarded options to purchase 160,000 shares of common stock. In November 2012, the Compensation Committee determined to award Mr. Garrett 125,000 restricted stock units (“RSUs”) that vest over three years from November 8, 2012. Mr. Garret’s November 2012 grant of 125,000 RSUs vested as to one-third of the grant in November 2013. Approximately 17,175 shares of common stock underlying these RSUs were withheld to pay taxes related to the vested RSUs.
In addition, on December 11, 2013, the Compensation Committee (i) approved a total bonus payment to Mr. Garrett in the amount of $100,000 attributable to services performed in Fiscal 2013, consisting of a performance target-based bonus in the amount of $75,000 and an additional discretionary bonus of $25,000; (ii) increased Mr. Garrett’s base salary from $250,000 to $300,000, effective as of March 1, 2014; and (iii) awarded Mr. Garrett options to purchase 25,000 shares of common stock.
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Employment Agreement with James O. McKenna III, Chief Financial Officer (2008 to present)
Mr. McKenna served as the Company’s Chief Financial Officer, Treasurer and Assistant Secretary pursuant to an Amended Employment Agreement, dated as of April 1, 2011, between the Company and Mr. McKenna, pursuant to which Mr. McKenna was entitled to an annual base salary of $225,000 during Fiscal 2012. On November 8, 2012, Mr. McKenna’s Employment Agreement was further amended (the “Amendment,” and together with the Amended Employment Agreement, the “McKenna Employment Agreement”) in connection with his relocation from California to Florida at the Company’s request pursuant to the move of the Company’s executive offices to West Palm Beach, Florida from Santa Monica, California. Among other things, the Amendment reduced his base salary to $210,000 per annum from $225,000 per annum, eliminated his housing allowance of $90,000 per annum (paid pursuant to the McKenna Employment Agreement), and provided for a bonus payment in the amount of $172,456, less applicable withholdings and deductions, all subject to the provisions provided in the Amendment. $86,228 of such bonus payment is attributed as a bonus to Mr. McKenna in Fiscal 2012, with the remainder to be attributed to future periods. Up to one half of such $172,456 bonus payment may be applied to reduce future bonuses due to Mr. McKenna, if any, on or prior to September 2014, pursuant to the terms and provisions of the Amendment. Of this amount, $43,000 was applied towards Mr. McKenna’s Fiscal 2013 bonus. See below. The term of the McKenna Employment Agreement expires on December 31, 2013, with automatic renewal for successive terms of one year each. Pursuant to the McKenna 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 McKenna Employment Agreement).
In November 2012 the Compensation Committee determined to award Mr. McKenna 7,500 options to purchase common stock pursuant to the 2007 Plan. The grant price was the closing price of the common stock on the grant date, or $3.36 per share. This award becomes exercisable in equal amounts over five years commencing on the first anniversary of the grant date. In March 2011 the Compensation Committee also determined to award Mr. McKenna 100,000 options to purchase common stock pursuant to the 2011 Plan. The grant price was the closing price of common stock on the grant date, or $3.73 per share. This award reflected the Committee’s belief that the award of equity-based compensation serves as a significant incentive to a high level of performance as well as a retention incentive. These options reflect the Committee’s assessment of the anticipated contributions by Mr. McKenna. This award becomes exercisable on the following dates: (i) 50,000 on March 8, 2014, (ii) 25,000 on March 8, 2015, and (iii) 25,000 on March 8, 2016. In November 2012, the Compensation Committee determined to award Mr. McKenna 105,000 RSUs that vest over three years from November 8, 2012. Mr. McKenna’s November 2012 grant of 105,000 RSUs vested as to one-third of the grant in November 2013. Approximately 9,472 shares of common stock underlying these RSUs were withheld to pay taxes related to the vested RSUs.
In addition, on December 11, 2013, the Compensation Committee approved a total bonus payment to Mr. McKenna in the amount of $86,000 attributable to services performed in Fiscal 2013, consisting of a performance target-based bonus in the amount of $63,000 and an additional discretionary bonus of $23,000. Half of Mr. McKenna’s bonus payment represents a cash payout and the other half ($43,000) represents a reduction of a portion of Mr. McKenna’s bonus prepaid in Fiscal 2012. See “Item 11. Executive Compensation – Summary Compensation Table” above. The Compensation Committee also awarded Mr. McKenna options to purchase 7,500 shares of common stock.
See “—Potential Payments upon Termination or Change in Control” below for further discussion on termination, retirement and change-in-control provisions of the employment agreements.
Outstanding Equity Awards at Fiscal Year-End
The following table shows the amount and value of equity-based awards granted to the Named Executive Officers that were outstanding at the end of Fiscal 2013.
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OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END | ||||||
Option Awards | Stock Awards | |||||
Name | Number of Securities (#) Exercisable | Number of Securities (#) Unexercisable | Option ($) | Option | Number of (#) | Market Value |
Robert Garrett, Jr. | 160,000 | -- | 2.05 | 11/3/2014 | 125,000 | 233,750 |
66,666 | 33,334 | 3.00 | 4/4/2022 |
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33,332 | 40,000 | 3.77 | 4/4/2022 |
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-- | 60,000 | 1.17 | 9/30/2022 |
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James O. McKenna III | 7,500 | -- | 2.02 | 12/10/2019 | 105,000 | 196,350 |
3,000 | 4,500 | 3.36 | 12/21/2020 |
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-- | 100,000 | 3.73 | 3/08/2021 |
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Pension Benefits
The Company maintained no pension plans or other long-term incentive plans or arrangements available to any employees during Fiscal 2013.
Nonqualified Deferred Compensation
We maintained no nonqualified defined contribution or deferred compensation plans or arrangements during Fiscal 2013.
Post-Employment Compensation
The Company does not maintain any pension, deferred compensation, or other post-employment compensation for executives or employees other than its 401(k) plan and, as the case may be, pursuant to the terms of employment agreements with its executive officers. The Compensation Committee has no fixed policy regarding the grant of severance benefits. Rather, severance compensation is determined on a case-by-case basis depending on the executive’s term of service, his performance in his position, and other factors.
Potential Payments Upon Termination or a Change in Control
Under the Garrett Employment Agreement, Mr. Garrett is entitled to payments equal to six (6) months of his salary if his employment agreement is not renewed during the first term and a severance payment equal to three (3) months of his salary if not renewed in subsequent terms. If Mr. Garrett is terminated without cause, he will be entitled to receive salary at the then prevailing rate for the greater of six months or the balance of the term as severance. If Mr. Garrett terminates his employment agreement for good reason under circumstances that do not constitute a change in control (as this term is defined in his agreement) severance equal to six (6) months of salary at the then prevailing rate. Under both circumstances, Mr. Garrett will also be entitled to (i) receive health insurance for Mr. Garret and his family to be paid for by the Company for a period equal to the greater of six (6) months or the balance of the term; (ii) accrued discretionary bonus, if any; and (iii) immediate vesting of any unvested options pursuant to applicable equity compensation plans. If Mr. Garrett’s employment is terminated without cause, or if he terminates his employment for good reason (as defined in the employment agreement), in either case within one year of a change of control (as defined), he is entitled to receive the following payments and benefits: (i) severance equal to 12 months of salary; (ii) health insurance for Mr. Garrett and his family to be paid for by the Company for a period equal to 12 months; (iii) accrued discretionary bonus, if any; and (iv) immediate vesting of any unvested options pursuant to applicable equity compensation plans.
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Under the McKenna Employment Agreement, as amended, 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 McKenna Employment Agreement). The Company’s election to give notice of non-renewal in connection with the end of the term is considered to be termination without cause.
The table below sets forth information concerning the potential payments upon termination of employment for each Named Executive Officer to whom the Company has a post-employment compensation obligation. Information is provided as if the termination, death, disability, or change in control had occurred as of September 30, 2013. As of December 1, 2013, the Compensation Committee has not awarded to any Named Executive Officer any non-equity incentive compensation (bonus) for Fiscal 2013.
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Director Compensation
The following table sets forth information with respect to compensation earned by or awarded to each director who served on the Board during Fiscal 2013.
DIRECTOR COMPENSATION | |||
Name | Fees Earned or | Option | Total ($) |
Current Directors | |||
Grange Johnson | 70,500 | -- | 70,500 |
John Chiste | 34,000 | -- | 34,000 |
Owen P.J. King | 34,000 | -- | 34,000 |
Timothy Gordon | 34,000 | -- | 34,000 |
Howard Morgan | 28,000 | -- | 28,000 |
Terry Wise | 30,500 | -- | 30,500 |
Robert Garrett, Jr. | -- | -- | -- |
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Our program for compensation of non-employee directors provides for each non-employee director to receive an annual retainer of $20,000, payable in quarterly increments of $5,000, and for the chairman of each committee to receive an additional $2,000 retainer per committee chair. In addition, each non-employee director receives $2,000 for each board meeting attended (except those held via conference call, which are $500 per conference call) and $1,000 for each committee meeting attended (unless attended in conjunction with a board meeting, in which case no additional fee is paid) and is entitled to reimbursement for actual and reasonable travel expenses incurred for attendance at such meetings. Effective as of January 1, 2012, our policy was revised to provide for the non-executive Chairman of the Board to receive an aggregate annual retainer of $60,000, payable in quarterly increments of $15,000. On December 11, 2013, each non-employee director was granted 15,000 shares of restricted common stock that vest in one year. Executive officers who also serve on the Board receive no director’s compensation for such service.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Securities Authorized for Issuance Under Equity Compensation Plans
Long-term equity based compensation is accomplished under the Forward Industries 2007 Equity Incentive Plan, as amended (the “2007 Plan”), adopted by the Company and by its shareholders in May 2007 and amended February 2009, and the 2011 Plan, adopted by the Company and by its shareholders in March 2011. Under the 2007 Plan, as of September 30, 2012, 800,000 shares of common stock were authorized for grants of awards of stock options and restricted stock, of which 100,991 shares remain available for grant. Under the 2011 Plan, as of September 30, 2012, 850,000 shares of common stock were authorized for grants of awards of stock options and restricted stock, of which 65,500 shares remain available for grant. There are options to purchase 30,000 shares of common stock outstanding under the 1996 Stock Incentive Plan.
Information relating to securities authorized for issuance under equity compensation plans as of September 30, 2013, is as follows:
Plan Category | Number of securities to be issued upon exercise of outstanding options | Weighted average exercise price of outstanding options | Number of securities |
(a) | (b) | (c) | |
Equity compensation plans approved by security holders | 897,000 | $2.98 | 166,491 |
Equity compensation plans not approved by security holders | -- | -- | -- |
Total | 897,000 | $2.98 | 166,491 |
Security Ownership of Certain Beneficial Owners and Management
Set forth below is information, as of December 2, 2013, with respect to the beneficial ownership of our common stock by (i) each director, (ii) each shareholder who, based on publicly available records, is known by the Company to own beneficially more than five percent (5%) of the Company’s common stock and (iii) all our current directors and executive officers, as a group (nine persons). Unless otherwise stated, the address of each person in the table below is c/o Forward Industries, Inc., 477 Rosemary Ave., West Palm Beach, FL 33401.
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Identity of Beneficial Owner | Beneficial Ownership | Percent of Class(a) | ||
Directors and Executive Officers: |
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Robert Garrett, Jr. (b) | 351,666 | 4.2% | ||
James O. McKenna III (c) | 129,425 | 1.6% | ||
Grange Johnson (d) (e) (f) | 639,368 | 7.8% | ||
Owen P.J. King (d) | 30,000 | * | ||
John F. Chiste (d) | 30,000 | * | ||
Timothy Gordon (g) (h) (i) | 60,259 | * | ||
Howard Morgan (i) | 10,000 | * | ||
Terry Wise (i) (j) | 1,593,541 | 19.6% | ||
5% or Greater Shareholders: |
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LaGrange Capital Partners, L.P. (f) | 527,848 | 6.5% | ||
Jenny P. Yu (k) | 444,217 | 5.5% | ||
BlackRock, Inc. (l) | 420,476 | 5.2% | ||
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All directors and executive officers |
2,844,259 |
33.6% |
*Less than 1 percent
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Certain Relationships and Related Transactions
See “Executive Compensation” for information relating to compensation arrangements between the Company and its executive officers and between the Company and its non-employee directors.
On April 2, 2012, the Board appointed Mr. Brett Johnson as the Company’s Co-Chief Executive Officer. Brett Johnson is the brother of Grange Johnson, the Chairman of the Board. Forward and Mr. Johnson opted not to renew Mr. Johnson’s employment contract and his employment with the Company ended on August 31, 2012. In addition, Mr. Johnson entered into an agreement and release with the Company on August 29, 2012, which provides, among other things, that Mr. Johnson is entitled to receive his current annual salary of $250,000 through August 1, 2013, less applicable withholdings and deductions, in accordance with the Company’s standard payroll procedures.
On March 12, 2012, the Company entered into a Buying Agency and Supply Agreement (the “Agreement”) with Forward China (f/k/a Seaton Global Corporation), a British Virgin Islands corporation, dated as of March 7, 2012. The Agreement provides that, upon the terms and subject to the conditions set forth therein, Forward China act as the Company’s exclusive buying agent and supplier of Products (as defined in the Agreement) in the APAC region. The Company purchases products at Forward China’s cost and pays a service fee on the net purchase price. The Agreement terminates on March 11, 2014, subject to renewal. Terence Wise, a director of the Company, is a principal of Forward China. From the entry into the Agreement through September 30, 2012, and for the fiscal year ended September 30, 2013, the Company recorded Forward China service fees of approximately $691,000, and $1,292,000, respectively.
On April 16, 2013, the Company entered into an Investment Management Agreement (the “Investment Agreement”) with LaGrange Capital Administration, L.L.C. (“LCA”), pursuant to which the Company retained LCA to manage certain investment accounts funded by the Company (collectively, the “Account”). Frank LaGrange Johnson, the Company’s Chairman of the Board, serves as the Managing Member of LCA.
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Pursuant to the Investment Agreement, LCA is authorized, subject to supervision of the Investment Committee of the Board and the terms and conditions of the Investment Agreement, to take all actions and make all decisions regarding the investment and reinvestment of the assets of the Account utilizing the Investment Agreement’s investment strategy. As compensation for its services, LCA is entitled to advisory fees, comprised of an asset-based fee and a performance fee, as provided in the Investment Agreement. The asset-based fee equals 1% per annum of the average Account Net Asset Value (“Account NAV”). The performance fee equals 20% of the increase (if any) in the Account NAV over an annual period. No performance fee is payable for any annual period in which the Account NAV at the end of such annual period is below the highest Account NAV at the end of any previous annual period. In addition to such advisory fees, the Company has agreed to reimburse LCA for certain investment and operational expenses. Under the Investment Agreement, the Company or its designees may make cash withdrawals from the Account on March 31, June 30, September 30 or December 31 of each year upon 45 days’ prior written notice to LCA; provided, that, in the event of a breach of certain terms of the Investment Agreement, the Company may make a complete cash withdrawal from the Account immediately without LCA’s consent. During Fiscal 2013, the Company recognized approximately $13,000 of expense in continuing operations in its consolidated statements of operations and comprehensive loss related to asset based advisory fees. The Company has not recorded any expense related to performance based advisory fees during Fiscal 2013.
The Investment Agreement is effective as of February 1, 2013 and will continue until the second anniversary of the effective date. Thereafter, the term of the Investment Agreement will automatically renew for additional one year terms unless terminated in accordance with the terms of the Agreement or if a party provides notice to the other party no less than 60 days prior to the end of a term of its decision to terminate the Investment Agreement at the end of the then current term.
On June 28, 2013, the Company completed the sale of (i) 381,644 shares of Convertible Preferred Stock and (ii) warrants to purchase a total of 381,644 shares of common stock to accredited investors in a private placement (the “Private Placement”) pursuant to the terms of securities purchase agreements, dated June 28, 2013, by and between the Company and each investor. Each of Frank L. Johnson and Timothy Gordon participated as investors in the initial closing of the Private Placement for an aggregate of approximately $150,000 and $75,000, respectively.
The Nominating and Governance Committee of the Board under the Nominating and Governance Committee Charter (the “Committee Charter”) is charged with the responsibilities of identification, review, evaluation, and approval or rejection of related party transactions (as described in Item 404 of Regulation S-K under the Exchange Act) and conflicts of interest between the Company and any related party. In evaluating any such transaction or potential conflict of interest, the Nominating and Governance Committee evaluates, among other factors, the utility and cost of services or property to be received by the Company, an assessment of whether comparable property or services can be obtained at better rates in the relevant market, the benefit to be received by the related party, whether such benefit is proper and appropriate in all respects, the absence of any actual or potential harm or prejudice to the Company and its business interests and prospects, and whether the transaction as a whole is believed to be fair and reasonable. Pursuant to the Committee Charter mandates, the Nominating and Governance Committee has adopted governance principles that, among other matters, (i) requires a specific resolution approving any transaction in which any director would provide services to the Company outside his duties as director and (ii) prohibits a director from receiving a personal, compensatory benefit (i.e., one that is not shared by directors or shareholders generally on a pro rata basis), directly or indirectly, arising from a transaction in which the Company is a party or otherwise involved.
Director Independence
In assessing the independence of our directors, our Board has reviewed and analyzed the standards for independence required under the NASDAQ standards, including without limitation, Marketplace Rule 5605(a)(2), and applicable SEC regulations.
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After reviewing any material relationships that any of our directors may have with the Company that could compromise his or her ability to exercise independent judgment in carrying out his responsibilities, our Board has determined that each of Messrs. Chiste, Gordon, King and Morgan who together comprise a majority of the Board, is independent in accordance with applicable NASDAQ standards. The Company has a separately standing Audit Committee, Compensation Committee and Nominating and Governance Committee. Each of the Audit Committee, Compensation Committee and Nominating and Governance Committee have a written charter approved by the Board, current copies of which are available at the Company’s web site at http://www.forwardindustries.com/corporate_governance.php. Messrs. Chiste, Gordon and King constitute in different combination the entire membership of each of the Audit Committee, Compensation Committee, and Nominating and Governance Committee of the Board in compliance with the independence standards of NASDAQ Marketplace Rules 5605(c)(2), 5605(d), and 5605(e), respectively.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Our Audit Committee pre-approved all audit and non-audit services involving CohnReznick LLP (formerly J.H. Cohn, “CohnReznick”), the Company’s independent auditors for Fiscal 2013. The Audit Committee must pre-approve all audit and non-audit services involving CohnReznick, the Company’s independent auditors for the fiscal year ending September 30, 2014. Unless an audit or non-audit type of service to be provided to the Company by our independent registered public accounting firm has received general pre-approval from the Audit Committee, it requires specific pre-approval by the Audit Committee. In addition to review and audit work necessary for the Company to file required reports under the Exchange Act (i.e., quarterly reports on Form 10-Q and annual reports on Form 10-K), the Company’s independent auditors may perform non-audit services other than those prohibited by the Sarbanes-Oxley Act of 2002, provided that they are pre-approved by the Audit Committee. Non-audit services that our independent accountants may not provide include: bookkeeping or other services related to the accounting records or financial statements of the audit client; financial information systems design and implementation; appraisal or valuation services, fairness opinions or contribution-in-kind reports; actuarial services; internal audit outsourcing services; and legal services and expert services unrelated to the audit.
Our Audit Committee regularly meets to review and approve the audit and review scope concerning the audit or review of the Company’s financial statements to be filed with the SEC, including the audit fees associated with this service. Furthermore, the fees and terms of permitted non-audit services that are recurring, if any, must be approved by the Audit Committee.
Proposals for other (i.e., non-recurring) non-audit services to be performed by the Company’s independent auditors that are allowable in accordance with this policy must be pre-approved by the Audit Committee. The Company’s chief financial officer will review for compliance with this policy and obtain necessary pre-approvals.
The following table sets forth the aggregate fees for professional services billed to us by CohnReznick for professional services rendered during Fiscal 2013 and Fiscal 2012.
| Fiscal Year Ended September 30, | |
| 2013 | 2012 |
Audit Fees (1) | $ 181,500 | $ 181,322 |
Audit-related Fees (2) | -- | -- |
Tax Fees (3) | -- | -- |
Other Fees (4) | -- | -- |
| $ 181,500 | $ 181,322 |
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PART IV
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The change in the fair value of the convertible preferred stock warrant liability (net of issuance costs) for the
The following table presents the Company’s fair value hierarchy for
Shareholder Rights Plan On April 26, 2013, the Board adopted a Shareholder Rights Plan, as set forth in the Rights Agreement between the Company and American Stock Transfer & Trust Company, LLC, as Rights Agent. Pursuant to the Rights Agreement, the Board declared a dividend distribution of one Right (a “Right”) for each outstanding share of Company Common Stock, par value $0.01 per share (the “Common Stock”) to shareholders of record at the close of business on May 6, 2013, which date will be the record date, and for each share of Common Stock issued (including shares distributed from treasury) by the Company thereafter and prior to the Distribution Date (as described below and defined in the Rights Agreement). Each Right entitles the registered holder, subject to the terms of the Rights Agreement, to purchase from the Company one one-thousandth of a share of Series A Participating Preferred Stock, $0.01 par value per share (the “Series A Preferred Stock”), at an exercise price of $4.00 per one one-thousandth of a share of Series A Preferred Stock, subject to adjustment. F-15 FORWARD INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 7 SHAREHOLDERS’ EQUITY (CONTINUED) Anti-takeover Provisions (continued) Shareholder Rights Plan (continued) Initially, no separate Rights “Blank Check” Preferred Stock As discussed above, the Company is authorized to issue up to 4,000,000 shares of “blank check” preferred stock. The Board 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. Of these shares, 1,500,000 shares have been authorized as the 6% Senior Convertible Preferred Stock and 100,000 shares have been authorized as the Series A Participating Preferred Stock.
In September 2002 and January 2004, the Board authorized the repurchase of up to an aggregate of 486,200 shares of outstanding common stock. Under those authorizations,
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, employees, consultants, and independent contractors.
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. F-16 FORWARD INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 8 SHARE BASED COMPENSATION (CONTINUED) 1996 Stock Incentive PlanThe Company’s 1996 Stock Incentive Plan (the “1996 Plan”) expired in accordance with its terms in November 2006. The exercise price of incentive stock 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
On October 16, 2012, the On December 11, 2013, the Company granted ten-year incentive stock options to
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:
During the fiscal years ended September 30, 2014 and 2013, the Company granted 32,500 and 120,000 stock options at weighted average grant date fair values per share of $0.90 and $0.61, respectively. The expected term represents the period over which the stock option awards are expected to be outstanding. The Company utilizes the “simplified” method to develop an estimate of the expected term of “plain vanilla” employee option grants. 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 award’s expected term. The volatility factor used in the Company’s assumptions is based on the historical price of its stock over the most recent period commensurate with the expected term of the award. The Company historically has not paid any dividends on its common stock and had no intention to do so on the date the share-based awards were granted. The Company As of September 30, 2014, there was approximately $50,574 of total unrecognized compensation cost related to unvested stock option awards, which is expected to be recognized over the remainder of the weighted average vesting period of 1.08 years.
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 8 SHARE BASED COMPENSATION (CONTINUED) Stock Option Awards (continued) The following table summarizes stock option activity during the fiscal years ended September 30, 2014 and 2013:
The table below provides additional information regarding stock option awards that were outstanding and exercisable at September 30, 2014:
Restricted Stock AwardsOn November 8, 2012, the Company granted an aggregate of 371,375 shares of restricted stock (141,375 shares were granted pursuant to the 2007 Plan and 230,000 shares were granted pursuant to the 2011 Plan) to executives and employees of the Company. The shares vest ratably over three years on the anniversaries of the date of grant. The aggregate grant date value of $430,795 will be recognized proportionate to the vesting period. F-18 FORWARD INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 SHARE BASED COMPENSATION (CONTINUED) Restricted Stock Awards(continued)
On January 9, 2014, the Company granted 5,000 shares of restricted stock For the fiscal years ended September 30,
As of September 30, The
WarrantsAs of September 30,
F-19
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 9 INCOME TAXESThe Company’s provision (benefit) for income taxes consists of the following United States
Income tax benefit from discontinued operations of approximately $0 and $(6,000) in the fiscal 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 Company’s deferred tax assets and liabilities are comprised of the following:
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 INCOME TAXES (CONTINUED) As of September 30, As of September 30, The significant elements contributing to the difference between the United States Federal statutory tax rate and the Company’s effective tax rate are as follows:
As of September 30,
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 10 LOSS PER SHAREBasic loss per share data for each period presented is computed using the weighted-average number of shares of common stock outstanding during each such period. Diluted loss per share data is computed using the weighted-average number of common and dilutive common-equivalent shares outstanding during each period. Dilutive common-equivalent shares consist of (a) shares that would be issued upon the exercise of stock options and warrants, computed using the treasury stock The following securities are excluded from the calculation of weighted average dilutive common shares because their inclusion would have been anti-dilutive:
The calculation of basic and diluted loss per share for the fiscal years ended September 30,
(1) Due to the net loss to common shareholders in each of the years presented above, diluted earnings per share was computed without consideration to potentially dilutive instruments as their inclusion would have been antidilutive. Potentially dilutive instruments include stock options, warrants, F-22 FORWARD INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In February 2010, Forward Switzerland and its European logistics provider (freight forwarding and customs agent) entered into a Representation Agreement (the “Representation Agreement”) whereby, among other things, the European logistics provider agreed to act as Forward Switzerland's As of February 1, 2010, Forward Switzerland entered into a guarantee agreement with a Swiss bank relating to the repayment of any amount up to €75,000 (equal to approximately The initial term of the bank letter of guarantee expired February 28, 2011, but renews automatically for one-year periods until February 28,
F-23
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 COMMITMENTS AND CONTINGENCIES (CONTINUED)
The Company rents certain of its facilities under leases expiring at various dates through September
NOTE 12 |
| (dollars in thousands) | ||
| Year Ended September 30, | ||
| 2013 |
| 2012 |
Americas: |
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United States........................................................ | $9,424 |
| $8,843 |
Other...................................................................... | 1,538 |
| 1,483 |
Total Americas............................................... | 10,962 |
| 10,326 |
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APAC Region: |
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Hong Kong........................................................... | 7,491 |
| 9,510 |
Other...................................................................... | 3,273 |
| 2,055 |
Total APAC.................................................... | 10,764 |
| 11,565 |
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EMEA Region: |
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Germany................................................................ | 5,097 |
| 4,071 |
Poland................................................................... | 3,525 |
| 2,596 |
Other...................................................................... | 563 |
| 845 |
Total Europe................................................... | 9,185 |
| 7,512 |
Total net sales............................................................. | $30,911 |
| $29,403 |
| (dollars in thousands) | ||||
| Fiscal Years Ended September 30, | ||||
| 2014 | 2013 | |||
Americas: |
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| |
United States | $ | 9,382 | $ | 9,424 | |
Other |
| 467 |
| 1,538 | |
Total Americas |
| 9,849 |
| 10,962 | |
APAC Region: |
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| |
Hong Kong |
| 8,608 |
| 7,491 | |
Other |
| 3,043 |
| 3,273 | |
Total APAC |
| 11,651 |
| 10,764 | |
EMEA Region: |
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| |
Germany |
| 7,238 |
| 5,097 | |
Poland |
| 3,955 |
| 3,525 | |
Other |
| 667 |
| 563 | |
Total Europe |
| 11,860 |
| 9,185 | |
Total net sales | $ | 33,360 | $ | 30,911 |
Long-Lived Assets (Net of Accumulated Depreciation and Amortization)
Identifiable long-lived assets, consisting predominately of property, plant and equipment, by geographic region are as follows:were located in the Americas at September 30, 2014 and 2013.
| (dollars in thousands) | ||
| Year Ended September 30, | ||
| 2013 |
| 2012 |
Americas........................................................................... | $170 |
| $178 |
EMEA Region.................................................................. | -- |
| 1 |
APAC Region.................................................................. | -- |
| -- |
Total long-lived assets (net)............................................ | $170 |
| $179 |
Supplier Concentration
The Company procures substantially all its supply of carrying solutions products from independent suppliers in China through Forward China. Depending on the product, the Company may require several different suppliers to furnish component parts or pieces. The Company purchased approximately 92%94% and 90% of its OEM products from four such suppliers in Fiscal 20132014 and 2012,2013, respectively. The approximate percentages of purchases of OEM products from each of these four suppliers with respect to continuing operations for Fiscal 20132014 and Fiscal 20122013 are as follows:
| Fiscal Year Ended | ||
Supplier: | 2013 |
| 2012 |
OEM Supplier A......................................................... | 50% |
| 54% |
OEM Supplier B.......................................................... | 19% |
| 17% |
OEM Supplier C.......................................................... | 14% |
| 9% |
OEM Supplier D.......................................................... | 9% |
| 10% |
Totals*..................................................................... | 92% |
| 90% |
69
F-27
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1615 OPERATING SEGMENT INFORMATION – (CONTINUED)
Supplier Concentration (continued)
| |||
Fiscal Year Ended September 30, | |||
2014 | 2013 | ||
Supplier: |
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OEM Supplier A | 66% | 0% | |
OEM Supplier B | 20% | 50% | |
OEM Supplier C | 5% | 19% | |
OEM Supplier D | 3% | 14% | |
OEM Supplier E | 1% | 9% | |
Totals | 95% | 92% |
The following customers or their affiliates or contract manufacturers accounted for more than ten percent of the Company’s net sales, by geographic region.
| Fiscal Year Ended September 30, 2013 | ||||||
|
Americas |
APAC |
EMEA | Total Company | |||
Diabetic Customer A......... | -- | 70% | 1% | 24% | |||
Diabetic Customer B.......... | 21% | 3% | 15% | 13% | |||
Diabetic Customer C.......... | 24% | -- | 51% | 24% | |||
Diabetic Customer D.......... | 18% | 2% | 24% | 14% | |||
Other Customer C............... | 18% | -- | 1% | 7% | |||
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| Fiscal Year Ended September 30, 2012 | ||||||
|
Americas |
APAC |
EMEA | Total Company | |||
Diabetic Customer A........... | 2% | 82% | -- | 33% | |||
Diabetic Customer B........... | 21% | 2% | 18% | 13% | |||
Diabetic Customer C........... | 12% | -- | 46% | 16% | |||
Diabetic Customer D.......... | 9% | 1% | 19% | 8% | |||
Other Customer C............... | 14% | -- | -- | 5% | |||
Other Customer D............... | 11% | -- | -- | 4% |
* Other Customer A B, and D represented less than ten percent of the Company’s net sales of any geographic region during the fiscal year ended September 30, 2013. Other Customer A and B represented less than ten percent of the Company’s net sales of any geographic region during the fiscal year ended September 30, 2012.
| Fiscal Year Ended September 30, 2014 | ||||||
| Americas | APAC Region | EMEA Region | Total Company | |||
Diabetic Customer A | -% | 87% | 4% | 27% | |||
Diabetic Customer B | 24% | 3% | 19% | 14% | |||
Diabetic Customer C | 24% | -% | 58% | 24% | |||
Diabetic Customer D | 14% | 2% | 22% | 11% |
| Fiscal Year Ended September 30, 2013 | ||||||
| Americas | APAC Region | EMEA Region | Total Company | |||
Diabetic Customer A | -% | 70% | 1% | 24% | |||
Diabetic Customer B | 21% | 3% | 15% | 13% | |||
Diabetic Customer C | 24% | -% | 51% | 24% | |||
Diabetic Customer D | 18% | 2% | 24% | 14% |
Four customers (including their affiliates or contract manufacturers) accounted for approximately 77% and 73% of the Company's accounts receivable at September 30, 2013. Three customers, including their affiliates or contract manufacturers, accounted for approximately 76% of the Company's accounts receivable at September 30, 2012.2014 and 2013, respectively.
NOTE
1716 SUBSEQUENT EVENTS
In November 2014, the Company repurchased and retired an aggregate of 10,340 shares of its outstanding Common Stock at a cost of approximately $12,000, in connection with the Settlement Agreement executed on July 3, 2013 betweenvesting of employee restricted stock awards, wherein certain employees surrendered a portion of their award in order to fund certain tax withholding obligations.
Legal Proceedings
On November 13, 2014, the Company filed a lawsuit in the Supreme Court of the State of New York, Kings County, against Terence Bernard Wise, a director of the Company, and G-Form,the following six individuals whom Mr. Wise claims that he has purportedly nominated to stand for election as described in Note 3directors at the Company’s Annual Meeting: Howard Morgan, Michael Luetkemeyer, Eric Freitag, Sangita Shah, N. Scott Fine, and Darryl Keyes. The Company’s complaint seeks a judicial declaration that Mr. Wise’s purported nominations are invalid, as they were not received within the timeframe expressly provided by the Company’s Bylaws for such nominations. The complaint also seeks injunctive relief from the court, enjoining Mr. Wise from soliciting proxies for his purported nominees to our audited consolidated financial statements, G-Form is required to makestand for election as directors at the 2014 annual meeting of shareholders. At a settlement paymenthearing on December 1, 2014, the court denied the Company’s request for preliminary injunctive relief. On December 2, 2014, the Company filed a notice of appeal of the court’s order to the Company inSupreme Court of the approximate amountState of $280,000. G-Form’s payment is overdue,New York, Appellate Division, Second Department and on December 3, 2014, the Company has filed a demandmoved before such appellate court for arbitration seeking enforcement of the terms ofpreliminary injunctive relief denied below. That motion remains pending, as does the Settlement Agreement. The Company expects payment to be made in its entirety and as such, no provision or allowance is reflected incase before the accompanying consolidated financial statements.lower court.
70
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: January 14, 2014
F-28
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Subsequent to September 30, 2014, as a result of the resignation of two directors of the Company, an aggregate of 30,000 shares of restricted stock were forfeited. On December 5, 2014, the Board granted an aggregate of 30,000 shares of restricted stock to two new directors of the Company.
POWER OF ATTORNEYTreasury Stock Retirement
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 eitherOn December 5, 2014, the Board of them as his or her true and lawful attorneys-in-fact and agents, with full powerDirectors approved the retirement 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 each706,410 shares 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:
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* Furnished and not filed herewith
†Portions have been omitted pursuant to request for confidential treatment and the omitted portions have been separately filed with the Commission.treasury stock.
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F-29