UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 20162019
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 0-6669001-34780
FORWARD INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
| New York | 13-1950672 | |
| (State or other jurisdiction of | (I.R.S. Employer Identification No.) | |
| incorporation or organization) |
477 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)
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $0.01 par value per share
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
| Common Stock, par value $0.01 | FORD | The Nasdaq Stock Market |
Securities registered pursuant to Section 12(g) of the Act:
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
☐ Yes ☒ No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act
Act. ☐ Yes ☒ No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
☒ Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rue 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
☒ Yes ☐ No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this form 10-K. [X]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.
See the definitions of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act).
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☐ Large accelerated filer | |
☐ Non-accelerated filer (Do not check if a smaller reporting company) ☐ Emerging growth company | ☐ Accelerated filer ☒ Smaller reporting company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) 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
The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, as of the last business day of the Registrant’s most recently completed second fiscal quarter was:was approximately $7,800,000.$9,400,000.
As of December 9, 2016, 8,780,83016, 2019, 9,533,851 shares of the Registrant’s common stock were outstanding.
Documents Incorporated by Reference
Portions of the registrant's Proxy Statement for the 20172020 Annual Meeting of Shareholders are incorporated herein by reference in Part III of this Annual Report on Form 10-K to the extent stated herein. Such Proxy Statement will be filed with the Securities and Exchange Commission within 120 days of the registrant's fiscal year ended September 30, 2016.2019.
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Note Regarding Use of Certain Terms
In this Annual Report on Form 10-K, unless the context otherwise requires, the following terms have the meanings assigned to them as set forth below:
“Forward”, “Forward Industries”, “we”, “our”, and the “Company” refer to Forward Industries, Inc., a New York corporation, together with its consolidated subsidiaries;
“Common stock” 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 UK” refers to Forward Industries’ wholly owned subsidiary Forward Industries UK Limited, a UK corporation;
“IPS” refers to Forward Industries’ wholly-owned subsidiary Intelligent Product Solutions, Inc., a New York corporation;
“Forward China” refers to Forward Industries Asia-Pacific Corporation (f/k/a Seaton Global Corporation), a British Virgin Islands registered corporation that is Forward’s exclusive sourcing agent in the Asia-Pacific region;Asia Pacific Region;
“U.S. GAAP” refers to accounting principles generally accepted in the United States;States of America;
“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 2016”2019” refers to our fiscal year ended September 30, 2016;2019;
“Fiscal 2015”2018” refers to our fiscal year ended September 30, 2015;2018;
“Europe” refers to the countries included in the European Union;
“EMEA Region” meansrefers to 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 America, Central America, and South America; and
“OEM” refers to Original Equipment Manufacturer; and“Retail” refers to the retail distribution channel.Manufacturer.
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PART I ITEM 1. BUSINESS General Forward Industries, Inc. Historically, our principal customer market On January 29, 2019, the Company entered into a distribution agreement with Mooni AB International. By virtue of our strategic collaboration and distribution agreement with Mooni AB International, we have secured a portfolio of smart enabled products Through the manufacture representative agreements we Corporate History Forward In May 2001, we formed Forward Switzerland to facilitate distribution of aftermarket products under our licenses for cell phone cases with a major North American multinational and to further develop our OEM European business presence. After the expiration of the last of these licenses in March 2009, staff at Forward Switzerland was significantly reduced and in recent years has primarily served our OEM customers in Europe. In January 2018, Forward acquired IPS which resulted in IPS being a wholly-owned subsidiary of Forward. The Company believes that the design and engineering service capabilities of IPS will augment the Company’s core sourcing business. In this report, the Company uses the term “distribution” to refer to what has historically been described as the “OEM” business. However, we may refer to our customers as “OEM” customers, using a standard industry term. In addition, we use the term “design” or “design and development” to describe the acquired IPS business, to be consistent with the operating segment definitions (see Note 16 to the audited consolidated financial statements herein). Customers The Company’s distribution customers are located in (i) the Asia-Pacific Region, which we refer to as the “APAC Region”; (ii) Europe, the Middle East, and Africa, which we refer to as the “EMEA Region”; and (iii) the Americas. IPS is currently actively providing product development services for Fortune 500 companies, established mid-level companies, and start-ups. The wide range of industries served includes industrial electronics, medical and dental equipment, food/beverage, U.S. Department of Defense, certain luxury brands, and oil/gas. Products The Company’s distribution 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 and recreational products, bar code scanners, smartphones, GPS location devices, tablets, and firearms). The Company does not manufacture any of its distribution products and sources substantially all of its distribution products from independent suppliers in China, through Forward China, a related party (see Note 13 to the consolidated financial statements). Diabetic Products We sell carrying cases for blood glucose diagnostic kits (“Diabetic Products”) directly to Other Products We also sell carrying and protective solutions to The acquisition of IPS has enabled us to provide a complete range of design, engineering and development services with respect to a diverse array of consumer and industrial electronics products. These include but are not limited to medical products, smart displays, beverage vending, enterprise and mobile software applications, lighting, security and detections systems, cameras, wearables and vehicle controls. Solutions in these and other areas are designed and developed in-house, beginning at product concept, extending through design, engineering and prototype, and final design for manufacturing and Computer-Aided Design (“CAD”) files. As a combined company, we are able to provide manufacturing sourcing and final product support and delivery services for initial short-run, low volume products. Product Development In our Services offered for each engagement vary from full development utilizing a wide range of in-house design and Channels of Distribution We primarily ship our products directly to our For the Fiscal Years Ended 2015 During Fiscal Product Supply The manufacture of custom carrying cases and other carry and protective solutions generally consists of die cutting fabrics and heat sealing, gluing, sewing, and decorating (affixing logos to) the cut-outs by means of silk screening, hot-stamping, embroidering or embossing. The principal materials used in the manufacture of our products are vinyl, nylon, leather, metal and plastic parts (for clips, buckles, loops, hinges and other hardware), foam padding and cardboard, all of which are obtained Dependence on Sourcing Agent On September 9, 2015, the Company renewed a Buying Agency and Supply Agreement (the “Supply Agreement”) with Forward Suppliers We procure substantially all of our We place orders with the Agent at the time we receive firm purchase orders and/or forecasts from our There are very few suppliers for the design and development part of the business as it is a services based business. We do, however, purchase supplies and equipment to develop prototypes or “mock-ups” for design and development projects. Design business suppliers are predominantly based in the United States. Quality Assurance Forward’s quality assurance manager oversees the process to ensure that our distribution products manufactured by our Chinese suppliers meet our quality assurance IPS follows general industry standard practices for review and corrective actions related to its design services. There are Competition Distribution Business The distribution business, Design and Engineering Business The depth and breadth of the services offered, and industries served by IPS are unique. The IPS management team is aware that there are very few competitive firms that have the full set of capabilities that IPS has under one roof. There are however, numerous design and engineering companies that compete with IPS in specific industries and/or with specific targeted skills or competitive advantages. Employees As of December Regulation and Environmental Protection Our sourcing business is subject to various regulations in various jurisdictions, including the United States and member states of the European Community, that restrict the use or importation of products manufactured with compounds deemed to be hazardous. We work with our suppliers to ensure compliance with such regulations. In addition, from time to time one or more customers may require testing of our products to ensure compliance with applicable consumer safety rules and regulations or the customer’s safety or packaging protocols. Because we do not manufacture the products that we sell and distribute, compliance with federal, state and local laws and regulations pertaining to the discharge of materials into the environment, or otherwise relating to the protection of the environment, has not had, and is not anticipated to have, any direct material effect upon our capital expenditures, earnings, or competitive position. However, compliance with such laws and regulations on the part of our suppliers may result in increased costs of supply to us, particularly if domestic environmental regulation in China becomes more prevalent. We have not been engaged in any environmental litigation or incurred any material costs related to compliance with environmental or other regulations. From time to time, we incur chemical and/or safety laboratory testing expenses in order to address customer requests regarding our product materials or method of manufacture or regarding their packaging methods and standards. There are no specific regulatory or environmental requirements imposed upon the IPS business. As a paid service provider, end customers are assisted in securing regulatory certifications including UL (Underwriters Laboratories – a U.S. based safety certification organization), FCC (Federal Communications Commission – U.S. governmental certification department for electronic goods), CE (Conformité Européenne – a European certification for health, safety and environmental protection standards) and others depending on needs, product types and locations of end customers’ product markets. ITEM 1A. RISK FACTORS Investing in our common stock involves a Risks Relating to Our Business During Fiscal 2019, we generated an operating loss and negative cash flow from In Fiscal 2019, we generated an operating loss of approximately While we believe that our existing cash resources are sufficient to support our growth strategy, there can be no assurances that our growth strategy will be successful or that we will earn a return on these investments. Our distribution business remains highly concentrated in our Diabetic Products Line. If our Diabetic Products Line were to suffer the loss of a principal customer or a material decline in Revenues The loss of any of, or a material reduction in orders from, our largest customers, would materially and adversely affect our results of operations and financial condition. Our distribution business is and has been characterized by a high degree of customer concentration. Our four largest distribution customers accounted for approximately If any one or more of our The predominant percentage of our revenues is derived from sales of case accessories to our OEM customers who package our cases “in box” with their electronics. During recent years, there have been numerous federal legislative and administrative actions that have affected government programs, including adjustments that have reduced or increased payments to healthcare providers and patients. Rising threats of international tariffs, Changes in political conditions in China and changes in the state of China-U.S. relations, including the current trade war, are difficult to predict and could adversely affect the operations or financial condition of the Company. In addition, because of our involvement in the Chinese market, any deterioration in political or trade relations might cause a public perception in the U.S. or elsewhere that might cause our business to become less attractive. Such an impact could adversely affect our revenues and cash flows. We continue to encounter pressures from our largest During Fiscal In addition to margin compression from customers in general, we are encountering increased pricing from our Chinese suppliers who are reacting to inflationary increases in materials and labor costs incurred by them. In addition, prices that our Chinese vendors charge to us may reflect appreciation of the Chinese currency against the U.S. dollar, which can be passed through to us in the form of higher U.S. dollar prices. This in turn will tend to reduce gross profit if we are unable to raise our prices. Any decrease in demand for our products, coupled with pressure from the market and our customers to decrease our prices, would materially adversely affect our business, financial condition, and results of operations. Increasingly, our distribution customers are requesting that we enter into supply agreements with them that have restrictive terms and conditions. These agreements typically include provisions that increase our financial exposure, which could result in significant costs to us. Increasingly, our distribution customers are requesting that we enter into supply agreements with them. These agreements typically do not include volume commitments, but do include provisions that generally serve to increase our exposure for product liability and limited sales returns, which could result in higher costs to us as a result of such claims. In addition, these agreements typically contain provisions that seek to limit our operational and pricing flexibility and extend payment terms, which could materially adversely affect our cash flow, business, financial condition, and results of operations. Our Chairman, Chief Executive Officer and largest shareholder is In addition, we depend significantly on Forward China as our exclusive buying agent for substantially all of our component parts. As a result, we have limited visibility as to our supplier base, making it difficult to forecast future events and to plan our operations. In addition, if Forward China fails to satisfactorily perform its obligations, including payment obligations, to our suppliers or its duties to us as our exclusive buying agent as a result of financial or other difficulties or for any other reason, or if our relationship with Forward China were to suffer or we are unable to extend our agreement with Forward China which expires in October 2020, we could suffer irreparable harm resulting in substantial harm to the distribution business. Our distribution business has benefited from Our future distribution revenue growth partially depends on new outsourcing opportunities from If we are unable to provide our customers with high-quality products, and In order to maintain our existing customer base and obtain business from new If we fail to maintain an effective system of internal controls over financial reporting, we may not be able to accurately report our financial results. As a result, current and potential stockholders could lose confidence in our financial reporting, which could harm our business and the trading price of our stock. Effective internal controls over financial reporting are necessary for us to provide reliable financial reports. If we cannot maintain effective controls and reliable financial reports, our business and operating results could be harmed. We continue to work on improvements to our internal controls over financial reporting. Any failure to implement and maintain internal controls over our financial reporting or difficulties encountered in the implementation of improvements in our controls, could cause us to fail to meet our reporting obligations. Any failure to improve our internal controls over financial reporting or to address identified weaknesses in the future, if they were to occur, could also cause investors to lose confidence in our reported financial information, which could have a negative impact on the trading price of our stock. Our results of operations are subject to the risks of fluctuations in the values of foreign currencies relative to the U.S. Dollar. Our results of operations are expressed in U.S. dollars. When the U.S. dollar appreciates or depreciates in value against a currency in which all or a significant portion of revenues or other accounts receivable are denominated, such as the Euro, our results of operations can be adversely affected or benefited, respectively. The degree of impact is proportional to the amount of foreign currency expense or revenue, as the case may be, and the fluctuations in exchange rates over the period in which the effect is measured on our financial statements. In addition, such currency fluctuations may affect the comparability of our results of operations between financial periods. Future revenues are difficult to predict and are likely to show significant variability as a consequence of customer concentration. Because our revenues are highly concentrated in a few large customers, and because the volumes of these customers’ order flows to us can fluctuate markedly in a short period of time, our quarterly revenues, and consequently our results of operations, may be highly variable and subject to significant changes over a relatively short period of time. Our largest Our gross margins, and therefore our profitability, vary considerably by customer and by product, and if the revenue contribution from one or more Our gross profit margins on the distribution products we sell can vary widely depending on the product type, customer, and order size. Because of the broad variability in price ranges and product types, we anticipate that gross margins, and accordingly their impact on operating income or loss, may fluctuate depending on the relative revenue contribution from each customer or product. If our gross margins decrease, our results of operations will be adversely affected. Product manufacture is often outsourced by our Contract manufacturing firms are performing manufacturing, assembly, and product packaging functions, including the bundling of our product accessories with the Our dependence on foreign manufacturers creates quality control and other risks to our business. From time to time we may experience certain quality control, on-time delivery, cost, or other issues that may jeopardize customer relationships. Our reliance on foreign suppliers, manufacturers and other contractors involves significant risks, including risk of product quality issues and reduced control over quality assurance, manufacturing yields and costs, pricing, timely delivery schedules, the potential lack of adequate manufacturing capacity and availability of product, the lack of capital and potential misappropriation of our designs. In any such event, our reputation and our business will be harmed. Our shipments of distribution products To the extent that there are disruptions or delays in loading container cargo in ports of origin or off-loading cargo at ports of destination as a result of labor disputes, work-rules related slowdowns, tariff or World Trade Organization-related disputes, piracy, physical damage to port terminal facilities or equipment caused by severe weather or terrorist incidents, congestion in port terminal facilities, inadequate equipment to load, dock and offload container vessels or energy-related tie-ups or otherwise, or for other reasons, product shipments to our customers will be delayed. In any such case, our customer may cancel or change the terms of its purchase order, resulting in a cancellation or delay of payments to us. A closure or partial closure of port facilities or other causes of delays in the loading, importation, offloading or movement of our products to the shipping destination agreed to with our customer could result in increased expenses, as we try to avoid such delays, delayed shipments or cancelled orders, or all of the above. Depending on the severity of such consequences, this may have an adverse effect on our financial condition and results of operations. Issues with our products may lead to product liability, personal injury or property damage claims, recalls, withdrawals, replacements of products, or regulatory actions by governmental authorities that could divert resources, affect business operations, decrease sales, increase costs, and put us at a competitive disadvantage, any of which could have a significant adverse effect on our financial condition. We may experience issues with products that we source that may lead to product liability, personal injury or property damage claims, recalls, withdrawals, replacements of products, or regulatory actions by governmental authorities. Any of these activities could result in increased governmental scrutiny, harm to our reputation, reduced demand by consumers for products, decreased willingness by retailer customers to purchase our products, absence or increased cost of insurance, or additional safety and testing requirements. Such results could divert development and management resources, adversely affect our business operations, decrease sales, increase legal fees and other costs, and put us at a competitive disadvantage compared to other companies not affected by similar issues with products, any of which could have a significant adverse effect on our financial condition and results of operations. Although the Company does not intend on providing warranties on the products it distributes directly, we can provide no assurances that customers will not seek damages if any of the foregoing events took place. The The carrying solutions distribution business is highly competitive and does not pose significant barriers to entry. There are many competitors in the sale of carry solutions products to our customers including OEMs, and competition is intense. Since little or no significant proprietary technology is involved in the design, production or distribution of the types of products we sell, others may enter the business with relative ease and compete against us. Such competition may result in the diminution of our market share or the loss of one or more major Our future depends, in part, on our ability to attract and retain key sales personnel and the continued contribution of our executive officers including Terence Wise, our Chief Executive Officer, who would be difficult to replace. Our design and development business employs and contracts highly sophisticated engineers to provide our customers with a full-service product, design and development team with vast technological knowledge and capabilities. The loss of the services of any of our key If a third party asserts that we Third party lawsuits alleging our infringement of Third party lawsuits alleging our infringement of patents, trade secrets or other intellectual property rights could If we experience system interruptions, it may cause us to lose customers and may harm our business. Our inability to maintain and improve our information technology systems and infrastructure may result in system interruptions. System interruptions and slow delivery times, unreliable service levels, prolonged or frequent service outages, or insufficient capacity may prevent us from efficiently providing services to our customers on our website, which could result in our losing customers and revenue. We lease space for our data center for power, security, connectivity and other services. We also rely on third party providers for bandwidth. We do not control these vendors and it would take significant time and effort to replace them. We have experienced, and may experience in the future, website disruptions, outages and other performance problems due to a variety of factors, including infrastructure changes, human or software errors and capacity constraints. Our systems are vulnerable to damage or interruption from terrorist attacks, floods, fires, power loss, telecommunications failures, hurricanes, computer viruses, computer denial of service attacks or other attempts to harm our systems. Any such damage or interruption would adversely affect our results of operations. Because our networks and IT systems may be vulnerable to unauthorized persons hacking our systems, it could disrupt our operations and result in the theft of our proprietary information. A party who is able to breach the security measures on our networks could misappropriate either our or our customers’ proprietary information, or cause interruptions or malfunctions in our operations. Hacking of companies’ infrastructure is a growing problem. Although we believe our systems and engineering team have the capability of protecting the Company from any such hacking, we can provide you with no such assurance. If we grow and obtain more visibility, we may be more vulnerable to hacking. We may be required to expend significant capital and other resources to protect against such threats or to alleviate problems caused by breaches in security, which could have a material adverse effect on our financial performance and operating results. Our design business uses software that is highly technical, and undetected errors, if any, could adversely affect our business. Our design business may use software that is highly technical and complex. Our software has contained, and may now or in the future contain, undetected errors, bugs, flaws, corrupted data or vulnerabilities. Some errors in our software code may only be discovered after the code has been released. Any errors, bugs, flaws or corrupted data could result in damage to our reputation, loss of users, or loss of revenue, any of which could adversely affect our business and financial results. We maintain cash balances in our bank accounts that exceed the FDIC insurance limitation. We maintain our cash assets at commercial banks in the U.S. in amounts in excess of the Federal Deposit Insurance Corporation insurance limit of $250,000 and in Europe in amounts that may exceed any applicable deposit insurance limits. In the event of a failure at a commercial bank where we maintain our deposits or uninsured losses on money market or other cash equivalents in which we maintain cash balances, we may incur a loss to the extent such loss exceeds the insurance limitation, which could have a material adverse effect upon our financial conditions and our results of operations. Our Chairman and Chief Executive Officer is a significant shareholder, which makes it possible for him to have significant influence over the outcome of all matters submitted to our shareholders for approval and which influence may be alleged to conflict with our interests and the interests of our other shareholders. Terence Wise, our Chairman and Chief Executive Officer, is a significant shareholder who beneficially owns approximately Risks Related to Our Common Stock Due to factors beyond our control, our stock price may be volatile. Any of the following factors could affect the market price of our common stock: Announcements by us, or our competitors, of significant contracts, acquisitions, commercial relationships, joint ventures or capital commitments. In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been instituted. A securities class action suit against us could result in substantial costs and divert our management’s time and attention, which would otherwise be used to benefit our business. Because our common stock is not actively traded, purchasers of our stock may incur difficulty in selling their shares at or above the price they paid for them, or at all. Our average daily trading volume on The Nasdaq Capital Market (“Nasdaq”) has been approximately 14,300 shares of common stock for the six trading days prior to December 17, 2019. An active market for our common stock may never develop, or if it does, it may not be sustained. Accordingly, investors may experience difficulty is selling their shares of common stock at or above the price they paid for them, or at all. Failure to meet the continued listing requirements of Nasdaq, could result in delisting of our common stock, which in its turn would negatively affect the price of our common stock and limit investors’ ability to trade in our common stock. Our common stock trades on Nasdaq. Nasdaq rules impose certain continued listing requirements, including the minimum $1 bid price, corporate governance standards and number of public stockholders. As of December 23, 2019, our closing bid price was $1.00. If we fail to meet these continued listing requirements, Nasdaq may take steps to delist our common stock. If our common stock is delisted from The Nasdaq Capital Market, we could face significant material adverse consequences, including: a determination that our shares of common stock are a “penny stock” which will require broker-dealers trading in our common stock to adhere to more stringent rules, possibly resulting in a reduced level of trading activity in the secondary trading market for our common stock; If we become subject to a regulatory investigation, it could cause us to incur substantial costs or require us to change our business practices in a manner materially adverse to our business. From time to time, we may receive inquiries from regulators regarding our compliance with laws and other matters. We have incurred significant expenses, responding to an SEC investigation into potential insider trading by certain insiders of the Company. Although that investigation has concluded, responding to or defending other such actions will cause us to continue to incur substantial expenses and divert our management’s attention. Violation of existing or future regulatory orders or consent decrees could subject us to substantial monetary fines and other penalties that could negatively affect our financial condition and results of operations. In addition, it is possible that future orders issued by, or enforcement actions initiated by, regulatory authorities could cause us to incur substantial costs or require us to change our business practices in a manner materially adverse to our business. We do not expect to pay dividends in the future, which means that investors may not be able to realize the value of their shares except through a sale. We do not anticipate that we will, declare or pay a cash dividend. We expect to retain future earnings, if any, for our business and do not anticipate paying dividends on common stock at any time in the foreseeable future. Because we do not anticipate paying dividends in the future, the only opportunity for our shareholders to realize the creation of value in our common stock will likely be through a sale of those shares. ITEM1B. UNRESOLVED STAFF COMMENTS Not ITEM2. PROPERTIES We lease approximately We lease approximately 3,000 square feet in We We believe that each of the foregoing leased properties is adequate for the purposes for which it is used. All leases are with unaffiliated third parties. We believe that the loss of any lease would not have a material adverse effect on our operations, as we believe that we could identify and lease comparable facilities upon approximately equivalent terms. ITEM3. LEGAL PROCEEDINGS From time to time, the Company may become a party to ITEM 4. MINE SAFETY DISCLOSURES. Not Applicable. ITEM 5.MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Market for Common Stock The principal market for our common stock is On December Holders of common stock. As of December Dividends We have not paid any cash dividends on our common stock since 1987 and do not plan to pay cash dividends in the foreseeable future. The payment of dividends in the future, if any, will depend upon our results of operations, as well as our short-term and long-term cash availability, net working capital, working capital needs, and other factors, as determined by our Board of Directors. Currently, except as may be provided by applicable laws, there are no contractual or other restrictions on our ability to pay dividends if we were to decide to declare and pay them. Recent Sales of Unregistered Securities None. ITEM 6. SELECTED FINANCIAL DATA Not applicable. Generaldesigns(“Forward” or the “Company”), through its wholly-owned subsidiaries, Intelligent Product Solutions (“IPS”), Forward US, Forward Switzerland and distributesForward UK, is a single source solution provider for the full spectrum of hardware and software product design and engineering services as well as a designer and distributer of carry and protective solutions, primarilysolutions. The Company offers a full suite of product development services required to conceptualize, create, and maintain products throughout the entire product life-cycle, from product concept and design to production support and field support. Forward provides clients, both large and small, a “one-stop-shop” for hand held electronic devices, including soft-sided carrying cases, bags, clips, hand straps, protective platesproduct design, development, manufacturing, and other accessories made of leather, nylon, vinyl, plastic, PVC and other synthetic materials. Ourdistribution.ishas been original equipment manufacturers, or “OEMs” (or the contract manufacturing firms of these OEM customers), that either package ourtheir products as accessories “in box” together with their branded product offerings, or sell them through their retail distribution channels. Our OEMinclude carrying caseswhich we anticipate will be distributed through retail outlets in the United States. As a result of this collaboration and other accessoriesproduct initiatives, the Company began is investing in and building out a distribution network for blood glucose monitoring kits andretail. The distribution network will be responsible for placing products into big box retailers for retail consumption. This build out is a varietycontinuation of other portable electronic and non-electronic products (such as sporting and recreational products, bar code scanners, smartphones, GPS and location devices, tablets, firearms and other products). Our carrying cases are designed to enable these devicesour strategy to be stoweda one-stop shop for product development, manufacture and distribution and represents a significant achievement in completing our strategy of taking a pocket, handbag, briefcase, or backpack, clipped to a belt or shoulder strap, or strapped to an arm, while protecting the consumer electronic or other product from scratches, dust,concept to the consumer. We anticipate having product in retail outlets by the second fiscal quarter of 2020. We have developed a sales team that covers North America by leveraging the manufacturer's representative model. We have identified and mishandling. Our OEM customerssigned agreements with long-established firms that have years of experience and relationships with big box retailers that we are located in: (i)targeting in both the Asia-Pacific Region, whichUnited States and Canada.refercurrently have in place, we hope to gain sales coverage to retailers such as the “APAC Region”; (ii) Europe, the Middle East,Best Buy, Target, Walmart, Costco, CVS, Walgreens, Staples, Office Depot and Africa, which we refermany others. The manufacture representative model allows us to engage and support a large sales team and cover a lot of territory with a variable cost model as the “EMEA Region”; and (iii) the Americas. We do not manufacture any of our OEM products and source substantially all of our OEM products from independent suppliers in China.these representatives work on commission only. Industries was incorporated in 1961 as a manufacturer and distributer of advertising specialty and promotional products. In 1989, we acquired Forward US, a manufacturer of soft-sided carrying cases. The carrying case business became our predominant business, and in September 1997, we sold the assets relating to the production of advertising specialty and promotional products, ceasing to operate in that segment.4 OEMs (orOEM customers, or their contract manufacturers) of thesemanufacturers. These electronic monitoring kits are made for use by diabetics. We typically sell these cases at prices ranging from approximately $0.50$0.60 to $6.50$7.00 per unit. Unit volumes are sold predominantly at the lower end of this price range. We also sell higher end units ranging from approximately $18.50 to $39.00 per unit, but this represents less than 1% of net revenues. The OEMdistribution customer (or its contract manufacturer) packages our carry cases “in box” as a custom accessory for the OEM’scustomer’s blood glucose testing and monitoring kits, or to a much lesser extent, sells them through their retail distribution channels. These kits typically include a small, electronic blood glucose monitor, testing strips, lancets for drawing a drop of blood and our carrying case, customized with the manufacturer’s logo and designed to fit and secure the glucose monitor, testing strips, and lancets in separate straps, pouches, and holders. As the kits and technology change, our carrying case designs change to accommodate the changes in size, shape and layout of the electronic monitoring device, strips and lancet. For Fiscal 2016,2019, our Diabetic Products customers accounted for approximately 88%89% of our total net revenues.revenues in the distribution business, compared to 89% in Fiscal 2018.OEMsdistribution customers for a diverse array of other portable electronic and other products (“Other Products”), including sporting and recreational products, bar code scanners, smartphones, GPS and location devices, tablets, and firearms, on a made-to-order basis that are customized to fit the products sold by our OEMdistribution customers. Our selling prices for these products also vary across a broad range, depending on the size and nature of the product for which we design and sell the carry solution. For Fiscal 2016,2019, our Other Products accounted for approximately 12%11% of our total net revenues.revenues in the distribution business, compared to 11% in Fiscal 2018.5 OEMdistribution business, the product life cycle in distributing and selling our technology solutions to our OEM customers is as described below. We typically receive requests to submit product designs in connection with a customer’s introduction and rollout to market of a new product that the customer has determinedproduct. IPS collaborates with clients to accessorize and customize with a carry solution. Our OEM customers furnish the desireddetermine functionality, size and other basic specifications and requirements for the carrying solutions or other product, including the OEM’s identifying logo imprint on the product.products. Our design and production resources develop more detailed product specifications and design options for our customer’s evaluation. We then furnishprovide documentation of each phase to the customer with product samples.client and gain approval of a working prototype. Working with our suppliers and the customer, samples are modified and refined. Once approved for commercial introduction and order by our customer, we work with our suppliers to ensure conformity of commercial production to the definitive product samples and specifications. Manufacture and delivery of products in production quantities are coordinated with the customer’s manufacturing and shipment schedules so that our carry solution products are available to be packaged with the customer’s additional product (and included “in box”, as the case may be)components prior to shipment and sale, or to a lesser extent sold by ourmake the product available to the customer for direct sale through its retail distribution channels.5Marketing, Distribution,ServicesRevenues Geographic Distribution of Revenuesengineering functions, to targeted design and engineering support for clients with in-house development teams. In-house capabilities (over 100 designers and engineers including contractors) include the following:Through our wholly owned subsidiaries, Forward USForward Switzerland, we distribute and sell our products globally. The approximate percentages of net revenues from OEM customers by their geographic location for Fiscal 2016 and Fiscal 2015 are as follows:Development Net Revenues for the Fiscal Years Ended September 30, 2016 2015 APAC Region 37 % 40 % EMEA Region 36 % 34 % Americas 27 % 26 % Total 100 % 100 % The importance of the APAC Region is attributable to the fact that certain of our key customers outsource product manufacture to contract manufacturers located in China or elsewhere in Asia. In these instances, we ship product to, and product is packaged “in box” at, such contract manufacturer’s facility. If payment to us is due from the contract manufacturer, we identify the sale to its geographic location rather than that of the customer for whom the contract manufacturer is supplying product. The decrease in the APAC Region’s contribution to total net revenues in Fiscal 2016 compared to Fiscal 2015 was primarily due to the decrease in revenue contribution from Diabetic Products Customer A within the APAC Region. The increase in the EMEA Region’s contribution to total net revenues in Fiscal 2016 compared to Fiscal 2015 was primarily due to the increase in revenue contribution from Diabetic Products Customer C within the EMEA Region. The increase in the Americas contribution to total net revenues in Fiscal 2016 compared to Fiscal 2015 was primarily due to increased revenue contribution from Diabetic Products Customers C and D, partially offset by lower revenue contribution from Diabetic Products Customer B within the Americas.DistributionOEMdistribution customers (or their contract manufacturers), who package our accessory products “in box” with their branded products. Some of our customers also purchase certain of our products and offer them for sale as stand-alone accessories to complement their product offerings. Revenues by Product LineRevenues from carry and protective solutions for Diabetic Products and for Other Products (all products other than diabetic carry cases for blood glucose monitor kits) accounted for approximately the following percentages of total net revenues in Fiscal 2016 and 2015: For the Fiscal Years Ended September 30, Net Revenues: 2016 2015 Diabetic Products 88 % 83 % Other Products 12 % 17 % Totals 100 % 100 % 6 Concentration of RevenuesDistribution Hubs for Customers Four customers (including their affiliates and contract manufacturers) accounted for approximately 88% and 82% of our net revenues from continuing operations in Fiscal 2016 and 2015, respectively. All four of these “major” customers are OEMs of diabetic monitoring kits. These customers package our carry and protective solutions “in box” with their branded products, or to a lesser extent, sell them through their retail distribution channels. The approximate percentages of net revenues contributed by each of these four customers to continuing operations for Fiscal 2016 and Fiscal 2015 are as follows:6 September 30, 2016 Diabetic Products Customer A 31 % 33 % Diabetic Products Customer B 25 % 24 % Diabetic Products Customer C 19 % 15 % Diabetic Products Customer D 13 % 10 % Totals 88 % 82 % 2016 and 2015, all net revenues from products sold to OEMs were made directly by our employees, which are assigned key accounts or defined geographic sales territories. OEM Distribution Hubs We have2017, we had distribution hub arrangements with four OEMdistribution customers. Effective May 1, 2017, one of the hub arrangements was changed from consignment to FOB shipping point. Accordingly, as of September 30, 2019, we had distribution hub arrangements with three distribution customers. These arrangements obligate us to supply our products to our customer’s distribution hubs (may be multiple locations) where their products are manufactured, kitted, and/or warehoused pending sale, and where our products are packaged “in box” with the OEMdistribution customer’s products or, to a much lesser extent, distributed for retail sale. The product quantities we are required to supply to each distribution hub are based on the OEMdistribution customer’s purchase orders and forecasts. We do not recognize revenue for product shipped to a hub until we have been notified by our customer that our product has been withdrawn fromor used by the distribution hub and “consumed”.hub. Hub arrangements have had the general effect of extendingproviding financing for our customers’ inventory buildpurchases by extending the time between our placement of orders to our suppliers in order to ship and supply the hubs and the time that we are able to recognize revenue. The corollary effect is an increase in our inventory levels. Credit RiskManufacturingWe generally sell our OEM products on 30-day to 120-day credit terms customary in the industry and without interest. Historically, we have not had significant credit problems with our customers. Our significant OEM customers are large, multinational companies with good credit histories. None of these customers is or has been in default to us, and payments from all customers are generally received from them on a timely basis. When we ship products to our OEM customer’s designated contract manufacturer and invoice such manufacturer (and not the OEM customer), even though our order flows originate with and depend on our relationship with the OEM, our accounts receivable credit risk lies with the contract manufacturer. Our OEM customer does not guarantee the payment obligations of the contract manufacturer to whom the OEM requests us to ship our carrying case products, and such order volumes may be significant from time to time. In most cases, these contract manufacturers are themselves major multinational enterprises with good credit.Product Supply Manufacturingaccording tofrom suppliers based on our specifications from suppliers.specifications. We do not believe that any of the component materials or parts used by our suppliers in the manufacture of our products isare supply constrained. We believe that there are adequate available alternative sources of supply for all of the materials used to manufacture, package, and ship our products.Industries Asia-Pacific Corporation, a British Virgin Islands corporationChina (the “Agent”) on substantially the same terms as its previous buying agency and supply agreement with the Agent, which was due to expire on September 11, 2015. The Supply Agreement provides that the Agent acts as the Company’s exclusive buying agent of carry and protective solutions. The Agent also arranges for sourcing, manufacture and exportation of such products. The Company purchases products at the Agent’s cost and pays a service fee to the Agent. The service fee is calculated at $100,000 monthly plus 4% of “Adjusted Gross Profit”, which is defined as the selling price less the cost from the Agent. The Supply Agreement terminates on September 8, 2018, subjecthas been extended to renewal.October 22, 2020. Mr. Terence Wise, the Company’s Chairman, Chief Executive Officer and largest shareholder, is a principal of the Agent. See “Item 1A. – Risk Factors” regarding our dependence on the Agent.7 Suppliers supply of carrying solutions products for our distribution business from independent suppliers in China through the Agent. Depending on the product, we may require several different suppliers to furnish component parts or pieces.OEMdistribution customers for a particular product. Accordingly, we do not have minimum supply requirement agreements with our suppliers to guarantee usa supply of finished product, nor have we made purchase commitments to purchase minimum amounts from any of our suppliers. However, from time to time, we may order products from our suppliers in advance of receiving a customer purchase order, or in quantities in excess of those forecasted to us by our customer, for which they are contractually obligated to us, in order to meet our customer’s anticipated delivery demands. Beginning September 1, 2013 we began making purchases directly from Forward China. During the years ended September 30, 20162019 and 2015,2018, all of our purchases for our distribution business were made directly through Forward China.7 In orderstandards, ourstandards. He independently verifies and supervises the inspection of products are inspectedprovided by independent contractors in China whichthat may be affiliated with one or more of our suppliers. These contractors were subject to the control and supervision of Forward China’s quality assurance employees based in Hong Kong. In July 2012,2015, Forward China received its ISO 9001:2008 quality certification. Logisticscertification, which was renewed in July 2018 and is valid until July 2021.Once our productsapproved for shipment by ourno independent quality assurance procedures, our productsstandards in place for its design and engineering work. Customer specifications and scope of services are typically shipped to our customer’s destination portlaid out in the Americasproject contracts and IPS works closely with the EMEA Region on ocean-going container vessels, or by ground transportcustomer to our APAC Region customer’s locations in China or Hong Kong. In certain cases,identify and primarily at our customer’s request, we will expedite the shipment of our products by using air transportation. Most ocean-going shipments bound for the United States are off-loaded at the port of Los Angeles or San Francisco, but certain customers arrange for shipments to East Coast ports, such as Miami or Philadelphia.Insurancecorrect any quality issues that arise.We maintain commercial loss and liability,interruption, and general claims and other insurance customary for our business. We do not maintain credit insurance for our trade accounts receivable.Competition Theor OEM business, in which we engage is highly competitive in terms of product pricing, design, delivery terms, and customer service. In the production of our OEMdistribution products, we compete with numerous United States and foreign producers and distributors. Some of our competitors are substantially larger than we are and have greater financial and other resources. We believe that we sustain our competitive position through maintenance of an effective product design capability, rapid response time to customer requests for proposals and product shipment, reliable product delivery and product quality, and competitive pricing. We believe that our ability to compete based on product quality assurance considerations is enhanced by Forward China’s local presence, and their quality control, shipment capabilities and shipment capabilities.Employeesexpertise in sourcing.9, 2016,12 2019, we had 1173 full-time employees. We consider our employee relations to be satisfactory. None of our employees are covered by a collective bargaining agreement.8 89 We havehistoryhigh degree of lossesrisk. You should carefully consider the following Risk Factors before deciding whether to purchase or sell stock in the Company. Additional risks and uncertainties not presently known to us, or that we currently deem immaterial, may also impair our business operations or our financial condition. If any of the events discussed in the Risk Factors below occur, our business, consolidated financial condition, results of operations or prospects could be materially and adversely affected. In such case, the value and marketability of the common stock could decline.operations. Weoperations, we cannot assure you that we will sustainregain profitability in the future. We have incurred significant losses and negative cash flows from operations in recent prior years. We reported net income of approximately $0.6 million and incurred a net$1.4$3.1 million for the fiscal years ended September 30, 2016 and 2015, respectively, and had net cash provided by operating activities of approximately $0.8 million and net cash used in operating activities of approximately $2.0 million for the fiscal years ended September 30, 2016million. Although we generated net income in Fiscal 2018 and 2015, respectively. Further,2017, we may incur netincurred significant losses from operations in future reporting periods as we incur expenses associated with the continuation of our business as well as its subsequent development, which development cannot be guaranteed. There isFiscal 2019. We can provide no assurance our future operationsthat we will not continue to be profitable.experience operating losses. In addition to our $1.3 million commercial line of credit (the “Line of Credit”) of which approximately $1.3 million has been utilized as of the date of this report, Forward China holds a $1.6 million note which is due January 17, 2020. If we cannot generate sufficient revenues to operate profitably, we may be forced to cease, limit or suspend operations, or we may be required to raise capital to maintain or grow our operations. There is no assurance that we will be able to raise such capital.or loss of revenues from any such large customer, our business would be materially and adversely affected.offrom Diabetic Products to OEMdistribution customers accounted for approximately 88%89% of our distribution net revenues from continuing operations in Fiscal 2016.2019. As a result, our financial condition and results of operations are subject to higher risk from the loss of a major Diabetic Products customer or changes in their business practices, forpractices. For example, recentlyin 2018 a new diabetes monitoring product has been brought to the market which does not use a carrying case. If our customers use new solutions in their diabetes product lines that do not use carrying cases, our business would be materially and adversely affected.88%87% and 82%84% of distribution net revenues from continuing operations in Fiscal 20162019 and Fiscal 2015,2018, respectively. Additionally four of our largest design and development customers accounted for approximately 53% and 47% of design and development net revenues in Fiscal 2019 and Fiscal 2018 (beginning with the acquisition of IPS), respectively. Although we continue our efforts to diversify our business, we cannot provide any assurance that we will be successful. The loss of any of these customers whether as a result of its purchase of its carry solution requirements from another vendor, its decision to manufacture its own carrying cases, its decision to award its orders to one of our competitors, or otherwise, would have a material adverse effect on our financial condition, liquidity and results of operations.10 OEMdistribution customers elect to reduce or discontinue inclusion of cases “in box”, our results of operations and financial condition would be materially and adversely affected.For example, the federal healthcare reform legislation that was enacted in March 2010 (known as the Patient Protection and Affordable Care Act of 2010 (“ACA”)) may reduce reimbursement for some healthcare providers and patients while increasing reimbursement for others. In addition, ACA mandates the implementation of various programs and value and quality-based reimbursement incentives that may impact the amount of reimbursement for healthcare providers and patients. In addition and more significantly, third-party payers, including governmental health administration authorities, managed care providers and private health insurers, have increasingly challenged the price and examined the cost effectiveness of medical products and services, which has affected the reimbursement of such products to patients. Due to this uncertainty in medical reimbursements, OEMs have experienced reductions in demand and, as a result, have sought continuously to reduce expenses. Additionally, it is uncertain what impact the election of Donald Trump as President will have on health care spending in light of his campaign promise to repeal the ACA. If enacted and implemented, anyAny measures to restrict health carehealthcare spending could result in decreased sales of our products. If one or more of our OEMdistribution customers generally begin to reduce or discontinue the practice of including carry case accessories “in box” or if our customers experience reduced demand for their products as a result of political changes, we may incur a significant decline in our revenues and our results of operations and financial condition would be materially and adversely affected.If President-elect Donald Trump follows through with hisRising threats of international tariffs, including tariffs applied to put significantgoods between the U.S. and China, may materially and adversely affect our business.or other restrictions on Chinese imports,including tariffs applied to goods traded between the U.S. and China, could materially and adversely affect our revenuesbusiness and results of operationsoperations. Since the beginning of 2018, there has been increasing rhetoric, in some cases coupled with legislative or executive action, from several U.S. and foreign leaders regarding the possibility of instituting tariffs on the foreign imports of certain materials and products. More specifically, throughout 2019 and 2018, the U.S. and China imposed tariffs or announced proposed tariffs to be may materially harmed.Donald Trump’s victoryapplied in the U.S. presidential election, as well as the Republican Party maintaining controlfuture to certain of both the House of Representatives and Senateeach other’s exports. As of the United States indate of this report, the congressional election, has created uncertainty with how trade would beCompany had not been directly affected between China andby the United States. Duringtariffs implemented by President Trump on the election campaign, President-elect Trump made threats regarding cutting off trade with China and/or imposing a tariff on all imports from China.medical technology industry. If any such restrictionstariffs or tariffsany restrictions are imposed on products that we import to our customers, we would be required to raise our prices which may result in the loss of customers and harm our business. Additionally, some of our non-diabetic distribution customers and customers in the design and development business have been affected by these tariffs, specifically those who manufacture electronic products. This may cause these customers to reduce the amount of discretionary spending they use on outsource product design and engineering services supplied by IPS.9OEMdistribution customers to maintain or even decrease prices or to supply lower priced carry solutions, and expect such pressure to persist. The effects of such price constraints on our business may be exacerbated by inflationary pressures that affect our costs of supply.2016 and Fiscal 2015,2019, we experiencedcontinued to experience significant pricing pressure from our largest OEMdistribution customers to maintain or even reduce the prices we charge them. When we are unable to extract comparable concessions from our suppliers on prices they charge us, our product sales margins erode. In addition, competitors may reduce their average selling prices faster than we are able to reduce costs, which can also accelerate the rate of decline of our selling prices.11 We dependOur distribution business depends on a single exclusive buying agent who, in turn, depends on a limited number of key suppliers.a principalthe owner of Forward China, our exclusive sourcing agent in the Asia Pacific region. We have entered into a Buying Agency and Supply Agreement with Forward China whereby Forward China will act as the Company’s exclusive agent to arrange for sourcing, manufacturing and exporting the Company’s distribution products. Historically, Forward China has relied on a limited number of suppliers to supply the component parts and pieces necessary for the production of our carry and protective solutions products. As a result, our ability to effectively push back against rising material costs may diminish.diminish, although thus far Forward China has absorbed these costs. In addition, any inability to obtain supplies from a single or limited number of suppliers may result in difficulty obtaining the supplies necessary for our business and may restrict our ability to produce our carry and protective solutions products. Where practical, we intend to establish alternative sources through Forward China to mitigate the risk that the failure of any single supplier will adversely affect our business. Nevertheless, either a prolonged inability to obtain certain components or the failure of one of our suppliers to do so could impair our ability to ship products and generate revenues, which could adversely affect our operating results and damage our customer relationships.OEMscustomers deciding to outsource their carry and protective solutions assembly needs to us. If OEMsour distribution customers choose to provide these services in-house or select other providers, our distribution business could suffer.OEMs.our distribution customers. Current and prospective customers continuously evaluate our performance against other providers. They also evaluate the potential benefits of manufacturing their products themselves. To the extent that outsourcing opportunities are not available either due to OEM decisionsthese customers deciding to produce these products themselves or to use other providers, our financial results and future growth could be materially adversely affected.responsive service, or if we are unable to deliver our products and/or service to our distribution customers in a timely manner, our business, financial condition, and results of operations may be materially adversely affected.OEM customers, we must demonstrate our ability to produce our products and services at the level of quality, responsiveness, of service, timeliness, of delivery, and cost that our customers require. If our products or services are provided at what customers believe are of a substandard quality, if they are not delivered on time, if we are not responsive to our customers’ demands or if we cannot meet our customers’ requirements,their needs, our reputation as a reliable supplier of our products and a sophisticated product designer and developer would likely be damaged. If we are unable to meet anticipated product and service standards, we may be unable to obtain new contracts or keep our existing distribution customers, and this would have a material adverse effect on our business, financial condition, and results of operations.1012 If we are unable to manage our growth effectively, our business, financial condition, and results of operations could be materially adversely affected. We may experience growth in the scope and complexity of our operations. This growth may strain our managerial, financial, manufacturing, and other resources. In order to manage our growth, we may be required to continue to implement additional operating and financial controls and hire and train additional personnel. There can be no assurance that we will be able to do so in the future, and failure to do so could jeopardize our expansion plans and seriously harm our operations.OEMdistribution customers may keep consumer products with which our carry solutions are packaged “in-box” in active promotion for many months, or for a very short period of time, depending on various factors, including sales trends for the product, product development cycles, new product introductions, and our customers' competitors' product offerings. As demand for the consumer product relating to the in-box program matures and decreases, we may be forced to accept significant price and/or volume reductions in customer orders for our carry solutions, which will adversely affect revenues. TheseAdditionally, our large design and development customers may have their budgets limited from many factors including economic declines causing discretionary budgets to decline or may from-time-to-time choose to do their development work in-house. All of these factors tend to lead to a high degree of variability in our quarterly revenue levels. Significant, rapid shifts in our operating results may occur if and when one or more of these customers increases or decreases the size(s) of, or eliminates, their orders or engagement from us by amounts that are material to our business.OEMdistribution customers or products changes materially, relative to total revenues, our gross profit percentage may fluctuate.13 OEMdistribution customers to contract manufacturing firms in China and in these cases it is the contract manufacturer to which we must look for payment.OEMdistribution customer's product. As a consequence of this business practice, we often sell our carry solutionsolutions products directly to the contract manufacturing firm. This is particularly significant in the case of diabetic product sales to certain customers. In these cases, we invoice the contract manufacturing firm and not the OEMdistribution customer. Therefore, it is the contract manufacturing firm to which we must look for payment in such cases and not thatour distribution customer. If we fail to receive payment from the contract manufacturer, our ability to be paid for products already delivered would be limited. In such event, our results of our OEM customer. This may alter the credit profile of our customer base and may involve significant purchase order volumes.operations will be adversely affected.11 via container may become subject to delays or cancellation due to work stoppages or slowdowns, piracy, damage to port facilities, caused by weather or terrorism, and congestion due to inadequacy of port terminal equipment and other causes.OEMCompany does not carry product liability insurance. Although we have not had significant claims for damages or losses from the products we distribute, any uninsured claim, if successful and of significant magnitude, could have a material adverse effect on our business, prospects, results of operations or financial condition.14 OEM customers, thereby adversely affecting our net revenues, results of operations, and financial condition. Many of our competitors are larger, better capitalized and more diversified than we are and may be better able to withstand a downturn in the general economy or in the product areas in which we specialize. Potential customers may prefer the pricing terms offered by competitors. These competitors may also have less sales concentration than we do and be better able to withstand the loss of a key customer or diminution in its orders. If we are not effectively able to compete, our results of operations will be adversely affected. OurIf we fail to retain our key personnel, we may not be able to achieve our anticipated level of growth and our business could suffer ifsuffer.sales personnel and the process to replace any key personnel would involve significant time and expense and may significantly delay or prevent the achievement of our business objectives.relyare infringing on were lostits intellectual property, whether successful or not, it could subject us to us.costly and time-consuming litigation or require us to obtain expensive licenses, and our business may be adversely affected.We are highly dependent on the efforts and servicescertain key sales representatives who have account responsibility for, and have longstanding relationships withpatents, trade secrets or other intellectual property rights could cause us to do one or more of the following:largest customers. Our businessmanagement to divert substantial time to our defenses;be materially and adversely affected if we lost the services of any such individual. If we lost the services of a key sales representative, we might experiencehave a material reduction in orders from his customers, resulting in a loss of revenues, which would materially and adversely affectadverse effect on our business, results of operations and financial condition.15 18.3%17% of the outstanding shares of our common stock as of December 9, 2016.12, 2019. Mr. Wise has substantial influence over the outcome of all matters submitted to our shareholders for approval, including the election of our directors and other corporate actions. This influence may be alleged to conflict with our interests and the interests of our other shareholders. In 2014, Mr. Wise successfully launched a proxy contest to elect a different slate of directors than what our Company proposed to shareholders. In addition, such influence by Mr. Wise could have the effect of discouraging potential business partners or create actual or perceived governance instabilities that could adversely affect the price of our common stock.16 • Our failure to increase revenue in each succeeding quarter; • Our failure to achieve and maintain profitability; • Our failure to meet our revenue and earnings guidance or our failure to meet financial analysts’ performance expectations; • The loss of Forward China as our agent; • The loss of a number of buyers or our failure to attract more buyers; • The sale of a large amount of common stock by our shareholders; • Our announcement of a pending or completed acquisition or our failure to complete a proposed acquisition; • An adverse court ruling or regulatory action; • Changes in market valuations of similar companies; • Short selling activities; • Our announcement of any financing which is dilutive to our shareholders; • Our announcement of a change in the direction of our business; or • 17 • a limited availability of market quotations for our common stock; • reduced liquidity with respect to our common stock; • • a limited amount of news and analyst coverage for our company; and • a limited ability to issue additional securities or obtain additional financing in the future. 18 ApplicableApplicable.2,8152,800 square feet in West Palm Beach, Florida for our executive offices, which we rent under a lease agreement scheduled to expire in September 2020. The lease has annual escalations of 3% per year;escalations; rent payments were approximately $6,900$7,000 per month during Fiscal 2016.2019.12 In April 2011, we relocated our executive offices from Pompano Beach, Florida to offices in Santa Monica, California, which consisted ofWe lease approximately 3,40014,000 square feet in Hauppauge, New York for IPS, which we rented during Fiscal 2013rent under a lease agreement that expiredscheduled to expire in September 2016.2027. The lease hadhas annual escalations of 3.5% per year;escalations; rent payments were approximately $15,400$28,000 per month during Fiscal 2016. Beginning2019.July 2013,Ronkonkoma, New York for IPS, which we sub-leased this space for the remainder of ourrent under a lease term at rates above those that weagreement scheduled to expire in 2022. The lease has annual escalations; rent payments were contractually obligated to pay.approximately $4,400 per month during Fiscal 2019.sub-leasesublease approximately 1,300 square feet of office space in Cham, Switzerland, on a month-to-month basis, at the rate of $1,700 per month, from a tenant at the same location. We use this office as our EMEA Region headquarters from which we coordinate our sales and sales support activities throughout the EMEA Region. other legal actions or proceedings in the ordinary course of its business. As of September 30, 2016,2019, 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.13PART IIITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES19the Nasdaq Capital Market (“Nasdaq”).Nasdaq. Our common stock is traded under the symbol "FORD". The following table sets forth the high and low closing bid quotations for our common stock on Nasdaq for each quarter in the last two fiscal years: Bid Price Information for Common Stock* Fiscal 2016 Fiscal 2015 High Bid Low Bid High Bid Low Bid First Quarter $ 1.80 $ 1.08 $ 1.35 $ 0.82 Second Quarter $ 1.56 $ 1.07 $ 1.25 $ 0.70 Third Quarter $ 1.60 $ 1.11 $ 0.85 $ 0.58 Fourth Quarter $ 2.11 $ 1.02 $ 3.90 $ 0.61 *High and low bid price information as furnished by The NASDAQ Stock Market Inc.9, 2016,23, 2019, the closing bid quotationprice for our common stock was $1.39.$1.00.9, 2016,12, 2019, there were approximately 10078 holders of record of our common stock. Because many of our shares of common stock are held by brokers and other institutions on behalf of stockholders, we are unable to estimate the total number of stockholders represented by these record holders. Recent redemption of convertible preferred stock On January 9, 2015, the Company received a notice of deemed liquidation from a majority of the outstanding Convertible Preferred Stockholders in which they requested redemption of their Convertible Preferred Stock. On February 23, 2015 the Company paid an aggregate $1,287,737 to the Convertible Preferred Stockholders, in order to redeem all of the outstanding shares of Convertible Preferred Stock. See Note 7 to our audited consolidated financial statements. Securities authorized for issuance under equity compensation plans. Long-term equity based compensation is accomplished under the Forward Industries, Inc. 2007 Equity Incentive Plan, as amended (the “2007 Plan”), adopted by the Company and by its shareholders in May 2007 and amended February 2009, and the Forward Industries, Inc. 2011 Long Term Incentive Plan (the “2011 Plan”), adopted by the Company and by its shareholders in March 2011. Under the 2007 Plan, 800,000 shares of common stock were authorized for grants of awards of stock options and restricted stock, of which 7,823 shares remain available for grant as of September 30, 2016. Under the 2011 Plan, 850,000 shares of common stock were authorized for grants of awards of stock options and restricted stock, of which 451,479 shares remain available for grant as of September 30, 2016. Information relating to securities authorized for issuance under equity compensation plans as of September 30, 2016, is as follows:14 Number of securities remaining available for Number of securities future issuance under to be issued upon Weighted-average equity compensation plans exercise of exercise price of (excluding securities Plan Category outstanding options outstanding options reflected in column (a)) (a) (b) (c) Equity compensation plans approved by security holders 266,000 $ 2.27 459,302 Equity compensation plans not approved by security holders - $ - - Total 266,000 $ 2.27 459,302 15
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ITEM 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONAND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with our consolidated financial statements and related notes appearing elsewhere in this report on Form 10-K. In addition to historical information, this discussion and analysis contains forward-looking statements that involve risks, uncertainties, and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including but not limited to those set forth under “Risk Factors.”
Cautionary statement for purposes of the “Safe Harbor” provisions of the Private Securities Litigation Reform Act of 1995regarding Forward-Looking Statement
The following management’s discussion and analysis
This report includes “forward-looking statements”, as such term is used within the meaning of the Private Securities Litigation Reform Act of 1995. These “forward-looking statements” are not based onstatements include, among other things, statements regarding:
as well as other statements regarding our future operations, financial condition and involve assessments of certain risks, developments,prospects, and uncertainties in our business looking to the future. Such forward lookingstrategies. Forward-looking statements generally can be identified by the use of forward-looking terminologywords such as “may”, “will”, “should”, “expect”, “anticipate”, “estimate”, “intend”, “continue”, or “believe”, or the negatives or other variations of these terms or comparable terminology. Forward-looking"anticipates," "believes," "estimates," "expects," "intends," "plans," "predicts," "projects," "will be," "will continue," "will likely result," and similar expressions. These forward-looking statements may include projections, forecasts, or estimates of future performance and developments. Forward-looking statements contained in this Annual Report are based uponon current expectations and assumptions that are subject to risks and assessments that we believeuncertainties, which could cause our actual results to be reasonable as of the date of this Annual Report. Whether those assumptions and assessments will be realized will be determined by future factors, developments, and events, which are difficult to predict and may be beyond our control. Actual results, factors, developments, and events may differ materially and adversely from those we assumed and assessed. Risks, uncertainties, contingencies, and developments, includingreflected in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in this Management’s Discussion and Analysis of Financial Condition and Results of Operations and those identified in “Risk Factors” in Item 1A of this Annual Report on Form 10-K, could cause our future operatingand in particular, the risks discussed under the caption "Risk Factors" in Item 1A of this report and those discussed in other documents we file with the SEC. We undertake no obligation to revise or publicly release the results of any revision to differ materially from those set forth in any forward looking statement. There can be no assurance that any such forward looking statement, projection, forecast or estimate contained can be realized or that actual returns, results, or business prospects will not differ materially from those set forth in any forward looking statement.
these forward-looking statements, except as required by law. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.
Business Overview
Forward Industries, Inc. designs 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 distribution customers), that either package our products as accessories “in box” together with their branded product offerings, or sell them through their retail distribution channels. The Company’s distribution 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 and recreational products, bar code scanners, smartphones, GPS location devices, tablets, firearms). The Company’s distribution customers are located in (i) the Asia-Pacific Region, which we refer to as the “APAC Region”; (ii) Europe, the Middle East, and Africa, which we refer to as the “EMEA Region”; and (iii) the Americas. The Company disclaims any obligation to update any such factors or to publicly announce the results of any revisions todoes not manufacture any of the forward-looking statements contained herein to reflect future results, events or developments.
Business Overview
Trendsits distribution products and Economic Environmentsources substantially all of its distribution products from independent suppliers in China, through Forward China.
In June 2012,
As a result of the expansion of the design development capabilities through its wholly owned subsidiary, IPS, the Company madenow plans to introduce proprietary products to the market from concepts brought to it from a number of different sources. The Company provides clients, both big and small, a true, authentic "one-stop-shop" for product design, development, distribution and manufacturing solutions.
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On January 29, 2019, the Company entered into a distribution agreement with Mooni AB International. By virtue of our strategic collaboration and distribution agreement with Mooni AB International, we have secured a portfolio of smart enabled products which we anticipate will be distributed to retail outlets in the United States. As a result of this collaboration and other product initiatives, the Company began to invest in and build out a distribution network for retail. The distribution network will be responsible for getting products into big box retailers for retail consumption. This build out is a continuation of our strategy to be a one-stop shop for product development, manufacture and distribution and represents a significant achievement in completing the strategic decisionprocess of taking a product from concept to focus solely on its core OEM business. Initially,the consumer. We anticipate having product in retail outlets by the second fiscal quarter of 2020. We have built out a sales team that covers North America by leveraging the manufacturer's representative model. We have identified and signed agreements with long standing firms that have years of experience and relationships with the big box retailers that we implemented several key restructuring measuresare targeting in orderboth United States and Canada.
Through the manufacture representative agreements we currently have in place, we hope to improve our operating performancegain sales coverage to retailers such as Best Buy, Target, Walmart, Costco, CVS, Walgreens, Staples, Office Depot and return the Companymany others. The manufacture representative model allows us to profitability. These actions included replacing our legacy sourcingengage and quality assurance infrastructuresupport a large sales team and cover a lot of territory with a variable lower cost solution through our usemodel as these representatives work on commission only.
On February 13, 2019, the SEC served certain of an exclusive Asia-based sourcing agent (See Note 12the Company’s executive officers and the custodian of records of the Company with subpoenas related to its investigation on the trading in the notes to our Consolidated Financial Statements) and rationalizing our fixed operating expenses, including office closures and headcount reductions. Our financial results, most notably our reduction of overhead and operating expenses for Fiscal 2016, reflectCompany’s securities surrounding the impact of these restructuring measures.
With the restructuring behind us, we have turned our focus to protecting the strong competitive position we have built across several key product categories, especially our Diabetic Products Line. We have reinvested a portionannouncement of the savings generatedacquisition of IPS. The Company has cooperated with the Staff’s requests and as recently as October 24, 2019 provided the Staff with requested documents. On December 18, 2019, the Company received communication from the restructuring towards better incentivizing our sales and sales support teams, which we believe will improve our ability to provide proactive and responsive support to our existing customer base. We believe that these incentives will improve our ability to provide innovative and differentiated solutions to our existing and prospective customers. As an example, the Diabetic Products sector seems to be undergoing significant changes that, we believe, present us with meaningful opportunities if managed proactively.
We remain challenged by a highly concentrated customer base and product offering, especially with respect to our Diabetic Products Line, where we operate in a price sensitive environment in which we continue to experience volatility in demand and downward pricing pressure from our major Diabetic Products customers. We believe that future investments in our sales and sales support teams will increase our ability to expand and diversify our customer base, which we believe is essential to overcoming these challengesSEC and the impact they have on our gross margins.
In addition to our endeavors to grow and diversify our business organically, we are beginning an active search process to identify potential acquisition targetsStaff informed us that would be complementary to our existing business and allow us to further leverage our operating infrastructure. We anticipate that this search process will be ongoing with the goalinvestigation has concluded. The Company is anticipating a letter from the SEC formalizing the conclusion of identifying prospective target companies that, if acquired, would be accretive to our organic results.
We continue to be challenged by rising costs from our China-based supplier base, which causes our gross margins to narrow when we are not able to fully pass cost increases through to customers. Our dedicated Asia-based sourcing agent has made meaningful progress in areas such as quality assurance and overall operational performance during Fiscal 2016, which 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 rising material costs may diminish.the investigation.
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Variability of Revenues and Results of Operation
Because a high percentage of our revenues is highly concentrated in a few large customers, and because the volumes of these customers’ order flows to us are highly variable, with short lead times, our quarterly revenues, and consequently our results of operations, are susceptible to significant variability over a relatively short period of time.
Critical Accounting Policies and Estimates
We have identified the accounting policies and significant estimation processes below as critical to our business operations and the understanding of our results of operations. The discussion below is not intended to be comprehensive. In many cases, the accounting treatment of a particular transaction is specifically dictated by U.S. GAAP, with no need for management’s judgment of a particular transaction. In other cases, management is required to exercise judgment in the application of accounting principles with respect to particular transactions. The impact and any associated risks related to these policies on our business operations are discussed throughout this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” where such policies affect reported and expected financial results. For a detailed discussion of the applications of these and other accounting policies, see “Item 8. Financial Statements and Supplementary Data” in this Annual Report. Our preparation of our Consolidated Financial Statements requires us to make estimates and assumptions that are believed to be reasonable under the circumstances. There can be no assurance that actual results will not differ from those estimates and such differences could be significant.
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Accounts ReceivableRevenue Recognition
Accounts receivable consist of unsecured trade accounts with customers or their contract manufacturers. We perform periodic credit evaluations of our customers including an evaluation of days outstanding, payment history, recent payment trends, and perceived creditworthiness, and believe that adequate allowances for any uncollectible receivables are maintained. Credit terms to customers
Distribution Segment
The Company generally rangerecognizes revenue from net thirty (30) days to net one hundred twenty (120) days. We have not historically experienced significant credit or collection problems with our OEM customers or their contract manufacturers. At September 30, 2016 and 2015, no allowance for doubtful accounts relating to our continuing operations was deemed necessary.
Inventories
Inventories consist primarily of finished goods and are stated at the lower of cost (determined by the first-in, first-out method) or market. Based on management’s estimates, an allowance is made to reduce excess, obsolete, or otherwise un-saleable inventories to net realizable value. The allowance is established through charges to cost of goods sold in our consolidated statements of operations and comprehensive income (loss). As reserved inventory is disposed of, we charge off the associated allowance. In determining the adequacy of the allowance, management’s estimates are based upon several factors, including analyses of inventory levels, historical loss trends, sales history and projections of future sales demand. Our estimates of the allowance may change from time to time based on management’s assessments, and such changes could be material. At September 30, 2016 and 2015, there was no allowance for obsolete inventory.
Income Taxes
We account for income taxes in accordance with GAAP, which requires, among other things, recognition of future tax benefits and liabilities measured at enacted rates attributable to temporary differences between financial statement and income tax bases of assets and liabilities and to net tax operating loss carry-forwards to the extent that realization of these benefits is more likely than not. We periodically evaluate the realizability of net deferred tax assets. See Note 9 to our Consolidated Financial Statements. Our policy is to account for interest and penalties relating to income taxes, if any, in “income tax expense” in our consolidated statements of operations and comprehensive income (loss) and include accrued interest and penalties within “accrued expenses and other current liabilities” in our consolidated balance sheets, if applicable. For fiscal years ended September 30, 2016 and 2015, no income tax related interest or penalties were assessed or recorded.
Revenue Recognition
We generally recognize revenueits distribution segment from product sales to ourits customers when:when (i) 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); (ii) persuasive evidence of an arrangement exists; (iii) we havethe Company has no continuing obligations to the customer; and (iv) collection of the related accounts receivable is reasonably assured. The Company defers revenue when it receives consideration before achieving the criterioncriteria previously mentioned.
Share-Based Payment ExpenseDesign Segment
Under ASC 606, the Company applies the “cost to cost” and “right to invoice” methods of revenue recognition to the contracts with customers in the design segment. The design segment typically engages in two types of contracts: (i) Time and Material and (ii) Fixed Price contracts. The Company recognizes revenue over time on its time and material contracts utilizing a “right to invoice” method. Revenues from fixed price contracts that require performance of services that are not related to the production of tangible assets are recognized by using cost inputs to measure progress toward the completion of its performance obligations or the “cost to cost” method. Revenues from contracts that contain specific deliverables are recognized when the performance obligation has been satisfied or the transfer of goods to the customer has been completed and accepted.
Recognized revenues that will not be billed until a later date, or contract assets, are recorded as an asset and classified as a component of accounts receivable in the accompanying consolidated balance sheets. Contract assets at September 30, 2019 and 2018 were approximately $0. Contracts where collections to date have exceeded recognized revenues, or contract liabilities, are recorded as a liability and classified as a component of deferred income in the accompanying consolidated balance sheets. Contract liabilities at September 30, 2019 and 2018 were approximately $220,000 and $125,000, respectively.
Business Combinations
We recognize share-based compensation in our consolidated statements of operations and comprehensive income (loss) at
The Company allocates the grant-date fair value of stock optionspurchase consideration to the tangible assets acquired, liabilities assumed and other equity-based compensation.intangible assets acquired based on their estimated fair values. The determinationexcess of grant-datethe purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill. When determining the fair values of assets acquired and liabilities assumed, the Company makes significant estimates and assumptions, especially with respect to intangible assets.
The Company recognizes the purchase of assets and the assumption of liabilities as an asset acquisition, if the transaction does not constitute a business combination. The excess of the fair value of the purchase price is allocated on a relative fair value basis to the identifiable assets and liabilities. No goodwill is recorded in an asset acquisition.
Critical estimates in valuing certain intangible assets include but are not limited to future expected cash flows from customer relationships and developed technology, discount rates and terminal values. Our estimate of fair value is estimated usingbased upon assumptions believed to be reasonable, but actual results may differ from estimates.
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Segment Reporting
As a result of the Black-Scholes option-pricing model,acquisition of IPS, management conducts business through two distinct operating segments, which includes variables such asare also our reportable segments: distributionand design. Forward US and Forward Switzerland comprise the expected volatilitydistribution operating segment and IPS is the design operating segment. It should be noted that financial performance and results of our share price, the exercise behavior of its grantees, interest rates, and dividend yields. These variables are projected based on our historical data, experience, and other factors. Changes in any of these variables could result in material changes to the valuation of options granted in future periods and increasesoperations in the expense recognizeddesign segment for share-based payments. In the case of awards with multiple vesting periods, we have elected to usefiscal year ended September 30, 2018 only covers the graded vesting attribution method, which recognizes compensation cost on a straight-line basis over each separately vesting portionperiod following the closing of the awardacquisition of IPS on January 18, 2018 through fiscal year end on September 30, 2018. The Fiscal 2019 results presented for the design segment are for the entire fiscal year.
Goodwill and Intangible Assets
Goodwill was acquired through the IPS acquisition on January 18, 2018. The value of goodwill acquired was $2.182 million. There was no impairment as ifof September 30, 2019.
Intangible assets were acquired through the awardIPS acquisition on January 18, 2018. The intangible assets include trademark and customer relationships. The value at acquisition date of January 18, 2018 was in-substance, multiple awards. See Note 8, Share-Based Compensation, in$475,000 for the Notes to our Consolidated Financial Statements. In addition, we recognize share-based compensation to non-employees based upontrademark and $1,050,000 for the fair value, using the Black-Scholes option pricing model, determined at the deemed measurement datescustomer relationships. The intangible assets are amortized over the related contract service period.useful life which is 15 years for the trademark and 8 years for the customer relationships. Amortization of intangibles is recognized in general and administrative expenses within the design segment of operations for the periods presented. The net value of the intangible assets was approximately $827,000 and $421,000 as of September 30, 2019 for the customer relationships and trademark, respectively. The net value of intangible assets was approximately $958,000 and $453,000 as of September 30, 2018 for the customer relationships and trademark, respectively.
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Recent Accounting Pronouncements
In May 2014,
Effective October 1, 2018, the FinancialCompany adopted Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09,Codification Topic 606, “Revenue from Contracts with Customers,” which supersedesCustomers” (“ASC 606”), using the modified retrospective method. The adoption had no impact to the Fiscal 2019 results nor was there a cumulative effect adjustment for previous periods. The Company has performed a review of ASU 2014-09 as compared to its previous accounting policies for our products and services revenues and did not identify any material impact to revenue. See Note 2 of the consolidated financial statements for more details about 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 pricesguidelines under ASC 606 adopted in the ordinary coursefirst quarter 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 does not anticipate that the adoption of ASU 2015-11 will have a material impact on its consolidated financial statements.Fiscal 2019.
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 does not anticipate that the adoption of ASU 2015-17 will have a material impact 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 evaluatingadopted ASU 2016-02 effective October 1, 2019 and upon adoption of Topic 842 the potential impactCompany expects recognition of adopting this guidanceadditional assets and corresponding liabilities pertaining to its operating leases on its consolidated financial statements.balance sheets. The Company expects the adoption will result in an increase in other assets and an increase in other liabilities of approximately $3.7 million. The Company does not expect the adoption of the new standard to have a significant impact on its consolidated statements of operations and cash flows.
In MarchAugust 2016, the FASB issued ASU 2016-09,2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments,” providing additional guidance on several cash flow classification issues, with the goal of the update to reduce the current and potential future diversity in practice. The amendments in this update are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The Company early adopted ASU No. 2016-15 and the adoption did not have any impact on the Company’s consolidated financial statements.
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In the first quarter of 2019, the Company adopted FASB ASU No. 2016-16, “Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory” (“ASU 2016-16”), which requires the recognition of the income tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs. The adoption of ASU 2016-16 did not have an impact to the financial statements due to the Company’s maintenance of a full valuation allowance on the Company’s net deferred tax asset.
In January 2017, the FASB issued ASU 2017-04, “Intangibles—Goodwill and Other (Topic 350)—Simplifying the Test for Goodwill Impairment.” ASU 2017-04 simplifies the accounting for goodwill impairments by eliminating the requirement to compare the implied fair value of goodwill with its carrying amount as part of step two of the goodwill impairment test referenced in ASC 350, “Intangibles - Goodwill and Other(ASC 350).” As a result, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value. However, the impairment loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. ASU 2017-04 is effective for annual reporting periods beginning after December 15, 2019, including any interim impairment tests within those annual periods, with early application permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company adopted the standard in the first quarter of Fiscal 2019 and it had no impact on the Company’s consolidated financial statements.
In May 2017, the FASB issued ASU No. 2017-09, “Scope of Modification Accounting”, to provide guidance on which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. This ASU is effective for interim and annual periods beginning after December 15, 2017. Early adoption is permitted.Adoption of this ASU is prospective. The Company adopted ASU No. 2017-09 in the first quarter of Fiscal 2019 and the adoption did not have any impact on the Company’s consolidated financial statements.
In March 2018, the FASB issued ASU 2018-05, “Income Taxes (Topic 740), Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118.” The ASU adds various Securities and Exchange Commission (“SEC”) paragraphs pursuant to the issuance of the December 2017 SEC Staff Accounting Bulletin No. 118, “Income Tax Accounting Implications of the Tax Cuts and Jobs Act (SAB 118)”, which was effective immediately. The SEC issued SAB 118 to address concerns about reporting entities’ ability to timely comply with the accounting requirements to recognize all of the effects of the Tax Cuts and Jobs Act in the period of enactment. SAB 118 allows disclosure that timely determination of some or all of the income tax effects from the Tax Cuts and Jobs Act are incomplete by the due date of the financial statements and if possible to provide a reasonable estimate. The Company has accounted for the tax effects of the Tax Cuts and Jobs Act under the guidance of SAB 118.
In June 2018, the FASB issued ASU 2018-07, “Compensation —- Stock Compensation.” ASU 2018-07 is an accounting pronouncement which expands the scope of ASC Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. The pronouncement is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted. We are currently in the process of evaluating the effects of this pronouncement on our consolidated financial statements.
In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement - Disclosure Framework (Topic 820).” The updated guidance improves the disclosure requirements on fair value measurements. The updated guidance if effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted for any removed or modified disclosures. The Company is currently assessing the timing and impact of adopting the updated provisions.
In November 2019, the FASB issued ASU 2019-08, “Compensation – Stock Compensation (Topic 718): Improvements and Revenue from Contracts with Customers (Topic 606).” ASU 2019-08 is an accounting pronouncement which expands the scope of ASC Topic 718 to Employee Share-Based Payment Accounting,” which simplifies several aspects of the accountingprovide guidance for share-based payment transactions, including the income tax consequences, classification of awards as either equitygranted to a customer in conjunction with selling goods or liabilities, and classification on the statement of cash flows. This ASUservices accounted for under Topic 606. The pronouncement is effective for fiscal years beginning after December 15, 2016,2019 and interim periods within those fiscal years. Early adoption is permitted. The Company does not anticipateis currently evaluating the effects of this pronouncement on our consolidated financial statements along with the effects of ASU 2018-07 noted above.
In November 2019, the FASB issued ASU 2019-11, “Codification Improvements to Topic 326, Financial Instruments – Credit Losses.” ASU 2019-11 is an accounting pronouncement that amends ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” The ASU 2019-11 amendment provides clarity and improves the codification to ASU 2016-03. The pronouncement would be effective concurrently with the adoption of ASU 2016-09 will have a material2016-03. The adoption of ASU 2016-03 and ASU 2019-11, similarly, did not impact on itsthe consolidated financial statements.
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RESULTS OF OPERATIONS FOR FISCAL 20162019 COMPARED TO FISCAL 20152018
Net Income (Loss) from Continuing Operations
Income from continuing operations
Distribution Segment
Distribution segment net loss was $0.6approximately $1.8 million in Fiscal 20162019 compared to a loss of $1.6$1.3 million in Fiscal 2015. Thenet income in Fiscal 20162018. Net loss in Fiscal 2019 was primarily due to a decreasedecline in sales volume and associated gross profit in addition to an increase in operating expenses especially generalincluding approximately $159,000 in bad debt expense, approximately $350,000 increase in legal expenses related to the SEC investigation, and administrativeapproximately $110,000 for share-based compensation expense related to the vesting of shares for directors among other less significant rises in operating expenses which included the Company’s proxy defense in Fiscal 2015, offset,2019. In addition, other expense of $296,000 in part, by a declinenon-cash fair value adjustment was recorded in revenuesthe fourth quarter to adjust for the earn-out and gross profitdeferred cash consideration components for the acquisition of IPS. Whereas, in Fiscal 2018, the Company booked a positive fair value adjustment of $498,000 to the earn-out and deferred cash consideration and an income tax benefit of $747,000 resulting from the acquisition of IPS.
Design Segment
The comparative financial results presented for the design segment for Fiscal 2018 represents less than a full year of operations and should not be directly compared to Fiscal 2019 as an accurate measurement of performance. Net loss for the design segment was approximately $1.8 million for Fiscal 2019. Net loss in Fiscal 2019 Period was primarily due to project overruns and an increase in the bad debt provision. For the shortened Fiscal 2018, the design segment net income was approximately $66,000.
Main components of Net income (loss) for the Distribution and Design Segments are reflected in the table below:
| (dollars in thousands) | |||||||||||
| For the Fiscal Years Ended | |||||||||||
| September 30, | |||||||||||
| Increase | |||||||||||
2016 | 2015 | (Decrease) | |||||||||
| Net revenues | $ | 27,480 | $ | 30,014 | $ | (2,534 | ) | ||||
| Gross profit | $ | 5,080 | $ | 5,793 | $ | (713 | ) | ||||
| Less: | |||||||||||
| Sales and marketing expenses | 1,891 | 2,363 | (472 | ) | |||||||
| General and administrative expenses | 2,572 | 4,943 | (2,371 | ) | |||||||
| Other expense, net | 10 | 120 | (110 | ) | |||||||
| Income (loss) from continuing operations | $ | 607 | $ | (1,633 | ) | $ | 2,240 | ||||
Income
| Main Components of Net Income | ||||||||||||||||||||||||||||
| (amounts in thousands) | ||||||||||||||||||||||||||||
| 2019 | 2018 | Increase (Decrease) | ||||||||||||||||||||||||||
| Consolidated | Distribution | Design | Consolidated | Distribution | Design | Consolidated | ||||||||||||||||||||||
| Net revenues | $ | 37,409 | $ | 21,988 | $ | 15,421 | $ | 34,499 | $ | 24,347 | $ | 10,152 | $ | 2,910 | ||||||||||||||
| Gross profit | $ | 6,581 | $ | 3,375 | $ | 3,206 | $ | 6,568 | $ | 4,061 | $ | 2,507 | $ | 13 | ||||||||||||||
| Less: | ||||||||||||||||||||||||||||
| Sales and marketing expenses | 1,965 | 1,441 | 524 | 1,782 | 1,296 | 486 | 183 | |||||||||||||||||||||
| General and administrative expenses | 7,713 | 3,311 | 4,402 | 4,526 | 2,601 | 1,925 | 3,187 | |||||||||||||||||||||
| Operating income (loss) | $ | (3,097 | ) | $ | (1,377 | ) | $ | (1,720 | ) | $ | 260 | $ | 164 | $ | 96 | $ | (3,357 | ) | ||||||||||
| Other expense (income), net | 511 | 438 | 73 | (372 | ) | (402 | ) | 30 | 883 | |||||||||||||||||||
| Income tax benefit | (4 | ) | (4 | ) | – | (747 | ) | (747 | ) | – | 743 | |||||||||||||||||
| Net income (loss) | $ | (3,604 | ) | $ | (1,811 | ) | $ | (1,793 | ) | $ | 1,379 | $ | 1,313 | $ | 66 | $ | (4,983 | ) | ||||||||||
Net income (loss) from continuing operations per basic and diluted share was $0.07 and $(0.25)$(0.38) for Fiscal 20162019 and 2015, respectively.$0.15 for Fiscal 2018.
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Net Revenues
We generate revenue through two operating segments. The design segment revenues presented for Fiscal 2019 is for an entire fiscal year and the design segment revenues for Fiscal 2018 is for the shortened year from acquisition date of January 18, 2018 through September 30, 2018. We believe that our total revenue will increase in the future as we continue to integrate IPS business with Forward’s historical business. Due to the long-term nature of our customer projects, we anticipate the growth will take some time to materialize. We are currently working on integrating the sales forces for both the distribution and design segments of our business to explore harmonious opportunities.
The chart below indicates the revenues by operating segment for the years ended September 30, 2019 and 2018:
| (amounts in thousands) | ||||||||||||
| For the Fiscal Years Ended September 30, | ||||||||||||
| 2019 | 2018 | Increase (Decrease) | ||||||||||
| Distribution | $ | 21,988 | $ | 24,347 | $ | (2,359 | ) | |||||
| Design | 15,421 | 10,152 | 5,269 | |||||||||
| Totals | $ | 37,409 | $ | 34,499 | $ | 2,910 | ||||||
Distribution Segment
Net revenues in the distribution segment declined $2.5approximately $2.4 million, or 8%10%, to $27.5approximately $22.0 million in Fiscal 20162019 from $30.0$24.4 million in Fiscal 20152018 due to reduced revenues in both product lines.Diabetic Products and Other Products. Revenues from Diabetic Products declined $0.6approximately $2.0 million and revenues infrom Other Products declined $1.9approximately $0.4 million.
The following tables below setsset forth revenues by channel, product line and geographic location of our distribution segment customers for the periods indicated:
| Net Revenues for Fiscal Year Ended September 30, 2019 | ||||||||||||||||
| (amounts in thousands) | ||||||||||||||||
| Americas | APAC | EMEA | Total | |||||||||||||
| Diabetic products | $ | 5,187 | $ | 6,645 | $ | 7,719 | $ | 19,551 | ||||||||
| Other products | 1,126 | 1,151 | 160 | 2,437 | ||||||||||||
| Total net revenues | $ | 6,313 | $ | 7,796 | $ | 7,879 | $ | 21,988 | ||||||||
| Net Revenues for Fiscal Year Ended September 30, 2018 | ||||||||||||||||
| (amounts in thousands) | ||||||||||||||||
| Americas | APAC | EMEA | Total | |||||||||||||
| Diabetic products | $ | 5,909 | $ | 6,764 | $ | 8,901 | $ | 21,574 | ||||||||
| Other products | 1,251 | 1,102 | 420 | 2,773 | ||||||||||||
| Total net revenues | $ | 7,160 | $ | 7,866 | $ | 9,321 | $ | 24,347 | ||||||||
| Net Revenues for the Fiscal Year Ended September 30, 2016 | ||||||||||||
| (dollars in thousands) | ||||||||||||
| APAC Region | EMEA Region | Americas | Total | |||||||||
| Diabetic Products | $ | 8,807 | $ | 9,461 | $ | 5,874 | $ | 24,142 | ||||
| Other Products | 1,407 | 472 | 1,459 | 3,338 | ||||||||
| Total net revenues | $ | 10,214 | $ | 9,933 | $ | 7,333 | $ | 27,480 | ||||
| Net Revenues for the Fiscal Year Ended September 30, 2015 | ||||||||||||
| (dollars in thousands) | ||||||||||||
| APAC Region | EMEA Region | Americas | Total | |||||||||
| Diabetic Products | $ | 10,086 | $ | 8,907 | $ | 5,789 | $ | 24,782 | ||||
| Other Products | 1,846 | 1,406 | 1,980 | 5,232 | ||||||||
| Total net revenues | $ | 11,932 | $ | 10,313 | $ | 7,769 | $ | 30,014 | ||||
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Diabetic Product Revenues
We design
Forward’s distribution segment sources to the order of, and sellsells carrying cases for blood glucose diagnostic kits directly to, OEMs (or their contract manufacturers). The OEM customer or its contract manufacturer packages our carry cases “in box” as a custom accessory for the OEM’s blood glucose testing and monitoring kits, or to a lesser extent, sell them through their retail distribution channels.
Revenues from Diabetic Products declined $0.6$2.0 million to $24.1$19.6 million in Fiscal 20162019 from $24.8$21.6 million in Fiscal 2015. This decrease2018. The decline was primarily due to lower revenues from twoall of our major Diabetic Products customers (Diabetic Products Customers A and B). The decline was offset, in part, by an increase in revenuesas a result of declining customer demand. Revenues from two majorour other Diabetic Products customers (Diabetic Products Customers C and D) and a slight increase in revenues from our Other Diabetic Products customers.declined, as well.
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The following table sets forth our revenues by Diabetic Products customerProduct revenue from major customers for the periods indicated:
| (dollars in thousands) | ||||||||||
| For the Fiscal Years Ended | ||||||||||
| September 30, | ||||||||||
| Increase | ||||||||||
| 2016 | 2015 | (Decrease) | ||||||||
| Diabetic Products Customer A | $ | 8,507 | $ | 9,870 | $ | (1,363 | ) | |||
| Diabetic Products Customer B | 6,704 | 7,235 | (531 | ) | ||||||
| Diabetic Products Customer C | 5,127 | 4,485 | 642 | |||||||
| Diabetic Products Customer D | 3,662 | 3,062 | 600 | |||||||
| All other Diabetic Products Customers | 142 | 130 | 12 | |||||||
| Totals | $ | 24,142 | $ | 24,782 | $ | (640 | ) | |||
| (amounts in thousands) | ||||||||||||
| For the Fiscal Years Ended September 30, | ||||||||||||
| 2019 | 2018 | Increase (Decrease) | ||||||||||
| Diabetic Products Customer A | $ | 6,513 | $ | 6,519 | $ | (6 | ) | |||||
| Diabetic Products Customer B | 4,128 | 4,849 | (721 | ) | ||||||||
| Diabetic Products Customer C | 6,114 | 6,521 | (407 | ) | ||||||||
| Diabetic Products Customer D | 2,265 | 2,593 | (328 | ) | ||||||||
| All other Diabetic Products Customers | 531 | 1,092 | (561 | ) | ||||||||
| Total Diabetic Revenue | $ | 19,551 | $ | 21,574 | $ | (2,023 | ) | |||||
Revenues from Diabetic Products customers represented 88%89% of our net revenues for the distribution segment in both Fiscal 2016 compared to 83% of our net revenues in2019 and Fiscal 2015.2018.
Other Product Revenues
We design
The distribution segment also sources and sellsells 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 from Other Products decreased $1.9declined approximately $0.4 million to $3.3$2.4 million in Fiscal 20162019 from $5.2$2.8 million in Fiscal 2015.2018. This is primarily due to the lossnet decline of several small$0.7 million from existing customers, partially offset by increases of approximately $0.3 million from new 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 of Other Products represented 12%11% of our net revenues in both Fiscal 2016 compared2019 and Fiscal 2018.
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Design Segment
Net revenues in the design segment were approximately $15.4 million for Fiscal 2019. Net revenues were $10.2 million for the shortened Fiscal 2018 period. Net revenues increased in Fiscal 2019 due to 17%the impact of a new project from a major customer (see chart below).
The following table sets forth our totaldesign segment net revenues inby major customers for Fiscal 2015.2019 and the shortened Fiscal 2018 period:
| (amounts in thousands) | ||||||||||||
| For the Fiscal Years Ended September 30, | ||||||||||||
| 2019 | 2018 | Increase (Decrease) | ||||||||||
| Design Segment Customer A | $ | 2,985 | $ | 1,999 | $ | 986 | ||||||
| Design Segment Customer C | 1,476 | 1,078 | 398 | |||||||||
| Design Segment Customer B | 1,080 | 1,038 | 42 | |||||||||
| Design Segment Customer D | 2,616 | 16 | 2,600 | |||||||||
| All other Design Segment Customers | 7,264 | 6,021 | 1,243 | |||||||||
| Total net revenues | $ | 15,421 | $ | 10,152 | $ | 5,269 | ||||||
Gross Profit
Distribution Segment
Gross profit decreasedfor the distribution segment declined approximately $0.7 million, or 12%17%, to $5.1$3.4 million in Fiscal 20162019 from $5.8$4.1 million in Fiscal 2015.2018. As a percentage of revenues, our gross profitmargin declined to 18.5%15.3% in Fiscal 2016,2019, compared to 19.3%16.7% in Fiscal 2015.2018.
The gross profit decline was driven primarily by a year over year decrease in total sales volumes relatedin addition to global revenues.margin decline. Fiscal 20162019 revenues in the Americas region declined approximately 12% to $6.3 million primarily due to decreased revenues from Diabetic Products Customers B and D, partially offset by increased revenues from Diabetic Products Customers A and C. Fiscal 2019 revenues in the APAC Regionregion declined 14%approximately 1% to $10.2$7.8 million primarily due to decreased revenues from Diabetic Products Customer AC, partially offset by an increase in revenue from Diabetic Customers B and Other Products customers.D in that region. Fiscal 20162019 revenues in the EMEA Regionregion declined 4%approximately 16% to $9.9 million primarily due to decreased revenues from Other Products customers, partially offset by increased revenues from Diabetic Products Customers C and D. Fiscal 2016 revenues in the Americas declined 6% to $7.3$7.7 million primarily due to decreased revenues from Diabetic Products CustomerCustomers B, D and A in addition to a net decline in revenues from Other Products customers partially offset by increased revenues from Diabetic Products Customers Cin that region.
Design Segment
Gross Profit for the design segment was approximately $3.2 million for Fiscal 2019. Gross Profit for the design segment was approximately $2.5 million for the shortened Fiscal 2018 period. Gross Profit as a percentage of revenue was 20.8% for the design segment in Fiscal 2019 compared to 24.7% in Fiscal 2018. The decline in gross profit as a percentage of revenue was primarily due to project overruns for two significant customers in the first half of Fiscal 2019. We believe the shortfall for the two customers is not an ongoing issue as the projects had been completed in the second quarter of Fiscal 2019. Depreciation expense is allocated to Cost of Sales in the design segment. Depreciation expense was approximately $139,000 and D.$94,000 for Fiscal 2019 and Fiscal 2018, respectively.
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Sales and Marketing Expenses
Distribution Segment
Sales and marketing expenses declinedfor the distribution segment increased approximately $471,000,$145,000, or 20%11%, to approximately $1,891,000$1.4 million in Fiscal 20162019 from approximately $2,363,000$1.3 million in Fiscal 2015,2018. The increase was primarily due to decreased personnel costsadditional expenses related to our strategic collaboration and distribution agreement with Mooni AB International. As a result of approximately $318,000this collaboration and travelother product initiatives, the Company began to invest in and entertainment costs of approximately $148,000.build out a distribution network for retail. The distribution network will be responsible for getting products into big box retailers for retail consumption. Fluctuations in other components of “Sales and Marketing Expenses” were not material individually or in the aggregate.
Design Segment
Sales and marketing expenses for the design segment, consisting primarily of sales personnel salaries and commissions, were approximately $524,000 for Fiscal 2019. Sales and marketing expenses were approximately $486,000 for the shortened year from January 19, 2018 to September 30, 2018. Sales and marketing expenses in the design segment declined in the 2019 Period from the 2018 Period on a ratable basis as a result of a reduction in salesperson headcount.
General and Administrative Expenses
Distribution Segment
General and administrative expenses decreasedfor the distribution segment increased approximately $2,371,000,$710,000, or 48%27%, to approximately $2,572,000$3.3 million in Fiscal 20162019 from approximately $4,943,000$2.6 million in Fiscal 2015,2018, primarily due decreasedto an increase in legal fees of approximately $350,000 related to the SEC investigation, an increase in bad debt expense of approximately $159,000, an increase in personnel costs of approximately $155,000 relating to the addition of a COO, an increase of consulting and professional fees of approximately $1,484,000 (resulted from the Fiscal 2015 proxy contest and other legal matters), personnel expenses of approximately $533,000 (net of insurance recovery of $425,000$50,000 related to the accrualmigration to a new computing software platform and an increase of settlements with both the former CEOapproximately $80,000 in non-income state business taxes, partially offset by a reduction of legal, accounting and former CFO), consultingvaluation fees of approximately $166,000, travel and entertainment costs$130,000 related to the acquisition of approximately $62,000, occupancy costsIPS in the 2018 Period. Certain legal fees incurred as a result of approximately $53,000, and other general and administrative expenses of approximately $88,000.the SEC investigation are covered by an insurance policy with a $100,000 deductible. Fluctuations in other components of “General and Administrative Expenses” were not material individually material.or in the aggregate.
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Design Segment
General and administrative expenses for the design segment were approximately $4.4 million for Fiscal 2019. General and administrative expenses for the design segment were approximately $1.9 million for the shortened year from January 19, 2018 to September 30, 2018. Bad debt expense was approximately $1.9 million for Fiscal 2019 and approximately $126,000 for the shortened Fiscal 2018 period. Bad Debt expense increased primarily as a result of a full provision on outstanding receivables for a major design customer of approximately $1.6 million. Amortization of intangible assets is allocated to general and administrative expenses in the design segment. Amortization of intangible assets was approximately $162,000 and $114,000 for Fiscal 2019 and the shortened year Fiscal 2018, respectively.
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Other Income (Expense)
Distribution Segment
Other income (expense), net, for the distribution segment was approximately $438,000 of expense net, decreasedin Fiscal 2019 compared to approximately $10,000 in$402,000 of income for Fiscal 2016 from approximately $120,000 in Fiscal 2015,2018. The decrease to other income (expense) is primarily due to decreased realizedthe net fair value increase adjustment of $296,000 recognized in the fourth quarter of Fiscal 2019 compared to the $498,000 net fair value decrease adjustment recognized in the third quarter of Fiscal 2018 and unrealized losses on investmentsapproximately $43,000 of additional interest expense in marketable securitiesFiscal 2019. Fluctuations in other components of “Other Income (Expense)” were not material individually or in the aggregate.
Design Segment
Other income (expense), net, for the design segment was approximately $73,000 of expense composed primarily of net interest expense for Fiscal 2019. Other income (expense), net was approximately $30,000 for the shortened year Fiscal 2018.
Income Taxes
he Company recorded an income tax refund of approximately $110,000. 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.
RESULTS OF DISCONTINUED OPERATIONS FOR FISCAL 2016 COMPARED TO FISCAL 2015
On June 21, 2012, we determined to exit our global Retail business and focus solely on growing our OEM business. The decision to eliminate the Retail division was primarily driven by the longer than estimated path to bring it to profitability and the strong net revenues growth and cost rationalizations in the OEM business. We have substantially completed the exit of our Retail business and have not had, and do not expect to have, any continuing involvement in the Retail business after this date. Accordingly, the results of operations for the Retail division have been recorded as discontinued operations in the accompanying consolidated financial statements$4,000 for the fiscal years presented.year ended September 30, 2019. The Company generated a loss before taxes of approximately $3.6 million. The Company maintains significant net operating loss carryforwards and does not recognize a significant income tax expense (benefit) as the Company's deferred tax provision is typically offset by maintaining a full valuation allowance on the Company's net deferred tax asset.
Income from discontinued operations was $0
The Company recorded an income tax benefit of approximately $747,000 for the fiscal year ended September 30, 2018 in connection with the acquisition of IPS in January 2018. The Company generated income before taxes of approximately $632,000 in Fiscal 2016 compared to2018. The effective tax rate for Fiscal 2018 was approximately $199,000-118%. The effective tax rate differs from the statutory tax rate of 24% (34% for the first three months in Fiscal 2015.2018 and 21% for the last nine months of Fiscal 2015 income is2018) primarily due to a reduction in the $200,000 settlement withvaluation allowance as a third party related to G-Form. The Company had $280,000result of accounts receivable relating to overdue 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. Due todeferred tax liability created upon the ageacquisition of the accounts receivable and G-Form’s non-responsiveness to the Company’s communication related to the matter, the Company established a full reserve for this receivable as of September 30, 2014. In December 2014, the Company recovered $200,000 from a third party, which was recognized as other income during Fiscal 2015.IPS.
LIQUIDITY AND CAPITAL RESOURCES
Our primary sourcessource of liquidity areis our operations. The primary demand on our working capital will be:has historically been (i) operating losses, should they occur;(ii) repayment of debt obligations, and (ii)(iii) 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.
As of the filing date of this report, we had $0 available under our $1.3 million Line of Credit. The Company intends on paying down the Line of Credit as funds become available when Accounts Receivable turn over in the short-term. Additionally, Forward China holds a $1.6 million promissory note which was extended to January 17, 2020 (see Note 13 – Related Party Transactions). Although this note has been extended on multiple occasions to assist the Company with its liquidity position, we plan on funding the repayment at maturity using existing cash balances and/or obtaining an additional credit facility.
We anticipate that our liquidity and financial resources for Forward and the consolidated subsidiaries for the next twelve12 months from the date of the filing of this report will be adequate to manage our operating and financial requirements. If we have the opportunity to make a strategic acquisition or to make an investment in a product or partnership, we will require additional capital beyond our current cash balance to fund the opportunity. If we seek to raise additional capital, there is no assurance that we will be able to raise funds on terms that are acceptable to us or at all.
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At September 30, 2016,2019, our current ratio (current assets divided by current liabilities) was 3.01.4 compared to 2.42.0 at September 30, 2015;2018; our quick ratio (current assets less inventories divided by current liabilities) was 2.31.2 compared to 1.8 at September 30, 2015;2018; and our working capital (current assets less current liabilities) was $8.2approximately $3.5 million compared to $7.3approximately $7.6 million at September 30, 2015.2018. As of September 30, 2016,December 13, 2019, we had no short or long-term debt outstanding. Weapproximately $2.3 million of cash on hand.
Although we do not anticipate the need to purchase any additional material capital assets in order to carry out our business.business, it may be necessary for us to purchase equipment and other capital assets in the future, depending on demand.
Cash Flows
During the fiscal years ended September 30, 20162019 and 2015,2018, our sources and uses of cash were as follows:
Cash Flows from Operating Activities
During Fiscal 2016,2019, cash provided byused in operating activities of approximately $768,000$1,970,000 resulted primarily from a net incomeloss of approximately $607,000,$3,604,000, a decrease inreduction of accounts receivablepayable (including due to Forward China) of approximately $590,000,$975,000, a decrease in inventoriesnet loss reconciling adjustment of approximately $293,000, non-cash share-based compensation$327,000 for the fair value of approximately $236,000 and a decreasecost method investment for services provided, an increase in prepaid expenses and other current assets of approximately $155,000, partially offset by a decrease$193,000, an increase in accounts payable (including due to Forward China)other assets of approximately $709,000 and a decrease in accrued expenses and other current liabilities of approximately $446,000.
During Fiscal 2015, cash used in operating activities of approximately $2,022,000 resulted primarily from a decrease in accounts payable (including due to Forward China) of approximately $1,596,000, a net loss of approximately $1,434,000$191,000 and an increase in inventoriesinventory of approximately $492,000,$40,000, partially offset by a decrease inthe reduction of accounts receivable of approximately $671,000,$264,000, an increase in accrued expenses and other current liabilities of approximately $505,000, non-cash realized and unrealized loss on marketable securities$97,000, an increase in deferred income of approximately $110,000$95,000, and the add-back of non-cash items including bad debt expense of approximately $2,065,000, depreciation and amortization of approximately $312,000, share-based compensation expense of approximately $216,000, deferred rent amortization of approximately $16,000 and a non-cash increase of $296,000 in fair value adjustments of the earn-out consideration and deferred cash consideration.
During Fiscal 2018, cash provided by operating activities of approximately $956,000 resulted from a net income of approximately $1,379,000, a reduction in inventory of approximately $552,000, an increase in accounts payable (including due to Forward China) of approximately $575,000 and a reduction in prepaid expenses of approximately $106,000, partially offset by an increase in accounts receivable of approximately $588,000, a decrease in prepaid expenses and other current assetsdeferred income of approximately $106,000.$312,000, a reduction in accrued expenses of approximately $169,000, and the add back of non-cash items including share-based compensation of approximately $290,000, depreciation and amortization of approximately $228,000, bad debt expense of approximately $126,000, deferred rent amortization of approximately $13,000 and a non-cash reduction of deferred tax asset valuation of $747,000 and a non-cash reduction of approximately $498,000 in fair value adjustments of the earn-out consideration and deferred cash consideration.
Cash Flows from Investing Activities
In Fiscal 2016,2019, cash used infor investing activities of approximately $48,000$33,000 resulted from purchases of property and equipment.capital assets.
In Fiscal 2015,2018, cash provided byused for investing activities of approximately $908,000$1,385,000 resulted primarily from net proceeds from salesthe cash consideration of $1.93 million paid for the IPS acquisition and purchases of marketable securitiescapital assets of approximately $941,000,$56,000, partially offset by purchases of property and equipmentthe cash acquired in the IPS acquisition of approximately $33,000.$600,000.
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Cash Flows from Financing Activities
In Fiscal 2016,2019, cash used inprovided by financing activities of approximately $2,000 resulted from$726,000 consisted of $1,550,000 in borrowings on the repurchaseLine of restricted stock.Credit, offset by $600,000 in repayments on the Line of Credit, approximately $170,000 in repayments on notes payable and approximately $55,000 in repayments on capital equipment leases.
21
In Fiscal 2015,2018, cash used inprovided by financing activities of approximately $1,321,000 resulted primarily$176,000 consisted of $1,600,000 borrowed from redemptionForward China to facilitate the IPS acquisition and $900,000 in borrowings on the Line of all outstanding 6% Senior Convertible Preferred StockCredit, offset by $1.5 million in repayments on the Line of Credit, a $500,000 payment for deferred cash consideration of IPS purchase, approximately $1,288,000.$298,000 in repayments on notes payable and approximately $26,000 in repayments on capital equipment leases.
ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and notes thereto included in this Annual Report may be found beginning on page F-1 of this Annual Report on Form 10-K.
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None.
ITEM 9A.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, of the effectiveness of our disclosure controls and procedures as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”). Based on their evaluation, our Principal Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures were effective as of September 30, 2016.2019.
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Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). Our management, under the supervision and with the participation of our Principal Executive Officer and Principal Financial Officer, evaluated the effectiveness of our internal control over financial reporting as of the end of the period covered by this report. In making this assessment, our management used the criteria set forth by the Committee of Sponsor Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework as issued in 2013. Based on that evaluation, our management concluded that our internal control over financial reporting as of September 30, 20162019 was effective based on that criteria.
Our internal control over financial reporting is a process designed under the supervision of our Principal Executive Officer and Principal Financial Officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our financial statements for external reporting purposes in accordance with U.S. GAAP. Internal control over financial reporting includes those policies and procedures that:that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. GAAP, and that receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with policies or procedures may deteriorate.
Changes in Internal Control
There were no changes in our internal control over financial reporting identified in management's evaluation pursuant to Rules 13a-15(d) or 15d-15(d) of the Exchange Act during the fourth quarter of Fiscal 20162019 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
None.
22
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PART III
ITEM 10.DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The response toinformation required by this item is incorporated by reference from the discussion responsive in the Company’sto our Proxy Statement for the 20172020 Annual Meeting of Stockholders.
Stockholders to be filed with the SEC within 120 days of the fiscal year ended September 30, 2019. Our Board has adopted a Code of Business Conduct and Ethics applicable to all officers, directors and employees, which is available on our website(http: (http://www.forwardindustries.com/#inv)#gov) under "Corporate Governance." We intend to satisfy the disclosure requirement under Item 5.05 of Form 8-K regarding amendment to, or waiver from, a provision of our Code of Conduct and by posting such information on the website address and location specified above.
ITEM 11. EXECUTIVE COMPENSATION
The response toinformation required by this item is incorporated by reference from the discussion responsive in the Company’sto our Proxy Statement for the 20172020 Annual Meeting of Stockholders.Stockholders to be filed with the SEC within 120 days of the fiscal year ended September 30, 2019.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The response toinformation required by this item is incorporated by reference from the discussion responsive in the Company’sto our Proxy Statement for the 20172020 Annual Meeting of Stockholders.Stockholders to be filed with the SEC within 120 days of the fiscal year ended September 30, 2019.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The response toinformation required by this item is incorporated by reference from the discussion responsive in the Company’sto our Proxy Statement for the 20172020 Annual Meeting of Stockholders.Stockholders to be filed with the SEC within 120 days of the fiscal year ended September 30, 2019.
ITEM 14.PRINCIPAL ACCOUNTANT FEES AND SERVICES
The response toinformation required by this item is incorporated by reference from the discussion responsive in the Company’sto our Proxy Statement for the 20172020 Annual Meeting of Stockholders.Stockholders to be filed with the SEC within 120 days of the fiscal year ended September 30, 2019.
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PART IV ITEM 15.EXHIBITS AND FINANCIAL STATEMENT SCHEDULES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Dated: December FORWARD INDUSTRIES, INC. In accordance with the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated: December /s/ Terence Wise December /s/ Michael Matte December /s/ Sangita Shah /s/ James Ziglar Exhibit Exhibit Description 3.1 Restated Certificate of Incorporation 3.2 Certificate of Amendment to the Amended and Restated Bylaws 3.3 Certificate of Amendment to the Amended and Restated Bylaws 3.4 Certificate of Amendment to the Amended and Restated Bylaws 3.5 Third Amended and Restated By-Laws 4.1 Rights Agreement, dated as of April 26, 2013 10.1 Wise Employment Agreement* 10.2 Matte Employment Agreement* 10.3 1996 Stock Incentive Plan 4/25/03 10.4 2011 Long Term Incentive Plan A 10.5 2007 Equity Incentive Plan, as amended 10.6 Buying Agency and Supply Agreement - Forward Industries (Asia-Pacific) Corporation 21.1 List of Subsidiaries 23.1 Auditor Consent 31.1 CEO Certifications (302) 31.2 CFO Certification (302) 32.1 CEO and CFO Certifications (906) XBRL Instance Document XBRL Taxonomy Extension Schema Document XBRL Taxonomy Extension Calculation Linkbase Document XBRL Taxonomy Extension Definition Linkbase Document XBRL Taxonomy Extension Label Linkbase Document XBRL Taxonomy Extension Presentation Linkbase Document * Management compensatory + Certain schedules, appendices and exhibits to this agreement have been omitted in accordance with Item 601 of Regulation S-K. A copy of any omitted schedule and/or exhibit will be furnished supplementally to the Securities and Exchange Commission staff upon request. Copies of this filing (including the financial statements) and any of the exhibits referred to above will be furnished at no cost to our shareholders who make a written request to Forward Industries, Inc. FORWARD INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Shareholders of Forward Industries, Inc. and Subsidiaries Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Forward Industries, Inc. and Subsidiaries (the “Company”) as of September 30, Basis for Opinion These consolidated statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on We conducted our audits in accordance with the standards of the Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence /s/ CohnReznick LLP We have served as the Company’s auditor since 2011. December FORWARD INDUSTRIES, INC. AND SUBSIDIARIES The accompanying notes are an integral part of the consolidated financial statements. FORWARD INDUSTRIES, INC. AND SUBSIDIARIES The accompanying notes are an integral part of the consolidated financial statements. FORWARD INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF Total operating expenses Total other (income) expense, net For the Fiscal Years Ended The accompanying notes are an integral part of the consolidated financial statements. FORWARD INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASHFLOWS The accompanying notes are an integral part of the consolidated financial statements. FORWARD INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 OVERVIEW Forward Industries, Inc. (“Forward” or the “Company”) As a result of the expansion of the design development capabilities through its wholly-owned subsidiary, IPS (acquired in January 2018), the Company NOTE 2 ACCOUNTING POLICIES Use of 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 Industries, Inc. and its wholly owned subsidiaries (Forward US, Forward Switzerland, Forward UK and The Company incurred a net loss of approximately $3.6 million for the fiscal year ended September 30, 2019 and generated negative cash flow from operations of approximately $2.0 million. We believe our existing cash balance and working capital will be sufficient to meet our liquidity needs at least through December 2020. FORWARD INDUSTRIES, INC. AND SUBSIDIARIES NOTE 2 ACCOUNTING POLICIES (Continued) Segment Reporting Operating segments are defined as components of an enterprise about which separate financial information is available that is regularly evaluated by a chief operating decision maker, or Forward management, in deciding how to allocate resources and in assessing performance. As a result of the acquisition of IPS, management conducts business through two distinct operating segments, which are also our reportable segments: distributionand design. Forward US, Forward Switzerland and Forward UK comprise the distribution operating segment and IPS is the design operating segment. It should be noted that the segment reporting for design for Fiscal 2018 covers the period following the closing of the acquisition of IPS on January 18, 2018 through September 30, 2018. Organizing our business through two operating segments allows us to align our resources and manage the operations. Our management team regularly reviews operating segment revenue and operating income (loss) when assessing financial results of operating segments and allocating resources. We measure the performance of our operating segments based upon operating segment revenue and operating income (loss). Segment operating income (loss) includes revenues earned and expenses incurred directly by the operating segment, including cost of sales and selling, marketing, and general and administrative costs (see Note 16 for more discussion on operating segments). Goodwill Goodwill is an asset representing the future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognized. Goodwill was recognized as a result of the acquisition of IPS in January 2018. Goodwill is reviewed for impairment at least annually, and when triggering events occur, in accordance with the provisions of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 350, “Intangibles – Goodwill and Other.” The Company has two reporting units for purposes of evaluating goodwill impairment and perform our annual goodwill impairment test on September 30 at the end of the fiscal year. The Company has the option to perform a qualitative assessment to determine if an impairment is more likely than not to have occurred. If the Company can support the conclusion that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then the Company would not need to perform the impairment test for the reporting unit. If the Company cannot support such a conclusion or does not elect to perform the qualitative assessment, then the Company will compare the fair value of the reporting unit with its carrying amount, including goodwill. If the fair value of the reporting unit exceeds its carrying value, no impairment charge is recognized. If the fair value of the reporting unit is less than its carrying value, an impairment charge will be recognized for the amount by which the reporting unit’s carrying amount exceeds its fair value. A significant amount of judgment is required in performing goodwill impairment tests including estimating the fair value of a reporting unit and the implied fair value of goodwill. Management compared the fair value of the reporting unit, the design segment which holds the goodwill, with its carrying value. Based on management’s evaluation, there were no impairments to goodwill at September 30, 2019. FORWARD INDUSTRIES, INC. AND SUBSIDIARIES NOTE 2 ACCOUNTING POLICIES (Continued) Intangible Assets Intangible assets include trademark and customer relationships, which were acquired as part of the acquisition of IPS in January 2018 (see Note 3 for details on intangible assets acquired as part of the acquisition) and are recorded based on the estimated fair value in purchase price allocation. The intangible assets are amortized over their estimated useful lives, which are periodically evaluated for reasonableness. Our intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In assessing the recoverability of our intangible assets, we must make estimates and assumptions regarding future cash flows and other factors to determine the fair value of the respective assets. These estimates and assumptions could have a significant impact on whether an impairment charge is recognized and also the magnitude of any such charge. Fair value estimates are made at a specific point in time, based on relevant information. These estimates are subjective in nature and involve uncertainties and matters of significant judgments and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. If these estimates or material related assumptions change in the future, we may be required to record impairment charges related to its intangible assets. Management evaluated and concluded that there were no impairments of intangible assets at September 30, 2019. Cash and Cash Equivalents The Company considers all highly liquid investments with an original maturity of three months or less when purchased to be cash 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 one hundred twenty (120) days. FORWARD INDUSTRIES, INC. AND SUBSIDIARIES NOTE 2 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 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 lives for furniture, fixtures and equipment ranges from three to Leases The Company enters into various lease agreements in conducting its business. At the inception of each lease, the Company evaluates the lease agreement to determine whether the lease is an operating or capital lease. Leases may contain initial periods of free rent and/or periodic escalations. When such items are included in a lease agreement, the Company records rent expense on a straight-line basis over the initial term of a lease. The difference between the rent payment and the straight-line rent expense is recorded as a deferred rent liability. The Company expenses any additional payments under its operating leases for taxes, insurance or other operating expenses as incurred. Income Taxes The Company NOTE 2 ACCOUNTING POLICIES (Continued) Revenue Recognition Distribution Segment The Company generally recognizes revenue Under ASC 606, the Company applies the “cost to cost” and “right to invoice” methods of revenue recognition to the contracts with customers in the design segment. The design segment typically engages in two types of contracts: (i) Time and Material and (ii) Fixed Price contracts. The Company Recognized revenues that will not be billed until a later date, or contract assets, are recorded as an asset and Shipping and Handling Fees The Company includes shipping and handling fees billed to customers in net revenues and the related transportation costs in cost of goods sold. Foreign Currency Transactions 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 NOTE 2 ACCOUNTING POLICIES (Continued) Fair Value Measurements We perform fair value measurements in accordance with the guidance provided by ASC 820. ASC 820 defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required to be recorded at their fair values, we consider the principal or most advantageous market in which we would transact and consider assumptions that market participants would use when pricing the assets or liabilities, such as inherent risk, transfer restrictions, and risk of nonperformance. ASC 820 establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. An asset's or liability's categorization within the fair value hierarchy is Reclassifications Certain amounts in the accompanying fiscal 2018 financial statements have been reclassified to conform to the Share-Based Compensation Expense The Company recognizes employee and director share-based compensation in its consolidated statements of operations Business Combinations The Company allocates the fair value of purchase consideration to the tangible assets acquired, liabilities assumed and intangible assets acquired based on their estimated fair values. The excess of the purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill. When determining the fair values of assets acquired and liabilities assumed, the Company makes significant estimates and assumptions, especially with respect to intangible assets. FORWARD INDUSTRIES, INC. AND SUBSIDIARIES NOTE 2 ACCOUNTING POLICIES (Continued) The Company recognizes the purchase of assets and the assumption of liabilities as an asset acquisition, if the transaction does not constitute a business combination. The excess of the fair value of the purchase price is allocated on a relative fair value basis to the identifiable assets and liabilities. No goodwill is recorded in an asset acquisition. Critical estimates in valuing certain intangible assets include but are not limited to future expected cash flows from customer relationships and developed technology, discount rates and terminal values. Our estimate of fair value is based upon assumptions believed to be reasonable, but actual results may differ from estimates. Recent Accounting Pronouncements In May 2014, the Effective October 1, 2018, the Company adopted ASC 606 and has elected the modified retrospective method on existing contracts at the date of adoption. The Company has implemented the necessary changes to such business processes, controls and systems to effectively review and account for the new contracts under this standard. Revenues recognized from the distribution segment under ASC 606 are consistent with previous revenue recognition standards under ASC 605, whereby revenue is Regarding the Company’s design segment, the Company has evaluated the changes from adopting this FORWARD INDUSTRIES, INC. AND SUBSIDIARIES NOTE 2 ACCOUNTING POLICIES (Continued) 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 In In the first quarter of 2019, the Company adopted FASB ASU No. 2016-16, “Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory” (“ASU 2016-16”), which requires the recognition of the income tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs. The adoption of ASU 2016-16 did not have an impact to the consolidated financial statements due to the Company’s maintenance of a full valuation allowance on the Company’s net deferred tax asset. In January 2017, the FASB issued ASU 2017-04, “Intangibles - Goodwill and Other (Topic 350) - Simplifying the Test for Goodwill Impairment.” ASU 2017-04 simplifies the accounting for goodwill impairments by eliminating the requirement to compare the implied fair value of goodwill with its carrying amount as part of step two of the goodwill impairment test referenced in ASC 350, “Intangibles - Goodwill and Other (“ASC 350”).” As a result, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value. However, the impairment loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. ASU 2017-04 is effective for annual reporting periods beginning after December 15, 2019, including any interim impairment tests within those annual periods, with early application permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company adopted ASU 2017-04 in the first quarter of Fiscal 2019 and the adoption did not have any impact on the Company’s consolidated financial statements. In May 2017, the FASB issued ASU No. 2017-09, “Scope of Modification Accounting”, to provide guidance on which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. The Company adopted ASU No. 2017-09 in the first quarter of Fiscal 2019 and the adoption did not have any impact on the Company’s consolidated financial statements. FORWARD INDUSTRIES, INC. AND SUBSIDIARIES NOTE 2 ACCOUNTING POLICIES (Continued) In March 2018, the FASB issued ASU 2018-05, “Income Taxes (Topic 740), Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118.” The ASU adds various Securities and Exchange Commission (“SEC”) paragraphs pursuant to the issuance of the December 2017 SEC Staff Accounting Bulletin No. 118, “Income Tax Accounting Implications of the Tax Cuts and Jobs Act (“SAB 118”)”, which was effective immediately. The SEC issued SAB 118 to address concerns about reporting entities’ ability to timely comply with the accounting requirements to recognize all of the effects of the Tax Cuts and Jobs Act in the period of enactment. SAB 118 allows disclosure that determination of some or all of the income tax effects from the Tax Cuts and Jobs Act may be incomplete by the due date of the financial statements and, if possible, provide a reasonable estimate. The Company has accounted for the tax effects of the Tax Cuts and Jobs Act under the guidance of SAB 118. In June 2018, the FASB issued ASU 2018-07, “Compensation — Stock Compensation (Topic 718) In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement - Disclosure Framework (Topic 820).” The updated guidance improves the disclosure requirements on fair value measurements. The updated guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted for any removed or modified disclosures. The Company is currently assessing the timing and impact of In November 2019, the FASB issued ASU 2019-08, “Compensation – Stock Compensation (Topic 718) and Revenue from Contracts with Customers (Topic 606).” ASU 2019-08 is an accounting pronouncement which expands the scope of ASC Topic 718 to provide guidance for share-based payment awards granted to a customer in conjunction with selling goods or services accounted for under Topic 606. The pronouncement is effective for fiscal years beginning after December 15, In November 2019, the FASB issued ASU 2019-11, “Codification Improvements to Topic 326, Financial Instruments – Credit Losses.” ASU 2019-11 is an accounting pronouncement that amends ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.��� The ASU 2019-11 amendment provides clarity and improves the codification to ASU 2016-03. The pronouncement would be effective concurrently with the adoption of ASU FORWARD INDUSTRIES, INC. AND SUBSIDIARIES NOTE 3 On $ FORWARD INDUSTRIES, INC. AND SUBSIDIARIES NOTE 3 ACQUISITION (Continued) The following table summarizes the allocation of the assets acquired and liabilities assumed based on their estimated fair values on the acquisition date and the related estimated useful lives of the amortizable intangible assets acquired (in thousands, except for estimated useful life): On June 30, 2018, the Earn-out consideration was revalued and adjusted down by $510,000 due to the high likelihood that IPS would not meet certain EBITDA milestones per the Stock Purchase Agreement for Fiscal year 2018. On September 30, 2019, the Earn-out consideration was revalued and adjusted up by $260,000 based on the updated projections in meeting the EBITDA milestones (see Note 6 - Fair Value Measurements). In relation to our acquisition of IPS, we incurred approximately $296,000 of expenses in Fiscal 2018 related to the transaction, including legal costs, financial and legal diligence, tax accounting, and valuation. FORWARD INDUSTRIES, INC. AND SUBSIDIARIES NOTE 3 ACQUISITION (Continued) Pro Forma Impact The following schedule presents unaudited consolidated pro forma results of operations for Fiscal 2018 as if the IPS acquisition had occurred on October 1, 2017. This information does not purport to be indicative of the actual results that would have occurred if the IPS acquisition had actually been completed on October 1, 2017, nor is it necessarily indicative of the future operating results or the financial position of the combined companies. The unaudited pro forma results of operations do not reflect the cost of any integration activities or benefits that may result from synergies that may be derived from any integration activities. NOTE 4 INTANGIBLE ASSETS and Intangible Assets The following table provides information regarding the Company’s intangible assets, which consist of the following: FORWARD INDUSTRIES, INC. AND SUBSIDIARIES NOTE 4 INTANGIBLE ASSETS and GOODWILL (Continued) The Company’s intangible assets were acquired as a result of the acquisition of IPS on January 18, 2018 and are amortized over their expected useful lives. The useful lives are 15 years for the Trademark and 8 years for the Customer Relationships. The intangible assets are held under the design segment of our business. During the years ended September 30, 2019 and 2018, the Company recorded amortization of approximately $162,000 and $114,000, respectively, which is included under the general and administrative expenses in the Company’s consolidated statements of operations. Estimated amortization expense for the Company’s intangible assets for each of the five succeeding years and thereafter at September 30, 2019 is as follows: Goodwill The Company recognized goodwill as a result of the acquisition of IPS on January 18, 2018 in the amount of approximately $2,182,000. The Company’s goodwill is held under the design segment of our business. Goodwill is not deductible for tax purposes. On June 30, 2018, the Company adjusted down the fair value of the earn-out consideration in connection with the IPS acquisition as a result of a shortfall in earnings performance for IPS. The shortfall in the performance was also considered a triggering event with regards to the evaluation of the carrying value of our trademark and customer relationship intangible assets as well as the goodwill resulting from the acquisition of IPS. As such, the Company performed an assessment of the carrying values considering specific qualitative facts and circumstances, macroeconomic factors and utilizing the initial inputs and projections that supported the initial fair value valuations of the intangible assets acquired from IPS. Based on these assessments, the Company concluded that the trademark, customer list and goodwill were not impaired during Fiscal 2018. The Company performed the annual goodwill impairment test for the year ended September 30, 2019 and determined no impairment. FORWARD INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 5 PROPERTY AND EQUIPMENT Property and equipment and related accumulated depreciation and amortization are summarized by reporting segment in the table below: September 30, Depreciation NOTE 6 FAIR VALUE MEASUREMENTS We perform fair value measurements in accordance with the guidance provided by ASC 820. ASC 820 defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required to be recorded at their fair values, we consider the principal or most advantageous market in which we would transact and consider assumptions that market participants would use when pricing the assets or liabilities, such as inherent risk, transfer restrictions, and risk of nonperformance. ASC 820 establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. An asset’s or liability’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. ASC 820 establishes three levels of inputs that may be used to measure fair value: The short-term deferred cash consideration of $834,000 on our consolidated balance sheet includes a deferred cash component with a present value of $484,000 and an earn-out consideration component with a fair value of $350,000 measured using the Black-Scholes option pricing method, a Level 3 valuation technique. The fair value of the earn-out consideration was deemed to be $350,000 at September 30, 2019 based on the likelihood of IPS reaching the projected EBITDA milestones. FORWARD INDUSTRIES, INC. AND SUBSIDIARIES NOTE 6 FAIR VALUE MEASUREMENTS (Continued) The following table presents the placement in the fair value hierarchy and summarizes the change in fair value of the earn-out consideration for the years ended September 30, 2018 and 2019: The fair value of the earn-out consideration will be measured on a recurring basis at each reporting date. The following table provides the unobservable inputs and assumptions used to measure the earn-out consideration at September 30, 2019: FORWARD INDUSTRIES, INC. AND SUBSIDIARIES NOTE 6 FAIR VALUE MEASUREMENTS (Continued) During the year ended September 30, 2019, the Company and a customer entered into an agreement, whereby the Company received common stock in the customer as compensation for product design services provided by the Company. The shares represent approximately a less than 2% ownership interest in the customer. Pursuant to ASC 820, management has estimated the value of the common stock consideration to be $326,941, based on a recent private placement round of common stock issued to third party private investors of the customer for cash, and has recognized revenue and a cost method investment for that amount. Management has determined that the inputs used to value the common stock are observable, either directly or indirectly, and therefore classified as a Level 2 valuation. Pursuant to ASC 820, the transaction price of the cash financing round establishes the fair value of the Common Stock issued as consideration unless one of the following conditions exists: The following table presents the placement in the fair value hierarchy and summarizes the establishment of fair value of the cost method investment during the year ended September 30, 2019: The Company recorded a full provision of outstanding receivables of $1.6 million in Fiscal 2019 for the same customer in which we hold the investment noted above. Management does not believe the investment is impaired as a result of the full provision for outstanding receivables for this customer. FORWARD INDUSTRIES, INC. AND SUBSIDIARIES NOTE Accrued expenses and other current liabilities by operating segment as of the fiscal years ended September 30, 2019 and 2018 are summarized in the table below: NOTE Anti-Takeover Provisions Shareholder Rights Plan On April 26, 2013, the Board of Directors (the 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 Stock and become exercisable on the distribution date (the “Blank Check” Preferred Stock The Company is authorized to issue up to 4,000,000 shares of FORWARD INDUSTRIES, INC. AND SUBSIDIARIES Warrants Effective January 22, 2018 through January 24, 2018, nine warrant holders Effective June 26, 2018, a warrant holder exercised (via a cashless exercise) 50,890 warrants with an exercise price of $1.84 per share and was issued 8,520 shares of the Company's common stock. As of September 30, 2019, the Company had 151,335 warrants outstanding and exercisable. The warrants have exercise prices ranging from $1.75 to $1.84 per share and have a weighted average exercise price of $1.80 per share. NOTE 2011 Long Term Incentive Plan In March 2011, shareholders of the Company approved the 2011 Long Term Incentive Plan (the 2007 Equity Incentive Plan The 2007 Equity Incentive Plan (the The assumptions. 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 FORWARD INDUSTRIES, INC. AND SUBSIDIARIES NOTE 9 SHARE-BASED COMPENSATION (Continued) In applying the Black-Scholes option pricing model to options granted, the Company used the following assumptions: On February 5, 2019, the Company granted five-year options to directors to purchase an aggregate of 150,021 shares of common stock at an exercise price of $1.54 per share. The shares vest one year from the grant date. The options had an aggregate grant date fair value of $120,000, which is being amortized over the vesting period of the options. On February 5, 2019, the Company granted five-year immediately vested options to directors to purchase an aggregate of 140,460 shares of common stock at an exercise price of $1.54 per share. The options had an aggregate grant date fair value of $107,800, which was recognized immediately. On February 23, 2018, the Company granted five-year options to employees to purchase an aggregate of 68,000 shares of common stock at an exercise price of $1.67 per share. The shares vest ratably over three years on the grant date anniversaries. The options had an aggregate grant date fair value of $77,128, which is being amortized over the vesting period of the options. On April 25, 2018, the Company granted immediately vested ten-year options to purchase an aggregate of 40,816 shares of common stock to two former directors and immediately vested five-year options to purchase 214,000 shares of common stock to a director, all at an exercise price of $1.44 per share. The options had an aggregate grant date fair value of $190,890, which was recognized immediately. The options granted during the years ended September 30, 2019 and 2018 had a weighted average grant date value of $0.78 and $0.83 per share, respectively. The Company recognized compensation expense As of September 30, FORWARD INDUSTRIES, INC. AND SUBSIDIARIES NOTE 9 SHARE-BASED COMPENSATION (Continued) The following table summarizes stock option activity during the The following table $ Restricted Stock Awards On On April 25, 2018, the Company granted 20,832 shares of immediately vested restricted stock to two former directors, pursuant to the 2011 Plan. The awards had an aggregate grant date value of $29,998, which was recognized immediately. The Company recognized compensation expense of approximately operations. As of September 30, FORWARD INDUSTRIES, INC. AND SUBSIDIARIES NOTE 9 SHARE-BASED COMPENSATION (Continued) The following table summarizes restricted stock activity during the NOTE The Company’s provision (benefit) for income taxes consists of the following United States federal and state, and foreign components: FORWARD INDUSTRIES, INC. AND SUBSIDIARIES NOTE 10 INCOME TAXES (Continued) The deferred tax expense (benefit) is the change in the deferred tax assets and liabilities representing the tax consequences of changes in the amounts of temporary differences, net operating loss carryforwards and changes in tax rates during the fiscal year. The Company’s deferred tax assets and liabilities are comprised of the following: For the fiscal years ended September 30, 2019 and 2018, the Company recorded a provision for income taxes which includes a refund of $4,162 in the current year, and a deferred tax benefit of $747,000 in the prior year. The current year refund of $4,162 is related to a partial refund of prior year AMT tax. FORWARD INDUSTRIES, INC. AND SUBSIDIARIES NOTE 10 INCOME TAXES (Continued) At September 30, As of September 30, The significant elements contributing to the difference between the United States federal statutory tax rate and the Company’s effective tax rate are as follows: As of September 30, FORWARD INDUSTRIES, INC. AND SUBSIDIARIES NOTE Basic The following securities FORWARD INDUSTRIES, INC. AND SUBSIDIARIES NOTE In February 2010, Forward Switzerland and its European logistics provider (freight forwarding and customs agent) entered into a Representation Agreement (the “Representation Agreement”) whereby, among other things, the European logistics provider agreed to act as Forward Switzerland's As of February 1, 2010, Forward Switzerland entered into a guarantee agreement with a Swiss bank relating to the repayment of any amount up to €75,000 (equal to approximately The initial term of the bank letter of guarantee expired February 28, 2011, but renews automatically for one-year periods on February 28 of each subsequent year 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 Operating Lease Commitments The Company The Company leases office space for its Distribution segment sales and administrative office in Cham, Switzerland on a month-to-month basis. The monthly rent payment is $1,599 CHF, which is approximately $1,615. IPS leases office space in Hauppauge, New York under a noncancelable lease agreement expiring in February 2027. The monthly rent payment is approximately $29,000, which includes power utilities. IPS leases office space in Ronkonkoma, New York under a 3 year agreement expiring in January 2022. The monthly rent payment is $4,400 FORWARD INDUSTRIES, INC. AND SUBSIDIARIES NOTE 12 COMMITMENTS AND CONTINGENCIES (Continued) Capital Leases The Company, specifically IPS, leases computer equipment through various capital lease agreements expiring through January 2022. The following is a summary of computer equipment held under capital leases: Future minimum payments under these capital leases are as follows: Total rent expense FORWARD INDUSTRIES, INC. AND SUBSIDIARIES NOTE Buying Agency and Supply Agreement On On Promissory Note On January 18, 2018, the Company issued a $1.6 million promissory note payable to Forward China in order to fund the acquisition of IPS. The promissory note bears an interest rate of 8% per annum. Monthly interest payments commenced on February 18, 2018. The original maturity date was January 18, 2019 and has been extended to January 17, 2020. The maturity date of the note has been extended on several occasions to assist the Company with liquidity. The Company made approximately During Fiscal 2019, the Company’s design division provided services to a customer, Duality Advisers. The Chief Operating and Financial Officer and equity owner of NOTE From time to time, the Company may become a party to On February 13, 2019, the SEC served certain of the Company’s executive officers and the custodian of records of the Company with subpoenas related to its investigation on the trading in the Company’s securities surrounding the announcement of the acquisition of IPS. The Company has cooperated with the Staff’s requests and as recently as October 24, 2019 provided the Staff with requested documents. On December 18, 2019, the Company received communication from the SEC and the Staff informed us that the investigation has concluded. The Company is anticipating a letter from the SEC formalizing the conclusion of the investigation. FORWARD INDUSTRIES, INC. AND SUBSIDIARIES NOTE The Company maintains a 401(k) benefit plan allowing eligible United States-based employees to contribute a portion of their salary in an amount up to the annual maximum amounts as set periodically by the Internal Revenue Service. In accordance with applicable Safe Harbor provisions, the Company made matching contributions NOTE The Company, The Distribution segment sources and The Design segment provides a full spectrum of hardware and software product design and engineering services. This segment operates predominantly in the Americas region. It should be noted that financial performance and results of operations in the design segment for the fiscal year ended September 30, 2018 covers the period following the closing of the acquisition of IPS on January 18, 2018 through fiscal year end on September 30, 2018. Segment operating income (loss) and net income (loss) before taxes for the years ended September 30, 2019 and 2018 are shown in table below: FORWARD INDUSTRIES, INC. AND SUBSIDIARIES NOTE 16 OPERATING SEGMENT INFORMATION (Continued) Revenues from External Customers Consolidated The following table sets forth our consolidated net revenues by geographic region for the fiscal years ended September 30, 2019 and 2018. All of design segment customer revenues are classified under the United States within the Americas region: [1] Includes $15.421 million of revenue attributed to IPS whose customers reside in the United States FORWARD INDUSTRIES, INC. AND SUBSIDIARIES NOTE 16 OPERATING SEGMENT INFORMATION (Continued) Major Customers and Concentrations by Geographic Region Distribution Segment The following customers or their affiliates or contract manufacturers accounted for more than 10% of the distribution segment’s net revenues, by geographic region, and in segment total for the fiscal years ended September 30, 2019 and 2018. Four customers (including their affiliates or contract manufacturers) accounted for approximately 90% and 86% of the Company's distribution segment accounts receivable at September 30, 2019 and 2018, respectively. Design Segment All of our design segment customers operate in the United States. Four customers accounted for approximately 67% of the Company’s design segment accounts receivable at September 30, 2018. Two customers accounted for approximately 63% of the Company’s design segment accounts receivable at September 30, 2019. FORWARD INDUSTRIES, INC. AND SUBSIDIARIES NOTE 16 OPERATING SEGMENT INFORMATION (Continued) Total Assets The following table presents Long-Lived Assets Identifiable long-lived assets, consisting Total Liabilities The following table presents total liabilities by operating segment for the years ended September 30, 2019 and 2018: NOTE 16 OPERATING SEGMENT INFORMATION (Continued) Supplier Concentration The Company procures all its supply of carrying solutions products for the distribution segment from independent suppliers in China through Forward China. Depending on the product, Forward China may require several different suppliers to furnish component parts or pieces. The Company purchased The - - The Company, specifically IPS, has a $1,300,000 revolving line of credit with TD Bank which renews at the discretion of the NOTE 18 DEBT As part of the acquisition of IPS, which was completed on January 18, 2018, the Company assumed the debt of the following: On January 8, 2014, IPS entered into a term loan with a lender in the amount of $1,000,000. The loan matured on January 8, 2019 and On April 1, 2016, IPS entered into a term loan with a lender in the amount of $325,000. The loan matures on April 1, 2020 and bears interest at a rate of 4.215% per annum. Interest and principal of $7,378 is paid on a monthly basis through maturity. This loan is secured by all of the IPS’ assets and is guaranteed by the Company. Outstanding balance as of September 30, 2018 and 2019 was $51,688 and $135,389, respectively. As of September 30, 2019 the Company was in violation of the required debt-service ratio covenants. The Company was granted a waiver of the violation from the lender. However, there is a potential risk that the lender may demand payment in full upon default. On October 19, 2016, IPS entered into two term loans with a lender in the amount of $100,000 and $50,000 with the first three monthly payments being interest only. The loans were scheduled to mature on January 19, 2019 and bore an interest rate of 12% per annum. The loans were unsecured. The loan balances of approximately $61,000 and $31,000 were paid off immediately after acquisition. On December 11, 2017, IPS entered into an installment payment financing arrangement with a lender in the amount of approximately $23,000. IPS makes monthly payments of $1,035, which includes an implied interest rate of 9.5%, for 24 months. The last payment is scheduled to be made in December 2019. The loan balance was approximately $3,000 and $16,000 at September 30, 2019 and 2018, respectively. FORWARD INDUSTRIES, INC. AND SUBSIDIARIES NOTE 18 DEBT (Continued) Future minimum principal payment requirements under the working capital term loan agreements in each of the years subsequent to September 30, 2019 are as follows: NOTE 19 MOONI AGREEMENT On January 29, 2019, the Company entered into a three-year Distribution Agreement (the “Agreement”) with Mooni International AB and its owner, Staffan Bern (the “Owner”). In accordance with the Agreement, the Company: (i) was appointed as the exclusive distributor of Mooni's current and future products (including future products developed or offered by Mooni and/or the Owner) in North America, (ii) subject to certain repayment requirements, the Company paid $400,000 to Mooni, and (iii) was granted an option to purchase a controlling interest of Mooni at a valuation not to exceed $5 million which, if exercised, would be effective on the 12 month anniversary of the effective date of the Agreement. Additionally, Forward China, a company owned by Terence Wise, the Company's Chairman and Chief Executive Officer, was named the designated supplier under the Agreement. As of September 30, 2019, the unamortized fee of approximately $311,000 is included in the prepaid and other current assets and other assets for the short-term and long-term components, respectively, in the accompanying consolidated balance sheet. Amortization of the cost for Fiscal 2019 of approximately $89,000 is included in the Sales and Marketing expenses in the accompanying consolidated statement of operations.(a) Documents filed as part of the report. (1) Financial Statements. See Index to Consolidated Financial Statements, which appears on page F-1 hereof. The financial statements listed in the accompanying Index to Consolidated Financial Statements are filed herewith in response to this Item. (2) Financial Statements Schedules. All schedules are omitted because they are not applicable or because the required information is contained in the consolidated financial statements or notes included in this report. (3) Exhibits. See the Exhibit Index. 2436 as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, hereuntothereunto duly authorized.12, 201627, 2019By: /s/ Terence Wise
Terence Wise
Chief Executive Officer
(Principal Executive Officer)12, 2016
Terence Wise
Principal Executive Officer and Director 12, 2016
Michael Matte
Principal Financial Officer and Chief Accounting Officer December 27, 2019 /s/ Howard Morgan
Howard Morgan
Director 12, 201627, 2019/s/ N. Scott FineN. Scott FineDirectorDecember 12, 2016/s/ Sharon HrynkowSharon HrynkowDirectorDecember 12, 2016/s/ Howard MorganHoward MorganDirectorDecember 12, 2016
Sangita Shah
DirectorDecember 27, 2019
James Ziglar
Director37 25EXHIBIT INDEX Incorporated by Reference
No.Form Date Number Filed or
Furnished
Herewith 10-K 12/8/10 3 8-K 2/14/12 3 8-K 4/26/12 3 8-K 7/3/2013 3 10-K 12/10/14 3 8-K 4/26/13 4 8-K 6/29/15 10.1 8-K 6/29/15 10.2 S-8 4 Def 14A 1/26/11 S-8 2/25/10 4.1 10-K 12/16/15 10.7 10-K 12/16/15 21.1 Filed Filed Filed Furnished 101.INS Filed 101.SCH Filed 101.CAL Filed 101.DEF Filed 101.LAB Filed 101.PRE Filed agreement.agreement or arrangement.,; 477 Rosemary Ave., Suite 219,219; West Palm Beach, Florida 33401,33401; Attention: Corporate Secretary.26FORWARD INDUSTRIES, INC. AND SUBSIDIARIES 38 27F-1 20162019 and 2015,2018, and the related consolidated statements of operations, and comprehensive income (loss), shareholders’ equity and cash flows for the years then ended. Forward Industries, Inc.ended, and Subsidiaries’ management is responsible for thesethe related notes (collectively referred to as the consolidated financial statements.statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of September 30, 2019 and 2018, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.thesethe Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement.misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included considerationAs part of our audits, we are required to obtain an understanding of the internal control over financial reporting, as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includessupportingregarding the amounts and disclosures in the consolidated financial statements, assessingstatements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statement presentation.statements. We believe that our audits provide a reasonable basis for our opinion.In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Forward Industries, Inc. and Subsidiaries as of September 30, 2016 and 2015, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
Jericho, New York New York12, 201627, 2019F-1F-2 September 30, 2019 2018 Assets Current assets: Cash $ 3,092,813 $ 4,369,866 Accounts receivable, net 6,695,120 9,024,518 Inventories 1,608,827 1,568,914 Prepaid expenses and other current assets 441,502 248,434 Total current assets 11,838,262 15,211,732 Property and equipment, net 243,002 358,975 Intangible assets, net 1,248,712 1,411,182 Goodwill 2,182,427 2,182,427 Investment 326,941 – Other assets 255,008 63,550 Total assets $ 16,094,352 $ 19,227,866 Liabilities and shareholders' equity Current liabilities: Line of credit $ 1,300,000 $ 350,000 Accounts payable 315,444 329,967 Due to Forward China 3,236,693 4,197,435 Deferred income 219,831 125,013 Notes payable - short-term portion 1,654,799 1,770,112 Capital leases payable - short-term portion 39,941 56,876 Deferred consideration - short-term portion 834,000 200,000 Accrued expenses and other current liabilities 694,972 594,887 Total current liabilities 8,295,680 7,624,290 Other liabilities: Notes payable - long-term portion – 54,335 Capital leases payable - long-term portion 26,438 64,041 Deferred rent 60,935 47,605 Deferred consideration - long-term portion – 338,000 Total other liabilities 87,373 503,981 Total liabilities 8,383,053 8,128,271 Commitments and contingencies Shareholders' equity: Common stock, par value $0.01 per share; 40,000,000 shares authorized; 9,533,851 and 9,533,851 shares issued and outstanding, respectively
95,338
95,338
Additional paid-in capital 18,936,130 18,720,396 Accumulated deficit (11,320,169 ) (7,716,139 ) Total shareholders' equity 7,711,299 11,099,595 Total liabilities and shareholders' equity $ 16,094,352 $ 19,227,866 F-3 FORWARD INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS September 30, 2016 2015 Assets Current assets: Cash and cash equivalents $ 4,760,620 $ 4,042,124 Accounts receivable 4,864,423 5,454,129 Inventories 2,572,980 2,866,464 Prepaid expenses and other current assets 141,421 296,012 Total current assets 12,339,444 12,658,729 Property and equipment, net 43,030 78,733 Other assets 12,843 40,962 Total assets $ 12,395,317 $ 12,778,424 Liabilities and shareholders' equity Current liabilities: Accounts payable $ 62,136 $ 122,803 Due to Forward China 3,519,676 4,168,021 Accrued expenses and other current liabilities 587,741 1,039,085 Total current liabilities 4,169,553 5,329,909 Other liabilities 51,486 115,202 Total liabilities 4,221,039 5,445,111 Commitments and contingencies Shareholders' equity: Common stock, par value $0.01 per share; 40,000,000 shares authorized; 8,780,830 and 8,641,755 shares issued and outstanding at September 30, 2016 and 2015, respectively 87,808 86,418 Additional paid-in capital 17,783,060 17,550,047 Accumulated deficit (9,674,805 ) (10,281,367 ) Accumulated other comprehensive loss (21,785 ) (21,785 ) Total shareholders' equity 8,174,278 7,333,313 Total liabilities and shareholders' equity $ 12,395,317 $ 12,778,424 For the Fiscal Years Ended
September 30, 2019 2018 Net Revenues $ 37,409,030 $ 34,499,503 Cost of sales 30,828,148 27,931,427 Gross profit 6,580,882 6,568,076 Operating expenses: Sales and marketing 1,965,230 1,782,138 General and administrative 7,713,035 4,525,286 Total operating expenses 9,678,265 6,307,424 Income (loss) from operations (3,097,383 ) 260,652 Other income (expenses): Fair value adjustment of earn-out consideration (260,000 ) 510,000 Fair value adjustment of deferred cash consideration (36,000 ) (12,000 ) Interest expense (201,004 ) (115,447 ) Other expense (13,805 ) (10,885 ) Total other income (expense) (510,809 ) 371,668 Income (loss) before income taxes (3,608,192 ) 632,320 Benefit from income taxes 4,162 747,000 Net income (loss) $ (3,604,030 ) $ 1,379,320 Earnings (loss) per share: Basic $ (0.38 ) $ 0.15 Diluted $ (0.38 ) $ 0.15 Weighted average number of common and common equivalent shares outstanding: Basic 9,532,034 9,264,670 Diluted 9,532,034 9,354,669 F-2F-4 OPERATIONS AND COMPREHENSIVE INCOME (LOSS)SHAREHOLDERS’ EQUITY For the Fiscal Years Ended September 30, 2016 2015 Net revenues $ 27,479,896 $ 30,013,891 Cost of goods sold 22,399,734 24,220,698 Gross profit 5,080,162 5,793,193 Operating expenses: Sales and marketing 1,891,409 2,362,553 General and administrative 2,571,799 4,943,184 4,463,208 7,305,737 Income (loss) from operations 616,954 (1,512,544 ) Other (income) expense: Interest income - (3,022 ) Loss on marketable securities, net - 110,001 Other expense, net 10,392 13,421 10,392 120,400 Income (loss) from continuing operations 606,562 (1,632,944 ) Income from discontinued operations, net of tax provision of $0 - 198,963 Net income (loss) 606,562 (1,433,981 ) Preferred stock dividends, accretion and beneficial conversion feature - (475,580 ) Net income (loss) applicable to common equity $ 606,562 $ (1,909,561 ) Net income (loss) $ 606,562 $ (1,433,981 ) Other comprehensive loss: Translation adjustments - (1,374 ) Comprehensive income (loss) $ 606,562 $ (1,435,355 ) Net income (loss) per basic common share: Income (loss) from continuing operations $ 0.07 $ (0.25 ) Income from discontinued operations 0.00 0.02 Net income (loss) per basic common share $ 0.07 $ (0.23 ) Net income (loss) per diluted common share: Income (loss) from continuing operations $ 0.07 $ (0.25 ) Income from discontinued operations 0.00 0.02 Net income (loss) per diluted common share $ 0.07 $ (0.23 ) Weighted average number of common and common equivalent shares outstanding: Basic 8,521,188 8,342,168 Diluted 8,675,583 8,342,168 The accompanying notes are an integral part of the consolidated financial statements . F-3FORWARD INDUSTRIES, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE FISCAL YEARS ENDED SEPTEMBER 30, 20162019 AND 20152018 Accumulated Additional Other Common Stock Paid-In Accumulated Comprehensive Shares Amount Capital Deficit Loss Total Balance - September 30, 2014 9,159,796 $ 91,598 $ 18,747,371 $ (8,371,806 ) $ (20,411 ) $ 10,446,752 Restricted stock award issuances 325,000 3,250 (3,250 ) - - - Restricted stock award forfeitures (126,291 ) (1,263 ) 1,263 - - - Restricted stock repurchased and retired (10,340 ) (103 ) (12,095 ) - - (12,198 ) Treasury stock retired (706,410 ) (7,064 ) (1,252,993 ) - - (1,260,057 ) Share-based compensation - - 69,751 - - 69,751 Preferred stock dividends - - - (21,208 ) - (21,208 ) Preferred stock accretion - - - (454,372 ) - (454,372 ) Foreign currency translation - - - - (1,374 ) (1,374 ) Net loss - - - (1,433,981 ) - (1,433,981 ) Balance - September 30, 2015 8,641,755 86,418 17,550,047 (10,281,367 ) (21,785 ) 7,333,313 Restricted stock award issuances 141,817 1,418 (1,418 ) - - - Restricted stock repurchased and retired (1,076 ) (11 ) (1,656 ) - - (1,667 ) Restricted stock award forfeitures (1,666 ) (17 ) 17 - - - Share-based compensation - - 236,070 - - 236,070 Net income - - - 606,562 - 606,562 Balance - September 30, 2016 8,780,830 $ 87,808 $ 17,783,060 $ (9,674,805 ) $ (21,785 ) $ 8,174,278 The accompanying notes are an integral part of the consolidated financial statements. Common Stock Additional Paid-In Accumulated Accumulated Other Comprehensive Income Shares Amount Capital Deficit (Loss) Total Balance - September 30, 2018 9,533,851 $ 95,338 $ 18,720,396 $ (7,716,139 ) $ – $ 11,099,595 Share-based compensation – – 11,794 – – 11,794 Net loss – – – (530,527 ) – (530,527 ) Balance - December 31, 2018 9,533,851 95,338 18,732,190 (8,246,666 ) – 10,580,862 Share-based compensation – – 136,096 – – 136,096 Net loss – – – (1,130,905 ) – (1,130,905 ) Balance - March 31, 2019 9,533,851 95,338 18,868,286 (9,377,571 ) – 9,586,053 Share-based compensation – – 33,290 – – 33,290 Net loss – – – (104,062 ) – (104,062 ) Balance - June 30, 2019 9,533,851 95,338 18,901,576 (9,481,633 ) – 9,515,281 Share-based compensation – – 34,554 – – 34,554 Net loss – – – (1,838,536 ) – (1,838,536 ) Balance - September 30, 2019 9,533,851 $ 95,338 $ 18,936,130 $ (11,320,169 ) $ – $ 7,711,299 Balance - September 30, 2017 8,920,830 $ 89,208 $ 17,936,673 $ (9,095,459 ) $ – $ 8,930,422 Share-based compensation – – (4,538 ) – – (4,538 ) Restricted stock award forfeitures (70,000 ) (700 ) 700 – – – Foreign currency translation – – – – 600 600 Net income – – – 46,651 – 46,651 Balance - December 31, 2017 8,850,830 88,508 17,932,835 (9,048,808 ) 600 8,973,135 Share-based compensation – – 45,764 – – 45,764 Stock issuance for IPS purchase 401,836 4,018 495,982 – – 500,000 Restricted stock award issuance 40,185 402 (402 ) – – – Cashless warrant exercise 223,704 2,237 (2,237 ) – – – Foreign currency translation – – – – (600 ) (600 ) Net income – – – 948,467 – 948,467 Balance - March 31, 2018 9,516,555 95,165 18,471,942 (8,100,341 ) – 10,466,766 Share-based compensation – – 235,672 – – 235,672 Restricted stock award forfeitures (12,056 ) (120 ) 120 – – – Restricted stock award issuance 20,832 208 (208 ) – – – Cashless warrant exercise 8,520 85 (85 ) – – – Net income – – – 235,484 – 235,484 Balance - June 30, 2018 9,533,851 95,338 18,707,441 (7,864,857 ) – 10,937,922 Share-based compensation – – 12,955 – – 12,955 Net income – – – 148,718 – 148,718 Balance - September 30, 2018 9,533,851 $ 95,338 $ 18,720,396 $ (7,716,139 ) $ – $ 11,099,595 F-4FORWARD INDUSTRIES, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS September 30, 2016 2015 Cash Flows From Operating Activities: Net income (loss) $ 606,562 $ (1,433,981 ) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Share-based compensation 236,070 69,751 Depreciation and amortization 52,754 53,445 Loss on disposal of property and equipment 31,070 - Realized and unrealized loss on marketable securities - 110,001 Deferred rent (17,437 ) (14,649 ) Changes in operating assets and liabilities: Accounts receivable 589,706 670,742 Inventories 293,484 (491,627 ) Prepaid expenses and other current assets 154,591 105,538 Other assets 28,119 - Accounts payable and due to Forward China (709,012 ) (1,596,344 ) Accrued expenses and other current liabilities (445,880 ) 505,219 Other liabilities (51,743 ) - Net cash provided by (used in) operating activities 768,284 (2,021,905 ) Cash Flows From Investing Activities: Proceeds from sales of marketable securities - 952,127 Purchases of marketable securities - (10,898 ) Purchases of property and equipment (48,121 ) (33,189 ) Net cash (used in) provided by investing activities (48,121 ) 908,040 Cash Flows From Financing Activities: Redemption of 6% Senior Convertible Preferred Stock - (1,287,737 ) Dividends paid - (21,208 ) Restricted stock repurchased and retired (1,667 ) (12,198 ) Net cash used in financing activities (1,667 ) (1,321,143 ) Net increase (decrease) in cash and cash equivalents 718,496 (2,435,008 ) Cash and cash equivalents at beginning of year 4,042,124 6,477,132 Cash and cash equivalents at end of year $ 4,760,620 $ 4,042,124 Supplemental Disclosure of Cash Flow Information: Supplemental disclosure of non-cash investing and financing activities: Preferred stock accretion $ - $ 454,372 F-5F-5 For the Fiscal Years Ended
September 30, 2019 2018 Cash Flows From Operating Activities: Net income (loss) $ (3,604,030 ) $ 1,379,320 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Share-based compensation 215,734 289,853 Depreciation and amortization 311,581 228,189 Bad debt expense 2,065,592 125,817 Deferred rent 16,013 13,259 Deferred tax asset – (747,000 ) Change in fair value of earn-out consideration 260,000 (510,000 ) Change in fair value of deferred cash consideration 36,000 12,000 Fair value of cost method investment for services provided (326,941 ) – Changes in operating assets and liabilities: Accounts receivable 263,806 (587,626 ) Inventories (39,913 ) 552,057 Prepaid expenses and other current assets (193,068 ) 106,475 Other assets (191,458 ) – Accounts payable and due to Forward China (975,265 ) 574,936 Deferred income 94,818 (311,961 ) Accrued expenses and other current liabilities 97,402 (168,834 ) Net cash provided by (used in) operating activities (1,969,729 ) 956,485 Cash Flows From Investing Activities: Purchases of property and equipment (33,138 ) (55,881 ) Cash acquired in IPS purchase – 600,435 Cash used to purchase IPS – (1,930,000 ) Net cash used in investing activities (33,138 ) (1,385,446 ) Cash Flows From Financing Activities: Proceeds from Note issued to Forward China – 1,600,000 Proceeds from Line of Credit borrowings 1,550,000 900,000 Repayment of Line of Credit borrowings (600,000 ) (1,500,000 ) Repayment of notes payable (169,648 ) (297,789 ) Repayments on capital equipment leases (54,538 ) (26,365 ) Cash Payment to Former IPS Owners – (500,000 ) Net cash provided by financing activities 725,814 175,846 Net decrease in cash (1,277,053 ) (253,115 ) Cash at beginning of year 4,369,866 4,622,981 Cash at end of year $ 3,092,813 $ 4,369,866 Supplemental Disclosures of Cash Flow Information: Cash paid for interest $ 201,004 $ 115,444 Cash paid for taxes $ – $ 2,690 Supplemental Disclosures of Non-Cash Investing and Financing Activities: Shares issued to purchase IPS $ – $ 500,000 Property and equipment funded by capital lease borrowings $ – $ 55,190 F-6 designsis a fully integrated design, development and distributesmanufacturing solution provider for top tier medical and technology customers worldwide. Through its acquisition of Intelligent Product Solutions, Inc. (“IPS”), the Company has expanded its ability to design and develop solutions for our existing multinational client base and expanded beyond the diabetic product line operations into a variety of industries with a full spectrum of hardware and software product design and engineering services. In addition to our existing design and distribution of carry and protective solutions, primarily for hand heldhandheld electronic devices.devices, the Company is now a one-stop shop for design, development and manufacturing solutions serving a wide range of clients in the industrial, commercial and consumer industries. The Company’s previous principal customer market ishas been original equipment manufacturers, or “OEMs” (or the contract manufacturing firms of these OEM customers), that either package theirour 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 and recreational products, bar code scanners, smartphones, GPS location devices, tablets, and firearms). The Company’s OEM customers are located in: (i) the Asia-Pacific Region, which we refer to as the “APAC Region”; (ii) Europe, the Middle East, and Africa, which we refer to as the “EMEA Region”; and (iii) the Americas. The Company does not manufacture any of its OEM products and sources substantially all of its OEM products from independent suppliers in China, through Forward China (refer to Note 12 – Buying Agency and Supply Agreement).China.On June 21, 2012,determinednow plans to exit its global Retail businessintroduce proprietary products to the market from concepts brought to it from a number of different sources, both inside and focus solely on growing its OEM business.outside the Company. The decision to eliminate the Retail division was primarily driven by the longer than estimated path to bring it to profitabilityCompany provides clients, both big and the strong top line growthsmall, a true, authentic “one-stop-shop” for product design, development and cost rationalizations in the OEM business. The Retail business is presented as discontinued operations.manufacturing solutions.Forward Switzerland)IPS). All significant intercompany transactions and balances have been eliminated in consolidation. Intercompany sales of approximately $221,000 and $305,000 from IPS to Forward have been eliminated in consolidation for Fiscal 2019 and Fiscal 2018, respectively.F-7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSF-8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSCash andequivalents consist primarily of cash on deposit. We hold cash andequivalents. There were no cash equivalents at majorSeptember 30, 2019 and 2018. The Company maintains its cash in bank and financial institutionsinstitution deposits in the United States (that at which cash amountstimes may significantly exceed the Federal Deposit Insurance Corporation’sfederally insured limits.limits of $250,000 per financial institution) and Switzerland. At September 30, 20162019 and 2015, this amount was2018, there were deposits totaling approximately $4.5$2.8 million (which includes $2.7 millionapproximately $650,000 in a foreign bank) and $3.9$4.1 million (which includes $2.0approximately $1.9 million in a foreign bank), respectively.respectively, held in excess of federally insured limits. Historically, we have not experienced any losses due to such cash concentrations.Marketable SecuritiesAs of September 30, 2014, the Company had investments in marketable securities that were classified as trading and were recorded at fair value with the corresponding unrealized holding gains or losses recognized in earnings. The fair value of marketable securities was determined based on quoted market prices. The cost of marketable securities sold was determined by the specific identification method. The Company classifies its realized and unrealized gains and losses as non-operating income (expense) in its consolidated statements of operations and comprehensive income (loss). In addition, the Company classified the cash flows from the trading of these marketable securities as investing activities in its consolidated statements of cash flows. During the year ended September 30, 2015, the Company sold its investments in marketable securities.Accounts ReceivableThe Company has not historically experienced significant credit or collection problems with its OEM customers or their contract manufacturers. At September 30, 20162019, there were allowances for doubtful accounts of approximately $159,000 and 2015, no$2,033,000 relating to the Company’s distribution segment and design segment accounts receivable, respectively. At September 30, 2018, the Company had allowances for doubtful accounts of approximately $0 and $126,000 related to the Company’s distribution segment and design segment accounts receivable, respectively. The increase in allowance for doubtful accounts relatingfor the design segment is primarily due to the Company’s continuing operations was deemed necessary.a full provision for bad debt on trade receivables for a major design segment customer for approximately $1.6 million. The Company also has an investment in this customer (see Note 6).F-6F-9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSInventoriesmarket.net realizable value. 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).operations. 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. At September 30, 20162019 and 2015,2018, there was no allowance for obsolete inventory.tenfive 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 each of the fiscal years ended September 30, 2016 and 2015, the Company recorded approximately $53,000 of depreciation and amortization expense from continuing operations.Leasesaccounts for its income taxes in accordance with accounting principles generally accepted in the United States of America, which requires, among other things, recognition ofrecognizes 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-forwardscarryforwards to the extent that realization of these benefits is more likely than not. The Company periodically evaluates the realizabilityAs of itsSeptember 30, 2019, there was no change to our assessment that a full valuation allowance was required against all net deferred tax assets. See Note 9 –Income Taxes. The Company’s policy isAccordingly, any deferred tax provision or benefit was offset by an equal and opposite change 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 “accrued liabilities” in its consolidated balance sheets, if applicable. For fiscal years ended September 30, 2016 and 2015, nothe valuation allowance. No material current book income tax related interest or penalties were assessed or recorded.6% Senior Convertible Preferred StockWarrants In accordance with ASC 815-40 – Derivatives and Hedging – Contracts in Entity’s Own Equity, the Company’s warrants were previously 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 had no provision for penalties upon the failure to register. At each balance sheet date, this liability’s fair value was re-measured and adjusted with the corresponding change in fair value recorded in 2019 due to net loss and the consolidated statementsexistence of operations and comprehensivesignificant net operating loss carryforwards, however, approximately $4,000 current year income (loss). After the Company met the requirements for registering the underlying common sharestax refund was recorded due to prior year AMT credits being partially refunded in the fiscal year ended September 30, 2014, the fair value of the warrants was reclassified to equity (additional paid-in capital).Preferred Stock Accretioncurrent year.At the date of issuance, the carrying amount of the convertible preferred stock 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 was equal to the redemption amount at the earliest redemption date. Such accretion was recorded as a preferred stock dividend.F-10 Revenue RecognitionFORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSfrom product sales toin its customersdistribution segment when: (i) title and risk of lossfinished goods are transferredshipped to our distribution customers (in general, these conditions occur at either point of shipment or point of destination, depending on the terms of sale); (ii) persuasive evidence of an arrangement exists;there are no other deliverables; and (iii) the Company hasthere are no continuingfurther obligations to the customer; and (iv) collectioncustomer after the title of the related accounts receivable is reasonably assured.goods has transferred. The Company defers revenue when it receives consideration before achieving the criterioncriteria previously mentioned.F-7FORWARD INDUSTRIES, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTSShippingDesign SegmentHandling Costsclassifies shippingrecognizes revenue over time on its time and handling costs, including inboundmaterial contracts utilizing a “right to invoice” method. Revenues from fixed price contracts that require performance of services that are not related to the production of tangible assets are recognized by using cost inputs to measure progress toward the completion of its performance obligations or the “cost to cost” method. Revenues from contracts that contain specific deliverables are recognized when the performance obligation has been satisfied or the transfer of goods to the customer has been completed and outbound freight charges, purchasingaccepted.receiving costs, inspection costs, warehousing costs, internal transfer costs and other costs,classified as a component of cost of goods soldaccounts receivable in the accompanying consolidated statementsbalance sheets. Contract assets at September 30, 2019 and 2018 were approximately $611,000 and $0, respectively. Contracts where collections to date have exceeded recognized revenues, or contract liabilities, are recorded as a liability and classified as a component of operationsdeferred income in the accompanying consolidated balance sheets. Contract liabilities at September 30, 2019 and comprehensive income (loss).2018 were approximately $220,000 and $125,000, respectively.(income) expense”income (expense)” in the accompanying consolidated statements of operations and comprehensive income (loss).operations. The approximate net losses from foreign currency transactions for continuing operations waswere approximately $16,000$14,000 and $20,000$10,000 for the fiscal years ended September 30, 20162019 and 2015,2018, respectively. Such foreign currency transaction losses were primarily the result of Euro denominated revenues from certain customers.F-11 Accumulated Other Comprehensive LossFORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSAccumulated other comprehensive loss,included as a componentbased upon the lowest level of shareholders’ equity, represents translation adjustments relatedinput that is significant 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 accrued expenses and other current liabilities, the carrying amount approximates fair value duemeasurement. ASC 820 establishes three levels of inputs that may be used to measure fair value:· Level 1: quoted prices in active markets for identical assets or liabilities; · Level 2: inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices in active markets for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; or · Level 3: unobservable inputs that are supported by little or no market activity and that are significant to the fair values of the assets or liabilities. short-term maturities of these instruments.fiscal 2019 presentation.and comprehensive income (loss) at the grant-dategrant date fair value of stock options and other equity-based compensation. The determination of stock option grant-dategrant 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 toawards (See Note 89 - Share-Based Compensation.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.F-12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSFinancial Accounting Standards Board (“FASB”)FASB issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers,” which(“ASU 2014-09”). ASU 2014-09 supersedes the revenue recognition requirements in Accounting Standards CodificationASC 605, “Revenue Recognition” (“ASC”ASC 605”) 605-Revenue Recognition and most industry-specific guidance throughout the ASC. The standard requires that an entity recognizeASC 605. ASU 2014-09 establishes principles for recognizing revenue to depictupon the transfer of promised goods or services to customers, in an amount that reflects the expected consideration to which the company expects to be entitledreceived in exchange for those goods or services. The guidance in ASU 2014-09 was further amended and isrevised in July 2015 to be effective for annual periods and interim periods within those annual periods beginning on or after December 15, 2017 and should be applied on a transitional basis either 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. In 2016, FASB issued additional ASUs that clarify the implementation guidance on principal versus agent considerations (ASU 2016-08), on identifying performance obligations and licensing (ASU 2016-10), and on narrow-scope improvements and practical expedients (ASU 2016-12) as well as on the revenue recognition criteria and other technical corrections (ASU 2016-20). These new standards became effective during the first quarter of fiscal 2019 and were adopted using the modified retrospective method. The Company has performed a review of ASU 2014-09 as compared to its previous accounting policies for our products and services revenues and did not identify any material impact to revenue. Therefore, there was no adjustment to retained earnings for a cumulative effect.currently evaluatingtypically recognized at either the potential impactpoint of shipment or point of destination, depending on the terms of the sale.guidancenew standard on its consolidated financial statements. In July 2015, the FASB issued ASU 2015-11, “Inventory (Topic 330): Simplifying the Measurement of Inventory,” which appliesreporting, disclosures and its various revenue streams. The Company now recognizes revenue over time on its time and material contracts utilizing a “right 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,invoice” method which is similar to previous revenue recognition standards under ASC 605. Revenues from fixed-price type contracts that require performance of services that are not related to the estimatedproduction of tangible assets are recognized by using cost inputs to measure progress toward the completion of its performance obligations. This method is similar to the method formerly applied to certain of the Company’s contracts covered by the previous revenue recognition standards under ASC 605. In some cases, contracts contain an arrangement of specific deliverables or production of prototypes, or a distinct performance obligation, and the Company allocates the transaction price to the performance obligation on a relative standalone 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 does not anticipate that the adoption of ASU 2015-11 will have a material impact on its consolidated financial statements.price basis.F-8F-13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSIn 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 does not anticipate that the adoption of ASU 2015-17 will have a material impact on its consolidated financial statements.is currently evaluatingadopted ASU 2016-02 effective October 1, 2019 and upon adoption of Topic 842 the potential impactCompany expects recognition of adopting this guidanceadditional assets and corresponding liabilities pertaining to its operating leases on its consolidated financial statements.balance sheets. The Company expects the adoption will result in an increase in other assets and an increase in other liabilities of approximately $3.7 million. The Company does not expect the adoption of the new standard to have a significant impact on its consolidated statements of operations and cash flows.MarchAugust 2016, the FASB issued ASU 2016-09,2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments,” providing additional guidance on several cash flow classification issues, with the goal of the update to reduce the current and potential future diversity in practice. The amendments in this update are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The Company early adopted ASU No. 2016-15 and the adoption did not have any impact on the Company’s consolidated financial statements.F-14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS: Improvements,” (“ASU 2018-07”). ASU 2018-07 is intended to Employee Share-Based Payment Accounting,” which simplifies several aspectsreduce cost and complexity and to improve financial reporting for nonemployee share-based payments. Currently, the accounting requirements for nonemployee and employee share-based payment transactions are significantly different. ASU 2018-07 expands the scope of Topic 718, Compensation — Stock Compensation (which currently only includes share-based payments to employees) to include share-based payments issued to nonemployees for goods or services. Consequently, the accounting for share-based payment transactions, including the income tax consequences, classificationpayments to nonemployees and employees will be substantially aligned. This ASU supersedes Subtopic 505-50, “Equity — Equity-Based Payments to Nonemployees.” The amendments in this ASU are effective for fiscal years beginning after December 15, 2018, and interim periods within that fiscal year. Early adoption is permitted, but no earlier than a company’s adoption date of awards as either equity or liabilities, and classificationTopic 606, Revenue from Contracts with Customers. The Company early adopted ASU 2018-07 effective October 1, 2019. The adoption of ASU 2018-07 did not have a material impact on the statementCompany’s consolidated financial statements.cash flows. Thisadopting the updated provisions.2016,2019 and interim periods within those fiscal years. Early adoption is permitted. The Company does not anticipateis currently evaluating the effects of this pronouncement on our consolidated financial statements along with the effects of ASU 2018-07 noted above.2016-09 will have a material impact2016-03. The pronouncement is effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years. The Company is currently evaluating the effects of this pronouncement on itsour consolidated financial statements.F-15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDISCONTINUED OPERATIONSACQUISITIONJune 21, 2012,January 18, 2018, the Company determinedentered into a Stock Purchase Agreement (the “Agreement”) by and among the Company, IPS, the holders of all of the common stock of IPS, Inc. (the “Sellers”) and Mitchell Maiman, President of IPS, representing the Sellers. In consideration for the acquisition of all of IPS’ outstanding securities, the Company: (i) paid approximately $1.9 million in cash; (ii) assumed approximately $1.5 million of outstanding debt; (iii) issued a total of 401,836 shares of the Company’s common stock to exit its global Retail businessthe two owners of IPS; (iv) agreed to pay $1,000,000 of deferred cash consideration (with the first payment of $500,000 due and focus solelypaid on growing its OEM business.May 31, 2018, the second payment of $200,000 due on September 30, 2019, and third payment of $300,000 due on September 30, 2020); and (v) agreed to pay up to $2.2 million of earnout payments based upon IPS meeting certain EBITDA milestones (as defined in the Agreement) over a three-year period. Additionally, the Company entered into three-year employment agreements with both Mitchell Maiman and Paul Severino (Chief Operating Officer of IPS), and agreed to pay them each $256,000 per year. In order to fund the acquisition of IPS, the Company issued a $1.6 million promissory note payable to Forward China Industries (Asia-Pacific) Corporation (“Forward China”) due January 18, 2019. The decision to eliminate the Retail division was primarily drivenpromissory note bears an interest rate of 8% per annum and requires monthly interest payments commencing February 18, 2018. Forward China is an entity which is principally owned by the longer than estimated pathCompany’s Chairman and Chief Executive Officer. As part of the Agreement, IPS entered into at-will employment agreements with two additional key employees. Pursuant to bring itthe employment agreements, the employees were issued a total of 40,184 shares of the Company’s common stock of which 40% vested immediately with the remainder vesting in two equal increments on the six-month and twelve-month anniversary of the grant date, subject to profitability and the strong net revenues growth and cost rationalizations in the OEM business. Accordingly, the results of operations for the Retail division have been recorded as discontinued operations in the accompanying consolidated financial statements for the fiscal years presented. The Company has completed its exit of its Retail business. Summarized operating results of discontinued operations are presented in the following table:continued employment on such vesting dates. For the Fiscal Years Ended September 30, 2016 2015 Net revenues $ - $ - Gross loss - - Operating expenses - (1,037 ) Other income - 200,000 Income from discontinued operations, net - $ 198,963 AsAt the date of September 30, 2016acquisition, the purchase consideration consists of cash, equity in Forward’s (“Buyer’s”) stock, deferred cash and 2015, the Company did not have assets or liabilities associated with discontinued operations. The Company had $280,000 of accounts receivable relating to overdue payments pursuant tocontingent consideration based on earn-out performance over 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. Due to the age of the accounts receivable and G-Form’s non-responsiveness to the Company’s communication related to the matter, the Company established a full reserve for this receivablethree-year period. Acquisition-related costs were expensed as of September 30, 2014, which was recognized as Operating Expenses in Fiscal 2014. In December 2014, the Company recovered $200,000 from a third party, which was recognized as other income in Fiscal 2015.NOTE 4 MARKETABLE SECURITIES In December 2014, the Company closed its investments account and liquidated its investments in marketable securities. Equity securities were 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. The corresponding unrealized holding gains or losses of securities classified as trading are recognized in earnings. Net gains and losses on marketable securities for the fiscal year ended September 30, 2015 were $547,000 and $(657,000), respectively,incurred and are included in the accompanyinggeneral and administrative expenses within the consolidated statements of operations. The purchase consideration components are summarized in the table below (amounts stated in thousands):Cash at closing (1) $ 1,930 Value of Equity in Buyer's Common Stock (2) 500 Fair Value of Earn-Out Consideration (3) 600 Fair Value of Deferred Cash Consideration (4) 936 Total Purchase Consideration $ 3,966 (1) Cash paid by Forward at closing funded, in part, by a $1.6 million promissory note issued to Forward China, a related party of Forward. The remainder of the cash was funded by Forward’s operating cash account. (2) Forward issued 401,836 shares of common stock valued at the January 18, 2018 closing price of $1.24 per share for an aggregated value of approximately $500,000. (3) Fair Value of the Earn-Out consideration is measured using the Black-Scholes option pricing method. Earn-Out is to be paid in cash only upon meeting certain EBITDA milestones over a three-year period. (4) Fair value of the Deferred Cash consideration is the present value of the $1,000,000 payable in three increments with an applied discount rate ranging between 4.73% and 5.33%. F-16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSCurrent Assets: Preliminary estimated useful life Cash and Equivalents $ 600 Accounts Receivable 2,489 Other Current Assets 52 Total Current Assets 3,141 Current Liabilities: Accounts Payable (149 ) Deferred Revenue (267 ) Accrued and Other Current Liabilities (548 ) Total Current Liabilities (964 ) Property and Equipment 346 Other Long-Term Assets 51 Deferred Tax Liability (747 ) Assumed Debt (1,568 ) Finite-Lived Intangible Assets: Trademark 475 15 years Customer Relationships 1,050 8 years Total Intangible Assets 1,525 Goodwill 2,182 Total $ 3,966 F-17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year Ended September 30, 2019 2018 Revenue $ 37,409,030 $ 38,849,084 Net income (loss) $ (3,604,030 ) $ 1,308,838 Net income (loss) per share: Basic $ (0.38 ) $ 0.14 Diluted $ (0.38 ) $ 0.13 Weighted Average Outstanding Shares Basic 9,532,034 9,666,506 Diluted 9,532,034 9,756,505 comprehensive income (loss).GOODWILL 2019 2018 Trademark Customer Relationships Total Intangible Assets Trademark Customer Relationships Total Intangible Assets Gross carrying amount $ 475,000 $ 1,050,000 $ 1,525,000 $ 475,000 $ 1,050,000 $ 1,525,000 Less accumulated amortization (53,703 ) (222,585 ) (276,288 ) (22,123 ) (91,695 ) (113,818 ) Net carrying amount $ 421,297 $ 827,415 $ 1,248,712 $ 452,877 $ 958,305 $ 1,411,182 F-18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSYears ending September 30, Amount 2020 $ 162,917 2021 162,917 2022 162,917 2023 162,917 2024 162,917 Thereafter 434,127 Total $ 1,248,712 F-19 F-9FORWARD INDUSTRIES, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 2016 2015 2019 2018 Furniture, fixtures and equipment $ 333,748 $ 398,903 Consolidated Distribution Design Consolidated Distribution Design Computer software and hardware $ 312,610 $ 278,131 $ 34,479 $ 282,644 $ 275,386 $ 7,258 Furniture and fixtures 198,250 78,605 119,645 198,454 80,209 118,245 Equipment 308,703 4,318 304,385 305,338 4,318 301,020 Leasehold improvements 42,020 97,107 42,020 42,020 – 42,020 42,020 – Property and equipment, cost 375,768 496,010 861,583 403,074 458,509 828,456 401,933 426,523 Less: accumulated depreciation and amortization (332,738 ) (417,277 ) (618,581 ) (385,249 ) (233,332 ) (469,481 ) (375,062 ) (94,419 ) Property and equipment, net $ 43,030 $ 78,733 $ 243,002 $ 17,825 $ 225,177 $ 358,975 $ 26,871 $ 332,104 and amortization expense was $52,754approximately $149,000 and $53,445$114,000 for the fiscal years ended September 30, 20162019 and 2015,2018, respectively.· Level 1: quoted prices in active markets for identical assets or liabilities; · Level 2: inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices in active markets for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; or · Level 3: unobservable inputs that are supported by little or no market activity and that are significant to the fair values of the assets or liabilities. F-20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Fair value measurement at reporting date using Quoted prices in active markets for identical assets Significant other observable inputs Significant unobservable inputs Balance (Level 1) (Level 2) (Level 3) September 30, 2017: $ – $ – $ – $ – Fair Value at date of acquisition - January 18, 2018 600,000 – – 600,000 Decrease in fair value of earn-out consideration (510,000 ) – – (510,000 ) September 30, 2018: $ 90,000 $ – $ – $ 90,000 Increase in fair value of earn-out consideration 260,000 – – 260,000 September 30, 2019: $ 350,000 $ – $ – $ 350,000 Description Valuation technique Unobservable Inputs Range Earn-out consideration Black-Scholes Volatility 38% Risk free interest rate 1.73% Expected term, in years 1.164 Dividend yield 0.00% F-21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSa. The transaction is between related parties, b. The transaction takes place under duress or the seller is forced to accept the price in the transaction, c. The unit of account represented by the transaction price is different from the unit of account for the asset or liability measured at fair value, or d. The market in which the transaction takes place is different from the principal market (or most advantageous market). Fair value measurement at reporting date using Quoted prices in active markets for identical assets Significant other observable inputs Significant unobservable inputs Balance (Level 1) (Level 2) (Level 3) September 30, 2018: $ – $ – $ – $ – Common stock - cost method investment 326,941 – 326,941 – September 30, 2019: $ 326,941 $ – $ 326,941 $ – F-22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS6 7ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES September 30, 2016 2015 Deferred revenue $ 309,571 $ 713,105 Personnel cost 256,144 200,005 Accrued settlements (former CEO and CFO) - 90,572 Other 22,026 35,403 Accrued expenses and other current liabilities $ 587,741 $ 1,039,085 September 30, 2019 2018 Consolidated Distribution Design Consolidated Distribution Design Accrued bonuses and sales commissions $ 45,681 $ 32,745 $ 12,936 $ 189,015 $ 47,087 $ 141,928 Accrued vacation 169,902 40,307 129,595 168,401 31,075 137,326 Accrued contract labor 141,567 – 141,567 126,889 – 126,889 Accrued legal fees 154,000 154,000 – – – – Other 183,822 30,686 153,136 110,582 36,367 74,215 Accrued expenses and other current liabilities $ 694,972 $ 257,738 $ 437,234 $ 594,887 $ 114,529 $ 480,358 7 8SHAREHOLDERS’ EQUITYAnti-takeover“Board”"Board") adopted a Shareholder Rights Plan, as set forth in the Rights Agreement between the Company and American Stock Transfer & Trust Company, LLC, as Rights Agent. Pursuant to the Rights Agreement, the Board declared a dividend distribution of one Right (a “Right”"Right") for each outstanding share of Company Common Stock, par value $0.01 per share (the “Common Stock”"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"Series A Preferred Stock”Stock"), at an exercise price of $4.00 per one one-thousandth of a share of Series A Preferred Stock, subject to adjustment.“Distribution Date”"Distribution Date"), which will occur on the earlier of: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”"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. There were no shares of preferred stock outstanding at September 30, 20162019 and 2015.2018.F-10F-23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS6% Senior Convertible Preferred StockNOTE 8SHAREHOLDERS’ EQUITY (Continued)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 being 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 approximately $0 and $21,000 for the fiscal years ended September 30, 2016 and 2015, respectively. These dividends, in addition to the accretion, totaled approximately $0 and $476,000 for the fiscal years ended September 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 therequesting 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 paidexercised (via cashless exercises) 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.Warrants Between June 28, 2013 and August 14, 2013, in connection with the issuance of the 6% Senior Convertible Preferred Stock, the Company issued ten-year521,621 warrants to purchase 648,846 shares of common stock with an exercise price of $1.84 per share. During the fiscal year ended September 30, 1999, the Companyshare and were issued warrants to purchase an aggregate of 75,000223,704 shares of the Company's common stock atstock.By their terms these76,335 warrants expirehave a remaining life of 3.87 years and 75,000 warrants have an expiration date 90 days after a registration statement registering common stock (other than pursuant to an employee benefit plans)plan) is declared effective by the United States Securities and Exchange Commission (the “Commission”). As of September 30, 2016, no such registration statement has been filed with the Commission.SEC.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 September 30, 2016, the Company repurchased an aggregate of 224,690 shares at a cost of approximately $487,000. During the fiscal years ended September 30, 2016 and 2015, the Company repurchased and retired an aggregate of 1,076 and 10,340 shares, respectively, of its outstanding restricted common stock at a cost of approximately $2,000 and $12,000, respectively, 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.Retirement of Treasury Stock On December 5, 2014, the Board of Directors approved the retirement of 706,410 shares of existing treasury stock.89 SHARE-BASED COMPENSATION“2011 Plan”"2011 Plan"), which authorizesoriginally authorized 850,000 shares of common stock for grants of various types of equity awards to officers, directors, employees, consultants, and independent contractors. On February 13, 2018, the shareholders of the Company approved an amendment to the 2011 Plan to increase the aggregate number of shares of the Company's common stock authorized for issuance under the 2011 Plan by 1,000,000 shares of common stock, from 850,000 shares of common stock to 1,850,000 shares of common stock. Forfeited awards 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 451,479 as of September 30, 2016. 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 plan.2011 Plan. Options generally expire ten years after the date of grant. The total shares of common stock available for grants of equity awards under the 2011 Plan was 730,972 as of September 30, 2019.“2007 Plan”"2007 Plan"), which was approved by shareholders of the Company in May 2007, and, as amended in February 2010, authorizes an aggregate of 800,000expired in accordance with its terms in May 2017. However, there remained 67,500 shares of common stock for grants of restricted common stock and stockassociated with unexercised options to officers, employees, and non-employee directors of the Company. Forfeited awards 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 7,823 as of September 30, 2016.2019. 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. There are no unvested restricted stock awards related to the 2007 Plan. The Compensation Committee administers the 2007 Plan. Options generally expire ten years after the date of grant.F-11FORWARD INDUSTRIES, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS1996 Stock Incentive PlanOptionsCompany’s 1996 Stock Incentive Plan (the “1996 Plan”) expired in accordance with its terms in November 2006. The exercise price of incentive stock options granted under the 1996 Plan to officers, employees, and non-employee directors of the Company was required by 1996 Plan provisions to be equal at least to the fair market value of the common stock at the date of grant. In general, options under this plan expired ten years after the date of grant. Unexercised options granted prior to 1996 Plan expiration remained outstanding until the earlier of exercise oreach option expiration. Under the 1996 Plan, the remaining 20,000 fully vested common stock options expired unexercised during the year ended September 30, 2016.Stock Option Awards Effective January 15, 2015, in connection with the Company’s former Chief Executive Officer’s voluntary termination, previously outstanding unvested stock options to purchase an aggregate of 83,334 shares of common stock at exercise prices ranging from $1.59 to $5.31 per share that would have been forfeited pursuant to their original terms were modified such that the options vested on January 28, 2015. In connection with the “improbable to probable” modification, the Company recorded a credit of approximately $(31,000) during the fiscal year ended September 30, 2015. See Note 11 for additional details in connection with the termination. On June 25, 2015, the Company granted a ten-year incentive stock option to purchase 50,000 shares of common stock at an exercise price of $0.64 per share to an executive of the Company, pursuant to the 2011 Plan. The option vests as follows: 15,000 sharesaward is estimated on the date of grant 15,000 shares onusing the two-year anniversary of the date of grant and 20,000 shares on the three-year anniversary of the date of grant. TheBlack-Scholes option had a grant date value of $19,000. On August 4, 2015, the Company granted ten-year incentive stock options to six employees to purchase an aggregate of 32,500 shares of common stock at an exercise price of $0.67 per share, pursuant to the 2011 Plan. The options vest as follows: an aggregate of 10,832 shares on the one year anniversary of the date of grant, an aggregate of 10,832 shares on the two-year anniversary of the date of grant and an aggregate of 10,836 shares on the three-year anniversary of the date of grant. The options had an aggregate grant date value of $13,000. The fair value of each stock option on the date of grant was estimated using a Black-Scholes option-pricing formula applyingpricing model that uses the following assumptions for each respective period: For the Fiscal Years Ended September 30, 2016 2015 Expected term (years) n/a 5.9 - 6.0 Expected volatility n/a 64.4% - 65.3% Risk free interest rate n/a 1.79% - 1.92% Expected dividends n/a 0% Estimated annual forfeiture rate n/a 10% There were no options granted during the fiscal year ended September 30, 2016. During the fiscal year ended September 30, 2015, the Company granted 82,500 stock options at weighted average grant date fair value per share of $0.39.Companyexpected 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 in its assumptionsis based on the implied yield currently available onof U.S. Treasury zero-coupon issues with a remaining term equivalent to the award’s expected term. The volatility factor used in the Company’s assumptions is based on the historical price of its stock over the most recent period commensurate with the expected term of the award. The Company historically has not paid any dividends on its common stock and had no intention to do so on the date the share-based awards were granted. The 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.F-24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Years Ended September 30, 2019 2018 Expected term (years) 2.50-2.75 2.50-5.00 Expected volatility 82.0% 80.0%-103.1% Risk free interest rate 2.53% 2.45%-2.84% Expected dividends 0.00% 0.00% Estimated annual forfeiture rate 0% 10% (credit) of approximately $10,000$212,000 and $(27,000)$218,000 during the fiscal years ended September 30, 20162019 and 2015,2018, respectively, in continuing operations for stock option awards in its consolidated statements of operations and comprehensive income (loss).operations.2016,2019, there was approximately $8,000$61,000 of total unrecognized compensation cost related to unvestednonvested stock option awards whichthat is expected to be recognized over the remainder of thea weighted average vesting period of 1.40.6 years.F-25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSfiscal yearsyear ended September 30, 2016 and 2015:2019:F-12FORWARD INDUSTRIES, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS Weighted Weighted Average Average Remaining Number of Exercise Life Intrinsic Options Price In Years Value Outstanding, September 30, 2014 778,500 $ 3.12 Granted 82,500 0.65 Exercised - Forfeited (550,000 ) 3.17 Outstanding, September 30, 2015 311,000 2.39 Granted - Exercised - Forfeited (25,000 ) 0.67 Expired (20,000 ) 6.02 Outstanding, September 30, 2016 266,000 $ 2.27 4.6 $ 53,850 Exercisable, September 30, 2016 225,999 $ 2.56 3.8 $ 19,999 Number of Options Weighted Average Exercise Price Weighted Average Remaining Life In Years Intrinsic Value Outstanding, September 30, 2018 545,066 $ 1.78 Granted 290,481 1.54 Exercised – – Forfeited (22,668 ) 1.78 Expired – Outstanding, September 30, 2019 812,879 $ 1.69 3.8 $ 18,750 Exercisable, September 30, 2019 622,007 $ 1.73 3.7 $ 18,750 below provides additional information regarding stock option awards that were outstanding and exercisable at September 30, 2016:2019:Options Outstanding Options Exercisable Weighted Weighted Weighted Average Outstanding Average Average Exercisable Exercise Exercise Number of Exercise Remaining Life Number of Price Price Options Price In Years Options $0.64 to $1.99 1.00 97,500 $ 1.25 5.6 57,499 $2.00 to $2.99 2.46 96,000 2.46 2.9 96,000 $3.00 to $3.79 3.74 72,500 3.74 3.8 72,500 266,000 3.8 225,999 Options Outstanding Options Exercisable Weighted Weighted Weighted Average Outstanding Average Average Exercisable Exercise Exercise Number of Exercise Remaining Life Number of Price Price Options Price In Years Options $0.64 to $1.23 $ 0.80 77,500 $ 0.80 5.1 77,500 $1.44 to $1.67 1.51 606,879 1.49 4.3 416,007 $2.20 to $2.85 2.48 66,000 2.48 0.6 66,000 $3.73 to $3.79 3.74 62,500 3.74 1.4 62,500 812,879 3.7 622,007 December 5, 2014,January 18, 2018, the Company granted an aggregate of 30,00040,184 shares of restricted stock to directorstwo employees, of the Company, pursuant to the 2011 Plan. Thewhich 12,056 shares were scheduled to vest on the one-year anniversary from the date of grant and the aggregate grant date value of $34,800 was scheduled to be recognized proportionate to the vesting period. On January 5, 2015, the aggregate of 30,000 shares of restricted stock were forfeited and retired when the shareholders did not elect these directors. On February 23, 2015, the Company grantedupon an aggregate of 210,000 shares of restricted stock, of which 175,000 shares went to current directors and 35,000 went to a former officer (See Note 11 – Commitments and Contingencies – Former CFO Agreement) of the Company, of which 140,000 shares and 70,000 shares were pursuant to the 2007 Plan and 2011 Plan, respectively. The shares vest as follows: (i) 35,000 shares vest immediately, and (ii) 175,000 shares vest on the one-year anniversary from the date of grant. The aggregate grant date value of $193,200 will be recognized over the vesting period. On June 25, 2015, the Company granted 50,000 shares of restricted stock to an executive of the Company,employee resignation, pursuant to the 2011 Plan. The shares vest as follows: 15,000 shares on the date of grant, 15,000 shares on the two year anniversary of the date of grant and 20,000 shares on the three year anniversary of the date of grant. The grant date value of $32,000 will be recognized proportionate to the vesting period. On August 5, 2015, the Company granted 35,000 shares of restricted stock to a member of the Board, pursuant to the 2011 Plan which vests on the one year anniversary of the date of grant. The grant date value of $23,800 will be recognized over the vesting period. 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. The16,072 shares vested on December 31, 2015. The grant date value of $19,775 was recognized over the service period.F-13FORWARD INDUSTRIES, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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. Theimmediately, 12,056 shares vest on the one-year anniversary from the date of grant.July 18, 2018 and 12,056 shares vest on January 18, 2019. The awards had an aggregate grant date value of $182,746 will be$49,828, which is being recognized ratably over the vesting period.period of the awards.$226,000$3,000 and $97,000 in continuing operations$72,000 during the years ended September 30, 2019 and 2018, respectively, for restricted stock awards in its consolidated statements of operations and comprehensive income (loss) for the fiscal years ended September 30, 2016 and 2015, respectively.2016,2019, there was approximately $85,000 ofno unrecognized compensation costexpense related to shares of unvestednonvested restricted stock which is expected to be recognized over the remainder of the weighted average vesting period of 0.5 years.awards.F-26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSfiscal yearsyear ended September 30, 2016 and 2015:2019: Weighted Average Total Number of Grant Date Grant Date Shares Fair Value Fair Value Non-vested, September 30, 2014 257,581 $ 1.32 $ 340,044 Granted 325,000 0.87 283,800 Vested (192,958 ) 1.21 (234,281 ) Forfeited (126,291 ) 1.26 (159,398 ) Non-vested, September 30, 2015 263,332 0.87 230,165 Granted 141,817 1.43 202,521 Vested (244,166 ) 0.92 (224,758 ) Forfeited (1,666 ) 1.67 (2,782 ) Non-vested, September 30, 2016 159,317 $ 1.29 $ 205,146 Weighted Average Total Number of Grant Date Grant Date Shares Fair Value Fair Value Non-vested, September 30, 2018 6,028 $ 1.24 $ 7,475 Granted – – – Vested (6,028 ) 1.24 (7,475 ) Forfeited – – – Non-vested, September 30, 2019 – $ – $ – 910 INCOME TAXES For the Fiscal Years Ended September 30, 2016 2015 Current: Federal $ - $ - State - - Foreign - - Deferred: Federal 74,467 (307,369 ) State 10,951 (45,201 ) Foreign 127,454 14,013 212,872 (338,557 ) Change in valuation allowance (212,872 ) 338,557 Income tax provision (benefit) $ - $ - F-14 For the Fiscal Years Ended September 30, 2019 2018 Current: Federal $ (4,162 ) $ – State – – Foreign – – Deferred: Federal (713,066 ) 1,602,329 State (127,140 ) 152,603 Foreign (45,471 ) 9,234 (889,839 ) 1,764,166 Change in valuation allowance 885,677 (2,511,318 ) Income tax benefit $ (4,162 ) $ (747,152 ) F-27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 2016 2015 Deferred tax assets: Net operating losses $ 3,689,028 $ 3,936,614 Capital loss carryforwards 383,795 383,795 Share-based compensation 155,180 155,432 Alternative minimum tax credit 99,757 99,757 Excess tax over book basis in inventory 85,573 109,175 4,413,333 4,684,773 Valuation allowance (4,340,498 ) (4,553,370 ) Net deferred tax assets 72,835 131,403 Deferred tax liabilities: Prepaid insurance (59,599 ) (118,167 ) Excess book over tax basis in fixed assets (13,236 ) (13,236 ) (72,835 ) (131,403 ) Total $ - $ - September 30, 2019 2018 Deferred tax assets: Net operating losses $ 2,310,746 $ 1,919,260 Capital loss carryforwards 38,120 36,705 Share-based compensation 168,462 114,317 Alternative minimum tax credit 9,165 99,757 Excess tax over book basis in inventory 32,273 25,975 Reserves and other 534,444 28,938 Deferred rent 19,291 – Accrued compensation 8,832 – Accrued expenses 151,444 – Depreciation 27,272 – Charitable contributions 813 – 3,300,862 2,224,952 Valuation allowance (2,665,672 ) (1,602,725 ) Net deferred tax assets 635,190 622,227 Deferred tax liabilities: Prepaid insurance (140,951 ) (15,960 ) Intangible assets (298,280 ) (324,572 ) 481 Election (IPS) (195,959 ) (248,570 ) Excess book over tax basis in fixed assets – (33,125 ) (635,190 ) (622,227 ) Total $ – $ – As of September 30, 2016 and 2015, the Company has no unrecognized income tax benefits. F-28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS2016,2019, the Company had available total net operating loss carryforwards (“NOLs”) for the U.S. federal and state income tax purposes of approximately $9,211,000 and $5,533,000, respectively, expiring through 2036, resulting$8,010,000. NOLs generated prior to 2018 expire beginning in 2031. NOLs generated after 2018 have an indefinite carryforward period. The net operating losses result in a deferred tax assetsasset in respect of U.S. federal and state income taxes of approximately $3,132,000 and $277,000, respectively.$1,910,000. In addition, at September 30, 2016,2019, the Company had total available net operating loss carryforwardslosses available to carry forward for foreign income tax purposes of approximately $3,188,000$3,815,000, resulting in a deferred tax asset of approximately $281,000,$397,000, expiring through 2023.2024. The Company has capital loss carryovers of approximately $984,000$160,000 expiring through 2020, resulting in deferred tax assets in respect of U.S. federal and state income taxes of approximately $384,000.$38,000. Total net deferred tax assets, before valuation allowances,allowance, was $4,413,000approximately $2,888,000 and $4,685,000$2,225,000 at September 30, 20162019 and 2015,2018, respectively. Undistributed earnings of the Company’sCompany's foreign subsidiaries are considered to be permanently reinvested; therefore, in accordance with U.S.accounting principles generally accepted accounting principles,in the United States of America, no provision for U.S. federal and state income taxes would result. In the fiscal year ended September 30, 2016,2019, Forward Switzerland had a net incomeloss of approximately $267,000, however, all$25,000, and Forward UK had a net loss of the Company’s foreign subsidiaries had accumulated deficits as of September 30, 2016.approximately $228,000.2016,2019, 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,including, among others, projections of future taxable income, current year net operating loss carryforward utilization and the extent of the Company’sCompany's cumulative losses in recent years),years, the Company determined that, on a more likely than not basis, it would not be able to use its remaining deferred tax assets, (exceptexcept in respect of the 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 reinvested and for which no United States tax liability has been accrued).accrued. Accordingly, the Company has determined to maintain a full valuation allowance against its net deferred tax assets. As of September 30, 20162019 and 2015,2018, the valuation allowances wereallowance was approximately $4,340,000$2,666,000 and $4,553,000,$1,603,000, respectively. In the future, the utilization of the Company's net operating loss carryfowardsNOLs may be subject to certain change of control limitations. If the Company determines in a future reporting period that it will be able to use some or all of its deferred tax assets in a future reporting period, 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” line item of the Company’s consolidated statements of operations and comprehensive income (loss).F-15 For the Fiscal Years Ended September 30, 2019 2018 US federal statutory rate 21.0% 21.0% State tax rate, net of federal benefit 2.8% 2.8% Share-based compensation 0.0% (2.2% ) Foreign rate differential 1.4% 0.5% Other 1.9% 2.6% Change in tax credits (0.1% ) 0.0% Effect of federal tax rate change 0.0% 208.2% Effect of repatriating Swiss earnings 0.0% 16.2% Capital loss - expiration 0.0% 30.0% Change in valuation allowance (26.6% ) (397.2% ) Federal Alternative Minimum Taxes (AMT) 0.1% 0.0% Permanent differences (0.4% ) 0.0% Income tax benefit 0.1% (118.2% ) FORWARD INDUSTRIES, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Fiscal Years Ended September 30, 2016 2015 US federal statutory rate 34.0 % (34.0 %) State tax rate, net of federal benefit 5.0 % (5.0 %) Permanent differences: Share-based compensation (8.3 %) 9.9 % Other 0.4 % 0.4 % Foreign rate differential (13.3 %) (5.3 %) Other 17.3 % 10.4 % Change in valuation allowance (35.1 %) 23.6 % Income tax provision (benefit) 0.0 % 0.0 % 20162019 and 2015,2018, the Company has not accrued any interest and penalties related to uncertain tax positions. It is the Company’sCompany'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).operations. For the periods presented in the accompanying consolidated statements of operations, and comprehensive income (loss), no material income tax related interest or penalties were assessed or recorded. All fiscal years prior to the fiscal year ended September 30, 20132016 are closed to federal and state examination.F-29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS10 INCOME11 EARNINGS (LOSS) PER SHAREincomeearnings (loss) per share data for each period presented is computed using the weighted-averageweighted average number of shares of common stock outstanding during each such period. Diluted incomeearnings (loss) per share data is computed using the weighted-averageweighted average number of common and dilutive common-equivalentcommon equivalent shares outstanding during each period. Dilutive common-equivalent shares consist of:of (i) shares that would be issued upon the exercise of stock options and warrants, computed using the treasury stock method;method, and (ii) shares of non-vestednonvested restricted stock. Net loss from continuing operations per basic and diluted share for the fiscal year ended September 30, 2015 is net of preferred stock cash dividends and accretion.For the fiscal years ended September 30, 2016 and 2015, theThe Company calculated the potential diluted earnings per share in accordance with ASC 260, as follows: For the Fiscal Years Ended September 30, 2016 2015 Numerator: Net income (loss) $ 606,562 $ (1,433,981 ) Preferred stock dividends and accretion - (475,580 ) Net income (loss) to common equity $ 606,562 $ (1,909,561 ) Denominator: Weighted average shares outstanding - basic 8,521,188 8,342,168 Effects of dilutive securities: Assumed exercise of stock options, treasury stock method 28,289 - Assumed vesting of restricted stock, treasury stock method 126,106 - Weighted average dilutive potential common shares 154,395 - Weighted average shares outstanding - diluted 8,675,583 8,342,168 Basic earnings (loss) per share $ 0.07 $ (0.23 ) Diluted earnings (loss) per share $ 0.07 $ (0.23 ) F-16 For the Fiscal Years Ended September 30, 2019 2018 Numerator: Net income (loss) (numerator for basic and diluted earnings (loss) per share) $ (3,604,030 ) $ 1,379,320 Weighted average shares outstanding (denominator for basic earnings (loss) per share) 9,532,034 9,264,670 Effects of dilutive securities: Assumed exercise of stock options, treasury stock method – 36,621 Assumed vesting of restricted stock, treasury stock method – 53,378 Dilutive potential common shares – 89,999 Denominator for diluted earnings (loss) per share - weighted average shares and assumed potential common shares 9,532,034 9,354,669 Basic earnings (loss) per share $ (0.38 ) $ 0.15 Diluted earnings (loss) per share $ (0.38 ) $ 0.15 FORWARD INDUSTRIES, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTSarewere excluded from the calculation of weighted average dilutive common sharesdiluted earnings per share because their inclusion would have been anti-dilutive: As of September 30, 2019 2018 Options 812,879 469,566 Warrants 151,335 151,335 Total potentially dilutive shares 964,214 620,901 For the Fiscal Years Ended September 30, 2016 2015 Options 188,500 311,000 Warrants 723,846 723,846 Non-vested restricted stock - 263,332 Total potentially dilutive shares 912,346 1,298,178 F-30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS1112 COMMITMENTS AND CONTINGENCIESFormer CEO AgreementEffective January 15, 2015, the Company’s former Chief Executive Officer (“Former CEO”) voluntarily resigned from his position and entered into an agreement with the Company, pursuant to which the Former CEO agreed to waive all payments under his Employment Agreement and all future claims against the Company. Under the agreement, for six months following his termination of active employment, the Former CEO will receive his regular monthly base salary and will remain eligible to participate in medical and dental plans similar to his current coverage level for a period of twelve months. The Former CEO will also receive a cash payment of $7,852 in lieu of shares of restricted stock of the Company that would otherwise vest on November 8, 2015. In addition, the Former CEO will retain certain other ancillary benefits for limited periods. The agreement includes customary confidentiality, non-solicitation, non-competition, non-disparagement and release provisions. As of September 30, 2015, the remaining obligation to the Former CEO of approximately $1,000 is reflected as an accrual in the consolidated balance sheets. As of September 30, 2016, the obligation has been fully paid and there are no further amounts owed to the Former CEO.Former CFO AgreementGuarantee ObligationOn February 16, 2015, the Company entered into a settlement agreement and mutual release (the “Agreement”) 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 September 30, 2015, the remaining obligation to the Former CFO of approximately $90,000 is reflected as an accrual in the consolidated balance sheet. As of September 30, 2016, the obligation has been fully paid and there are no further amounts owed to the Former CFO.Guarantee ObligationFiscalfiscal representative in The Netherlands for the purpose of providing services in connection with any value added tax matters. As part of this agreement, 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.$84,000$82,000 as of September 30, 2016)2019) 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:that (i) a value added tax liability is imposed on the Company's revenues 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.F-17FORWARD INDUSTRIES, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS$1.7 million$650,000 at September 30, 2016)2019). As of September 30, 2016,2019, the Company had not incurred a liability in connection with this guarantee.rentsleases office space for its corporate headquarters in West Palm Beach, Florida under an operating leasea 90-month agreement expiring in September 20202020. The operating lease granted six initial months of free rent and escalates at 3% per year. The monthly rent payment is approximately $7,700, which includes common area maintenance costs.F-31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 2019 Computer equipment $ 203,328 Accumulated depreciation 138,265 Net Book Value $ 65,063 Year Ending September 30, Amount 2020 $ 41,096 2021 8,578 2022 800 Total minimum lease payments $ 50,474 included in continuing operations for the years ended September 30, 20162019 and 20152018 amounted to approximately $107,000$473,000 and $138,000 (net of $168,000 and $185,000 of rental income from a sub-lease),$342,000, respectively. The following is a schedule by years of future minimum rental payments required under operating leases that have initial or remaining noncancelable lease terms in excess of one year as of September 30, 2016:2019:Fiscal Years Ended September 30, Amount 2020 $ 495,090 2021 413,331 2022 380,385 2023 375,732 2024 385,644 Thereafter 974,878 Total lease commitments $ 3,025,060 Fiscal Years Ended September 30, Amount 2017 $ 85,000 2018 87,000 2019 90,000 2020 93,000 Total lease commitments $ 355,000 F-32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS1213 RELATED PARTY TRANSACTIONSNew York Office RentOn February 1, 2014, the Company began leasing office space in New York, New York for its former Chief Executive Officer at a rate of $2,500 per month from LaGrange Capital Administration, L.L.C. (“LCA”), an entity owned by a former member of the Company’s Board of Directors. 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 fiscal year ended September 30, 2015, the Company recognized approximately $51,000 of rent expense related to the New York office.March 12, 2012,September 9, 2015, 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:of (i) $100,000;$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 directorChairman 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 $1,466,000$1,398,000 and $1,522,000$1,426,000 during the fiscal years ended September 30, 20162019 and 2015,2018, respectively, in service fees paid to Forward China, which are included as a component of costscost of goods sold in continuing operations in the accompanying consolidated statements of operations and comprehensive income (loss).Investment Management Agreementoperations. Effective October 22, 2019, the Company extended the term of the supply agreement to October 22, 2020 under the same terms, substantially.April 16, 2013,August 14, 2018, the Company entered into an Investment Managementa formal agreement, confluent with the Supply Agreement (the “Investment Management Agreement”) with LCA, pursuantnoted above, to whichaddress the potential impact of customers sourcing directly from Forward China. Although unlikely, customers may be introduced directly or indirectly by the Company retained LCA to manage certain investment accounts funded byForward China. In the Company. The Investment Management Agreement formally terminated effective February 1, 2015. There were no new funds invested with LCA duringevent a customer determines to bypass the fiscal year ended September 30, 2015. During the fiscal year ended September 30, 2015,services of the Company purchasedand do business directly with Forward China, Forward China has agreed to pay a commission of 50% of the net revenue generated from the products or services sold to the customer after deduction of direct costs. No commissions have been received per agreement during Fiscal 2019 and 2018.$11,000$128,000 and $85,000 in interest payments associated with the note in Fiscal 2019 and Fiscal 2018, respectively.marketable securities. DuringDuality Advisers is an immediate family member of a director on the fiscal year ended September 30, 2015,Company’s board and a member on the Board’s Audit and Compensation committees. The Company sold approximately $952,000 of marketable securities. As a result of these activities, the Company recognized net investment losses of approximately $110,000 during the fiscal year ended$150,000 in design services to Duality Advisers in Fiscal 2019. At September 30, 2015.2019, there was approximately $9,000 in accrued receivables for Duality Advisers.F-18FORWARD INDUSTRIES, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS1314 LEGAL PROCEEDINGS other legal actions or proceedings in the ordinary course of its business. As of September 30, 2016,2019, 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.F-33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS1415 401(K) PLANrelated to its continuing operations of approximately $37,000$226,000 and $55,000$126,000 during the fiscal years ended September 30, 20162019 and 2015,2018, respectively, which are reflected in the accompanying consolidated statements of operations and comprehensive income (loss).operations. The Company’s contributions vest immediately.1516 OPERATING SEGMENT INFORMATIONreportspost IPS acquisition, conducts its business through two operating segments, which are also its reportable segments:· Distribution and · Design manages its continuing operations based on a single operating segment: the design and distribution ofdistributes carry and protective product solutions, primarily for hand held electronic devices. Products designed and distributedsourced 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 the APAC Region, the EMEA Region, the Americas and the Americas.APAC Region. Geographic regions are defined by reference primarily to the location of the customer or its contract manufacturer. For the Year Ended September 30, 2019 2018 Revenue Distribution $ 21,987,670 $ 24,347,408 Design 15,421,360 10,152,095 Total revenue 37,409,030 34,499,503 Cost of sales Distribution $ 18,612,881 $ 20,286,446 Design 12,215,267 7,644,981 Total cost of sales $ 30,828,148 $ 27,931,427 Segment operating income (loss) Distribution $ (1,376,675 ) $ (140,804 ) Design (1,720,708 ) 401,456 Total income (loss) from operations $ (3,097,383 ) $ 260,652 Other income (expenses) Distribution $ (437,809 ) $ 401,779 Design (73,000 ) (30,111 ) Total other income (expense) $ (510,809 ) $ 371,668 Income (loss) before income taxes Distribution $ (1,814,484 ) $ 260,975 Design (1,793,708 ) 371,345 Total income (loss) before income taxes $ (3,608,192 ) $ 632,320 F-34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands) For the Fiscal Years Ended September 30, 2019 2018 EMEA Region: Germany $ 3,875 $ 3,987 Poland 3,355 4,071 Switzerland 297 407 Austria 186 302 Other 166 553 Total EMEA Region 7,879 9,320 Americas: United States [1] 21,730 17,307 Other 4 8 Total Americas 21,734 17,315 APAC Region: Hong Kong 6,017 6,485 Malaysia 153 480 China 318 248 Singapore 564 338 Taiwan 164 195 Other 580 119 Total APAC Region 7,796 7,865 Total Net Revenues $ 37,409 $ 34,500 F-35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Fiscal Year Ended September 30, 2019 EMEA Americas APAC Total Diabetic Products Customer A 49% 42% – 30% Diabetic Products Customer B 29% 22% 6% 19% Diabetic Products Customer C – 3% 76% 28% Diabetic Products Customer D 13% 15% 3% 10% Totals 91% 82% 85% 87% For the Fiscal Year Ended September 30, 2018 EMEA Americas APAC Total Diabetic Products Customer A 42% 36% – 20% Diabetic Products Customer B 30% 28% – 27% Diabetic Products Customer C – – 82% 27% Diabetic Products Customer D 13% 16% 2% 10% Totals 85% 80% 84% 84% F-36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSnet revenuestotal assets by geographic region.operating segment for the years ended September 30, 2019 and 2018: (dollars in thousands) For the Fiscal Years Ended September 30, 2016 2015 APAC Region: Hong Kong $ 8,322 $ 9,628 Other 1,892 2,293 Total APAC Region 10,214 11,921 EMEA Region: Germany 4,807 5,319 Poland 4,690 3,998 Other 436 996 Total EMEA Region 9,933 10,313 Americas: United States 7,318 7,432 Other 15 348 Total Americas 7,333 7,780 Total Net Revenues $ 27,480 $ 30,014 Long-Lived Assets F-19 September 30, 2019 2018 Distribution $ 9,554,465 $ 12,010,344 Design 6,539,887 7,217,522 Total assets $ 16,094,352 $ 19,227,866 FORWARD INDUSTRIES, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTSpredominatelypredominantly of property, plant and equipment, by operating segment are presented net of accumulated depreciation and amortization and segregated by geographic region as follows:amortization. All of the Company’s long-lived assets are geographically located in the United States or Americas region. See table below: (dollars in thousands) September 30, 2016 2015 Americas $ 56 $ 120 APAC Region - - EMEA Region - - Total long-lived assets (net) $ 56 $ 120 September 30, 2019 2018 Consolidated Distribution Design Consolidated Distribution Design Americas $ 243,002 $ 17,825 $ 225,177 $ 358,975 $ 26,871 $ 332,104 APAC – – – – – – EMEA – – – – – – Total long-lived assets (net) $ 243,002 $ 17,825 $ 225,177 $ 358,975 $ 26,871 $ 332,104 September 30, 2019 2018 Distribution $ 6,061,472 $ 6,568,918 Design 2,321,581 1,559,353 Total liabilities $ 8,383,053 $ 8,128,271 F-37 Supplier ConcentrationFORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSapproximately 100% of its OEM products from Forward China in Fiscal 20162019 and 2015.Major Customers2018.following customers or their affiliates or contract manufacturers accountedCompany procures materials and supplies used to build prototypes and “mock-ups” for more than ten percentdesign service projects. All of the Company’s net revenues, by geographic region, anddesign segment vendors are located in total.the United States. For the Fiscal Year Ended September 30, 2016 APAC Region EMEA Region Americas Total Company Diabetic Products Customer A 81 % 2 % - 31.0 % Diabetic Products Customer B 45 % 31 % 24.5 % Diabetic Products Customer C 1 % 33 % 24 % 18.7 % Diabetic Products Customer D 4 % 14 % 25 % 13.3 % Totals 86 % 94 % 80 % 87.5 % For the Fiscal Year Ended September 30, 2015 APAC Region EMEA Region Americas Total Company Diabetic Products Customer A 81 % 2 % - 32.9 % Diabetic Products Customer B 44 % 34 % 24.1 % Diabetic Products Customer C 2 % 27 % 20 % 14.9 % Diabetic Products Customer D 2 % 12 % 20 % 10.2 % Totals 85 % 85 % 74 % 82.1 % Four customers (including their affiliates or contract manufacturers) accounted for approximately 83% and 82%NOTE 17 LINE OF CREDITCompany's accounts receivablelender on April 30, 2019. The line of credit was amended and modified on September 28, 2018 to extend the line of credit limit from $1,000,000 to $1,300,000 and was also undersigned by Forward Industries, Inc. as the guarantor and is secured by all of IPS’ assets. The interest rate on the line of credit is 0.75% above The Wall Street Journal prime rate. The effective interest rate at September 30, 20162019 was 5.75%. As of September 30, 2019, the Company had $0 available under the line of credit. The Company is subject to certain debt-service ratio requirements which are measured annually. As of September 30, 2019 the Company was in violation of the required debt-service ratio covenants. The Company was granted a waiver of the violation from the lender. However, there is a potential risk that the lender may demand payment in full upon default.2015,bore interest at a rate of 4.230% per annum. Interest and principal of $18,546 was paid on a monthly basis through maturity. This loan was secured by all of IPS’ assets and was guaranteed by the Company. Outstanding balance was $0 and $73,528 as of September 30, 2019 and 2018, respectively.F-20F-38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSYear Amount 2020 $ 54,027 Thereafter – Total $ 54,027 F-39