NOTE 1    OVERVIEW                 

Forward Industries, Inc. ("Forward" or the “Company”) 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. 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 its products as accessories “in box” together with their branded product offerings, or sell them through their retail distribution channels. The Company’s OEM products include carrying cases and other accessories for medical monitoring and diagnostic kits and a variety of other portable electronic and non-electronic products (such as sporting & recreational products, bar code scanners, smartphones, GPS location devices, tablets, and firearms). The Company’s OEM customers are located in the Americas, the EMEA Region, and the APAC Region. 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 10 – Buying Agency and Supply Agreement).

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 top line growth and cost rationalizations in the OEM business.

In the opinion of management, the accompanying consolidated financial statements presented in this Quarterly Report on Form 10-Q/A reflect all normal recurring adjustments necessary to present fairly the financial position and results of operations and cash flows for the interim periods presented herein, but are not necessarily indicative of the results of operations for the fiscal year ending September 30, 2013. These financial statements should be read in conjunction with the Company's audited consolidated financial statements included in its Annual Report on Form 10-K for the fiscal year ended September 30, 2012, and with the disclosures and risk factors presented herein and therein, respectively. The September 30, 2012 balance sheet has been derived from the audited consolidated financial statements.

NOTE 2    RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS

The Company has restated its financial statements for the three- and nine-month periods ended June 30, 2013, due to the recognition of a non-cash deemed dividend of approximately $293,000 related to a beneficial conversion feature present in the Company’s 6% Senior Convertible Preferred Stock which was issued on June 28, 2013. Additionally, the Company has restated its consolidated balance sheet as of June 30, 2013 to adjust the carrying value of the convertible preferred stock and warrants by approximately $51,000. See Note 6. The adjustments did not have an effect on the Company’s previously reported net income (loss) for the three and nine month periods ended June 30, 2013, total assets on the consolidated balance sheet as of June 30, 2013, or the consolidated statement of cash flows for the nine months ended June 30, 2013.

A summary of the impact of the restatement on the Consolidated Balance Sheet and Consolidated Statements of Operations and Comprehensive Income (Loss) are as follows:

 

8

 

 

 

 

 

 

 

 

NOTE 2         RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS (CONTINUED)

Consolidated Balance Sheets (Unaudited)

As of June 30, 2013

	Previously		Restatement
	Reported		Adjustments		As Restated
Assets:
Current assets:
Cash and cash equivalents.........................................................	$5,011,600		$          --		$5,011,600
Marketable securities..................................................................	405,721		--		405,721
Accounts receivable, net ...........................................................	6,222,761		--		6,222,761
Inventories, net............................................................................	2,363,833		--		2,363,833
Prepaid expenses and other current assets.............................	755,826		--		755,826
Assets of discontinued operations..........................................	312,319		--		312,319
Total current assets.......................................................	15,072,060		--		15,072,060
Property and equipment, net......................................................	123,533		--		123,533
Other assets..................................................................................	40,442		--		40,442
Total Assets......................................................................................	$15,236,035		$         --		$15,236,035
Liabilities and shareholders’ equity
Current liabilities:
Accounts payable.........................................................................	$4,223,383		$        --		$4,223,383
Accrued expenses and other current liabilities........................	868,741		51,281		920,022
Liabilities of discontinued operations.......................................	35,391		--		35,391
Total current liabilities.................................................	5,127,515		51,281		5,178,796
Other liabilities..............................................................................	82,811		--		82,811
Total Liabilities................................................................................	5,210,326		51,281		5,261,607
6% Senior Convertible Preferred Stock, par value $0.01 per share; 1,500,000 shares authorized; 381,674 shares issued and outstanding (aggregate liquidation value of $750,000)....	447,983		(50,894)		397,089
Commitments and contingencies
Shareholders’ equity:
Preferred stock, par value $0.01 per share; 4,000,000 shares authorized; no shares issued and outstanding..............................................	--		--		--
Series A Participating Preferred stock, par value $0.01; 100,000 authorized; no shares issued and outstanding......	--		--		--
Common stock, par value $0.01 per share; 40,000,000 shares authorized, 8,819,095 and 8,811,595 shares issued; and 8,112,685 and 8,105,185 shares outstanding, respectively.	88,191		--		88,191
Additional paid-in capital.................................................................	17,353,932		293,063		17,646,995
Treasury stock, 706,410 shares at cost..........................................	(1,260,057)		--		(1,260,057)
Accumulated deficit..........................................................................	(6,582,790)		(293,450)		(6,876,240)
Accumulated other comprehensive loss.......................................	(21,550)		--		(21,550)
Total shareholders’ equity.................................................................	9,577,726		(387)		9,577,339
Total liabilities and shareholders’ equity........................................	$15,236,035		$           --		$15,236,035

 

 

9

 

 

 

 

 

 

 

 

 

NOTE 2         RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS (CONTINUED)

Consolidated Statements of Operations and Comprehensive Loss (Unaudited)

For the Three Month Period Ended June 30, 2013

	Previously Reported		Restatement Adjustments		As Restated
Net sales..........................................................................................................	$8,590,248		$            --		$8,590,248
Cost of goods sold..........................................................................................	6,747,066		--		6,747,066
Gross profit.....................................................................................................	1,843,182		--		1,843,182
Operating expenses:
Sales and marketing................................................................................	602,038		--		602,038
General and administrative....................................................................	767,588		--		767,588
Total operating expenses..............................................................	1,369,626		--		1,369,626
Income from operations...............................................................................	473,556		--		473,556
Other income (expense):
Interest expense.....................................................................................	(120)		--		(120)
Loss on marketable securities, net......................................................	(702,377)		--		(702,377)
Other income (expense), net.................................................................	2,897		--		2,897
Total other income (expense), net...............................................	(699,600)		--		(699,600)
Loss from continuing operations before income tax expense	(226,044)		--		(226,044)
Income tax expense.......................................................................................	--		--		--
Loss from continuing operations	(226,044)		--		(226,044)
Loss from discontinued operations, net of tax benefit of $8,977............	(18,659)		--		(18,659)
Net loss............................................................................................................	(244,703)		--		(244,703)
Preferred stock dividends, accretion and beneficial conversion feature	--		(293,450)		(293,450)
Net loss applicable to common equity.........................................	$(244,703)		$(293,450)		$(538,153)
Net loss.............................................................................................................	$(244,703)		$            --		$(244,703)
Other comprehensive loss:
Translation adjustments........................................................................	(152)		--		(152)
Total other comprehensive loss...................................................	(152)		--		(152)
Comprehensive loss......................................................................................	$(244,855)		$          --		$(244,855)
Net loss per basic and diluted common share:
Loss from continuing operations.................................................................	$(0.03)		$(0.04)		$(0.07)
Loss from discontinued operations.............................................................	$(0.00)		--		$(0.00)
Net loss per share..........................................................................................	$(0.03)		$(0.04)		$(0.07)
Weighted average number of common and common equivalent shares outstanding
Basic..........................................................................................................	8,112,685		--		8,112,685
Diluted.......................................................................................................	8,112,685		--		8,112,685

 

 

10

 

 

 

 

 

 

 

 

NOTE 2      RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS (CONTINUED)

Consolidated Statements of Operations and Comprehensive Income (Unaudited)

For the Nine Month Period Ended June 30, 2013

	Previously Reported		Restatement Adjustments		As Restated
Net sales............................................................................................................	$23,350,344		$           --		$23,350,344
Cost of goods sold............................................................................................	18,489,104		--		18,489,104
Gross profit......................................................................................................	4,861,240		--		4,861,240
Operating expenses:
Sales and marketing.................................................................................	1,620,880		--		1,620,880
General and administrative.....................................................................	2,612,398		--		2,612,398
Total operating expenses...............................................................	4,233,278		--		4,233,278
Income from operations.................................................................................	627,962		--		627,962
Other income (expense):
Interest income (expense).......................................................................	(376)		--		(376)
Loss on marketable securities, net........................................................	(374,160)		--		(374,160)
Other income (expense), net...................................................................	(11,285)		--		(11,285)
Total other income (expense), net................................................	(385,821)		--		(385,821)
Income from continuing operations before income tax expense	242,141		--		242,141
Income tax expense..........................................................................................	507		--		507
Income from continuing operations	241,634		--		241,634
Loss from discontinued operations, net of tax benefit of $6,002.............	(199,498)		--		(199,498)
Net income.......................................................................................................	42,136		--		42,136
Preferred stock dividends, accretion and beneficial conversion feature..................................................................................	--		(293,450)		(293,450)
Net income (loss) applicable to common equity........................	$42,136		$(293,450)		$(251,314)
Net income.......................................................................................................	$42,136		$            --		$42,136
Other comprehensive income (loss):
Change in unrealized gains on marketable securities........................	23,744		--		23,744
Translation adjustments........................................................................	(9,353)		--		(9,353)
Total other comprehensive income.............................................	14,391		--		14,391
Comprehensive income.................................................................................	$56,527		$           --		$56,527
Net income (loss) per basic and diluted common share:
Income (loss) from continuing operations.................................................	$0.03		$(0.04)		$(0.01)
Loss from discontinued operations............................................................	$(0.02)		--		$(0.02)
Net income (loss) per share.........................................................................	$0.01		$(0.04)		$(0.03)
Weighted average number of common and common equivalent shares outstanding
Basic..........................................................................................................	8,110,734		--		8,110,734
Diluted.......................................................................................................	8,120,909		10,175		8,110,734

 

11

 

 

 

 

 

 

 

NOTE 3    ACCOUNTING POLICIES

Accounting Estimates

The preparation of the Company's consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates and assumptions.

Basis of Presentation

The accompanying consolidated financial statements include the accounts of Forward and its wholly owned subsidiaries (Forward US, Forward Switzerland, Forward HK, Forward APAC, and Forward UK). All significant intercompany transactions and balances have been eliminated in consolidation.

Reclassifications

Certain prior period amounts have been reclassified to conform to the current period presentation.

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. The Company may purchase these short-term bonds with anticipated maturity of 90 days or less at a premium or discount. The Company records these investments as cash and cash equivalents net of amortization of premium or discount. The Company minimizes its 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. The Company holds 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 June 30, 2013, this amount was approximately $3.8 million. Historically, the Company has not experienced any losses due to such cash concentrations.

Marketable Securities

At June 30, 2013, the Company has investments in marketable securities that are classified as trading and are recorded at fair value with the corresponding unrealized holding gains or losses recognized in earnings. The fair value of marketable securities is determined based on quoted market prices at the consolidated balance sheet dates. The cost of marketable securities sold is determined by the specific identification method. At September 30, 2012, the Company classified its investments in marketable securities as “available-for-sale”. Securities that are classified as available-for-sale are recorded at fair value with the corresponding unrealized holding gains and losses, net of taxes, are recorded as a separate component of “Accumulated Other Comprehensive Loss” within shareholders’ equity.

Accounts Receivable

Accounts receivable consist of unsecured trade accounts with customers or their contract manufacturers. The Company performs periodic credit evaluations of its customers including an evaluation of days outstanding, payment history, recent payment trends, and perceived creditworthiness, and believes that adequate allowances for any uncollectible receivables are maintained. Credit terms to customers generally range from net thirty (30) days to net ninety (90) days. The Company has not historically experienced significant credit or collection problems with its OEM customers or their contract manufacturers. At June 30, 2013, the allowance for doubtful accounts with respect to its continuing operations was approximately $22,000. The Company did not require an allowance for doubtful accounts with respect to its continuing operations at September 30, 2012.

12

 

 

 

 

 

 

 

NOTE 3    ACCOUNTING POLICIES (CONTINUED)

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 the Company’s consolidated statements of operations and comprehensive income (loss). As reserved inventory is disposed of, the Company charges 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. The Company’s estimates of the allowance may change from time to time based on management’s assessments, and such changes could be material. The Company did not require an allowance for obsolete inventory with respect to its continuing operations at June 30, 2013. At September 30, 2012, the allowance for obsolete inventory of the Company’s continuing operations was approximately $99,000.

Property and Equipment

Property and equipment consist of furniture, fixtures, and equipment and leasehold improvements and are recorded at cost. Expenditures for major additions and improvements are capitalized, and minor replacements, maintenance, and repairs are charged to expense as incurred. When property and equipment are retired or otherwise disposed of, the cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is included in the results of operations for the respective period. Depreciation is provided over the estimated useful lives of the related assets using the straight-line method. The estimated useful life for furniture, fixtures and equipment ranges from three to ten years. Amortization of leasehold improvements is computed using the straight-line method over the shorter of the remaining lease term or the estimated useful lives of the improvements. For the three-month periods ended June 30, 2013 and 2012, the Company recorded approximately $19,000 and $30,000 of depreciation and amortization expense from continuing operations, respectively. For the nine-month periods ended June 30, 2013 and 2012, the Company recorded approximately $56,000 and $83,000 of depreciation and amortization expense from continuing operations, respectively.

Income Taxes

The Company accounts for its income taxes in accordance with accounting principles generally accepted in the United States of America, 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. The Company periodically evaluates the realizability of its net deferred tax assets.  See Note 8 to these Notes to Consolidated Financial Statements. The Company’s policy is to account for interest and penalties relating to income taxes, if any, in “income tax expense” in its consolidated statements of operations and comprehensive income (loss) and include accrued interest and penalties within the “accrued liabilities” in its consolidated balance sheets, if applicable. For the three and nine month periods ended June 30, 2013 and 2012, no income tax related interest or penalties were assessed or recorded.

6% Senior Convertible Preferred Stock

Temporary Equity

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

13

 

 

 

 

 

 

 

NOTE 3    ACCOUNTING POLICIES (CONTINUED)

6% Senior Convertible Preferred Stock (Continued)

Warrants

In accordance with ASC 815-40, the Company’s warrants have been classified as a liability, at fair value, as a result of a related registration rights agreement that contains certain requirements for registering the underlying common shares, but has no provision for penalties upon the failure to register. At each balance sheet date, this liability’s fair value will be re-measured and adjusted.The liability associated with the warrants is included in the “Accrued expenses and other current liabilities” line of the consolidated balance sheet.

Preferred Stock Accretion

 The carrying amount of the convertible preferred stock is less than the redemption value. As a result of the Company’s 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.  

Revenue Recognition

The Company generally recognizes revenue from product sales to its 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) the Company has no continuing obligations to the customer; and (4) collection of the related accounts receivable is reasonably assured.

Shipping and Handling Costs

The Company classifies shipping and handling costs including inbound and outbound freight charges, purchasing and receiving costs, inspection costs, warehousing costs, internal transfer costs, and other costs associated with the Company’s Asia-based distribution capability, as a component of cost of goods sold in the accompanying consolidated statements of operations and comprehensive income (loss).

Foreign Currency Transactions

The functional currency of the Company and its wholly-owned foreign subsidiaries is the U.S. dollar (except for Forward UK, which is the British Pound). Foreign currency transactions may generate receivables or payables that are fixed in terms of the amount of foreign currency that will be received or paid. Fluctuations in exchange rates between such foreign currency and the functional currency increase or decrease the expected amount of functional currency cash flows upon settlement of the transaction. These increases or decreases in expected functional currency cash flows are foreign currency transaction gains or losses that are included in “other income (expense), net” in the accompanying consolidated statements of operations and comprehensive income (loss). The approximate net losses from foreign currency transactions for continuing operations was $(3,000) and $(26,000) for the three-month periods ended June 30, 2013 and 2012, respectively. For the nine-month periods ended June 30, 2013 and 2012, the Company recorded $(17,000) and $(46,000), respectively, in approximate foreign currency transaction losses. Such foreign currency transaction losses were primarily the result of Euro denominated sales to certain customers.

14

 

 

 

 

 

 

 

NOTE 3    ACCOUNTING POLICIES (CONTINUED)

Accumulated Other Comprehensive Loss

Accumulated other comprehensive loss, which is included as a component of shareholders’ equity, includes unrealized gains or losses on available-for-sale securities (as of September 30, 2012) and currency translation adjustments related to the Company’s foreign subsidiaries.

Fair value of financial instruments

For certain of the Company’s 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. The Company records its financial instruments that are accounted for under Accounting Standard Codification (“ASC”) 320, “Investments-Debt and Equity Securities” (“ASC 320”) at fair value. In addition, the Company records its warrant liability at fair value. The determination of fair value is based upon the fair value framework established by ASC 820 “Fair Value Measurement”. 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 Compensation

The Company recognizes share-based compensation in its 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 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 6 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 February 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update 2013-02 “Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income” (“ASU 2013-02”). ASU 2013-02 requires an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. ASU 2013-02 is effective for annual periods and interim periods within those periods beginning after December 15, 2012. ASU 2013-02 will be effective for the Company beginning in the first quarter of fiscal 2014 and is not expected to have a material impact on the Company’s Consolidated Financial Statements.

In July 2013, the FASB issued ASU No. 2013-11, Income Taxes (ASC Topic 740) - Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. The objective is to end some inconsistent practices with regard to the presentation on the balance sheet of unrecognized tax benefits. The update is effective for financial statement periods beginning after December 15, 2013, with early adoption permitted. The Company will adopt this standard beginning January 1, 2014. The Company does not expect these changes to have a material impact on its consolidated financial statements.

15

 

 

 

 

 

 

 

 

NOTE 4    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 top line growth and cost rationalizations in the OEM business. Accordingly, the results of operations for the Retail division have been recorded as discontinued operations in the accompanying consolidated financial statements for the fiscal periods presented. Summarized operating results of discontinued operations are presented in the following table:

	For the Three-Month Periods Ended June 30				For the Nine-Month Periods Ended June 30,
	2013		2012		2013		2012
Net sales................................	$(9,701)		$430,540		$388,530		$2,093,718
Gross profit (loss) ...............	(10,223)		(1,524,337)		85,599		(1,084,894)
Operating expenses.............	(21,752)		(1,138,487)		(298,968)		(3,594,979)
Other income (expense)......	4,333		(15,251)		7,861		(42,343)
Loss from discontinued operations, net of tax expense (benefit) of $(8,977) and $(130); and $(6,002) and $4,850, respectively.....................	$(18,659)		$(2,678,075)		$(199,498)		$(4,722,216)

 

Summarized assets and liabilities of discontinued operations are presented in the following table:

	June 30,		September 30,
	2013		2012
Accounts receivable, net..............................................	$--		$26,186
Inventories, net..............................................................	179,028		350,942
Prepaid assets and other current assets.....................	133,291		244,751
Total assets of discontinued operations............	$312,319		$621,879
Accounts payable.........................................................	$24,286		$45,874
Accrued liabilities..........................................................	11,105		215,932
Total liabilities of discontinued operations......	$35,391		$261,806

The above asset amounts as of June 30, 2013, include approximately $311,000 relating to expected payments pursuant to a Settlement Agreement and General Release (“Settlement Agreement”) executed on July 3, 2013 between the Company and G-Form LLC (“G-Form”) in exchange for certain retail inventories, the Company’s cooperation with certain administrative matters, and a mutual general release. G-Form paid $31,000 of the settlement in July 2013 with the balance due 60 days after delivery of the retail inventory, which occurred in August 2013. The Company has substantially completed its exit of its Retail business as of March 31, 2013. The Company has not had, and does not expect to have, any continuing involvement in the Retail business after this date.

 

16

 

 

 

 

 

 

NOTE 5    MARKETABLE SECURITIES

The Company classifies its marketable securities as either (i) held-to-maturity, (ii) trading, or (iii) available-for-sale. Effective October 1, 2012, the Company changed its classification of marketable equity securities and corporate bonds from available-for-sale to trading. As a result of this reclassification, a gross gain of $4,764 and a gross loss of $(28,508) was reclassed out of accumulated other comprehensive income (loss) and charged to earnings using a specific identification basis. Equity securities are carried at fair value, as determined by quoted market prices, which is a Level 1 input, as established by the fair value hierarchy under ASC 820.  Corporate bonds are carried at amortized cost, which approximates market value. The corresponding unrealized holding gains or losses are recognized in earnings. The Company’s marketable securities are summarized in the table below:

	June 30,		September 30,
	2013		2012
Trading:
Cost......................................................................	$532,445		$--
Unrealized Losses..............................................	(126,724)		--
Total Fair Value...........................................	$405,721		$--
Available-for-sale:
Cost......................................................................	$--		$444,349
Unrealized Gains................................................	--		4,764
Unrealized Losses.............................................	--		(28,508)
Total Fair Value..........................................	$--		$420,605

            The net loss on marketable securities for the three and nine-month periods ended June 30, 2013 was approximately $(702,000) and $(374,000), respectively, in the accompanying consolidated statements of operations and comprehensive income (loss).

The following table presents the Company’s fair value hierarchy for assets, consisting of marketable securities, measured at fair value on a recurring basis at June 30, 2013 and September 30, 2012:

	Level 1		Level 2		Level 3		Total
Equity securities............................	$405,721		$--		$--		$405,721
Total assets at fair value at June 30, 2013...........................	$405,721		$--		$--		$405,721
Equity securities............................	$420,605		$--		$--		$420,605
Total assets at fair value at September 30, 2012................	$420,605		$--		$--		$420,605

 

17

 

 

 

 

 

 

NOTE 6    SHAREHOLDERS’ EQUITY

“Blank Check” Preferred Stock

The Company is authorized to issue up to 4,000,000 shares of "blank check" preferred stock. The Board of Directors (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 Preferred Stock.

6% Senior Convertible Preferred Stock with Warrants

On June 28, 2013, the Company completed the sale of (i) 381,674 shares of its newly authorized 6% Senior Convertible Preferred Stock, par value $0.01 per share (the “Convertible Preferred Stock”) and (ii) warrants to purchase a total of 381,674 shares of the Company’s common stock (“Common Stock”) (the “Warrants” and together with the Convertible Preferred Stock, the “Securities”) to accredited investors (“Investors”) in a private placement (the “Private Placement”) pursuant to the terms of securities purchase agreements, dated June 28, 2013 (the “Purchase Agreements”), by and between the Company and each Investor.  The total purchase price paid by Investors for each share of Convertible Preferred Stock and Warrant purchased by them was $1.965, consisting of (i) a fair value of  $1.145 in respect of the Convertible Preferred Stock, plus (ii) a fair value of $0.82 in respect of the Warrant. The Private Placement resulted in gross proceeds of approximately $750,000 to the Company.  The Company has received $180,000 of these proceeds in cash as of June 30, 2013, net of issuance costs of approximately $69,000, which is reflected in the “Cash and cash equivalents” line of the Company’s consolidated balance sheets.  These proceeds of $750,000 have been allocated to the Convertible Preferred Stock and the Warrants based upon their fair values assigned (net of issuance costs of approximately $69,000) of approximately $397,000 and $284,000, respectively. The remaining approximate $500,000 of proceeds was received in July 2013 and is reflected in “Prepaid expenses and other current assets” line on the Company’s consolidated balance sheet as of June 30, 2013. The Company may sell additional shares of Convertible Preferred Stock, together with related Warrants, in one or more subsequent closings.

The Private Placement included purchases of Securities by two directors of the Company that, in the aggregate, purchased 114,502 shares of Convertible Preferred Stock and Warrants.

The Warrants have an initial exercise price of $1.84 per share, subject to adjustment upon the occurrence of certain customary events.  The Warrants are exercisable at any time on or after January 1, 2014 (the “Initial Exercise Date”) and terminate on the 10-year anniversary of the Initial Exercise Date.

Each share of Convertible Preferred Stock is convertible into shares of Common Stock at an initial conversion price of $1.84 per share, subject to adjustment upon the occurrence of certain customary events (the “Conversion Price”).  At the initial Conversion Price, the 381,674 shares of Preferred Stock issued at the initial closing are convertible into an aggregate of 407,599 shares of Common Stock. 

As of June 30, 2013, the carrying value of the Convertible Preferred Stock was approximately $397,000 and is included on the Company’s consolidated balance sheets as temporary equity. The change in the carrying value, or accretion, of the Convertible Preferred Stock from the issuance date to June 30, 2013 is classified as a preferred stock dividend in the amount of approximately $400 and is included as a component of “Net loss applicable to common equity” in calculating loss per share for the three and nine month periods ended June 30, 2013. As a result of the Convertible Preferred Stock containing a beneficial conversion feature, whereby the accounting conversion price is less than the fair value of the common stock, the Company recorded a preferred stock dividend in the amount of approximately $293,000 for the three and nine months ended June 30, 2013. This amount has also been recorded as an increase to additional paid-in capital and included as a component of “Net loss applicable to common equity” for the three and nine months ended June 30, 2013.

18

 

 

 

 

 

 

 

NOTE 6    SHAREHOLDERS’ EQUITY (CONTINUED)

6% Senior Convertible Preferred Stock with Warrants (Continued)

Dividends on the Convertible Preferred Stock will be payable, on a cumulative basis, in cash, at the rate per annum of 6% of the Liquidation Preference (as defined below) and will be payable quarterly, in arrears, on each March 31, June 30, September 30 and December 31, commencing on September 30, 2013. The Company is prohibited from paying any dividend with respect to shares of Common Stock or other junior securities in any quarter unless full dividends are paid on the Convertible Preferred Stock in such quarter.

In the event of a liquidation (or deemed liquidation, as described below) of the Company, the holders of the Convertible Preferred Stock shall receive in preference to the holders of Common Stock and any junior securities of the Company an amount (the “Liquidation Preference”) equal to (i) $1.965 (the “Original Issue Price”) per each outstanding share of Convertible Preferred Stock (subject to adjustment upon the occurrence of certain customary events), plus (ii) any accrued but unpaid dividends.  A Change of Control of the Company (as defined in the Certificate of Amendment) will be treated as a liquidation at the option of the holders of a majority of the Convertible Preferred Stock; provided that the amount paid to holders of Convertible Preferred Stock in such event will be equal to 101% of the Original Issue Price, plus accrued but unpaid dividends.

Each share of Convertible Preferred Stock is convertible at any time, at the option of the holder, into one share of Common Stock at the then applicable Conversion Price.  In addition, upon the consent of 80% of the holders of the Convertible Preferred Stock, the Convertible Preferred Stock automatically will be converted to shares of Common Stock at the then-applicable Conversion Price. 

On or after June 28, 2018, the Company may, at its option and upon at least 30 days prior written notice to the holders of the Convertible Preferred Stock, redeem all or any portion of the outstanding Convertible Preferred Stock in cash at a redemption price equal to the full Liquidation Preference as of the redemption date. In addition, at any time on or after June 28, 2023, each holder of the Convertible Preferred Stock will have the right to require the Company to redeem (provided that funds are legally available to do so) all or any portion of such holder’s outstanding Convertible Preferred Stock at a redemption price equal to the full Liquidation Preference of such shares of Convertible Preferred Stock as of the redemption date.

The Convertible Preferred Stock will vote together with the Common Stock on an as-converted basis on all matters except as required by law.  In addition, for so long as 50% of the shares of Convertible Preferred Stock remains outstanding, without the approval of the holders of a majority of the Convertible Preferred Stock, voting as a separate class, the Company may not: (i) authorize or issue any equity security senior to the Convertible Preferred Stock; (ii) declare or pay any dividends on the Common Stock or any series of preferred stock that ranks junior to the Convertible Preferred Stock; (iii) increase or decrease the total number of authorized shares of Convertible Preferred Stock; (iv) alter or change the rights, preferences or privileges of the Convertible Preferred Stock so as to affect materially and adversely the Convertible Preferred Stock; or (v) increase the authorized capitalization of the Company, or otherwise amend its certificate of incorporation or bylaws in a manner which adversely affects the rights or preferences of the Convertible Preferred Stock.

As of June 30, 2013, the liability associated with the Warrants was approximately $284,000 (net of issuance costs of approximately $29,000) and is included in the “Accrued expenses and other current liabilities” line of the Company’s consolidated balance sheets.

 

 

19

 

 

 

 

 

 

 

NOTE 6    SHAREHOLDERS’ EQUITY (CONTINUED)

6% Senior Convertible Preferred Stock with Warrants (Continued)

The fair value of the Warrants was determined using a Black-Scholes closed-form call option pricing model, which is considered a level 3 instrument under the fair value hierarchy. The fair value of the Warrants were estimated using the following assumptions as of June 30, 2013

Risk-free interest rate	2.5%
Dividend yield	--
Volatility	30.0%
Expected term (in years)	10.5

The change in the fair value of the convertible preferred stock warrant liability for the three and nine months ended June 30, 2013 is summarized below:

Opening balance	$           0
Issuance of convertible preferred stock warrant	312,973
Decrease in fair value	0
Closing balance	$312,973

The following table presents the Company's fair value hierarchy for liabilties, consisting of a warrant liability, measured at fair value, prior to issuance costs, on a recurring basis at June 30, 2013.

	Level 1		Level 2		Level 3		Total
Warranty liability	$--		$--		$312,973		$312,973

            Anti-takeover Provisions

Shareholder Rights Plan

On April 26, 2013, the Board 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. 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.

 

20

 

 

 

 

 

 

 

NOTE 6    SHAREHOLDERS’ EQUITY (CONTINUED)

Anti-takeover Provisions (Continued)

Shareholder Rights Plan

Initially, no separate Rights Certificates will be distributed and instead the Rights will attach to all certificates representing shares of outstanding Common Stock.  Subject to certain exceptions specified in the Rights Agreement, the Rights will separate from the Common and become exercisable on the distribution date (the “Distribution Date”), which will occur on the earlier of (i) the 10th business day (or such later date as may be determined by the Board) after the public announcement that an Acquiring Person (as defined in the Rights Agreement) has acquired beneficial ownership of 20% or more of the Common Stock then outstanding or (ii) the 10th business day (or such later date as may be determined by the Board) after a person or group announces a tender or exchange offer that would result in a person or group of affiliated and associated persons beneficially owning 20% or more of the Common Stock then outstanding. 

“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.

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, as of June 30, 2013, the Company had repurchased an aggregate of 172,603 shares at a cost of approximately $403,000, but none during the three and nine-month periods ended June 30, 2013 and 2012.

Changes in Shareholders’ Equity, as restated

Changes in shareholders’ equity for the nine-month period ended June 30, 2013 are summarized below:

 

21

 

 

 

 

 

 

 

 

NOTE 7    SHARE-BASED COMPENSATION

2011 Long Term Incentive Plan

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. Under the 2011 Plan, as of June 30, 2013, the Compensation Committee of the Company’s Board of Directors (the “Compensation Committee”) has approved awards of stock options to purchase an aggregate of 1,315,000 shares of common stock to certain of the Company’s executive officers and employees (1,020,000 shares), a consultant (160,000 shares), non-employee directors (130,000 shares), and to a non-employee executive officer (5,000 shares).  Of these awards, as of June 30, 2013, 530,500 shares were forfeited and reverted to, and are eligible for re-grant under, the 2011 Plan.  The total shares of common stock available for grants of equity awards under the 2011 Plan was 65,500 as of June 30, 2013. The prices at which equity awards may be granted and the exercise prices of stock options granted may not be less than the fair market value of the common stock as quoted at the close on the Nasdaq Stock Market on the grant date. The Compensation Committee administers the 2011 Plan.  Options generally expire ten years after the date of grant and vest one year from the date of grant for non-employee directors, and, in the case of initial grants to officers and employees, vest over five years with 50%, 25% and 25% vesting on the third, fourth, and fifth anniversary of the grant date, respectively. Options granted under a consulting agreement in November 2011 expire three years after the grant date and vested equally over the term of the consulting agreement, which concluded February 29, 2012.

2007 Equity Incentive Plan

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. Under the 2007 Plan, the Compensation Committee approved awards of restricted common stock and stock options of 977,375, in the aggregate, to certain officers, employees and non-employee directors. Of these awards, as of June 30, 2013, 278,366 shares were forfeited and reverted to, and are eligible for re-grant under, the 2007 Plan.  The total shares of common stock available for grants of equity awards under the 2007 Plan was 100,991 as of June 30, 2013. The prices at which restricted common stock may be granted and the exercise price of stock options granted may not be less than the fair market value of the common stock as quoted at the close on the Nasdaq Stock Market on the grant date. The Compensation Committee administers the 2007 Plan.  Options generally expire ten years after the date of grant, and in the case of non-employee directors, vest on the first anniversary of the date of grant. In the case of officers and employees, options either vest in equal amounts over three to five years or vest over five years with 50%, 25% and 25% vesting on the third, fourth, and fifth anniversary of the grant date, respectively. Restricted stock grants generally vest in equal proportions over three years.

1996 Stock Incentive Plan

The Company’s 1996 Stock Incentive Plan (the “1996 Plan”) expired in accordance with its terms in November 2006.  The exercise price of incentive 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 grant and generally vest in equal proportions over three years.  Unexercised options granted prior to 1996 Plan expiration remain outstanding until the earlier of exercise or option expiration. Under the 1996 Plan 30,000 fully vested common stock options are the only awards that remain outstanding and unexercised, all at exercise prices higher than the fair market value of the common stock at June 30, 2013.

 

 

22

 

 

 

 

 

 

 

NOTE 7    SHARE-BASED COMPENSATION (CONTINUED)

Stock Option Awards

Under the 2011 and 2007 Plans, the Compensation Committee has approved awards of stock options to purchase an aggregate of 1,737,500 shares of common stock to the Company’s current and certain former non-employee directors, to certain key employees, to current and certain former Company officers, and to a consultant, of which awards covering 255,000 shares from the 2007 Plan and 530,500 shares from the 2011 Plan of common stock were forfeited, with such shares reverting to the respective plans and eligible for grant. The exercise prices of the awards granted was, in each case equal, to the closing market value of the Company’s common stock on the Nasdaq Stock Market on the various grant dates.

The Company recognized an expense of approximately $48,000 and a recovery of $(81,000) of compensation in continuing operations for stock option awards in its consolidated statements of operations and comprehensive income (loss) for the three-month periods ended June 30, 2013 and 2012, respectively; and an expense of $176,000 and a recovery of $(142,000) for the nine-month periods ended June 30, 2013 and 2012, respectively

As of June 30, 2013, there was approximately $193,000 of total unrecognized compensation cost related to 414,834 shares of unvested stock option awards granted under the 2007 and 2011 Plans, which is expected to be recognized over the remainder of the weighted average vesting period (extending to August 2016).

The following table summarizes stock option activity under the 2011 Plan and 2007 Plan, from September 30, 2012 through June 30, 2013 (there was no activity during such period with respect to the 1996 Plan grants):

	Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (Years)		Aggregate Intrinsic Value
Outstanding at September 30, 2012	1,142,000		$3.31		4.2		$ --
Granted..............................................	120,000		1.14		9.3		--
Exercised...........................................	--		--		--		--
Forfeited............................................	(365,000)		3.43		--		--
Expired..............................................	--		--		--		--
Outstanding at June 30, 2013	897,000		$2.98		6.5		$ --
Options expected to vest at June 30, 2013..................................	375,151		$2.88		8.4		$--
Options vested and exercisable at June 30, 2013..................................	482,166		$3.03		4.9		$--

 

During the nine-month period ended June 30, 2013, the Company granted 120,000 stock options at a weighted average grant date fair value of $0.61. During the nine-month period ended June 30, 2012 the Company granted 420,000 stock options at a weighted average grant date fair value of $0.96.

23

 

 

 

 

 

 

 

 

NOTE 7    SHARE-BASED COMPENSATION (CONTINUED)

Stock Option Awards (Continued)

The fair value of each stock option on the date of grant was estimated using the Black-Scholes option-pricing formula applying the following assumptions for each respective period:

		For the Nine-Month Periods Ended June 30,
		2013		2012
Expected term (in years)		5.0		3.0 to 5.0
Risk-free interest rate..........		0.6%-0.7%		0.04% to 0.83%
Expected volatility..............		70.0%-70.4%		63% to 69%
Expected dividend yield.....		0%		0%
Forfeiture rate......................		5%		13%

The expected term represents the period over which the stock option awards are expected to be outstanding. 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. Accordingly, the Company used a dividend yield of zero in its assumptions. The Company estimates the expected term, volatility and forfeitures of share-based awards based upon historical data. The Company adjusted its estimated forfeiture rate effective October 1, 2011 and recognized a recovery of approximately $46,000 during the three-month period ended December 31, 2011.

Restricted Stock Awards

Under the 2011 Plan and 2007 Plan, the Compensation Committee has approved and granted awards of 554,875 shares of restricted stock, in the aggregate, to certain key employees. Of these awards, 160,134 have vested and 23,366 shares of restricted stock were forfeited and reverted to, and are eligible for re-grant under, the 2007 Plan. Vesting of restricted stock awards is generally subject to a continued service condition with one-third of the awards vesting each year on the three successive anniversary dates of the grant date, typically commencing on the first such anniversary date.  The fair value of the awards granted was equal to the closing market value of the Company’s common stock as quoted on the Nasdaq Stock Market on the grant date. During the three-month periods ended June 30, 2013 and 2012, the Company recognized approximately $59,000 and $1,000, respectively, of compensation expense in continuing operations in its consolidated statements of operations and comprehensive income (loss) related to restricted stock awards; and approximately $157,000 and $4,000 for the nine-month periods ended June 30, 2013 and 2012, respectively.

24

 

 

 

 

 

 

 

NOTE 7    SHARE-BASED COMPENSATION (CONTINUED)

Restricted Stock Awards (Continued)

The following table summarizes restricted stock activity under the 2011 Plan and 2007 Plan from September 30, 2012, through June 30, 2013.

		Shares		Weighted Average Grant Date Fair Value
Non-vested balance at September 30, 2012..................................		7,500		$2.02
Changes during the period:
Shares granted...........................................................................		371,375		1.16
Shares vested............................................................................		(7,500)		2.02
Shares forfeited.........................................................................		--		--
Non-vested balance at June 30, 2013...........................................		371,375		$1.16

                As of June 30, 2013, there was approximately $230,000 of total unrecognized compensation cost related shares of unvested restricted stock awards (reflected in the table above) granted under the 2011 Plan and 2007 Plan. That cost is expected to be recognized over the remainder of the requisite service (vesting) periods. The total grant date fair value of restricted stock that vested during the nine-month period ended June 30, 2013 was approximately $15,000.

Warrants

    As of June 30, 2013, warrants to purchase 75,000 shares of the Company’s common stock at an exercise price of $1.75 issued in fiscal year ended 1999 were outstanding. By their terms these warrants expire 90 days after a registration statement registering common stock (other than pursuant to employee benefit plans) is declared effective by the Securities and Exchange Commission. As of June 30, 2013, no such registration statement has been filed with the Securities and Exchange Commission.

NOTE 8    INCOME TAXES

The Company’s provision (benefit) for income taxes consists of the following United States Federal and State, and foreign components:

	For the Three-Month Periods Ended June 30,				For the Nine-Month Periods Ended June 30,
	2013		2012		2013		2012
Current:
Federal.......................................	$--		$--		$--		$--
State...........................................	--		--		75		--
Foreign......................................	(8,977)		(130)		(5,570)		4,850
Deferred:
Federal.....................................	(99,438)		367,299		82,082		(443,941)
State.........................................	(5,675)		20,966		4,683		(25,764)
Foreign....................................	2,068		(144,343)		(10,682)		(188,495)
Change in valuation allowance.	103,045		(243,922)		(76,083)		658,200
Income tax (benefit) expense.....	$(8,977)		$         (130)		$(5,495)		$            4,850

25

 

 

 

 

 

 

NOTE 8    INCOME TAXES (CONTINUED)

Income tax benefit from discontinued operations of approximately $(9,000) and $(100) recorded in the three-month periods ended June 30, 2013 and 2012, respectively, and income tax expense (benefit) from discontinued operations of $(6,000) and $5,000 recorded in the nine-month period ended June 30, 2013 and 2012, respectively, is attributable to Forward UK. 

As of June 30, 2013, and September 30, 2012, the Company has no unrecognized income tax benefits. At June 30, 2013, the Company had available total net operating loss carryforwards for U.S. Federal and state income tax purposes of approximately $8,154,000 and $6,515,000, respectively, expiring through 2033, resulting in deferred tax assets in respect of U.S. Federal and state income taxes of approximately $2,643,000 and $224,000, respectively. In addition, at June 30, 2013, the Company had total available net operating loss carryforwards for foreign income tax purposes of approximately $4,986,000 resulting in a deferred tax asset of $439,000 approximately, expiring through 2020.  Total net deferred tax assets, before valuation allowances, was $3,742,000 at June 30, 2013 and $3,818,000 at September 30, 2012, respectively. Undistributed earnings of the Company’s foreign subsidiaries are considered to be permanently invested; therefore, in accordance with U.S. generally accepted accounting principles, no provision for U.S. Federal and state income taxes would result. As of June 30, 2013, there were no accumulated earnings of any of the Company’s foreign subsidiaries.

As of June 30, 2013, as part of its periodic evaluation of the necessity to maintain a valuation allowance against its deferred tax assets, and after consideration of all factors, both positive and negative (including, among others, projections of future taxable income, current year net operating loss carryforward utilization and the extent of the Company’s cumulative losses in recent years), the Company determined that, on a more likely than not basis, it would not be able to use its remaining deferred tax assets (except in respect of United States income taxes in the event the Company elects to effect the repatriation of certain foreign source income of its Swiss subsidiary, which income is currently considered to be permanently invested and for which no United States tax liability has been accrued). Accordingly, the Company has determined to maintain a full valuation allowance against its total deferred tax assets. As of June 30, 2013 and September 30, 2012, the valuation allowances were approximately $3,742,000 and $3,818,000, respectively.  If the Company determines in a future reporting period that it will be able to use some or all of its deferred tax assets, the adjustment to reduce or eliminate the valuation allowance would reduce its tax expense and increase after-tax income. Changes in deferred tax assets and valuation allowance are reflected in the “Income tax expense (benefit)” line item of the Company’s consolidated statements of operations and comprehensive income (loss).

As of June 30, 2013 and September 30, 2012, the Company has not accrued any interest and penalties related to uncertain tax positions. It is the Company’s policy to recognize interest and/or penalties, if any, related to income tax matters in income tax expense in the consolidated statements of operations and comprehensive income (loss). For the periods presented in the accompanying consolidated statements of operations and comprehensive income (loss), no income tax related interest or penalties were assessed or recorded. All fiscal years prior to the fiscal year ended September 30, 2009 are closed to Federal and State examination, except with respect to net operating losses generated in prior fiscal years.

NOTE 9    INCOME (LOSS) PER SHARE

Basic 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 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 shares that would be issued upon the exercise of stock options and warrants, computed using the treasury stock method. Diluted loss per share data for the three-month periods ended June 30, 2013 and 2012, and the nine-month period ended June 30, 2013 and 2012, exclude 1,650,487 and 1,224,500 of outstanding common equivalent shares as inclusion of such shares would be anti-dilutive.

 

26

 

 

 

 

 

 

 

NOTE 10   COMMITMENTS AND CONTINGENCIES

Employment and Agreements

Robert Garrett Jr. Employment Agreement

Under his employment agreement, which was effective as of March 1, 2012, Mr. Robert Garrett Jr. is currently employed as the Company’s Chief Executive Officer at 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 $50,000.  In addition, 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. Mr. Garrett’s employment agreement also entitles him to awards of stock options to purchase an aggregate of 200,000 shares of the Company’s common stock pursuant to the 2011 Plan, which have been granted in their entirety.

Mr. Garrett’s employment agreement provides for successive one-year renewal terms, unless either party provides written notice of its intention not to renew the agreement not later than 90 days prior to the end of the term (or renewal period). In the event of the termination of Mr. Garrett’s employment, depending on the circumstances, Mr. Garrett could be entitled to receive a severance payment which could be up to (12) twelve months of his salary, and under certain circumstances, the immediate vesting of any unvested options pursuant to applicable equity compensation plans, as well as any accrued discretionary bonus.

Mr. Garrett’s employment agreement binds him to customary non-competition and non-solicitation covenants of up to one year following the expiration of the employment term.

James O. McKenna Employment Agreement

James O. McKenna serves as the Company’s Chief Financial Officer, Treasurer and Assistant Secretary pursuant to an Amended Employment Agreement, dated as of April 1, 2011 (the “Employment Agreement”), between the Company and Mr. McKenna.  On November 8, 2012, Mr. McKenna’s Employment Agreement was further amended (the “Amendment”) in connection with the logistical coordination, planning and implementation of the move of the Company’s executive offices to West Palm Beach, Florida from Santa Monica, California, and his relocation from California to Florida at the Company’s request. 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 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. Approximately $86,000 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 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. The term of the Employment Agreement expires on December 31, 2013, with automatic renewal for successive terms of one year each.  Pursuant to the 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 Employment Agreement).

Guarantee Obligation

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 Fiscal representative in The Netherlands for the purpose of providing services in connection with any value added tax matters. As part of this agreement, which succeeds a substantially similar agreement (except as to the amount and term of the undertaking) between the parties that expired June 30, 2009, Forward Switzerland agreed to provide an undertaking (in the form of a bank letter of guarantee) to the logistics provider with respect to any value added tax liability arising in The Netherlands that the logistics provider is required to pay to Dutch tax authorities on its behalf.

27

 

 

 

 

 

 

 

NOTE 10   COMMITMENTS AND CONTINGENCIES (CONTINUED)

Guarantee Obligation (Continued)

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 $98,000 as of June 30, 2013) paid by such bank to the logistics provider in order to satisfy such undertaking pursuant to the bank letter of guarantee.  Forward Switzerland would be required to perform under the guarantee agreement only in the event that: (i) a value added tax liability is imposed on the Company's sales in The Netherlands, (ii) the logistics provider asserts that it has been called upon in its capacity as surety by the Dutch Receiver of Taxes to pay such taxes, (iii) Forward Switzerland or the Company on its behalf fails or refuses to remit the amount of value added tax due to the logistics provider upon its demand, and (iv) the logistics provider makes a drawing under the bank letter of guarantee. Under the Representation Agreement, Forward Switzerland agreed that the letter of guarantee would remain available for drawing for three years following the date that its relationship terminates with the logistics provider to satisfy any value added tax liability arising prior to expiration of the Representation Agreement but asserted by The Netherlands after expiration.

The initial term of the bank letter of guarantee expired February 28, 2011, but renews automatically for one-year periods until February 28, 2014, unless Forward Switzerland provides the Swiss bank with written notice of termination at least 60 days prior to the renewal date. It is the intent of Forward Switzerland and the logistics provider that the bank letter of guarantee amount be adjusted annually. In consideration of the issuance of the letter of guarantee, Forward Switzerland has granted the Swiss bank a security interest in all of its assets on deposit with, held by, or credited to Forward Switzerland’s accounts with, the Swiss bank (approximately $1,245,000 at June 30, 2013). As of June 30, 2013, the Company had not incurred a liability in connection with this guarantee.

NOTE 11  BUYING AGENCY AND SUPPLY AGREEMENT

On March 12, 2012, the Company, entered into a Buying Agency and Supply Agreement (the “Agreement”) with Forward Industries Asia-Pacific Corporation (f/k/a Seaton Global Corporation), a British Virgin Islands corporation (“Forward China”), dated as of March 7, 2012.  The Agreement provides that, upon the terms and subject to the conditions set forth therein, Forward China shall act as the Company’s exclusive buying agent and supplier of Products (as defined in the Agreement) in the Asia Pacific region.  The Company shall purchase products at Forward China’s cost, and shall pay a service fee on the net purchase price.  The Agreement shall terminate on March 11, 2014, subject to renewal.  Terence Wise, a director of the Company, is a principal of Forward China. In addition, Jenny P. Yu, a Managing Director of Forward China, owns shares of the Company’s common stock. The Company recognized approximately $306,000 and $270,000, respectively, during the three-month periods ended June 30, 2013 and 2012, and $798,000 and $332,000, respectively, during the nine-month periods ended June 30, 2013 and 2012, of Forward China service fees, which are included as a component of costs of goods sold in continuing operations in the accompanying consolidated statements of operations and comprehensive income (loss).

28

 

 

 

 

 

 

 

NOTE 12  INVESTMENT MANAGEMENT AGREEMENT

  On April 16, 2013, the Company entered into an Investment Management Agreement (the “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.

Pursuant to the Agreement, LCA is authorized, subject to supervision of the Investment Committee of the Board and the terms and conditions of the Agreement, to take all actions and make all decisions regarding the investment and reinvestment of the assets of the Account utilizing the Investment Strategy (as defined in the Agreement).  As compensation for its services to the Company, LCA shall be entitled to advisory fees, comprised of an asset-based fee and a performance fee, as provided in the Agreement.  The asset-based fee will equal 1% per annum of the average Account Net Asset Value (“Account NAV”).  The performance fee will equal 20% of the increase (if any) in the Account NAV over an annual period. No performance fee will be 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 will reimburse LCA for certain investment and operational expenses.  Under the 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 Agreement, the Company may make a complete cash withdrawal from the Account immediately without LCA’s consent. During the three and nine-month periods ended June 30, 2013, the Company recognized approximately $6,000 of expense in continuing operations in its consolidated statements of operations and comprehensive income (loss) related to asset based advisory fees. The Company has not recorded any expense related to performance based advisory fees during the three and nine-month periods ended June 30, 2013.

The Agreement is effective as of February 1, 2013 and shall continue until the second anniversary of the effective date.  Thereafter, the term of the Agreement shall 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 Agreement at the end of the then current term.

NOTE 13  LEGAL PROCEEDINGS

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 June 30, 2013, 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.

NOTE 14  OPERATING SEGMENT INFORMATION

As of June 30, 2013, the Company reported and managed its continuing operations based on a single operating segment: the design and distribution of carry and protective solutions, primarily for hand held electronic devices. Products designed and distributed by this segment include carrying cases and other accessories for medical monitoring and diagnostic kits, portable consumer electronic devices (such as smartphones, tablets, personnel computers, notebooks, and GPS devices), and a variety of other portable electronic and non-electronic products (such as firearms, sporting, and other recreational products). This segment operates in geographic regions that include primarily APAC, the Americas, and Europe. Geographic regions are defined by reference primarily to the location of the customer or its contract manufacturer.

On June 21, 2012, the Company determined to wind down its Retail segment, which commenced during the three-month period ended December 31, 2011, 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 top line growth and cost rationalizations in the OEM business. The Company has substantially completed its exit of its Retail business as of March 31, 2013. The Company has not had, and does not expect to have, any continuing involvement in the Retail business after this date.

 

 

29

 

 

 

 

 

 

 

NOTE 14  OPERATING SEGMENT INFORMATION (CONTINUED)

Revenues from External Customers

The following table presents net sales by geographic region.

	(dollars in millions)				(dollars in millions)
	For the Three-Month Periods Ended June 30,				For the Nine-Month Periods Ended June 30,
	2013		2012		2013		2012
Americas:
United States..............................	$2.1		$2.7		$7.5		$5.9
Other............................................	0.8		0.5		1.2		1.1
Total Americas..........................	2.9		3.2		8.7		7.0
APAC:
Hong Kong.................................	2.9		2.6		5.5		7.4
Other............................................	0.9		0.7		2.6		1.5
Total APAC................................	3.8		3.3		8.1		8.9
Europe:
Germany......................................	1.1		0.4		4.7		2.6
Poland.........................................	0.6		0.7		1.7		1.2
Other...........................................	0.2		0.1		0.2		0.4
Total Europe..............................	1.9		1.2		6.6		4.2
Total net sales*........................	$8.6		$7.7		$23.4		$20.0

* Table may not total due to rounding.

Long-Lived Assets (Net of Accumulated Depreciation and Amortization)

Identifiable long-lived assets, consisting predominately of property and equipment, by geographic region are as follows:

 

 

30

 

 

 

 

 

 

 

NOTE 15              SUBSEQUENT EVENTS

                On August 7, 2013, the Company completed the sale of (i) an additional 216,282 shares of 6% Senior Convertible Preferred Stock and (ii) Warrants to purchase a total of 216,282 shares of Common Stock to accredited investors in the Private Placement pursuant to the terms of securities purchase agreements (“Purchase Agreements”), dated August 7, 2013. The Purchase Agreements were entered into in connection with the second closing under the Private Placement (the “Second Closing”) following the initial closing under the Private Placement which occurred on June 28, 2013 (the “Initial Closing”).  See Note 6 to our Consolidated Financial Statements - “Shareholders’ Equity - 6% Senior Convertible Preferred Stock” and “Part II. Other Information, Item 2. Unregistered Sales of Equity Securities and Use of Proceeds” in this Form 10-Q/A for a description of the Initial Closing. 

                The Second Closing resulted in gross proceeds of approximately $425,000 to the Company and, together with the gross proceeds of approximately $750,000 from the Initial Closing, amounts to total gross proceeds of approximately $1,175,000 from the Private Placement through the date of the Second Closing.  Together with the Securities sold in the Initial Closing, the Company sold a total of 597,956 shares of 6% Senior Convertible Preferred Stock and Warrants to purchase 597,956 shares of Common Stock in the Private Placement as of the date of the Second Closing. The Company may sell additional shares of 6% Senior Convertible Preferred Stock, together with related Warrants, in one or more subsequent closings.

 

 

 

31