Forward Industries, Inc. - Quarter Report: 2016 June (Form 10-Q)

 

477 S. Rosemary Ave., Suite 219, West Palm Beach, FL 33401
(Address of principal executive offices, including zip code)

(561) 465-0030
(Registrant’s telephone number, including area code)

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 twelve 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. Yes [X] No [ ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes [X] No [ ]

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.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes [

]

No [X]

The number of shares outstanding of the registrant’s common stock, par value $0.01 per share, on August 11, 2016, which is the latest practical date prior to the filing of this report, was 8,782,496 shares.

 

 

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Note Regarding Use of Certain Terms

In this Quarterly Report on Form 10-Q, unless the context otherwise requires, the following terms have the meanings assigned to them as set forth below:

“we”, “our”, and the “Company” refer to Forward Industries, Inc., a New York corporation, together with its consolidated subsidiaries;
“Forward” or “Forward Industries” refers to Forward Industries, Inc.;
“common stock” refers to the common stock, $.01 par value per share, of Forward Industries, Inc.;
“Forward US” refers to Forward Industries’ wholly owned subsidiary Forward Industries (IN), Inc., an Indiana corporation;
“Forward Switzerland” refers to Forward Industries’ wholly owned subsidiary Forward Industries (Switzerland) GmbH, a Swiss corporation;
“Forward China” refers to Forward Industries Asia-Pacific Corporation (f/k/a Seaton Global Corporation), 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 2015” refers to our fiscal year ended September 30, 2015;
“Fiscal 2016” refers to our fiscal year ending September 30, 2016;
“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; and
“Retail” refers to the retail distribution channel.

Note Regarding Presentation of Financial Information

     Certain figures included in this Quarterly Report on Form 10-Q 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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The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

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FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
UNAUDITED)

 

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

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The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

 

 

 

 

 

 

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The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

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FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2           ACCOUNTING POLICIES (CONTINUED)

Share-Based Compensation Expense

     The Company recognizes employee and director share-based compensation in its condensed consolidated statements of operations and comprehensive income (loss) at the grant-date fair value of stock options and other equity-based compensation. The determination of stock option grant-date fair value is estimated using the Black-Scholes option pricing model, which includes variables such as the expected volatility of the Company’s share price, the exercise behavior of its grantees, interest rates, and dividend yields. These variables are projected based on the Company’s historical data, experience, and other factors. In the case of awards with multiple vesting periods, the Company has elected to use the graded vesting attribution method, which recognizes compensation cost on a straight-line basis over each separately vesting portion of the award as if the award was, in-substance, multiple awards. Refer to Note 5 - Share-Based Compensation. In addition, the Company recognizes 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 May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers,” which 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 recognize 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 was further amended and is effective for annual periods and interim periods within those annual periods beginning after December 15, 2017 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. The Company is currently evaluating the potential impact of adopting this guidance on its consolidated financial statements.

     In July 2015, the FASB issued ASU 2015-11, “Inventory (Topic 330): Simplifying the Measurement of Inventory,” which applies to inventory that is measured using first-in, first-out (“FIFO”) or average cost. Under the updated guidance, an entity should measure inventory that is within scope at the lower of cost and net realizable value, which is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. Subsequent measurement is unchanged for inventory that is measured using last-in, first-out (“LIFO”). This ASU is effective for annual and interim periods beginning after December 15, 2016, and should be applied prospectively with early adoption permitted at the beginning of an interim or annual reporting period. The Company is currently evaluating the potential impact of adopting this guidance on its consolidated financial statements.

     In November 2015, the FASB issued ASU 2015-17, “Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes,” which applies to the classification of deferred tax assets and liabilities. The update eliminates the requirement to classify deferred tax assets and liabilities as noncurrent or current within a classified statement of financial position. This ASU is effective for annual and interim periods beginning after December 15, 2016, and should be applied prospectively with early adoption permitted at the beginning of an interim or annual reporting period. The Company is currently evaluating the potential impact of adopting this guidance on its consolidated financial statements.

     In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842),” which will require lessees to report most leases as assets and liabilities on the balance sheet, while lessor accounting will remain substantially unchanged. This ASU requires a modified retrospective transition approach for existing leases, whereby the new rules will be applied to the earliest year presented. The new standard is effective for reporting periods beginning after December 15, 2018 and early adoption is permitted. The Company is currently evaluating the potential impact of adopting this guidance on its consolidated financial statements.

     In March 2016, the FASB issued ASU 2016-09, “Compensation — Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting,” which simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. This ASU is effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the potential impact of adopting this guidance on its consolidated financial statements.

 

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FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3          DISCONTINUED OPERATIONS

     On June 21, 2012, the Company determined to exit its global retail business and focus solely on growing its 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 growth in net revenues and cost rationalizations in the OEM business. Accordingly, the results of operations for the Retail division have been recorded as discontinued operations in the accompanying condensed consolidated financial statements for the periods presented. The Company has completed its exit of its Retail business. Summarized operating results of discontinued operations are presented in the following table:

     In December 2014, the Company recovered from a third party $200,000 of accounts receivables that had been previously written off, which was recognized as other income during the three months ended December 31, 2014. There was no activity in discontinued operations for the nine months ended June 30, 2016.

NOTE 4          SHAREHOLDERS’ EQUITY

6% Senior Convertible Preferred Stock

     As of the 6% Senior Convertible Preferred Stock (the “Convertible Preferred Stock”) issuance date, the carrying amount was less than the redemption value. As a result of the Company’s determination that redemption was probable, the carrying value was increased by periodic accretions so that the carrying value would equal the redemption amount at the earliest redemption date. Such accretion was recorded as a preferred stock dividend.

     Dividends on the Convertible Preferred Stock totaled $0 for the three months ended June 30, 2016 and 2015 and totaled approximately $0 and $21,000 for the nine months ended June 30, 2016 and 2015, respectively. These dividends, in addition to the accretion, totaled $0 for the three months ended June 30, 2016 and 2015 and totaled approximately $0 and $476,000 for the nine months ended June 30, 2016 and 2015, respectively. At the December 30, 2014 Annual Meeting, the shareholder vote resulted in the turnover of a majority of the Board members, which represented a Change of Control pursuant to the terms of the Convertible Preferred Stock. On December 31, 2014, the Company determined to recognize the balance of the accretion and bring the Convertible Preferred Stock carrying value up to its redemption value due to the likelihood of the holders requesting redemption. On January 9, 2015, the Company received a notice of deemed liquidation from holders owning a majority of the outstanding Convertible Preferred Stock in which they requested redemption of their Convertible Preferred Stock. On February 23, 2015, the Company paid an aggregate of $1,287,737 to the holders of the Convertible Preferred Stock in order to redeem all of the outstanding shares of Convertible Preferred Stock.

Stock Repurchase

     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, through June 30, 2016, the Company repurchased an aggregate of 224,690 shares at a cost of approximately $487,000. During the nine months ended June 30, 2016, the Company repurchased and retired an aggregate of 1,076 shares of its outstanding restricted common stock at a cost of approximately $2,000 in connection with the vesting of employee restricted stock awards, wherein certain employees surrendered a portion of their award in order to fund certain tax withholding obligations.

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FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5          SHARE-BASED COMPENSATION

     The fair value of each option award is estimated on the date of grant using the Black-Scholes option pricing model that uses the assumptions noted in the following table. 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 expected volatility used is based on the historical price of the Company’s stock over the most recent period commensurate with the expected term of the award. The risk-free interest rate used is based on the implied yield of U.S. Treasury zero-coupon issues with a remaining term equivalent to the award’s expected term. 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 estimated annual forfeiture rate is based on management’s expectations and will reduce expense ratably over the vesting period. The forfeiture rate will be adjusted periodically based on the extent to which actual option forfeitures differ, or are expected to differ, from the previous estimate, when it is material.

 

     There were no options granted during the three and nine months ended June 30, 2016. The weighted average grant date fair value of options granted during the three and nine months ended June 30, 2015 was $0.38.

       The following table summarizes stock option activity during the nine months ended June 30, 2016:

 

     The Company recognized compensation expense (credit) of approximately $(1,000) and $1,000 during the three months ended June 30, 2016 and 2015, respectively, and approximately $9,000 and $(36,000) during the nine months ended June 30, 2016 and 2015, respectively, in continuing operations for stock option awards in its condensed consolidated statements of operations and comprehensive income (loss).

     As of June 30, 2016, there was approximately $11,000 of total unrecognized compensation cost related to nonvested stock option awards. That cost is expected to be recognized over a weighted average period of 1.6 years.

 

 

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FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5          SHARE-BASED COMPENSATION (CONTINUED)

     The following table provides additional information regarding stock option awards that were outstanding and exercisable at June 30, 2016:

 

Restricted Stock Awards

     On October 26, 2015, the Company granted 17,500 shares of restricted stock, pursuant to the 2007 Plan, to a former director of the Company. The shares vested on December 31, 2015. The grant date value of $19,775 was recognized over the service period.

     On October 26, 2015, the Company accelerated the vesting date of 35,000 shares of restricted stock that were previously granted to a director of the Company from February 23, 2016 to December 31, 2015. The Company analyzed the modification as of the modification date and determined that the modification did not result in any incremental compensation expense, however, the remaining unamortized compensation expense attributable to the original award was recognized over the modified remaining service period.

     On February 23, 2016, the Company granted an aggregate of 124,317 shares of restricted stock to directors of the Company, pursuant to the 2007 Plan. The shares vest on the one-year anniversary from the date of grant. The aggregate grant date value of $182,746 will be recognized ratably over the vesting period.

     The Company recognized compensation expense of approximately $52,000 and $42,000 during the three months ended June 30, 2016 and 2015, respectively, and approximately $174,000 and $39,000 during the nine months ended June 30, 2016 and 2015, respectively, in continuing operations for restricted stock awards in its condensed consolidated statements of operations and comprehensive income (loss).

     As of June 30, 2016, there was approximately $135,000 of total unrecognized compensation cost related to nonvested restricted stock awards. That cost is expected to be recognized over a weighted average period of 0.7 years.

      The following table summarizes restricted stock activity during the nine months ended June 30, 2016:

 

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FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 6          INCOME (LOSS) PER SHARE

     Basic income (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 income (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 method; and (b) shares of nonvested restricted stock. Net income (loss) from continuing operations per basic and diluted share for the three and nine months ended June 30, 2015 is net of preferred stock cash dividends and accretion. The Company calculated the potential diluted earnings per share in accordance with ASC 260, as follows:

 

     The following securities were excluded from the calculation of diluted earnings per share because their inclusion would have been anti-dilutive:

NOTE 7          COMMITMENTS AND CONTINGENCIES

Former CFO Agreement

     On February 16, 2015, the Company entered into a settlement agreement (the “Agreement”) and mutual release with James McKenna, the Company’s former Chief Financial Officer (“Former CFO”), in connection with a lawsuit filed by Mr. McKenna on August 26, 2014 in the U.S. District Court for the Southern District of New York against the Company and then-directors Frank LaGrange Johnson, Robert Garrett, John F. Chiste, Timothy Gordon and Owen P.J. King (the “SDNY Lawsuit”), 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 sought an unspecified amount of monetary consequential damages and punitive damages. Pursuant to the Agreement, Mr. McKenna and the Company have agreed to settle and release all disputes or claims against the other party related to the SDNY Lawsuit and any such disputes or claims arising out of Mr. McKenna’s employment with the Company, without an admission of liability or wrongdoing. Under the Agreement, Mr. McKenna received: (i) $315,000 (representing 18 months' salary); (ii) approximately $375,000 in legal fees, back pay, prior out-of-pocket benefits, taxes and penalties on Mr. McKenna’s 401(k) loan, and accrued paid time off; and (iii) 35,000 restricted stock units vesting immediately. The Agreement includes customary non-disparagement and release provisions. As of June 30, 2016, the obligation has been fully paid and there are no further amounts owed to the Former CFO.

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FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 8          CONCENTRATIONS

Concentration of Revenues and Accounts Receivable

     For the three and nine months ended June 30, 2016 and 2015, the Company had significant customers with individual percentage of total revenues equaling 10% or greater as follows:

 

     At June 30, 2016 and September 30, 2015, concentration of accounts receivable with significant customers representing 10% or greater of accounts receivable was as follows:

NOTE 9          RELATED PARTY TRANSACTIONS

New York Office Services Agreement

     On February 1, 2014, the Company began leasing office space in New York, New York for its then Chief Executive Officer at a rate of $2,500 per month from LaGrange Capital Administration, L.L.C. (“LCA”). Frank LaGrange Johnson, the Company’s former Chairman of the Board, serves as the Managing Member of LCA. This lease was month-to-month and was cancellable by either the Company or LCA at any time. Effective April 1, 2014, LCA increased the monthly rental charge (inclusive of rent, allocable share of office assistant, and equipment leases) from $2,500 to approximately $12,700 per month. On January 16, 2015, the Company provided notice to LCA that it was immediately terminating the New York Office Services Agreement. During the three and nine months ended June 30, 2015, the Company recognized approximately $0 and $51,000, respectively, of rent expense related to the New York office.

Buying Agency and Supply Agreement

     On March 12, 2012, the Company entered into a Buying Agency and Supply Agreement (the “Supply Agreement”) with Forward Industries Asia-Pacific Corporation (f/k/a Seaton Global Corporation), a British Virgin Islands corporation (“Forward China”). The Supply Agreement, as amended on March 13, 2014 and March 11, 2015, provides that, upon the terms and subject to the conditions set forth therein, Forward China will act as the Company’s exclusive buying agent and supplier of Products (as defined in the Supply Agreement) in the Asia Pacific region. The Company purchases products at Forward China’s cost and also pays to Forward China a monthly service fee equal to the sum of: (i) $100,000; and (ii) 4% of “Adjusted Gross Profit”, which is defined as the selling price less the cost from Forward China. The amended Supply Agreement was terminated on September 11, 2015 and the Company entered into a new Supply Agreement on substantially similar terms on September 9, 2015 that expires on September 8, 2018, subject to renewal. Terence Bernard Wise, Chief Executive Officer and a director of the Company, is a principal of Forward China. In addition, Jenny P. Yu, a Managing Director of Forward China, beneficially owns more than 5% of the Company’s shares of common stock. The Company recognized approximately $362,000 and $371,000 during the three months ended June 30, 2016 and 2015, respectively, and $1,101,000 and $1,144,000 during the nine months ended June 30, 2016 and 2015, respectively, in service fees paid to Forward China, which are included as a component of costs of goods sold in continuing operations in the accompanying condensed consolidated statements of operations and comprehensive income (loss).

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FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 9          RELATED PARTY TRANSACTIONS (CONTINUED)

Investment Management Agreement

     On April 16, 2013, the Company entered into an Investment Management Agreement (the “Investment Management Agreement”) with LCA, pursuant to which the Company retained LCA to manage certain investment accounts funded by the Company. The Investment Management Agreement formally terminated effective February 1, 2015.

     There were no new funds invested with LCA during the nine months ended June 30, 2015. The Company purchased $0 and approximately $11,000 of marketable securities during the three and nine months ended June 30, 2015, respectively. The Company sold $0 and approximately $952,000 of marketable securities during the three and nine months ended June 30, 2015, respectively. As a result of these activities, the Company recognized net investment losses of $0 and approximately $110,000 during the three months and nine months ended June 30, 2015, respectively. The Company didn’t recognize any advisory fee or performance fee expense during the three and nine months ended June 30, 2015.

NOTE 10          LEGAL PROCEEDINGS

From time to time, the Company may become a party to legal actions or proceedings in the ordinary course of its business. As of June 30, 2016, 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.

 

 

 

 

 

 

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ITEM 2.           MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     The following discussion and analysis should be read in conjunction with our unaudited condensed consolidated financial statements, and the notes thereto, and other financial information appearing elsewhere in this Quarterly Report on Form 10-Q and the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2015. The following discussion and analysis compares our consolidated results of operations for the three and nine months ended June 30, 2016 (the “2016 Quarter” and ”2016 Period”, respectively), with those for the three and nine months ended June 30, 2015 (the “2015 Quarter” and “2015 Period”, respectively). 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.

Business Overview

     Forward Industries, Inc. is a designer and distributor of specialty and promotional products. The Company designs, markets, and distributes carry and protective solutions, primarily for hand held electronic devices. The Company’s principal customer market is original equipment manufacturers, or “OEMs” (or the contract manufacturing firms of these OEM customers), that either package their products as accessories “in box” together with their branded product offerings, or sell them through their retail distribution channels. The Company does not manufacture any of its OEM products and sources substantially all of its OEM products from independent suppliers in China (refer to Note 9 to the unaudited condensed consolidated financial statements – Buying Agency and Supply Agreement).

     Beginning in the second quarter of fiscal 2016, we executed supplier agreements with two healthcare customers. Although there are no minimum purchase requirements, the agreements provide the framework and pricing for supplying the customers with our carrying cases.

     Although we have had five consecutive quarters of profitability, our revenues have decreased each of the last three consecutive quarters. Additionally, 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 to our customers. Our dedicated Asia-based sourcing agent has made meaningful progress in areas such as quality assurance and overall operational performance that has better positioned us to negotiate such cost increases with our customers. However, we believe and anticipate that our supplier base may become more concentrated. As a result, our ability to effectively push back against such rising material costs may continue to diminish.

Variability of Revenues and Results of Operations

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

Critical Accounting Policies and Estimates

     We discuss the material accounting policies that are critical in making these estimates and judgments in our Annual Report on Form 10-K for the fiscal year ended September 30, 2015, under the caption “Management’s Discussion and Analysis—Critical Accounting Policies and Estimates”. There has been no material change in critical accounting policies or estimates since September 30, 2015.

Recent Accounting Pronouncements

     For information on recent accounting pronouncements, see Note 2 to the unaudited condensed consolidated financial statements.

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2016 COMPARED TO THE THREE MONTHS ENDED JUNE 30, 2015

Income from Continuing Operations

     Income from continuing operations in the 2016 Quarter was approximately $78,000 compared to approximately $495,000 in the 2015 Quarter. The 2016 Quarter decrease in income from continuing operations is primarily due to a decrease in gross profit of approximately $270,000 and an increase in general and administrative expenses of approximately $185,000, partially offset by a decrease in sales and marketing expenses of approximately $45,000.

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Income from continuing operations attributable to common shareholders per basic and diluted share was $0.01 and $0.06, respectively, for the 2016 Quarter and 2015 Quarter.

Net Revenues

     Net revenues in the 2016 Quarter decreased $0.5 million, or 8%, to $6.7 million from $7.2 million in the 2015 Quarter primarily due to lower revenues from Other Products. The tables below set forth revenues by channel, product line, and geographic location of our customers for the periods indicated:

 

*Tables may not total due to rounding.

Diabetic Product Revenues

     We design 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, sells them through its retail distribution channels.

     Revenues from Diabetic Products decreased $0.1 million to $5.8 million in the 2016 Quarter, from $5.9 million in the 2015 Quarter. The decrease was primarily due to lower revenues derived from our largest major Diabetic Products’ customer (Diabetic Customer A). The decrease was offset, in part, by higher revenues derived from two of our other three major Diabetic Products’ customers (Diabetic Customers C and D). Revenues from our other Diabetic Products’ customers were flat quarter over quarter.

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      The following table sets forth our revenues by Diabetic Products’ customers for the periods indicated:

*Tables may not total due to rounding.

     Revenues from Diabetic Products represented 87% of our total net revenues in the 2016 Quarter compared to 82% of our total net revenues in the 2015 Quarter.

Other Product Revenues

     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.

     Revenues of Other Products decreased $0.4 million to $0.9 million in the 2016 Quarter from $1.3 million in the 2015 Quarter. This is primarily due to the loss of several small customers. We will continue to focus on our sales and sales support teams in our attempt to expand and diversify our Other Products customer base.

     Revenues from Other Products represented 13% of our net revenues in the 2016 Quarter compared to 18% of our total net revenues in the 2015 Quarter.

Gross Profit

     The decrease in gross profit of approximately $270,000 was driven by a year over year decline in net revenues of 8% as well as a decline in gross margins. Our gross margin decreased to 16.2% in the 2016 Quarter compared to 18.6% in the 2015 Quarter. The decrease in gross profit was driven by a drop in net revenues and a decline in gross margins.

Sales and Marketing Expenses

     Sales and marketing expenses decreased approximately $45,000, or 9%, to approximately $453,000 in the 2016 Quarter compared to approximately $498,000 in the 2015 Quarter, primarily due to decreased travel and entertainment expenses of approximately $33,000 and personnel expenses of approximately $20,000. 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 increased approximately $185,000, or 52%, to approximately $541,000 in the 2016 Quarter from approximately $356,000 in the 2015 Quarter, primarily due to a $425,000 reduction in the 2015 Quarter resulting from the recognition of insurance recovery proceeds received stemming from the settlement with the Company’s former Chief Financial Officer. This was partially offset in the 2016 Quarter by decreased accounting and legal fees of approximately $87,000, recruiter fees of approximately $56,000, and director fees of approximately $52,000. Fluctuations in other components of “General and Administrative Expenses” were not individually material.

Other (Income) Expense, Net

     Other (income) expense, net, consisting primarily of foreign exchange losses, was approximately $7,000 in the 2016 Quarter compared to approximately $(1,000) in the 2015 Quarter.

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RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED JUNE 30, 2016 COMPARED TO THE NINE MONTHS ENDED JUNE 30, 2015

Income (Loss) from Continuing Operations

     Income from continuing operations in the 2016 Period was approximately $466,000 compared to a loss of approximately $1,893,000 in the 2015 Period. The 2016 Period increase in income from continuing operations is primarily due to decreases in general and administrative expenses of approximately $2,151,000 and sales and marketing expenses of approximately $558,000, partially offset by a decrease in gross profit of approximately $461,000.

 

Income (loss) from continuing operations attributable to common shareholders per basic share was $0.05 and $(0.28) for the 2016 Period and 2015 Period, respectively. Income (loss) from continuing operations attributable to common shareholders per diluted share was $0.05 and $(0.28) for the 2016 Period and 2015 Period, respectively.

Net Revenues

     Net revenues in the 2016 Period decreased $1.6 million, or 7%, to $20.8 million from $22.4 million in the 2015 Period primarily due to lower revenues from Other Products. The tables below set forth revenues by channel, product line, and geographic location of our customers for the periods indicated:

 

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Diabetic Product Revenues

     Revenues from Diabetic Products decreased $0.1 million in the 2016 Period compared to the 2015 Period. The lower revenues derived from two of our four largest major Diabetic Products’ customers (Diabetic Customers A and B) were partially offset by higher revenues derived from our other two largest major Diabetic Products’ customers (Diabetic Customer C and D). Revenues from our other Diabetic Products’ customers were flat quarter over quarter.

      The following table sets forth our revenues by Diabetic Products’ customers for the periods indicated:

*Tables may not total due to rounding.

     Revenues from Diabetic Products represented 89% of our total net revenues in the 2016 Period compared to 83% of our total net revenues in the 2015 Period.

Other Product Revenues

     Revenues of Other Products decreased $1.4 million to $2.4 million in the 2016 Period from $3.8 million in the 2015 Period. This is primarily due to the loss of several small customers. We will continue to focus on our sales and sales support teams in our attempt to expand and diversify our Other Products customer base.

     Revenues from Other Products represented 11% of our net revenues in the 2016 Period compared to 17% of our total net revenues in the 2015 Period.

Gross Profit

     The decrease in gross profit of approximately $461,000 was driven by a year over year decline in net revenues of 7%. Our gross margin decreased to 18.3% in the 2016 Period compared to 19.0% in the 2015 Period. The decrease in gross profit was driven by a drop in net revenues and a decline in gross margins.

Sales and Marketing Expenses

     Sales and marketing expenses decreased approximately $558,000, or 30%, to $1,318,000 in the 2016 Period compared to approximately $1,876,000 in the 2015 Period, primarily due to reduced personnel expenses as a result of the headcount reduction. A more cost conscious approach to travel and entertainment spending also provided for savings to a lesser extent. 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 approximately $2,158,000, or 52%, to approximately $2,005,000 in the 2016 Period from approximately $4,163,000 in the 2015 Period, primarily due to the following:

• $1.4 million decrease in legal fees and professional fees related to the FY 2015 proxy contest and other legal matters;
• $0.5 million decrease, net of insurance recovery of $0.4 million, in personnel expenses related to the accrual of settlements with both the former CEO and former CFO; and
• $0.1 million decrease in accounting and other legal fees.

      Fluctuations in other components of “General and Administrative Expenses” were not individually material.

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Other Expense, Net

     Other expense, net, consisting primarily of realized and unrealized losses on investments in marketable securities and foreign exchange losses, was approximately $12,000 in the 2016 Period compared to approximately $116,000 in the 2015 Period. The loss in marketable securities was related to an Investment Management Agreement pursuant to which the Company funded certain investment accounts. The Investment Management Agreement was terminated effective February 1, 2015.

     For the nine months ended June 30, 2016, no current book tax provision was recorded against book net income due to the existence of significant net operating loss carryforwards. The Company’s deferred tax provision is completely offset by a full valuation allowance.

RESULTS OF DISCONTINUED OPERATIONS FOR THE 2016 PERIOD COMPARED TO THE 2015 PERIOD

     Income from discontinued operations was $0 in the 2016 Period compared to income of approximately $199,000 in the 2015 Period. In the 2015 Period, we recovered from a third party $200,000 of accounts receivables that had been previously written off, which was recognized as other income during the three months ended December 31, 2014.

LIQUIDITY AND CAPITAL RESOURCES

     Our primary sources of liquidity are our operations. The primary demand on our working capital will be: (i) operating losses, should they occur; and (ii) any increases in accounts receivable and inventories arising in the ordinary course of business. 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.

     At June 30, 2016, our current ratio (current assets divided by current liabilities) was 2.6; our quick ratio (current assets less inventories divided by current liabilities) was 2.1; and our working capital (current assets less current liabilities) was $7.9 million. As of June 30, 2016, we had no short or long-term debt outstanding. We do not anticipate the need to purchase additional material capital assets in order to carry out our business.

      During the nine months ended June 30, 2016 and 2015, our sources and use of cash were as follows:

Cash Flows from Operating Activities

     During the 2016 Period, cash provided by operating activities of approximately $1,243,000 resulted primarily from net income of approximately $466,000, a decrease in accounts receivable of approximately $725,000, a decrease in inventories of approximately $208,000 and the add back of non-cash share-based compensation of approximately $185,000, partially offset by a decrease in accounts payable (including due to Forward China) and accrued expenses of approximately $373,000.

     During the 2015 Period, cash used in operating activities of approximately $1,777,000 resulted primarily from a net loss of approximately $1,694,000, a decrease in accounts payable (including due to Forward China) and accrued expenses of approximately $562,000 and an increase in inventories of approximately $509,000, partially offset by a decrease in accounts receivable of approximately $797,000 and the add back of non-cash realized and unrealized loss on marketable securities of approximately $110,000.

Cash Flows from Investing Activities

     In the 2016 Period, cash used in investing activities of approximately $48,000 resulted from purchases of property and equipment.

     In the 2015 Period, cash provided by investing activities of approximately $908,000 resulted from net proceeds from sales and purchases of marketable securities of approximately $941,000, offset by purchases of property and equipment of approximately $33,000.

Cash Flows from Financing Activities

     In the 2016 Period, cash used in financing activities of approximately $2,000 resulted from the repurchase of restricted stock.

     In the 2015 Period, cash used in financing activities of approximately $1,321,000 resulted primarily from redemption of all outstanding 6% Senior Convertible Preferred Stock of approximately $1,288,000.

 

 

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Related Party Transactions

     For information on related party transactions and their financial impact, see Note 9 to the unaudited condensed consolidated financial statements contained herein.

Cautionary Note Regarding Forward-Looking Statements

     This report contains “forward-looking statements”, as such term is used within the meaning of the Private Securities Litigation Reform Act of 1995, including statements regarding our liquidity and working capital. Forward-looking statements can be identified by words such as “anticipates,” “intends,” “plans,” “seeks,” “believes,” “estimates,” “expects” and similar references to future periods. Forward-looking statements are based on our current expectations and assumptions regarding our business, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict. Our actual results may differ materially from those contemplated by the forward-looking statements. We caution you therefore against relying on any of these forward-looking statements. They are neither statements of historical fact nor guarantees or assurances of future performance. Important factors that could cause actual results to differ materially from those in the forward-looking statements include the failure to receive material orders, failure to diversify the industries which we sell our products and pricing pressure on our products. Further information on our risk factors is contained in our filings with the SEC, including our Form 10-K for the year ended September 30, 2015. Any forward-looking statement made by us speaks only as of the date on which it is made. Factors or events that could cause our actual results to differ may emerge from time to time, and it is not possible for us to predict all of them. We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required by law.

 

 

 

 

 

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ITEM 3.           QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

ITEM 4.           CONTROLS AND PROCEDURES

     Evaluation of Disclosure Controls and Procedures. Our management carried out an evaluation, with the participation of our Principal Executive Officer and Principal Financial Officer, required by Rule 13a-15 and Rule 15d-15 of the Securities Exchange Act of 1934 (the “Exchange Act”) of the effectiveness of our disclosure controls and procedures as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Exchange Act. Based on their evaluation, our management has concluded that our disclosure controls and procedures are effective as of the end of the period covered by this report to ensure that information required to be disclosed by us 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 SEC’s rules and forms and is accumulated and communicated to our management, including our Principal Executive Officer and Principal Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

     Changes in Internal Control Over Financial Reporting. There were no changes in our internal control over financial reporting as defined in Rule 13a-15(f) and Rule 15d-15(f) under the Exchange Act that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

     Limitations of the Effectiveness of Controls and Procedures. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations of any control system, no evaluation of controls can provide absolute assurance that all control issues, if any, within a company have been detected.

 

 

 

 

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PART II.          OTHER INFORMATION

 

 

The exhibits listed in the accompanying “Index to Exhibits” are filed or incorporated by reference as part of this Form 10-Q.

 

 

 

 

 

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Signatures

     Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, hereunto duly authorized.

Dated: August 12, 2016

 

 

 

 

 

 

 

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*	This exhibit is being furnished rather than filed and shall not be deemed incorporated by reference into any filing, in accordance with Item 601 of Regulation S-K.

     Copies of this report (including the financial statements) and any of the exhibits referred to above will be furnished at no cost to our stockholders who make a written request to Forward Industries, Inc., 477 S. Rosemary Ave. Ste. 219, West Palm Beach, Florida 33401, Attention: Corporate Secretary.

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