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 2020, 2022
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to___________ to_____________.
Commission File Number: 001-34780
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) |
700 Veterans Memorial Highway, Suite 100, Hauppauge, NY11788
(Address of principal executive offices, including zip code)
(631)547-3041
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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 LLC (The Nasdaq |
Securities registered pursuant to Section 12(g) of the Act: None
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. ☐ 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 every Interactive Data File required to be submitted 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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act).
☐ Large accelerated filer
☒Non-accelerated filer
☐ 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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ¨☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒No
As of March 31, 2020,2022, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was approximately $7,400,000$12,000,000 based on the closing price ($1.11) as reported on the Nasdaq Stock Market.Market.
As of November 30, 2020, 9,886,351There were shares of the registrant’s common stock were outstanding.outstanding as of December 9, 2022.
Documents Incorporated by Reference
Portions of the registrant's Proxy Statement for the 20212023 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, 2020.2022.
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
Forward Industries, Inc.
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General
Forward Industries, Inc. (“Forward”, “we”, “our” or the “Company”), through its wholly-owned subsidiaries, Forward Industries (IN), Inc., (“Forward US”), Forward Industries (Switzerland) GmbH (“Forward Switzerland”), Forward Industries UK Limited (“Forward UK”), Intelligent Product Solutions, Inc., (“IPS”), and Kablooe, Inc., (“Kablooe”), is a fully integratedglobal design, developmentmanufacturing, sourcing and manufacturing solution provider fordistribution group serving top tier medical and technology customers worldwide. The Company has expanded its ability to design and develop solutions forAs a result of the continued expansion of our existing multinational client base and expand beyond the diabetic product line 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 handheld electronic devices, the Company is now a one-stop shop for design development capabilities through our wholly-owned subsidiaries, IPS and manufacturing solutions servingKablooe, we are able to introduce proprietary products to the market from concepts brought to us from a wide rangenumber of clients indifferent sources, both inside and outside the industrial, commercial and consumer industries. Company.
The Company’s previous principal customer market in our original equipment manufacturer (“OEM”) distribution business has been original equipment manufacturers,OEMs or “OEMs” (or the contract manufacturing firms of these OEM customers),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’sOur 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 (suchsuch as sporting and recreational products, bar code scanners, smartphones, GPS location devices, tablets and firearms). The Company’sfirearms. Our OEM customers are located in: (i) the Asia-Pacific region,in various regions worldwide.
Our retail distribution business, which we referbegan in 2019, sources and sells smart-enabled furniture, hot tubs and a variety of other products through various online retailer websites to as the “APAC Region”; (ii) Europe, the Middle East, and Africa, which we refer to as the “EMEA Region”; and (iii) the geographic area encompassing North America, Central America and South America, which we refer to as 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 Industries Asia-Pacific Corporation, a British Virgin Islands corporation (“Forward China”).
As a result of the expansion of the design development capabilities through its wholly-owned subsidiaries, IPS and Kablooe, the Company is now able to introduce proprietary products to the market from concepts brought to it from a number of different sources, both inside and outside the Company.
By virtue of our strategic collaboration and distribution agreements, we have secured a portfolio of smart enabled products which we have begun distributing to retail outletscustomers predominantly located in the United States.U.S. The rollout of many of these products has beenwas delayed by COVID-19 as discussed below. As a result of this collaboration and other product initiatives, we invested in and began to build out aexpanded our retail distribution network, responsible for gettingwe have been able to sell a variety of 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 process of taking a product from concept to the consumer.
Through the manufacturer representative agreements we currently have in place, we expect to gain sales coverage tothrough retailers such as Best Buy, Target,Wayfair, Walmart, Costco, Amazon, CVS, Walgreens, Staples, Office Depot and many others.Amazon. The manufacturer representative model allows us to engage and support a large sales team and cover a larger territory with a variable cost model as these representatives work on commission only.
We do not manufacture any of our OEM or retail distribution products and source substantially all these products from independent suppliers in China through Forward Industries Asia-Pacific Corporation, a British Virgin Islands corporation (“Forward China”). Forward China is owned by our Chairman and Chief Executive Officer.
Our design business provides a full spectrum of hardware and software product design and engineering services to customers predominantly located in the U.S. Our expertise in various disciplines enables us to serve a wide variety of industries and provide clients with a single source solution for concepts, industrial design, mechanical engineering, embedded software and systems architecture, mobile and enterprise application software, and optical engineering.
The outbreak of the COVID-19 virus in China and its subsequent spread throughout the world has impactedhad a significant impact on our business. In Fiscal 2020, results of operations. In efforts to contain the virus, authorities have implemented travel restrictions, quarantines, business limitations and shutdowns. Since the majority of our workforce is based in New York, these restrictions have required substantially all our employees to work from home for much of Fiscal 2020. During the third quarter of Fiscal 2020, productivity of our direct labor employees was reduced, which caused a decline in revenue and gross profit. As some of these restrictions were relaxed in the fourth quarter of Fiscal 2020, employees started to return to the office with minimal operational challenges. Business shutdowns resulting from the pandemic disrupted our supply chain and the manufacture orand shipment of our OEM products and have delayed the rollout of our smart enabled retail products to big box retail stores, causingproducts. Demand for our distribution segment revenues in Fiscal 2020 to be less than anticipated. Additionally, our design segment reported lower revenues as demand for its design and development services werewas reduced or delayed.delayed because of the pandemic as certain customers reduced discretionary spending. In Fiscal 2021, the economy began to open across the world, and consumer demand grew much faster than manufacturers could satisfy, leading to extensive shipping delays, a global shipping container shortage and higher ocean freight costs. This continued to reduce the availability of many of our products and increased their cost of importation. The increase in consumer demand continued in Fiscal 2022, which dramatically increased demand for ocean freight, particularly from the Asia-Pacific region. Labor shortages at U.S. ports and in ground transportation services caused container ships to spend a significant amount of time waiting to be unloaded and to arrive at our warehouses, which caused an increase in the demand for and cost of ground transportation. These factors resulted in further cost increases and delayed consumer availability for many of our products. The impact from lower revenue was partially offset by a reduction in certain selling and travel related expenses resulting from government mandated stay-at-home orders and travel restrictions as well as revenues derived from sales and sourcing of personal protective equipment. The pandemic had temporarily impacted our liquidityinflation in Fiscal 2020, as collections2022 caused an increase in the cost of accounts receivable were somewhat delayed at certain times.acquiring and retaining employees in our design business.
The economy started to openeffects of COVID-19 may further impact our business in certain jurisdictions where the virus was considered under control. However, there continue to be areas with increased rates of infection that could cause government officials to enact more restrictions on how businesses operate. The futureways we cannot predict, and such impacts of the pandemic and any resulting economic impact are largely unknown and could be significant. It is possible that the pandemic, the measures taken by the governments of countries affected and the resultingThe current economic impactconditions may continue to negatively impact our results of operations, cash flows and financial position in future periods as well as that of our customers, including their ability to pay for our products and services and choosingto choose to allocate their budgets to new or existing projects which may or may not require our products and services. The long-term financial impact on our business cannot be reasonably estimated at this time. As a result, the effects of COVID-19 may not be fully reflected in our financial results until future periods. Refer to “Part I, Item 1A — Risk Factors” in this report for a description of the material risks that the Company currently faces in connection with COVID-19.
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Until there is a vaccine and treatment that is widely distributed,the effects of the pandemic have fully receded, we expect business conditions to remain challenging. In response to these challenges, we will continue to focus on those factors that we can control: closely managing and controlling our expenses;expenses and inventory levels; aligning our design and development schedules with demand in a proactive manner as there are changes in market conditions to minimize our cash operating costs; pursuing further improvements in the productivity and effectiveness of our development, selling and administrative activities and, where appropriate, taking advantage of opportunities to enhance our business growth and profitability strategy.
Corporate History
Forward 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.
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.
InIn January 2018, Forward acquired IPS, which resultedan engineering design company, and in IPS being a wholly-owned subsidiary of Forward.
In August 2020, Forward acquired the assets of Kablooe Design, a medical and consumer design and development company. The Company believesWe believe that the design and engineering service capabilities of Kablooe will complement the IPS business and further diversify the industries and customers with which the Company doeswe do 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 and Kablooe businesses, to be consistent with the operating segment definitions (see Note 16 to the audited consolidated financial statements herein).
Customers
The Company’sOur OEM distribution customers are located in: (i)in all geographic regions worldwide. Our retail distribution customers are predominantly located in the APAC Region; (ii) the EMEA Region; and (iii) the Americas.U.S.
IPS and Kablooe provideOur design business provides 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. Our design customers are located primarily in the U.S.
Products
The Company’s distributionOur 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). Beginning in Fiscal 2020, the Company’s distributionOur products also include smart-enabled furniture, hot tubs and a variety of other products such as speakers and lamps.
The Company doessold through our retail distribution network. We do not manufacture any of its distributionour products and sourceswe source substantially all of its distributionour products from independent suppliers in China through Forward China, a related party (see Note 1413 to the consolidated financial statements).
Diabetic Products
We sell carrying cases for blood glucose diagnostic kits (“Diabetic Products”) directly to OEM customers, or their contract manufacturers. These electronic monitoring kits are made for use by diabetics. We typically sell these cases at prices ranging from approximately $0.60 to $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 2% of net revenues. The distributiondiabetic products customer (or its contract manufacturer) packages our carry cases “in box” as a custom accessory for the customer’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 2020, our Diabetic Products customers accounted for 83% of our total net revenues in the distribution business, compared to 89% in Fiscal 2019.
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Other Products
We also sell carrying and protective solutions to distribution 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 distribution 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.
Retail Products
In Fiscal 2020, as a result of the build out and growth of our retail distribution network, we addedbegan selling smart-enabled products, to our distribution business. Our smart-enabled products includesuch as speakers and lamps that provide lighting and sound with connectivityBluetooth® connectivity. In Fiscal 2021, we began expanding our retail product offerings to other devices via Bluetooth. Our selling prices for these products, including related accessories, ranges from $35 to $135 per unit. For Fiscal 2020, ourinclude additional smart-enabled furniture, such as desks and side tables, as well as hot tubs and various other products accounted for 17% of our total net revenues in the distribution business, compared to 11% in Fiscal 2019.that are sold through retailer websites.
Our design segmentbusiness provides 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”)computer-aided design 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 the OEM division, of our distribution business, we typically receive requests to submit product designs in connection with a customer’s introduction and rollout to market of a new product. IPS collaboratesWe collaborate with clients to determine functionality, size and other basic specifications and requirements for products. Our design and production resources develop more detailed product specifications and design options for our customers’ evaluation. We provide documentation of each phase to the 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 products are available to be packaged with the customer’s additional product components prior to shipment and sale, or to make the product available to the customer for direct sale through its retail distribution channels.
In the retail division, we work with various retailers to understand their product requirements and specifications and consumer demand and utilize our sourcing resources to obtain products that meet these needs. Additionally, we have a portfolio of retail products that we share with retailers to gauge the level of consumer interest. We receive design and marketing services for some retail products from The Justwise Group Ltd., a company owned by Terence Wise, our Chairman, Chief Executive Officer and largest shareholder.
Services
Services offered for each engagementin our design business vary from full development utilizing a wide range of in-house design and engineering functions, to targeted design and engineering support for clients with in-house development teams. Our in-house capabilities include the following:
· | Electrical Engineering | |
· | Mechanical Engineering | |
· | Software Engineering | |
· | Industrial Design | |
· | User Experience/User Interface (UX/UI) Design and Development | |
· | Optical Engineering | |
· | Program Management | |
· | IoT System Architecture | |
· | Marketing | |
· | IT Support |
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Distribution
Channels of Distribution
We primarily ship our OEM distribution products directly to our 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.
In Fiscal 2019, we secured a portfolio of smart-enabledWe primarily ship our retail distribution products which we began distributing through retail outletsdirectly to end customers from distribution centers located in the U.S. in Fiscal 2020.and Canada. We may also ship certain retail products directly to some larger retailers. We continue to invest in and build out a distribution networkevaluate our strategy for retail products as we expect this part of our business to grow in the future. The retail distribution network is responsible for placing productsbusiness in an effort to increase profitability and match our product offerings with major retailers for consumption both in store and online.consumer demand.
Distribution Hubs for Customers
We have arrangements with various customer’scertain customers’ distribution hubs. These arrangements obligate us to supply our products to our customers’ distribution hubs where their products are manufactured, kitted, and/or warehoused pending sale, and where our products are packaged “in box” with the distribution customers’ products. The product quantities we are required to supply to each distribution hub are based on the distribution customer’s purchase orders and forecasts. We do not recognize revenue for product shipped to a customers’customer’s hub until we have been notified by our customer that our product has been withdrawn or used by the distribution hub. Hub arrangements have had the general effect of providing financing for our customers’ inventory purchases 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.
Third-Party and Consignment Warehouses
We also have arrangements with various third-party fulfillment centers for products distributed through retail outletswarehouses and consignment warehouses of major retailers in the U.S. and Canada to store, manage and ship our retail products. We do not recognize revenue for retail products shipped to a fulfillment centerany of these warehouses until the product has been shipped to the end-user customer.end customer and our performance obligation is complete.
Product Supply
Manufacturing
The manufacture of custom carrying cases and other carry and protective solutions generally consists of die cutting fabrics and heat sealing, gluing, sewing, and decorating (affixingaffixing logos to)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 from suppliers based on our specifications.
The manufacture of smart furniture consists of laser cutting, punching, welding and powder coating the various parts and finished product, including lamination, board cutting and drilling for certain products. The main materials used include particle board, engineered wood composite, tempered glass and metal. The manufacture of certain other retail products includes mold creation and assembly and uses various plastics and light components.
We do not believe that any of the component materials or parts used in the manufacture of our products are 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.
Dependence on Sourcing Agent
The Company hasWe have a Buying Agency and Supply Agreement (the “Supply Agreement”) with Forward China (the “Agent”).China. The Supply Agreement provides that the AgentForward China acts as the Company’sour exclusive buying agent. The Agentagent for the products we sell. Forward China also arranges for sourcing, manufacture and exportation of such products. The Company purchasesWe purchase products at the Agent’sForward China’s cost and payspay them a monthly 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.Forward China. The Supply Agreement has been extended to October 22, 2023. Terence Wise, the Company’sour Chairman, Chief Executive Officer and largest shareholder, is a principalthe owner of the Agent.Forward China. See “Item 1A. – Risk Factors” regarding our dependence on the Agent.Forward China.
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Suppliers
We procure substantially all products for our OEM and retail distribution businessproducts from independent suppliers in China through the Agent.Forward China. Depending on the product, we may require several different suppliers to furnish component parts or pieces.
We place orders with the Agent for particular products. Weproducts and do not have minimum supply requirement agreements with our suppliers to guarantee a supply of finished product, nor have we made purchase commitments to purchase minimum amounts from any of our suppliers.amounts. However, from time to time, we may order certain OEM 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 customers’ anticipated delivery demands. Beginning September 1, 2013, we began making purchases directly from Forward China. During Fiscal 2020 and Fiscal 2019, all of our purchases for our distribution business were made directly through Forward China.
There are very few suppliers required for the design and development partsegment of the business as it is a service-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 suppliersin China meet our quality assurance standards. HeThe quality assurance manager independently verifies and supervises the inspection of products provided by independent contractors in China. In July 2015, Forward China received its ISO 9001:2008 quality certification, which was renewed in July 2018 and is valid until July 2021.2024.
Our design business follows general industry standard practices for review and corrective actions related to its design services. There are no independent quality assurance standards in place for its design and engineering work. Customer specifications and scope of services are laid out in the project contracts and the Company workswe work closely with the customer to identify and correct any quality issues that arise.
Competition
Distribution Business
TheOur OEM division of ourand retail distribution business isbusinesses are highly competitive in terms of product pricing, design, delivery terms, and customer service. In the production of our distribution products, we compete with numerous United StatesU.S. 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, quality control, shipment capabilities and expertise in sourcing.
Design and Engineering Business
The depth and breadth of the services offered and industries served by our design segment are unique. Our management team is aware that there are very few competitive firms that have the full set of capabilities that our design segment has under one roof. There are, however, numerous design and engineering companies that compete with us in specific industries and/or with specific targeted skills or have competitive advantages.
Human Capital/Employees
The Company’s key human capital management objectives are to attract, retain and develop the highest quality talent. To support these objectives, the Company’s human resources programs are designed to develop talent to prepare them for critical roles and leadership positions for the future; reward and supportAs of November 30, 2022, we had approximately 100 employees, through competitive pay and benefits; enhance the Company’s culture through efforts aimed at making the workplace more engaging and inclusive; acquire talent and facilitate internal talent mobility to create a high-performing, and diverse workforce. Nonesubstantially all of our employeeswhom work full-time, none of which are covered by a collective bargaining agreement.
The Company employed approximately 85 people as of November 30, 2020. We hire consultants on an as-needed basisbasis.
Human capital management is critical to our ongoing business success, which requires investing in our design segment.people. Our aim is to create a highly engaged and motivated workforce where employees are inspired by leadership, engaged in purpose-driven, meaningful work and have opportunities for growth and development. We are committed to creating and maintaining a work environment in which employees are treated with respect and dignity. We value our diverse employees and provide career and professional development opportunities that foster the success of our company.
An effective approach to human capital management requires that we invest in talent, development, culture and employee engagement. We aim to create an environment where our employees are encouraged to make positive contributions and fulfill their potential. We emphasize our core values of innovation, encouragement, motivation, and curiosity with our employees to instill our culture and create an environment of growth and positivity.
Our Compensation Committee is also actively involved in reviewing and approving executive compensation, and succession plans so that we have leadership in place with the requisite skills and experience to deliver results the right way. We offer fair, competitive compensation and benefits that support our employees’ overall wellbeing. In addition to health benefits, we contribute to employees’ 401(k) plans and offer student tuition reimbursement (if certain requirements are met).
Impact of COVID-19
The health and well-being of our employees is of utmost importance to us. Starting in March 2020, the majority of our employees transitioned to a remote workforce. Since that time, our employees have demonstrated resilience, wisdom, commitment, and compassion in working with our customers. As conditions improved, employees in the U.S. were encouraged to return to their offices. We encourage all employees to follow Centers for Disease Control and Prevention and local guidelines and recommendations.
Regulation and Environmental Protection
Our sourcing business isretail and OEM distribution businesses are subject to various regulations in various jurisdictions, including the United StatesU.S. and member states of the European Community,Union, 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 regulations in China becomesbecome 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 design segment of our 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.
AsAvailable Information
Our corporate website is www.forwardindustries.com. On our retail business increases,website under “Investors” "SEC Filings", we anticipate that we will be requiredmake available access to obtain certain certifications for productsour Annual Reports on an as required basis.Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, Proxy Statements on Schedule 14A and amendments to those materials filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”), free of charge. The contents of the website are not incorporated into this report.
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Investing in our common stock involves a high degree of risk. You should carefully consider the following Risk Factorsrisk 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.
Risks Relating to Our Business, Liquidity and Operations
OurThe COVID-19 pandemic and measures intended to prevent its spread have had, and may continue to have, a material and adverse effect on our business and results of operations have been negatively impacted by the coronavirus pandemic.operations.
TheGlobal health concerns relating to the COVID-19 pandemic has spread across the globe and continuesrelated government actions taken to negatively impact worldwide economic activity and has impacted our Company in a number of ways. COVID-19 has increased the risk that the Company or its employees, suppliers, customers and other commercial partners may be prevented from conducting business for an indefinite period of time, including due toreduce the spread of the disease or shutdowns requested or mandated by governmental authorities. Specifically, COVID-19virus have weighed on the macroeconomic environment, and the pandemic has significantly increased economic uncertainty and reduced economic activity in the riskpast. Small businesses, which represent a large portion of customers’ inability to pay for our design servicescustomers, were impacted particularly hard. The pandemic resulted in government authorities and hasbusinesses implementing numerous measures to try to contain the potential to continue to impact collections on the distribution side of the business. The Company has transitioned some of its employees to working remotely, which subjects the Companyvirus, such as travel bans and restrictions, quarantines, shelter in place or total lockdown orders, school closures, and business limitations and shutdowns. Such measures contributed significantly to increased cybersecurity risksunemployment and may reduce workplace efficiency.negatively impacted consumer and business spending. Business shutdowns have disrupted our supply chain and the manufacture or shipment of our products and have delayed the rollout of our smart enabled retail products to big box retail stores.distribution products. While many of the foregoing developments have largely subsided since the pandemic’s peak, there can be no assurances that a subsequent wave will not occur in the future or that a new, potentially more contagious or dangerous variant will not arise.
Various regions throughout China have been subject to government mandated Covid lockdowns. While these lockdowns have not had a material impact on our ability to source product, there is no assurance that future actions will not affect our supply chain. The fulltiming and extent of COVID-19’s negativethese lockdowns, as well as the potential impact on our business, remains uncertainare largely unknown and it is not possible at this timedifficult to estimate the fullpredict. Disruption of our key suppliers could have a material impact that COVID-19 will have on our business. ability to source product and the related cost of these products.
Even after the COVID-19 pandemic has completely subsided, we may experience material and adverse impacts to our business as a result of the virus’s global economic impact, including the availability of credit, bankruptcies or insolvencies of customers, and recession or economic downturn. For example, in the U.S. and other countries, stimulus packages, rising inflation and demand and other developments during and in the wake of the pandemic have created an inflationary market environment, and in response the Federal Reserve and foreign entities have imposed significant interest rate increases which have resulted in the increased likelihood of a recession in the short-term.
Any of the issues discussed above could have a material adverse effect on our business if this continues for an extended period of time. If we incur significant declines in customer orders, increased aging of accounts receivable or other negative consequences due to COVID-19, the extent of which remains highly uncertain, it will have a material adverse effect on our business, financial condition and results of operations.
During Fiscal 2020,2022, we generated an operating loss and negative cash flow from operations, weoperations. We cannot assure you that we will regain profitability in the future.
In Fiscal 2020,2022, we generated an operating loss of $1,982,000 and had net cash used in operating activities of $263,000. Although we generated net income in Fiscal 2018 and 2017, we incurred significant losses from operations in Fiscal 2019 and Fiscal 2020.approximately $1,240,000. We can provide no assurance that we will not continue to experience operating losses. In addition to our $1,300,000 commercial line of credit (the “Line of Credit”), none of which $1,000,000 has been utilized as of the date of this report, Forward China holds a $1,600,000$1,400,000 note which is due December 31, 2021.2024. Forward China, which is owned by our Chief Executive Officer and Chairman of the Board, has previously agreed to extend this note numerous times to assist the Company with its liquidity resources.liquidity. We cannot provide you with any assurance that heForward China will continue to grant us extensions on this note. 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 or incur additional debt to maintain or grow our operations. There is no assurance that we will be able to raise such capital and if so on terms that are not onerous and dilutive to the Company and its shareholders.
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.
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Our OEM distribution business remains highly concentrated in our Diabetic Products Line.diabetic products line. If our Diabetic Products Linediabetic products line were to suffer the loss of a principal customer or a material decline in revenues from any such large customer, our business would be materially and adversely affected.
Revenues from diabetic products to distribution customers accounted for 83%85% of our OEM distribution net revenues in Fiscal 2020.2022, and OEM distribution revenue accounted for approximately 43% of our overall revenue in Fiscal 2022. 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. For example, in 2018 a new diabetes monitoring product was 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.
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.
Each of our distribution and design businesses can at times be concentrated with certain larger customers. Our distribution business is and has been characterized by a high degreelargest design customer accounted for 10.6% of customer concentration. Our four largestour consolidated net revenue in Fiscal 2022. Further, two distribution customers accounted for 79% and 87%23.0% of distributionour consolidated net revenuesrevenue in Fiscal 20202022 and Fiscal 2019, respectively. Additionally, three distribution customers represented 36.8% of our largest designconsolidated net revenue in Fiscal 2021. Although our customer concentration changes from year to year, and development customers accounted for 46% of design and development net revenues in both Fiscal 2020 and Fiscal 2019. 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 would have a material adverse effect on our financial condition, liquidity and results of operations.
If any one or more of our OEM distribution customers elect to reduce or discontinue inclusion of cases “in box”, our results of operations and financial condition would be materially and adversely affected.
The predominant percentage of our OEM distribution 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. Any measures to restrict healthcare spending could result in decreased sales of our products. If one or more of our distribution customers 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.
Rising threats of international tariffs, including tariffs applied to goods between the U.S. and China, may materially and adversely affect our business.
Rising threats of international tariffs, including tariffs applied to goods traded between the U.S. and China, could materially and adversely affect our business and results of operations. 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 2020 and 2019, the U.S. and China imposed tariffs or announced proposed tariffs to be applied in the future to certain of each other’s exports. As of the date of this report, the Company had not been directly affected by theany tariffs previously implemented by former President Trump on the medical technology industry.industry which remain in place pending the Biden Administration’s continued review of the tariffs. However, we do not know whatif the newBiden administration will implement when President-Elect Biden takes office.any new tariffs or alter current tariffs. If any such tariffs or any restrictions are imposed on products that we import tofor 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 our design segment.
Changes in political conditions in China and changes in the state of China-U.S. relations, including the current tradeany tensions relating to potential military conflict between China and Taiwan, 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. In an effort to reduce the impact of this potential disruption, we continue to explore low-cost opportunities from non-China manufacturers. We can provide no assurance that we will obtain alternate sources or that our mitigation efforts will prevent any such disruptions.
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We continue to encounter pressure from our largest distribution customers to maintain or even decrease prices, or to supplyprovide 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.supply and labor.
During Fiscal 2020,2022, we continued to experience significant pricing pressure from many customers, including some of our largest distribution customers, to 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. The recent inflationary environment in the U.S. and globally has caused production costs to increase in Fiscal 2022. Similarly, due to continued trends of high demand and low supply in the labor market which have persisted despite Federal Reserve interest rate increases, the cost of labor has risen in both our design and distribution businesses. These developments have a material adverse impact on our margins and our ability to achieve or maintain profitability. 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.
In addition to margin compression from customers in general, we are encountering increased pricingcosts 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 or services, coupled with pressure from the market and our customers to decrease our prices, would materially adversely affecthave a material adverse effect on our business, financial condition, and results of operations.
Increasingly, our OEM 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 OEM 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 distribution business depends on a single exclusive buying agent who, in turn, depends on a limited number of key suppliers.
Our Chairman, Chief Executive Officer and largest shareholder is the 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, although historically 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.
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 was to suffer or we are unable to extend our agreement with Forward China which expires in October 2023, we could suffer irreparable harm resulting in substantial harmdamage to the distribution business.
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Our distribution business has benefited from customers deciding to outsource their carry and protective solutions assembly needs, as well as product development and design functions, to us. If our distribution customers choose to provide these services in-house or select other providers, our distribution business could suffer.
Our future distribution revenue growth partially depends on new outsourcing opportunities from our distributioncurrent and prospective customers. Current and prospective customers continuously evaluate our performance against other providers. They also evaluate the potential benefits of developing, designing, manufacturing and transporting their products themselves. To the extent that outsourcing opportunities are not available either due to these customers deciding to develop, design, produce or transport these products themselves or to use other providers, our financial results and future growth could be materially adversely affected.
If we are unable to provide our customers with high-quality products and service,services or if we are unable to deliver our products and/or serviceservices to our distribution customers in a timely manner, our business, financial condition, and results of operations may be materially adversely affected.
In order to maintain our existing customer base and obtain business from new customers, we must demonstrate our ability to develop, design and produce our products and services at the level of quality, responsiveness, timeliness, 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 cannot meet their needs, our reputation as a reliable supplier of ourhigh-quality products and a sophisticated product designer and developer would likely be damaged. If we are unable to meet anticipated product and service standards imposed by contractual arrangements, customer expectations, industry practices, regulatory requirements and competitive forces, we may be unable to obtain new or keep our existing distribution customers, and this would have a material adverse effect on our business, financial condition, and results of operations.
If our design teams fail to complete a project in a timely manner, miss a required performance standard, or otherwise fail to adequately perform on a project, then we may incur a loss on that project.
Our design engagements often involve large-scale, complex projects. The quality of our performance on such projects depends in large part upon our ability to manage the relationship with our clients and our ability to effectively manage the project and deploy appropriate resources, including third-party contractors and our own personnel, in a timely manner. We may commit to a client that we will complete a project by a scheduled date and/or at a fixed fee. We may also commit that a project, when completed, will achieve specified performance standards. If the project is not completed by the scheduled date or fails to meet required performance standards, we may incur significant additional costs or be held responsible for the costs incurred by the client to rectify damages due to late completion or failure to achieve the required performance standards. The uncertainty of the timing of a project can present difficulties in planning the amount of personnel needed for the project. If the project is delayed or canceled, we may bear the cost of an underutilized workforce that was dedicated to fulfilling the project. In addition, performance of projects can be affected by a number of factors beyond our control, including unavoidable delays from government inaction, inability to obtain financing, weather conditions, unavailability of vendor materials, changes in the project scope of services requested by our clients, industrial accidents, environmental hazards, and labor disruptions. Furthermore, our entrance into fixed price arrangements mean that if the costs of supplies, labor and other resources rise due to shortages, heightened demand, inflation or other factors, our margin for a given project will decline. To the extent these events occur, the total costs of the project could exceed our estimates, and we could experience reduced profits or, in some cases, incur a loss on a project, which may reduce or eliminate our overall profitability on that project or in general. Further, any defects or errors, or failures to meet our clients’ expectations, could result in claims for damages against us. Failure to meet performance standards or complete performance on a timely basis could also adversely affect our reputation.
Our results of operations could suffer if we are not able to maintain adequate utilization of our workforce.
The cost of providing our design services, including the extent to which we utilize our workforce, affects our profitability. The rate at which we utilize our workforce is affected by a number of factors, including:
· | our ability to transition employees from completed projects to new assignments and to hire and assimilate new employees; | |
· | our ability to forecast demand for our services and thereby maintain an appropriate headcount in each of our operating units; | |
· | our ability to engage employees in assignments during natural disasters or pandemics; | |
· | our ability to manage attrition; | |
· | our need to devote time and resources to training, business development, professional development, and other non-chargeable activities; and | |
· | our ability to match the skill sets of our employees to the needs of the marketplace. |
If we over-utilize our workforce, our employees may become disengaged, which could impact employee attrition. If we under-utilize our workforce, our profit margin and profitability could suffer.
Employee or agent misconduct, or our failure to comply with anti-bribery and other laws or regulations, could harm our reputation, reduce our revenue and profits, and subject us to criminal and civil enforcement actions.
Misconduct, fraud, non-compliance with applicable laws and regulations, or other improper activities by one of our employees or agents could have a significant negative impact on our business and reputation. Such misconduct could include the failure to comply with various procurement regulations, regulations regarding the protection of confidential information, regulations prohibiting bribery and other foreign corrupt practices, regulations regarding the pricing of labor and other costs in contracts, regulations on lobbying or similar activities, regulations pertaining to the internal controls over financial reporting, environmental laws, and any other applicable laws or regulations. For example, the Foreign Corrupt Practices Act, or FCPA, and similar anti-bribery laws in other jurisdictions generally prohibit companies and their intermediaries from making improper payments to non-U.S. officials for the purpose of obtaining or retaining business. Our policies mandate compliance with these regulations and laws, and we take precautions to prevent and detect misconduct. However, since our internal controls are subject to inherent limitations, including human error, it is possible that these controls could be intentionally circumvented or become inadequate because of changed conditions. As a result, we cannot assure that our controls will protect us from reckless or criminal acts committed by our employees or agents. Our failure to comply with applicable laws or regulations or acts of misconduct could subject us to fines and penalties and suspension or debarment from contracting, any or all of which could harm our reputation, reduce our revenue and profits, and subject us to criminal and civil enforcement actions.
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.
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Our results of operations are subject to the risks of fluctuations in the values of foreign currencies relative to the U.S. Dollar.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.concentration and operating in multiple segments.
Because our revenues are highlycan at times be concentrated in a few large customers, and because the volumes of these customers’ order flows to us can fluctuate markedly in a short period of time, our quarterly revenues, and consequently our results of operations, may be highly variable and subject to significant changes over a relatively short period of time. Our largest OEM distribution 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. Additionally, our large design and development customers may have their budgets limited from many factors including economic declines (resulting from a pandemic or any other reason) causing discretionary budgets to decline or may from-time-to-time choose to do their development work in-house. Further, in our design and development business customers may decline to use us for future work after a project is completed, which may be due to lack of continued need for our services after their product has been developed, produced and marketed or because they are dissatisfied with our pricing or performance. 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.
Our gross margins, and therefore our potential profitability, vary considerably by customer and by product and service offering, and if the revenue contribution from one or more distribution customers or products or project changes materially, relative to total revenues, our gross profit percentage may fluctuate.
Our gross profit margins on the distribution products and services we sell can vary widely depending on the product or project type, customer, and contract or order size. Because of the broad variability in price ranges and product and project 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. Similarly, because we offer a wide range of products and services which often vary with each customer and project, we face challenges in maintaining and enhancing operational efficiencies. For example, because of the range of products and services we offer and our general lack of specializations within our fields relative to some of our competitors, we may not enjoy the advantages offered by more focused or streamlined operations, such as economies of scale or improved production capabilities from our labor, facilities, and procedures with the passage of time. If our gross margins decrease, our results of operations will be adversely affected.
Product manufacture is often outsourced by our distribution customers to contract manufacturing firms in China and in these cases, it is the contract manufacturer to which we must look for payment.
Contract manufacturing firms are performing manufacturing, assembly, and product packaging functions, including the bundling of our product accessories with the OEM distribution customer's product. As a consequence of this business practice, we often sell our carry solutions 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 OEM distribution customer. Therefore, it is the contract manufacturing firm to which we must look for payment in such cases and not our OEM 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 operations and cash flows will be adversely affected.
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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 may become subject to delays or cancellation due to work stoppages or slowdowns, piracy, damage to port facilities, and congestion due to inadequacy of port terminal equipment and other causes.
To the extent that there are disruptions or delays in loading container cargo in ports of origin or off-loading cargo at ports of destination as a result of labor disputes, work-rules related slowdowns, tariff or World Trade Organization-related disputes, piracy, physical damage to port terminal facilities or equipment caused by severe weather or terrorist incidents, congestion in port terminal facilities, inadequate equipment to load, dock and offload container vessels or energy-related tie-ups or otherwise, or for other reasons, product shipments to our customers will be delayed. For example, in March 2021, a container ship carrying some of our products ran aground in the Suez Canal and was immobilized for six days. Although this accident did not have a material adverse effect on our business, there is no assurance that, if it happened again, that it would not. In any such case, our customercustomers 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 or services 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 or develop, or with the services we render, 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 or services, decreased willingness by retailer customers to purchase our products or procure our services, 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 and services, 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,carries product liability insurance and works with its customers to satisfy product quality concerns (the cost of such efforts are typically covered by our sourcing agent, Forward China) we can provide no assurancesassurance that customers will not seek damages if any of the foregoing events took place. The Company does not carry product liability insurance.beyond what we warranty or beyond our insurance coverage. Although we have not had significant claims for damages or losses from the products we distribute in our distribution business or assist in the development, design or production of in our design business, 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.
The carrying solutionsproduct distribution business isand design businesses are highly competitive and doesdo 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 customers, thereby adversely affecting our net revenues, results of operations, and financial condition. Further, with respect to our design business, while management believes there are a limited number of customers offering the broad range of design and development services we do, there are numerous design and engineering companies that compete with us in specific industries and/or with specific targeted skills or competitive advantages, and some prospective customers might prefer a competitor that focuses in a specialty area in which they operate or target over an offering such as ours that is not limited to any specific industry or product type.
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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.
If we fail to retain our key personnel, we may not be able to achieve our anticipated level of growth and our business could suffer.
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 employsis highly labor intensive and, contracts highly sophisticatedtherefore, our ability to attract and retain professional and technical staff is an important factor in our future success. The market for qualified engineers is competitive and, from time to providetime, it may be difficult to attract and retain qualified individuals with the required expertise within the timeframe demanded by our customers with a full-service product, design and development team with vast technological knowledge and capabilities.clients. The loss of the services of any of our key 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.
If a third party asserts that we are infringing on its intellectual property, whether successful or not, it could subject us to costly and time-consuming litigation or require us to obtain expensive licenses, and our business may be adversely affected.
Third party lawsuits alleging our infringement of patents, trade secrets or other intellectual property rights could cause us to do one or more of the following:
· | stop using technology that contains the allegedly infringing intellectual property; | |
· | incur significant legal expenses; | |
· | cause our management to divert substantial time to our defenses; | |
· | pay substantial damages to the party whose intellectual property rights we may be found to be infringing; | |
· | indemnify customers; or | |
· | attempt to obtain a license to the relevant intellectual property from third parties, which may not be available to us on reasonable terms or at all. |
Third party lawsuits alleging our infringement of patents, trade secrets or other intellectual property rights could have a material adverse effect on our business, results of operations and financial condition. In addition to our products, potential adverse developments involving intellectual property described above may occur with respect to customers’ products incorporating our products or services that we render.
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 partythird-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.
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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 17%18% of the outstanding shares of our common stock as of September 30, 2020.December 9, 2022. 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 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.
15 |
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:
Our failure to increase revenue in each succeeding quarter and achieve and thereafter 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; | ||
Cybersecurity breaches; | ||
· | The loss of customers or our failure to attract more customers; | |
Creditworthiness and solvency of clients; | ||
· | Loss of key employees; | |
· | 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 regulatory practices, including tariffs and taxes; | ||
· | Changes in market valuations of similar companies; | |
Short selling activities; | ||
Our announcement of any financing or a change in the direction of our business; | ||
Announcements by us, or our competitors, of significant contracts, acquisitions, commercial relationships, joint ventures or capital | ||
· | Other forces outside of our control such as inflation, Federal Reserve interest rate increases and the recessionary environment it could bring, geopolitical turmoil such as the recent Ukraine war, and other developments that could adversely impact the U.S. and global economies and erode investor sentiment. |
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 120,000 shares of common stock for the six trading days prior to November 30, 2020. An active market for our common stock may never develop, or if it does, it may not be sustained. Accordingly, investors may experience difficulty in 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. At November 30, 2020,December 9, 2022, our closing bid price was $1.83.$1.25. 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 limited availability of market quotations for our common stock; | ||
· | ||
reduced liquidity with respect to our common stock; | ||
· | ||
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; | ||
· | ||
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. |
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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. Recently,In 2019, we 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 would 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.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not Applicable.
ITEM 2. PROPERTIES
The Company leasesWe lease all of its properties where itsour business is operated. We believe that these properties are adequate for the purposes for which they are 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. The following properties which are material to the Company’s business are described below:
We lease 14,000 square feet in Hauppauge, New York for our executive offices and IPS, which we rent under a lease agreement scheduled to expire in 2027. The lease has annual escalations;escalations and rent payments were $29,000approximately $30,000 per month during Fiscal 2020.2022.
We lease 46,00011,000 square feet in Coon Rapids, Minnesota for Kablooe, which we rent under a lease agreement schedulescheduled to expire in June 2021. Rent2026. The lease has annual escalations and rent payments were $9,200approximately $10,000 per month during Fiscal 2020.2022.
On August 21, 2020, IPS was named a third-party defendant in a patent dispute claim currently pending in the U.S. District Court for the Eastern District of New York. The complaint, which contains no specific amount of monetary damages, asserts that certain intellectual property was misappropriated by IPS and one of its former employees. IPS denies the allegations, believes the action is without merit and intends to vigorously defend it. The Company received permission from the District Court to file a motion to dismiss the complaint and filed such motion on December 14, 2020.
From time to time, the Company may become a party to other legal actions or proceedings in the ordinary course of its business. As of September 30, 2020,2022, 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.
ITEM 4. MINE SAFETY DISCLOSURES.
Not Applicable.
PART II
ITEM 5.MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
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 Nasdaq. Our common stock is traded under the symbol “FORD”.
On November 30, 2020,December 9, 2022, the closing price for our common stock was $1.83.$1.25.
Holders of common stockCommon Stock.
At November 30, 2020,2022, there were approximately 7570 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.
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 DATARESERVED
Not applicable.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND 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. The following discussion and analysis compares our results of operations for the year ended September 30, 2022 (“Fiscal 2022”) with those for the year ended September 30, 2021 (“Fiscal 2021”). All dollar amounts and percentages presented herein have been rounded to approximate values. 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 regarding Forward-Looking StatementStatements
This report includes “forward-looking statements”, as such term is used within the meaning of the Private Securities Litigation Reform Act of 1995. These statements include, among other things, statements regarding:
inflation on our business, as well as other statements regarding our future operations, financial condition and prospects, and business strategies. Forward-looking statements generally can be identified by words such as "anticipates," "believes," "estimates," "expects," "intends," "plans," "predicts," "projects," "will be," "will continue," "will likely result," and similar expressions. These forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties, which could cause our actual results to differ materially and adversely from those reflected in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in this Annual Report on Form 10-K, and 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 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.
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Business Overview
Forward Industries, Inc. is a fully integratedglobal design, developmentmanufacturing, sourcing and manufacturing solution provider fordistribution group serving top tier medical and technology customers worldwide. As a result of the continued expansion of our design development capabilities through our wholly ownedwholly-owned subsidiaries, IPS and Kablooe, we arethe Company is now able to introduce proprietary products to the market from concepts brought to usit from a number of different sources, both inside and outside the Company.
Our design division provides hardware and software product design and engineering services to customers predominantly located in the U.S. Our OEM distribution division sources and sells carrying cases and other accessories for medical monitoring and diagnostic kits as well as a variety of other portable electronic and non-electronic devices to OEMs, or their contract manufacturers worldwide, that either package our products as accessories “in box” together with their branded product offerings or sell them through their retail distribution channels. Our retail distribution division sources and sells smart-enabled furniture, hot tubs and various other products through various online retailer websites to customers predominantly located in the U.S.
The future impactseffects of the COVID-19 pandemic continue to impact the retail and any resulting economic impactOEM distribution segments of our business. The increase in global consumer demand, coupled with the global shipping container shortage, dramatically increased demand for both ocean freight and ground transportation. These factors led to a significant increase in freight costs, particularly from the Asia-Pacific region and most notably in Fiscal 2022. Labor shortages at U.S. ports and in ground transportation services caused container ships to spend a significant amount of time waiting for goods to be unloaded and to arrive at our warehouses. These factors caused an increase in the demand for and cost of ground transportation and delayed consumer availability for many of our products in Fiscal 2022. The timing and extent of these COVID-19 related transportation disruptions are still largely unknown but are expected to continue into Fiscal 2023.
The effects of the pandemic had a lesser impact on the design segment of our business. Rising inflation caused an increase in the cost of acquiring and retaining our employees, particularly in the second half of Fiscal 2022. The timing and extent of future inflation is difficult to predict, but we expect these rising costs to continue into Fiscal 2023.
The effects of COVID-19 may further impact our business in ways we cannot predict, and such impacts could be significant. It is possible that the COVID-19 pandemic, the measures taken by the governments of countries affected and the resultingThe current economic impactconditions may continue to negatively impact our results of operations, cash flows and financial position in future periods as well as that of our customers, including their ability to pay for our products and services and choosingto choose to allocate their budgets to new or existing projects which may or may not require our products and services. The long-term financial impact on our business cannot be reasonably estimated at this time. As a result, the effects of COVID-19 may not be fully reflected in our financial results until future periods.
Until there is a vaccine and treatment that is widely distributed,the effects of the pandemic have fully receded, we expect business conditions to remain challenging. In response to these challenges, we will continue to focus on those factors that we can control: closely managing and controlling our expenses;expenses and inventory levels; aligning our design and development schedules with demand in a proactive manner as there are changes in market conditions to minimize our cash operating costs; pursuing further improvements in the productivity and effectiveness of our development, selling and administrative activities and, where appropriate, taking advantage of opportunities to enhance our business growth and profitability strategy.
Additionally, see Part I.,I, Item 1A. Risk Factors - The adverse impact1A “Risk Factors” for a description of COVID-19 onthe material risks we currently face in connection with COVID-19.
Variability of Revenues and Results of Operations
A significant portion of our businesses will continue for an unknown lengthrevenue is concentrated with several large customers, some of timewhich are the same and may continue to impactsome of which change over time. Orders from some of these customers can be highly variable, with short lead times, which can cause our quarterly revenues, and consequently our results of operations.
operations, to vary over a relatively short period of time.
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. 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. Ourreport. The preparation of our Consolidated Financial Statementsconsolidated 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.
Revenue Recognition
OEM Distribution Segment
The Company generallyOEM distribution segment recognizes revenue in its distribution segment when: (i)when finished goods are shipped to our distributionits customers (in general, these conditions occur at either point of shipment or point of destination, depending on the terms of sale i.e.,and transfer of control); (ii) there are no other deliverables or performance obligations; and (iii) there are no further obligations to the customer after the title of the goods has transferred. If the Company receives consideration before achieving the criteria previously mentioned, it records a contract liability, which is classified as a component of deferred income in the accompanying consolidated balance sheets.
Retail Distribution Segment
The retail distribution segment sells products primarily through online websites operated by authorized third-party retailers. Revenue is recognized when control, as defined in Accounting Standards Codification (“ASC”) 606, “Revenue from Contracts with Customers”, of the related goods is transferred to the retailer, which generally occurs upon shipment to the end customer. Other than product delivery, the retail distribution segment does not typically have other deliverables or performance obligations associated with its products. Revenue is measured as the amount of consideration expected to be received in exchange for the products provided, net of allowances taken by retailers for product returns and any taxes collected from customers that will be remitted to governmental authorities. When the Company receives consideration before achieving the criteria previously mentioned, it records a contract liability, which is classified as a component of deferred income in the accompanying consolidated balance sheets. Contract liabilities at September 30, 2020 and 2019 were $75,000 and $0, respectively, for the distribution segment.
Design Segment
The Companydesign segment applies the “cost to cost” and “right to invoice” methods of revenue recognition to theits contracts with customers in the design segment.customers. The design segment typically engages in two types of contracts: (i) time and material and (ii) fixed price contracts.price. 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 fixed price 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, 2020 and 2019 were $649,000 and $611,000, respectively. 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, 2020 and 2019 were $410,000 and $220,000, respectively.
Business CombinationsSegment Reporting
The Company allocates the fair value of purchase consideration to the tangible and intangible assets acquired and liabilities assumed 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.
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.
Other estimates associated with the accounting for acquisitions may change as additional information becomes available regarding the assets acquired and liabilities assumed.
Segment Reporting
The Company has twoWe have three reportable segments: OEM distribution, retail distribution and design. The OEM distribution segment consists of two reporting units (Forward USsources and Forward Switzerland, that collectively comprise one operating segment) that source and distributedistributes carrying cases and other accessories for medical monitoring and diagnostic kits and a variety of other portable electronic and non-electronic devices.devices directly to OEMs or their contract manufacturers worldwide. The retail distribution segment sources and sells smart-enabled furniture, hot tubs and a variety of other products through various online retailer websites to customers predominantly located in the U.S. The design segment consists of two operating segments (IPS and Kablooe, which have been aggregated into one reportable segment) that provide a full spectrum of hardware and software product design and engineering services.services to customers predominantly located in the U.S.
Organizing our business through these operating segments allows us to align our resources and manage our operations. Our chief operating decision maker (“CODM”) regularly reviews operating segment revenue and profitability 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 or loss. Segment operating income or loss includes revenues earnedfor each segment to assess financial results and allocate resources. For our OEM and retail distribution segments, we exclude general and administrative and general corporate expenses incurred directlyfrom their measure of profitability as these expenses are not allocated to the segments and therefore not included in the measure of profitability used by the operatingCODM. For the design segment, including cost of sales and selling, marketing, and general and administrative expenses directly attributable to that segment are included in its measure of profitability as these expenses are included in the measure of its profitability reviewed by the CODM. We do not include intercompany activity in our segment results to be consistent with the information that is presented to the CODM. Segment assets consist of accounts receivable and inventory, which are regularly reviewed by the CODM, as well as goodwill and intangible assets resulting from design segment acquisitions (see Note 16 for more discussion15 to the consolidated financial statements).
Inventory Valuation
Inventories consist primarily of finished goods and are stated at the lower of cost (determined by the first-in, first-out method) or net realizable value. Based on operating segments).management’s estimates, an allowance is made to reduce excess, obsolete, or otherwise unsellable inventories to net realizable value. The allowance is established through charges to cost of sales in the Company’s consolidated statements of operations. 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.
Goodwill and Intangible Assets
The Company reviewsWe review goodwill for impairment at least annually, or more often if triggering events occur. The Company hasWe have two reporting units with goodwill (the IPS and Kablooe operating segments) and we perform our annual goodwill impairment test on September 30, the end of the fiscal year, or upon the occurrence of a triggering event. The Company hasWe have the option to perform a qualitative assessment to determine if an impairment is more likely than not to have occurred. If the Companywe 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 Companywe would not need to perform thea quantitative impairment test for the reporting unit. If the Companywe cannot support such a conclusion or doesdo not elect to perform the qualitative assessment, then we will perform the Company will comparequantitative impairment test by comparing 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,amount, no impairment charge is recognized. If the fair value of the reporting unit is less than its carrying value,amount, 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 unitunit. There were no indications of goodwill impairment in Fiscal 2022 or Fiscal 2021.
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 implied fair value of goodwill. During Fiscal 2020, the Company recordedrespective assets. These estimates and assumptions could have a significant impact on whether an impairment charge is recognized and 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 goodwill (See Note 4).
our intangible assets. There were no indications of impairment of intangible assets in Fiscal 2022 or 2021.
Recent Accounting Pronouncements
In August 2018,November 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2018-13 “Fair Value Measurement – Disclosure Framework (Topic 820)” to improve 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 does not expect the adoption of this guidance to have a material impact on its consolidated financial statements.
In November 2019, the FASB issued ASU 2019-08, “Compensation - Stock Compensation (Topic 718) and Revenue from Contracts with Customers (Topic 606)” 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, 2019 and interim periods within those fiscal years. The Company does not expect the adoption of this guidance to have a material impact on its consolidated financial statements.
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 provides clarity to and amends earlier guidance on this topic and would be effective concurrently with the adoption of such earlier guidance. This pronouncement is effective for the Companyus for fiscal years beginning after December 15, 2022 and interim periods within those fiscal years. The Company isWe are currently evaluating the effects of this pronouncement on itsour consolidated financial statements.
In August 2018, the FASB issued ASU 2018-15 “Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40)” addressing customers’ accounting for implementation costs incurred in a cloud computing arrangement that is a service contract, which requires customers to apply internal-use software guidance to determine the implementation costs that are able to be capitalized. Capitalized implementation costs are required to be amortized over the term of the arrangement, beginning when the cloud computing arrangement is ready for its intended use. The effective date of the new guidance for public companies is for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years. Early adoption is permitted. The Company does not expect the adoption of this guidance to have a material impact on its consolidated financial statements.
In December 2019, the FASB issued ASU 2019-12 “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.” This guidance removes certain exceptions to the general principles in Topic 740 and provides consistent application of U.S. GAAP by clarifying and amending existing guidance. The effective date of the new guidance for public companies is for fiscal years beginning after December 15, 2020 and interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluatingWe adopted this guidance in the timingfirst quarter of adoption andfiscal 2022 with no material impact of the updated guidance on itsto our consolidated financial statements.
RESULTS OF OPERATIONS FOR FISCAL 20202022 COMPARED TO FISCAL 20192021
Net LossConsolidated Results
Distribution SegmentThe table below summarizes our consolidated results of operations for Fiscal 2022 as compared to Fiscal 2021:
Consolidated Results of Operations | ||||||||||||||||
Fiscal 2022 | Fiscal 2021 | Change ($) | Change (%) | |||||||||||||
Net revenues | $ | 42,337,000 | $ | 39,022,000 | $ | 3,315,000 | 8.5% | |||||||||
Cost of sales | 33,969,000 | 30,888,000 | 3,081,000 | 10.0% | ||||||||||||
Gross profit | 8,368,000 | 8,134,000 | 234,000 | 2.9% | ||||||||||||
Sales and marketing expenses | 2,855,000 | 2,503,000 | 352,000 | 14.1% | ||||||||||||
General and administrative expenses | 6,753,000 | 6,396,000 | 357,000 | 5.6% | ||||||||||||
Loss from operations | (1,240,000 | ) | (765,000 | ) | (475,000 | ) | 62.1% | |||||||||
Other expense/(income), net | 135,000 | (1,289,000 | ) | 1,424,000 | (110.5% | ) | ||||||||||
Income tax provision | 3,000 | – | 3,000 | – | ||||||||||||
Consolidated net (loss)/income | $ | (1,378,000 | ) | $ | 524,000 | $ | (1,902,000 | ) | (363.0% | ) |
The increase in net revenues in Fiscal 2022 was primarily driven by revenue growth in the design segment and to a lesser extent, revenue growth in the retail segment, which was partially offset by a decline in revenue in the OEM distribution segment.
Distribution segment net loss was $1,321,000Gross profit increased $234,000, but gross margin declined from 20.8% in Fiscal 2020 compared2021 to $1,811,00019.8% in Fiscal 2019. The decrease2022. Better utilization and higher billing rates in net lossthe design segment were mostly offset by higher importation and logistics costs, which drove OEM and retail distribution margins down. Due to inflation and the continued uncertainty surrounding supply chain stability, management believes there will be continued volatility in OEM and retail distribution cost of sales in Fiscal 2020 was2023.
Sales and marketing expenses increased due to higher advertising and promotional costs, primarily in the retail segment. Sales and marketing expenses as a percentage of revenue increased from 6.4% in Fiscal 2021 to 6.7% in Fiscal 2022. If revenues from the retail segment grow to comprise a larger portion of the overall business, management expects sales and marketing costs, both in total and as a percentage of revenue, to increase in future periods.
General and administrative expenses increased in Fiscal 2022, primarily related to an increase in other income relatedpayroll costs and non-employee board members’ cash and equity compensation due to fair value adjustments (non-cash income), a decreasethe cost cutting measures taken in Fiscal 2021 which were not implemented in Fiscal 2022. These increases were partially offset by lower bad debt expense. Management continues to monitor the various components of general and administrative expenses partiallyand how these costs are affected by inflationary and other factors. We intend to adjust these costs as needed based on the overall needs of the business.
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We reported other expense of $135,000 in Fiscal 2022 as compared to other income of $1,289,000 in Fiscal 2021. The variance is primarily due to the $1,357,000 forgiveness of note payable related to the Paycheck Protection Program loan (“PPP loan”) and to a lesser extent, driven by a decrease in interest income on a note receivable from a customer which was fully reserved for in Fiscal 2019.
In Fiscal 2022, we recorded a tax provision of $3,000, generated a loss before income taxes of $1,376,000 and had an effective tax rate of (0.2%). In Fiscal 2021, we recorded no tax provision or benefit, and we generated income before income taxes of $524,000, primarily resulting from the $1,357,000 forgiveness of note payable related to the PPP loan. The forgiveness of the PPP loan was not recognized as taxable income per the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”). We maintain significant net operating loss carryforwards and do not recognize a significant income tax provision or benefit as our deferred tax provision is typically offset by lower revenue and gross profit.maintaining a full valuation allowance on our net deferred tax assets.
Consolidated basic and diluted earnings/(loss) per share was $(0.14) and $0.05 for Fiscal 2022 and Fiscal 2021, respectively.
Segment Results
The discussion that follows below provides further details about the results of operations for each segment as compared to the prior year.
Segment Results of Operations | ||||||||||||||||||||
OEM Distribution | Retail Distribution | Design | Corporate Expenses | Consolidated | ||||||||||||||||
Fiscal 2022 revenues | $ | 18,036,000 | $ | 4,130,000 | $ | 20,171,000 | $ | – | $ | 42,337,000 | ||||||||||
Fiscal 2021 revenues | 19,290,000 | 3,183,000 | 16,549,000 | – | 39,022,000 | |||||||||||||||
Change | $ | (1,254,000 | ) | $ | 947,000 | $ | 3,622,000 | $ | – | $ | 3,315,000 | |||||||||
Fiscal 2022 operating income/(loss) | $ | 905,000 | $ | (1,809,000 | ) | $ | 2,148,000 | $ | (2,484,000 | ) | $ | (1,240,000 | ) | |||||||
Fiscal 2021 operating income/(loss) | 1,479,000 | (779,000 | ) | 603,000 | (2,068,000 | ) | (765,000 | ) | ||||||||||||
Change | $ | (574,000 | ) | $ | (1,030,000 | ) | $ | 1,545,000 | $ | (416,000 | ) | $ | (475,000 | ) |
Design SegmentOEM Distribution
Net lossrevenues in the OEM distribution segment declined due to reduced revenues in the sale of diabetic products and, to a lesser extent, a decline in other OEM product revenue. Revenues from diabetic products declined $1,185,000 and revenues from other products declined $69,000. As consumer demand increases for diabetic testing products which require no carrying case, we expect diabetic product sales to represent a smaller portion of our OEM distribution revenue.
The following tables set forth revenues by product line of our OEM distribution segment customers for the design segment was $364,000 in Fiscal 2020 as compared to $1,793,000 in Fiscal 2019. The decrease in net loss in Fiscal 2020 resulted from higher gross profit, lower general and administrative expenses, partially offset by the impairment of goodwill (non-cash expense).periods indicated:
OEM Revenues by Product Line | ||||||||||||||||
Fiscal 2022 | Fiscal 2021 | Change ($) | Change (%) | |||||||||||||
Diabetic products | $ | 15,403,000 | $ | 16,588,000 | $ | (1,185,000 | ) | (7.1% | ) | |||||||
Other products | 2,633,000 | 2,702,000 | (69,000 | ) | (2.6% | ) | ||||||||||
Total net revenues | $ | 18,036,000 | $ | 19,290,000 | $ | (1,254,000 | ) | (6.5% | ) |
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Main components of net loss for the distribution and design segments are reflected in the table below:
Main Components of Net Income | ||||||||||||||||||||||||||||
(amounts in thousands) | ||||||||||||||||||||||||||||
Fiscal 2020 | Fiscal 2019 | Increase (Decrease) | ||||||||||||||||||||||||||
Consolidated | Distribution | Design | Consolidated | Distribution | Design | Consolidated | ||||||||||||||||||||||
Net revenues | $ | 34,478 | $ | 20,752 | $ | 13,726 | $ | 37,409 | $ | 21,988 | $ | 15,421 | $ | (2,931 | ) | |||||||||||||
Gross profit | $ | 6,639 | $ | 2,775 | $ | 3,864 | $ | 6,581 | $ | 3,375 | $ | 3,206 | $ | 58 | ||||||||||||||
Sales and marketing expenses | 1,951 | 1,495 | 456 | 1,965 | 1,441 | 524 | (14 | ) | ||||||||||||||||||||
General and administrative expenses | 5,655 | 2,884 | 2,771 | 7,713 | 3,311 | 4,402 | (2,058 | ) | ||||||||||||||||||||
Goodwill impairment | 1,015 | – | 1,015 | – | – | – | 1,015 | |||||||||||||||||||||
Operating loss | (1,982 | ) | (1,604 | ) | (378 | ) | (3,097 | ) | (1,377 | ) | (1,720 | ) | 1,115 | |||||||||||||||
Other (income)/expense, net | (216 | ) | (202 | ) | (14 | ) | 511 | 438 | 73 | (727 | ) | |||||||||||||||||
Income tax provision/(benefit) | 9 | 9 | – | (4 | ) | (4 | ) | – | 13 | |||||||||||||||||||
Net loss | $ | (1,775 | ) | $ | (1,411 | ) | $ | (364 | ) | $ | (3,604 | ) | $ | (1,811 | ) | $ | (1,793 | ) | $ | 1,829 |
Consolidated basic and diluted income loss per share was $0.19 and $0.38 for Fiscal 2020 Fiscal 2019, respectively.
Net Revenues
We generate revenue through two reportable segments: distribution and design. We believe that our total revenue will increase in the future as we grow our retail business and integrate the Kablooe business. We continue to work on integrating the sales forces for both the distribution and design segments of our business to explore synergistic opportunities.
The chart below indicates the revenues by operating segment for Fiscal 2020 and Fiscal 2019:
(amounts in thousands) | ||||||||||||
Fiscal 2020 | Fiscal 2019 | Increase (Decrease) | ||||||||||
Distribution | $ | 20,752 | $ | 21,988 | $ | (1,236 | ) | |||||
Design | 13,726 | 15,421 | (1,695 | ) | ||||||||
Total | $ | 34,478 | $ | 37,409 | $ | (2,931 | ) |
Distribution Segment
Net revenues in the distribution segment declined $1,236,000, or 5.6%, to $20,752,000 in Fiscal 2020 from $21,988,000 in Fiscal 2019 due to reduced revenues in the sale of diabetic products partially offset by an increase in other product revenue. Revenues from diabetic products declined $2,314,000 and revenues from other products increased $1,078,000. We believe this decrease in diabetic product sales and increase in other product sales is a trend that will continue.
The following tables set forth revenues by channel, product line and geographic location of our distribution segment customers for the periods indicated:
Net Revenues for Fiscal 2020 | ||||||||||||||||
(amounts in thousands) | ||||||||||||||||
Americas | APAC | EMEA | Total | |||||||||||||
Diabetic products | $ | 4,896 | $ | 5,572 | $ | 6,769 | $ | 17,237 | ||||||||
Other products | 2,439 | 760 | 316 | 3,515 | ||||||||||||
Total net revenues | $ | 7,335 | $ | 6,332 | $ | 7,085 | $ | 20,752 |
Net Revenues for Fiscal 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 |
Diabetic Product Revenues
Our OEM distribution segment sources to the order of, and sells 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, sellsells them through their retail distribution channels.
Revenues from diabetic products declined $2,314,000, or 11.8%, to $17,237,000 in Fiscal 2020 from $19,551,000 in Fiscal 2019. The decline was primarily due to lower revenues from twoall major diabetic customers (Diabetic Products Customers B and C). Revenue declinesdue to a reduction in the volume of orders from othermost major diabetic customers were less significantcustomers. An increase in competition and continued pricing pressures, driven by inflation and in some cases a transition to lower cost carrying cases, drove diabetic revenues down further. These declines were partially offset by ana net increase in revenue from all of our other diabetic products customers.customers which were less significant. As mentioned above, management believes that revenues from diabetic customers will continue to decline.
The following table sets forth our distribution segment net revenues by diabetic products customer for the periods indicated:
(amounts in thousands) | ||||||||||||
Fiscal 2020 | Fiscal 2019 | Increase (Decrease) | ||||||||||
Diabetic Products Customer A | $ | 6,145 | $ | 6,513 | $ | (368 | ) | |||||
Diabetic Products Customer B | 3,448 | 4,128 | (680 | ) | ||||||||
Diabetic Products Customer C | 4,912 | 6,114 | (1,202 | ) | ||||||||
Diabetic Products Customer D | 1,924 | 2,265 | (341 | ) | ||||||||
All other Diabetic Products Customers | 808 | 531 | 277 | |||||||||
Total Diabetic Revenue | $ | 17,237 | $ | 19,551 | $ | (2,314 | ) |
Revenues from diabetic products represented 83%85% of net revenues for the OEM distribution segment in Fiscal 20202022 compared to 89%86% in Fiscal 2019.2021.
Other Product Revenues
Our OEM distribution segment also sources and sells cases and protective solutions to OEMs for a diverse array of portable electronic and non-electronic products (such as sporting and recreational products, bar code scanners, GPS devices, tablets and firearms) on a made-to-order basis that are customized to fit the products sold by our OEM customers. In Fiscal 2020, other product revenues were also derived from the sales and sourcing of personal protective equipment.
Revenues from other products increased $1,078,000, or 44%,decreased due to $3,515,000a decrease in Fiscal 2020sales volume from $2,437,000certain existing customers, which was offset by increases in Fiscal 2019. Revenues from the sale of personal protective equipment increased $758,000 and salesbusiness from other products increased $320,000.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 17% of our net revenuesOperating Income
Operating income for the OEM distribution segment declined and operating income margin declined to 5.0% in Fiscal 20202022, compared to 7.7% in Fiscal 2021, primarily due to rising material and importation costs and continued pricing pressure from our major diabetic customers. The cost of importing all products from China has increased and both the diabetic and other OEM product lines have experienced pricing pressures from customers, resulting in a decrease in gross margin as compared to 11% in Fiscal 2019.
Design Segment
Net revenues in the design segment declined $1,695,000, or 11.0%, to $13,726,000 in Fiscal 2020 from $15,421,000 in Fiscal 2019. The decline in revenues was due to the reduction or delay in demand for design and development projects, partially related to COVID-19. Since its acquisition on August 17, 2020, Kablooe generated revenue of $172,000 in Fiscal 2020. The following table sets forth our design segment net revenues by major customers for the periods indicated:
(amounts in thousands) | ||||||||||||
Fiscal 2020 | Fiscal 2019 | Increase (Decrease) | ||||||||||
Design Segment Customer 1 | $ | 2,585 | $ | – | $ | 2,585 | ||||||
Design Segment Customer 2 | 1,781 | 1,476 | 305 | |||||||||
Design Segment Customer 3 | 1,958 | 2,985 | (1,027 | ) | ||||||||
Design Segment Customer 4 | – | 2,616 | (2,616 | ) | ||||||||
Design Segment Customer 7 | – | 1,080 | (1,080 | ) | ||||||||
All other Design Segment Customers | 7,402 | 7,264 | 138 | |||||||||
Total net revenues | $ | 13,726 | $ | 15,421 | $ | (1,695 | ) |
Gross Profit
Distribution Segment
Gross profit for the distribution segment declined $600,000, or 17.8%, to $2,775,000 in Fiscal 2020 from $3,375,000 in Fiscal 2019. Gross margin declined to 13.4% in Fiscal 2020, compared to 15.3% in Fiscal 2019.
These declines were driven primarily by lower sales revenue and a shift to lower-margin cases and pricing pressures on diabetic products from customers.prior year. The decline in gross margin from our diabetic products was partially offsetmitigated by higher gross margins on the sale of personal protective equipment in Fiscal 2020.lower selling and marketing costs related to OEM sales commissions. We are workingcontinue to work on expanding our product offeringofferings to include higher margin products as well asand enhancing our sales efforts to raise top side gross sales to raise totalgrow revenue and increase gross profit.
Retail Distribution Segment
Net revenues increased in Fiscal 2022 due to an increase in sales volume on certain products with two retailers. As the cost of products increases and inflation continues to reduce consumer spending, profitability becomes more challenging in the retail segment. We plan to focus our sales and sales support teams on efforts to match our product offerings with consumer demand, strategically increase the volume of revenue from more profitable products and expand these product offerings through additional retailer websites.
The rising cost of freight, storage and other logistics services outpaced the increase in revenue, which, when coupled with additional expense associated with increases in other inventory related costs, led to a decrease in gross profit from Fiscal 2021 to Fiscal 2022. This was further exacerbated by higher sales and marketing expenses related to sales commissions, and advertising and promotional expenses necessary to support the growth in revenue, which increased the operating loss margin from 24.5% in Fiscal 2021 to 43.8% in Fiscal 2022.
Design Segment
Gross profit for the design segmentThe increase in net revenues was driven by new customers and an increase in projects from certain existing customers, which was partially offset by declines in revenues from certain prior year customers.
Operating income increased $658,000, or 20.5%, to $3,864,000 in Fiscal 2020 from $3,206,000 in Fiscal 2019. Grossand operating income margin improved from 20.8% Fiscal 2019 to 28.2%3.6% in Fiscal 2020. Gross margin2021 to 10.6% in Fiscal 2019 was significantly lower than historical performance due to project overruns for two significant customers in that year. Depreciation expense, which is allocated to cost of sales for the design segment, was $98,000 and $139,000 for Fiscal 2020 and Fiscal 2019, respectively.
Sales and Marketing Expenses
Distribution Segment
Sales and marketing expenses for the distribution segment increased $54,000, or 3.7%, to $1,495,000 in Fiscal 2020 from $1,441,000 in Fiscal 2019.2022. The increase in gross profit, driven by higher revenue and better utilization and billing rates, was further enhanced by a decrease in general and administrative expenses primarily due to additional amortization on the cost of the Mooni Agreement (see Note 19). Sales and marketing expenses for the distribution segment increased to 7.2% of revenues in Fiscal 2020 from 6.6% in Fiscal 2019.
Design Segment
Sales and marketing expenses for the design segment decreased $68,000, or 13.0%, to $456,000 in Fiscal 2020 from $524,000 in Fiscal 2019. The decrease was primarily due to lower sales commissions and entertainment related expenses, partially offset by higher sales salaries. Sales and marketing expenses for the design segment remained fairly consistent at 3.3% of revenues in Fiscal 2020 compared to 3.4% in Fiscal 2019.
General and Administrative Expenses
Distribution Segment
General and administrative expenses for the distribution segment declined $427,000, or 12.9%, to $2,884,000 in Fiscal 2020 from $3,311,000 in Fiscal 2019. This decline was primarily due to a $511,000 reduction in legal fees related to responding to an SEC subpoena in Fiscal 2019 (which includes an $80,000 insurance settlement received in Fiscal 2020), a decrease in bad debt expense of $69,000, partially offset by higher professional fees of $100,000 (related to the Kablooe acquisition, valuation work and other matters), severance costs of $157,000 and $65,000 related to internal software implementation projects. General and administrative expenses as a percentage of revenue for the distribution segment decreased to 13.9% in Fiscal 2020 from 15.1% in Fiscal 2019.
Design Segment
General and administrative expenses for the design segment decreased $1,631,000, or 37.1%, to $2,771,000 in Fiscal 2020 from $4,402,000 for Fiscal 2019. The decrease is primarily related to a $2,075,000 reduction in bad debt expense, partially offset by the $327,000 investment impairment discussed in Note 6. Amortization of intangible assets is allocated to general and administrative expenses in the design segment. Amortization of intangible assets was $167,000 and $163,000 for Fiscal 2020 and Fiscal 2019, respectively.
Other (Income)/Expense
Distribution Segment
The distribution segment reported other income of $202,000 in Fiscal 2020 as compared to other expense of $438,000 in Fiscal 2019. The variance is due to fair value adjustments of $334,000 in Fiscal 2020 to reduce the deferred consideration liability associated with the IPS acquisition as compared to fair value adjustments of $296,000 in Fiscal 2019 to increase this deferred consideration liability.
Design Segment
The design segment reported other income of $14,000 in Fiscal 2020 as compared to other expense of $73,000 in Fiscal 2019. The change relates to interest payments of $61,000 received on the note receivable written off in Fiscal 2019 (See Note 6). In addition, interest expense was lower in Fiscal 2020 due to lower interest rates and a reduction in the average amount of debt outstanding.
Income Taxes
In Fiscal 2020, the Company recorded a tax provision of $9,000, generated a loss before income taxes of $1,766,000 and had an effective tax rate of 0.5%. In Fiscal 2019, the Company recorded a tax benefit of $4,000, generated a loss before income taxes of $3,604,000 and had an effective tax rate of 0.1%.
The Company maintains significant net operating loss carryforwards and does not recognize a significant income tax provision/(benefit) as its deferred tax provision is typically offset by maintaining a full valuation allowance on its net deferred tax assets. The Fiscal 2020 tax provision is primarily comprised of income taxes assessed in states where net operating losses are not available.higher payroll costs.
LIQUIDITY AND CAPITAL RESOURCES
Our primary source of liquidity is our operations. The primary demand on our working capital has historically been (i) operating losses, (ii) repayment of debt obligations, and (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 At September 30, 2022, our working capital was $4,362,000 compared to $5,587,000 at September 30, 2021, the filing date of this report,decrease primarily due to higher payables and accrued expenses, partially offset by higher inventory levels. At November 30, 2022, we had $300,000approximately $3,200,000 cash on hand and $1,300,000 available under our $1,300,000 line of credit with a bank which matures May 31, 2021. Additionally, 2023.
Forward China, our largest vendor and an entity owned by our Chairman of the Board and Chief Executive Officer, holds a $1,600,000 promissory note (the “FC Note”) issued by us which was extended tomatures on December 31, 20212024 (see Note 14)13 to the consolidated financial statements). The balance of the FC Note was reduced to $1,400,000 after we made principal payments of $200,000 in Fiscal 2022. Although this notethe FC Note has been extended on multiple occasions to assist the Companyus with itsour liquidity position, we plan on funding the repayment at maturity using existing cash balances and/or obtaining an additional credit facility as deemed necessary. Additionally, Forward China has extended payment terms on our outstanding payables due to them when necessary. We can provide no assurance that (i) Forward China will extend the noteFC Note again if we request an extension, nor that(ii) Forward China will continue to extend payment terms on outstanding payables when we need them, or (iii) any suchadditional credit facility will be available on terms acceptable to us or at all.
As discussed in Note 18, on April 18, 2020, the Company entered into a loan in an aggregate principal amount of $1,357,000 under the Paycheck Protection Program (the “PPP Loan”) pursuant to the recently enacted U.S. Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). In December 2020, the Small Business Administration approved our forgiveness request for this loan.
We anticipate that our liquidity and financial resources for the next 12 months fromfollowing 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 (as we have in the past with the acquisitions of IPS and Kablooe) or an investment in a product or partnership, we may 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.
At September 30, 2020, our working capital (current assets less In the current liabilities) was $3,396,000 comparedenvironment of rising interest rates, any future borrowing is expected to $3,542,000 at September 30, 2019. As of November 30, 2020, we had $2,594,000 of cash on hand.result in higher interest expense.
Although we do not anticipate the need to purchase any additional material capital assets in order to carry out our business, it may be necessary for us to purchase equipment and other capital assets in the future, depending on need.
Cash Flows
During Fiscal 20202022 and Fiscal 2019,2021, our sources and uses of cash were as follows:
Cash Flows from Operating Activities
During Fiscal 2020,2022, cash used inprovided by operating activities of $263,000$1,535,000 resulted from a net loss of $1,775,000, an increase in accounts payable and amounts due to Forward China of $1,856,000, a decrease in accounts receivable of $733,000,$953,000, non-cash fair value adjustments of $334,000,charges for depreciation, amortization, share-based compensation and bad debt recoveriesexpense of $78,000, partially offset by non-cash impairment charges$775,000, an increase in accrued expenses of $1,342,000, depreciation and amortization of $272,000, share-based compensation of $245,000$624,000 and the net change in other operating assets and liabilities of $798,000.$443,000, partially offset by the net loss of $1,378,000 and an increase in inventories of $1,738,000.
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During Fiscal 2019,2021, cash used in operating activities of $1,970,000$528,000 resulted from a netan operating loss of $3,604,000, a reduction of accounts payable (including due to Forward China) of $975,000, a net loss reconciling adjustment of $327,000 for the fair value of cost method investment for services provided,$765,000, an increase in prepaid expenses and other current assetsaccounts receivable of $193,000,$1,665,000, an increase in other assetsinventories of $191,000 and an increase in inventory of $40,000, partially offset by the reduction of accounts receivable of $264,000, an increase in accrued expenses and other current liabilities of $97,000, an increase$787,000, a decrease in deferred income of $95,000,$297,000 and the add-backnet change in other operating assets and liabilities of $223,000, partially offset by an increase in accounts payable and amounts due to Forward China of $2,306,000 and non-cash items includingexpenses of $903,000 related to depreciation, amortization, share-based compensation and bad debt expense of $2,065,000, depreciation and amortization of $312,000, share-based compensation expense of $216,000, deferred rent amortization of $16,000 and a non-cash increase of $296,000 in fair value adjustments of the earn-out consideration and deferred cash consideration.expense.
Cash Flows from Investing Activities
In Fiscal 2020,2022 and Fiscal 2021, cash used for investing activities of $390,000 primarily resulted from the $353,000 cash consideration paid for the Kablooe acquisition$170,000 and purchases of property and equipment of $68,000.
In Fiscal 2019, cash used for investing activities of $33,000$67,000, respectively, resulted from purchases of property and equipment.
Cash Flows from Financing Activities
In Fiscal 2020,2022, cash provided byused in financing activities of $485,000$200,000 consisted of $1,357,000 proceeds fromprincipal payments on the PPP Loan, borrowingspromissory note held by Forward China.
In Fiscal 2021, cash used in financing activities of $900,000$919,000 consisted of net repayments under our line of credit of $1,000,000, repayments of notes payable and $32,000 infinance lease liabilities of $187,000, partially offset by proceeds from stock options exercised partially offset by $1,200,000 in repayments on the line of credit, $500,000 paid out on the deferred cash consideration and $104,000 in repayments on notes payable and capital leases.$268,000.
In Fiscal 2019, cash provided by financing activities of $726,000 consisted of $1,550,000 in borrowings on the line of credit, offset by $600,000 in repayments on the line of credit and $225,000 in repayments on notes payable and capital 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.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
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”).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, 2020.2022.
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 SponsorSponsoring 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, 20202022 was effective based on that criteria.
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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 (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 20202022 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
None.
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
Not Applicable.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this item is incorporated by reference to our Proxy Statement for the 20212023 Annual Meeting of Stockholders to be filed with the SEC within 120 days of the fiscal year ended September 30, 2020.2022. Our Board has adopted a Code of Business Conduct and Ethics applicable to all officers, directors and employees, which is available on our website (https://forwardindustries.com/investors/governance/)forwardindustries.com) under "Corporate Governance.“Investors”, "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 information required by this item is incorporated by reference to our Proxy Statement for the 20212023 Annual Meeting of Stockholders to be filed with the SEC within 120 days of the fiscal year ended September 30, 2020.2022.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS
The information required by this item is incorporated by reference to our Proxy Statement for the 20212023 Annual Meeting of Stockholders to be filed with the SEC within 120 days of the fiscal year ended September 30, 2020.2022.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
The information required by this item is incorporated by reference to our Proxy Statement for the 20212023 Annual Meeting of Stockholders to be filed with the SEC within 120 days of the fiscal year ended September 30, 2020.2022.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item is incorporated by reference to our Proxy Statement for the 20212023 Annual Meeting of Stockholders to be filed with the SEC within 120 days of the fiscal year ended September 30, 2020.2022.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(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. |
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: December 17, 202016, 2022
FORWARD INDUSTRIES, INC.
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By: /s/ Terence Wise Terence Wise Chief Executive Officer (Principal Executive Officer) |
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 Terence Wise Principal Executive Officer and Director |
December | /s/ Anthony Camarda Anthony Camarda Principal Financial Officer and Chief Accounting Officer |
December | /s/ Sangita Shah Sangita Shah Director |
December
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/s/ James Ziglar | |
December 16, 2022 | /s/ Sharon Hrynkow |
EXHIBIT INDEX
______________________
* Management compensatory agreement or arrangement.
+ 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.
$ As previously disclosed, this executive officer has received an increase to his annual Base Salary.
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.; 700 Veterans Memorial Hwy, Suite 100, Hauppauge, NY 11788; Attention: Corporate Secretary.
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
F-1 |
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, 20202022 and 2019,2021, and the related consolidated statements of operations, shareholders’ equity and cash flows for the years then ended, and the related notes (collectively referred to as the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of September 30, 20202022 and 2019,2021, 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.
Change in Accounting Principle
As discussed in Notes 2 and 13 to the consolidated financial statements, the Company has changed its method for accounting for leases as of October 1, 2019 due to the adoption of Accounting Standards Codification Topic 842 Leases.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the 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.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the auditaudits to obtain reasonable assurance about whether the consolidated financial statements are free of material 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. As part of our audits, we are required to obtain an understanding of the internal control over financial reporting 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.
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 regarding the amounts and disclosures in the consolidated financial statements. 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 statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (i) related to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which they relate.
Assessment of Going Concern (Note 1 to the Consolidated Financial Statements)
Significant judgment is exercised by the Company in determining whether there is substantial doubt the Company will continue as a going concern. Specifically, the Company’s forecasted cash flows are sensitive to significant assumptions such as projected revenue and projected operating results, all of which are affected by the expected future market or economic conditions, including the residual effects of the global pandemic, and inflation.
Given these factors, the related audit effort in evaluating management’s judgments in determining the Company’s ability to continue as a going concern was challenging, subjective, and complex and required a high degree of auditor judgment.
How our Audit Addressed the Critical Audit Matter
Our principal audit procedures related to the Company’s assessment of going concern included the following:
· | Obtaining an understanding of and evaluating the Company’s process to develop forecasted cash flows, including significant assumptions used in developing forecasted cash flows as well as considering the appropriateness of the underlying data used by the Company in its analyses. | |
· | Evaluating the reasonableness of the Company’s forecasted revenue, operating results, and cash flows by comparing those forecasts to underlying business strategies, including customer relationships and the Company’s ability to obtain new customers, and to historical results. In addition, we performed sensitivity analyses related to the key inputs used in the Company’s forecasted cash flows, including evaluating whether the changes in the assumptions would result in a material change in forecasted cash flows. | |
· | Evaluating management’s ability to accurately forecast future cash flows by comparing the Company’s historical forecasted sales, operating results and cash flow forecasts to actual results. |
/s/ CohnReznick LLP
We have served as the Company’s auditor since 2011.
Jericho,Melville, New York
December 17, 202016, 2022
(PCAOB No. 596)
F-2 |
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES |
CONSOLIDATED BALANCE SHEETS |
September 30, | ||||||||
2020 | 2019 | |||||||
Assets | ||||||||
Current assets: | ||||||||
Cash | $ | 2,924,627 | $ | 3,092,813 | ||||
Accounts receivable, net | 7,602,316 | 6,695,120 | ||||||
Inventories | 1,275,694 | 1,608,827 | ||||||
Prepaid expenses and other current assets | 419,472 | 441,502 | ||||||
Total current assets | 12,222,109 | 11,838,262 | ||||||
Property and equipment, net | 215,323 | 243,002 | ||||||
Intangible assets, net | 1,531,415 | 1,248,712 | ||||||
Goodwill | 1,758,682 | 2,182,427 | ||||||
Investment | – | 326,941 | ||||||
Operating lease right of use assets, net | 3,512,042 | – | ||||||
Other assets | 116,697 | 255,008 | ||||||
Total assets | $ | 19,356,268 | $ | 16,094,352 | ||||
Liabilities and shareholders' equity | ||||||||
Current liabilities: | ||||||||
Line of credit | $ | 1,000,000 | $ | 1,300,000 | ||||
Note payable to Forward China | 1,600,000 | 1,600,000 | ||||||
Accounts payable | 197,022 | 315,444 | ||||||
Due to Forward China | 3,622,401 | 3,236,693 | ||||||
Deferred income | 485,078 | 219,831 | ||||||
Current portion of notes payable | 983,395 | 54,799 | ||||||
Current portion of capital leases payable | 18,411 | 39,941 | ||||||
Current portion of deferred consideration | 45,000 | 834,000 | ||||||
Current portion of operating lease liability | 259,658 | – | ||||||
Accrued expenses and other current liabilities | 615,401 | 694,972 | ||||||
Total current liabilities | 8,826,366 | 8,295,680 | ||||||
Other liabilities: | ||||||||
Notes payable, less current portion | 529,973 | – | ||||||
Operating lease liability, less current portion | 3,359,088 | – | ||||||
Capital lease liability, less current portion | 12,769 | 26,438 | ||||||
Deferred rent | – | 60,935 | ||||||
Deferred consideration, less current portion | 45,000 | – | ||||||
Total other liabilities | 3,946,830 | 87,373 | ||||||
Total liabilities | 12,773,196 | 8,383,053 | ||||||
Commitments and contingencies | ||||||||
Shareholders' equity: | ||||||||
Common stock, par value $0.01 per share; 40,000,000 shares authorized; 9,883,851 and 9,533,851 shares issued and outstanding at September 30, 2020 and 2019, respectively | 98,838 | 95,338 | ||||||
Additional paid-in capital | 19,579,684 | 18,936,130 | ||||||
Accumulated deficit | (13,095,450 | ) | (11,320,169 | ) | ||||
Total shareholders' equity | 6,583,072 | 7,711,299 | ||||||
Total liabilities and shareholders' equity | $ | 19,356,268 | $ | 16,094,352 |
The accompanying notes are an integral part of the consolidated financial statements.
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Fiscal Years Ended September 30, | ||||||||
2020 | 2019 | |||||||
Revenues, net | $ | 34,478,358 | $ | 37,409,030 | ||||
Cost of sales | 27,839,851 | 30,828,148 | ||||||
Gross profit | 6,638,507 | 6,580,882 | ||||||
Sales and marketing | 1,950,704 | 1,965,230 | ||||||
General and administrative | 5,655,186 | 7,713,035 | ||||||
Goodwill impairment | 1,015,000 | – | ||||||
Loss from operations | (1,982,383 | ) | (3,097,383 | ) | ||||
Fair value adjustment of earn-out consideration | (350,000 | ) | 260,000 | |||||
Fair value adjustment of deferred cash consideration | 16,000 | 36,000 | ||||||
Interest income | (60,932 | ) | – | |||||
Interest expense | 174,962 | 201,004 | ||||||
Other expense, net | 3,701 | 13,805 | ||||||
Loss before income taxes | (1,766,114 | ) | (3,608,192 | ) | ||||
Provision for (benefit from) income taxes | 9,167 | (4,162 | ) | |||||
Net loss | $ | (1,775,281 | ) | $ | (3,604,030 | ) | ||
Net loss per share: | ||||||||
Basic | $ | (0.19 | ) | $ | (0.38 | ) | ||
Diluted | $ | (0.19 | ) | $ | (0.38 | ) | ||
Weighted average common shares outstanding: | ||||||||
Basic | 9,583,441 | 9,532,034 | ||||||
Diluted | 9,583,441 | 9,532,034 |
September 30, | ||||||||
2022 | 2021 | |||||||
Assets | ||||||||
Current assets: | ||||||||
Cash | $ | 2,575,522 | $ | 1,410,365 | ||||
Accounts receivable, net | 7,542,666 | 8,760,715 | ||||||
Inventories, net | 3,801,030 | 2,062,557 | ||||||
Prepaid expenses and other current assets | 417,605 | 561,072 | ||||||
Total current assets | 14,336,823 | 12,794,709 | ||||||
Property and equipment, net | 241,146 | 167,997 | ||||||
Intangible assets, net | 1,105,901 | 1,318,658 | ||||||
Goodwill | 1,758,682 | 1,758,682 | ||||||
Operating lease right of use assets, net | 3,427,726 | 3,743,242 | ||||||
Other assets | 68,737 | 72,251 | ||||||
Total assets | $ | 20,939,015 | $ | 19,855,539 | ||||
Liabilities and shareholders' equity | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 268,160 | $ | 391,992 | ||||
Due to Forward China | 7,713,880 | 5,733,708 | ||||||
Deferred income | 438,878 | 187,695 | ||||||
Current portion of earnout consideration | 25,000 | 25,000 | ||||||
Current portion of operating lease liability | 377,940 | 340,151 | ||||||
Accrued expenses and other current liabilities | 1,153,906 | 529,497 | ||||||
Total current liabilities | 9,977,764 | 7,208,043 | ||||||
Other liabilities: | ||||||||
Note payable to Forward China | 1,400,000 | 1,600,000 | ||||||
Operating lease liability, less current portion | 3,249,824 | 3,559,053 | ||||||
Earnout consideration, less current portion | 45,000 | 45,000 | ||||||
Total liabilities | 14,672,588 | 12,412,096 | ||||||
Commitments and contingencies (Note 11) | – | – | ||||||
Shareholders' equity: | ||||||||
Common stock, par value $ | per share; shares authorized; shares issued and outstanding at September 30, 2022 and 2021100,612 | 100,612 | ||||||
Additional paid-in capital | 20,115,711 | 19,914,476 | ||||||
Accumulated deficit | (13,949,896 | ) | (12,571,645 | ) | ||||
Total shareholders' equity | 6,266,427 | 7,443,443 | ||||||
Total liabilities and shareholders' equity | $ | 20,939,015 | $ | 19,855,539 |
The accompanying notes are an integral part of the consolidated financial statements.
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES |
CONSOLIDATED STATEMENTS OF OPERATIONS |
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
For the Fiscal Years Ended September 30, | ||||||||
2022 | 2021 | |||||||
Revenues, net | $ | 42,337,385 | $ | 39,021,996 | ||||
Cost of sales | 33,969,115 | 30,887,577 | ||||||
Gross profit | 8,368,270 | 8,134,419 | ||||||
Sales and marketing expenses | 2,854,664 | 2,503,518 | ||||||
General and administrative expenses | 6,753,280 | 6,395,900 | ||||||
Loss from operations | (1,239,674 | ) | (764,999 | ) | ||||
Gain on forgiveness of note payable | – | (1,356,570 | ) | |||||
Fair value adjustment of earnout consideration | – | (20,000 | ) | |||||
Interest income | – | (88,760 | ) | |||||
Interest expense | 123,411 | 171,957 | ||||||
Other expense, net | 12,612 | 4,569 | ||||||
(Loss)/income before income taxes | (1,375,697 | ) | 523,805 | |||||
Provision for income taxes | 2,554 | – | ||||||
Net (loss)/income | $ | (1,378,251 | ) | $ | 523,805 | |||
(Loss)/earnings per share: | ||||||||
Basic | $ | (0.14 | ) | $ | 0.05 | |||
Diluted | $ | (0.14 | ) | $ | 0.05 | |||
Weighted average common shares outstanding: | ||||||||
Basic | 10,061,185 | 9,950,094 | ||||||
Diluted | 10,061,185 | 10,443,018 |
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the Fiscal Year Ended September 30, 2020 | ||||||||||||||||||||
Additional | ||||||||||||||||||||
Common Stock | Paid-In | Accumulated | ||||||||||||||||||
Shares | Amount | Capital | Deficit | Total | ||||||||||||||||
Balance at September 30, 2019 | 9,533,851 | $ | 95,338 | $ | 18,936,130 | $ | (11,320,169 | ) | $ | 7,711,299 | ||||||||||
Share-based compensation | – | – | 245,154 | – | 245,154 | |||||||||||||||
Shares issued for Kablooe acquisition | 300,000 | 3,000 | 366,900 | – | 369,900 | |||||||||||||||
Stock options exercised | 50,000 | 500 | 31,500 | – | 32,000 | |||||||||||||||
Net loss | – | – | – | (1,775,281 | ) | (1,775,281 | ) | |||||||||||||
Balance at September 30, 2020 | 9,883,851 | $ | 98,838 | $ | 19,579,684 | $ | (13,095,450 | ) | $ | 6,583,072 |
For the Fiscal Year Ended September 30, 2019 | ||||||||||||||||||||
Additional | ||||||||||||||||||||
Common Stock | Paid-In | Accumulated | ||||||||||||||||||
Shares | Amount | Capital | Deficit | Total | ||||||||||||||||
Balance at September 30, 2018 | 9,533,851 | $ | 95,338 | $ | 18,720,396 | $ | (7,716,139 | ) | $ | 11,099,595 | ||||||||||
Share-based compensation | – | – | 215,734 | – | 215,734 | |||||||||||||||
Net loss | – | – | – | (3,604,030 | ) | (3,604,030 | ) | |||||||||||||
Balance at September 30, 2019 | 9,533,851 | $ | 95,338 | $ | 18,936,130 | $ | (11,320,169 | ) | $ | 7,711,299 |
The accompanying notes are an integral part of the consolidated financial statements.
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES |
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY |
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
For the Fiscal Year Ended September 30, 2022 | ||||||||||||||||||||
Additional | ||||||||||||||||||||
Common Stock | Paid-In | Accumulated | ||||||||||||||||||
Shares | Amount | Capital | Deficit | Total | ||||||||||||||||
Balance at September 30, 2021 | 10,061,185 | $ | 100,612 | $ | 19,914,476 | $ | (12,571,645 | ) | $ | 7,443,443 | ||||||||||
Share-based compensation | – | – | 201,235 | – | 201,235 | |||||||||||||||
Net loss | – | – | – | (1,378,251 | ) | (1,378,251 | ) | |||||||||||||
Balance at September 30, 2022 | 10,061,185 | $ | 100,612 | $ | 20,115,711 | $ | (13,949,896 | ) | $ | 6,266,427 |
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Fiscal Years Ended September 30, | ||||||||
2020 | 2019 | |||||||
Operating Activities: | ||||||||
Net loss | $ | (1,775,281 | ) | $ | (3,604,030 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
Share-based compensation | 245,154 | 215,734 | ||||||
Depreciation and amortization | 271,973 | 311,581 | ||||||
Bad debt (recovery)/expense | (78,278 | ) | 2,065,592 | |||||
Deferred rent | – | 16,013 | ||||||
Change in fair value of earn-out consideration | (350,000 | ) | 260,000 | |||||
Change in fair value of deferred cash consideration | 16,000 | 36,000 | ||||||
Goodwill impairment | 1,015,000 | – | ||||||
Fair value of cost method investment for services provided | – | (326,941 | ) | |||||
Impairment of investment | 326,941 | – | ||||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable | (733,228 | ) | 263,806 | |||||
Inventories | 333,133 | (39,913 | ) | |||||
Prepaid expenses and other current assets | 30,542 | (193,068 | ) | |||||
Other assets | 138,311 | (191,458 | ) | |||||
Accounts payable and due to Forward China | 245,679 | (975,265 | ) | |||||
Deferred income | 219,713 | 94,818 | ||||||
Operating lease liabilities | 25,945 | – | ||||||
Accrued expenses and other current liabilities | (194,550 | ) | 97,402 | |||||
Net cash used in operating activities | (262,946 | ) | (1,969,729 | ) | ||||
Investing Activities: | ||||||||
Purchases of property and equipment | (68,456 | ) | (33,138 | ) | ||||
Cash used in acquisition of Kablooe, Inc. | (352,628 | ) | – | |||||
Cash acquired in acquisition of Kablooe, Inc. | 31,024 | – | ||||||
Net cash used in investing activities | (390,060 | ) | (33,138 | ) | ||||
Financing Activities: | ||||||||
Proceeds from line of credit borrowings | 900,000 | 1,550,000 | ||||||
Repayment of line of credit borrowings | (1,200,000 | ) | (600,000 | ) | ||||
Repayment of notes payable | (68,551 | ) | (169,648 | ) | ||||
Proceeds from PPP loan | 1,356,570 | – | ||||||
Cash proceeds from stock options exercised | 32,000 | – | ||||||
Repayments of capital leases | (35,199 | ) | (54,538 | ) | ||||
Payment of deferred cash consideration | (500,000 | ) | – | |||||
Net cash provided by financing activities | 484,820 | 725,814 | ||||||
Net decrease in cash | (168,186 | ) | (1,277,053 | ) | ||||
Cash at beginning of year | 3,092,813 | 4,369,866 | ||||||
Cash at end of year | $ | 2,924,627 | $ | 3,092,813 | ||||
Supplemental Disclosures of Cash Flow Information: | ||||||||
Cash paid for interest | $ | 178,114 | $ | 201,004 | ||||
Cash paid for taxes | $ | 4,854 | $ | – | ||||
Supplemental Disclosures of Non-Cash Information: | ||||||||
Lease assets recorded in accordance with ASC 842 | $ | 3,825,632 | $ | – | ||||
Lease liabilities recorded in accordance with ASC 842 | $ | 3,906,391 | $ | – | ||||
Common stock issued in Kablooe acquisition | $ | 369,900 | $ | – | ||||
Fair value of Kablooe contingent earnout consideration | $ | 90,000 | $ | – |
For the Fiscal Year Ended September 30, 2021 | ||||||||||||||||||||
Additional | ||||||||||||||||||||
Common Stock | Paid-In | Accumulated | ||||||||||||||||||
Shares | Amount | Capital | Deficit | Total | ||||||||||||||||
Balance at September 30, 2020 | 9,883,851 | $ | 98,838 | $ | 19,579,684 | $ | (13,095,450 | ) | $ | 6,583,072 | ||||||||||
Share-based compensation | – | – | 68,855 | – | 68,855 | |||||||||||||||
Stock options exercised | 177,334 | 1,774 | 265,937 | – | 267,711 | |||||||||||||||
Net income | – | – | – | 523,805 | 523,805 | |||||||||||||||
Balance at September 30, 2021 | 10,061,185 | $ | 100,612 | $ | 19,914,476 | $ | (12,571,645 | ) | $ | 7,443,443 |
The accompanying notes are an integral part of the consolidated financial statements.
F-5 |
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES |
CONSOLIDATED STATEMENTS OF CASH FLOWS |
For the Fiscal Years Ended September 30, | ||||||||
2022 | 2021 | |||||||
Operating Activities: | ||||||||
Net (loss)/income | $ | (1,378,251 | ) | $ | 523,805 | |||
Adjustments to reconcile net (loss)/income to net cash provided by/(used in) operating activities: | ||||||||
Share-based compensation | 201,235 | 68,855 | ||||||
Depreciation and amortization | 309,239 | 327,290 | ||||||
Bad debt expense | 264,912 | 506,469 | ||||||
Gain on forgiveness of note payable | – | (1,356,570 | ) | |||||
Change in fair value of earn-out consideration | – | (20,000 | ) | |||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable | 953,137 | (1,664,868 | ) | |||||
Inventories | (1,738,473 | ) | (786,863 | ) | ||||
Prepaid expenses and other current assets | 143,467 | (141,600 | ) | |||||
Other assets | 3,514 | 44,446 | ||||||
Accounts payable and due to Forward China | 1,856,340 | 2,306,277 | ||||||
Deferred income | 251,183 | (297,383 | ) | |||||
Net changes in operating lease liabilities | 44,076 | 49,258 | ||||||
Accrued expenses and other current liabilities | 624,409 | (87,427 | ) | |||||
Net cash provided by/(used in) operating activities | 1,534,788 | (528,311 | ) | |||||
Investing Activities: | ||||||||
Purchases of property and equipment | (169,631 | ) | (67,207 | ) | ||||
Net cash used in investing activities | (169,631 | ) | (67,207 | ) | ||||
Financing Activities: | ||||||||
Proceeds from line of credit borrowings | – | 150,000 | ||||||
Repayment of line of credit borrowings | – | (1,150,000 | ) | |||||
Repayment of notes payable | – | (156,798 | ) | |||||
Repayment of note payable to Forward China | (200,000 | ) | – | |||||
Proceeds from stock options exercised | – | 267,711 | ||||||
Repayments of finance leases | – | (29,657 | ) | |||||
Net cash used in financing activities | (200,000 | ) | (918,744 | ) | ||||
Net increase/(decrease) in cash | 1,165,157 | (1,514,262 | ) | |||||
Cash at beginning of year | 1,410,365 | 2,924,627 | ||||||
Cash at end of year | $ | 2,575,522 | $ | 1,410,365 | ||||
Supplemental Disclosures of Cash Flow Information: | ||||||||
Cash paid for interest | $ | 123,411 | $ | 154,510 | ||||
Cash paid for taxes | $ | 10,856 | $ | 8,389 | ||||
Supplemental Disclosures of Non-Cash Information: | ||||||||
Operating lease assets obtained in exchange for operating lease liabilities | $ | 204,881 | $ | 565,590 |
The accompanying notes are an integral part of the consolidated financial statements.
F-6 |
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 OVERVIEW
Business
Forward Industries, Inc. (“Forward”, “we”, “our”, or the “Company”), is a fully integratedglobal design, developmentmanufacturing, sourcing and manufacturing solution provider fordistribution group serving top tier medical and technology customers worldwide. Through its acquisitions of IPS and Kablooe, the Company has expanded its ability to design and develop solutions for our existing multinational client base and expand beyond the diabetic product line 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 handheld electronic 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 has been original equipment manufacturers, or “OEMs” (or the contract manufacturing firms of these OEM customers), that either package our products as accessories “in box” together with their branded product offerings or sell them through their retail distribution channels. 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 geographic area encompassing North America, Central America and South America, which we refer to as 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 Industries Asia-Pacific Corporation, a British Virgin Islands corporation (“Forward China”), See Note 14.
As a result of the continued expansion of theour design development capabilities through itsour wholly-owned subsidiaries, IPS and Kablooe, the Company is now able to introduce proprietary products to the market from concepts brought to it from a number of different sources, both inside and outside the Company.
Within this report, certain dollar amountsThe Company’s design division provides hardware and percentages have been roundedsoftware product design and engineering services to customers predominantly located in the U.S. The Company’s OEM distribution division sources and sells carrying cases and other accessories for medical monitoring and diagnostic kits as well as a variety of other portable electronic and non-electronic devices to original equipment manufacturers (“OEM”s), or their approximate values.contract manufacturers worldwide, 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 retail distribution division sources and sells smart-enabled furniture, hot tubs and various other products through various online retailer websites to customers predominantly located in the U.S.
The Company does not manufacture any of its OEM or retail products and sources substantially all of these products from independent suppliers in China, through Forward Industries Asia-Pacific Corporation, a British Virgin Islands corporation (“Forward China”). See Note 13.
Liquidity
In Fiscal 2022, the Company generated a net loss of $1,378,000 and $1,535,000 of cash flows from operating activities. Based on our forecasted cash flows, we believe our existing cash balance and working capital will be sufficient to meet our liquidity needs through at least December 31, 2023.
Impact of COVID-19
The outbreakeffects of the COVID-19 virus in Chinapandemic continue to impact the retail and its subsequent spread throughout the world has impacted our Fiscal 2020 results of operations. In efforts to contain the virus, authorities have implemented travel restrictions, quarantines, business limitations and shutdowns. Since the majorityOEM distribution segments of our workforce is basedbusiness. The increase in New York, these restrictions have required substantially allglobal consumer demand, coupled with the global shipping container shortage, dramatically increased demand for both ocean freight and ground transportation. These factors led to a significant increase in freight costs, particularly from the Asia-Pacific region and most notably in Fiscal 2022. Labor shortages at U.S. ports and in ground transportation services caused container ships to spend a significant amount of time waiting for goods to be unloaded and to arrive at our employees to work from home for much of Fiscal 2020. During the third quarter of Fiscal 2020, productivity of our direct labor employees was reduced, whichwarehouses. These factors caused a decline in revenue and gross profit. As some of these restrictions were relaxedan increase in the fourth quarterdemand for and cost of Fiscal 2020, employees started to return to the office with minimal operational challenges. Business shutdowns resulting from the pandemic disrupted our supply chainground transportation and the manufacture or shipmentdelayed consumer availability for many of our products and have delayed the rollout of our smart enabled retail products to big box retail stores, causing our distribution segment revenues in Fiscal 20202022. The timing and extent of these COVID-19 related transportation disruptions are still largely unknown but are expected to be less than anticipated. Additionally, our design segment reported lower revenues as demand for its design and development services were reduced or delayed. The impact from lower revenue was partially offset by a reduction in certain selling and travel related expenses resulting from government mandated stay-at-home orders and travel restrictions as well as revenues derived from sales and sourcing of personal protective equipment. The pandemic had temporarily impacted our liquidity incontinue into Fiscal 2020, as collections of accounts receivable were somewhat delayed at certain times.
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2023.
The economy started to open in certain jurisdictions where the virus was considered under control. However, there continue to be areas with increased rates of infection that could cause government officials to enact more restrictions on how businesses operate. The future impactseffects of the pandemic had a lesser impact on the design segment of our business. Rising inflation caused an increase in the cost of acquiring and any resulting economicretaining our employees, particularly in the second half of Fiscal 2022. The timing and extent of future inflation is difficult to predict, but we expect these rising costs to continue into Fiscal 2023.
The effects of COVID-19 may further impact are largely unknownour business in ways we cannot predict, and such impacts could be significant. It is possible that the pandemic, the measures taken by the governments of countries affected and the resultingThe current economic impactconditions may continue to negatively impact our results of operations, cash flows and financial position in future periods as well as that of our customers, including their ability to pay for our products and services and choosingto choose to allocate their budgets to new or existing projects which may or may not require our products and services. The long-term financial impact on our business cannot be reasonably estimated at this time. As a result, the effects of COVID-19 may not be fully reflected in our financial results until future periods. Refer to “Part I, Item 1A — Risk Factors” in this Annual Report for a description
F-7 |
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Until the effects of the material risks that the Company currently faces in connection with COVID-19.
As a result of revenue and earnings shortfalls in the second quarter of Fiscal 2020, due in part to COVID-19 and the related future uncertainty, the Company revised revenue and operational projections for IPS for the later part of Fiscal 2020 and future periods. These events impacted the carrying value of goodwill (see Note 4). Until there is a vaccine and treatment that is widely distributed,pandemic have fully receded, we expect business conditions to remain challenging. In response to these challenges, we will continue to focus on those factors that we can control: closely managing and controlling our expenses;expenses and inventory levels; aligning our design and development schedules with demand in a proactive manner as there are changes in market conditions to minimize our cash operating costs; and pursuing further improvements in the productivity and effectiveness of our development, selling and administrative activities.activities and, where appropriate, taking advantage of opportunities to enhance our business growth and strategy.
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 (“U.S. GAAP”) 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. Within this report, certain dollar amounts and percentages have been rounded to their approximate values.
The worldwide spread of COVID-19 has resulted in a global slowdown of economic activity which is likely to decrease demand for a broad variety of goods and services, while also disrupting sales channels, marketing activities and general business operations for an unknown period of time until the disease is contained. At this point, the extent to which COVID-19 may impact our financial condition or results of operations is uncertain, and asuncertain. As of the date of issuance of these consolidated financial statements,this report, we are not aware of any specific eventevents or circumstancecircumstances that would require us to update our estimates or judgments or adjust the carrying valueamount of our assets or liabilities. These estimates may change, as new events occur and additional information is obtained, and are recognized in the consolidated financial statements as soon as they become known. Actual results could differ from those estimates and any such differences may be material to our consolidated financial statements.
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, IPS and Kablooe). All significant intercompany transactions and balances have been eliminated in consolidation. Intercompany sales of $49,000 and $221,000 from IPS to Forward US have been eliminated in consolidation for Fiscal 2020 and Fiscal 2019, respectively.
The Company incurred a net loss of $1,775,000 for Fiscal 2020 and generated negative cash flow from operations of $263,000. We believe our existing cash balance and working capital will be sufficient to meet our liquidity needs at least through December 2021.
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Segment Reporting
The Company has twothree reportable segments: OEM distribution, retail distribution and design. The OEM distribution segment consists of two reporting units (Forward USsources and Forward Switzerland, that collectively comprise one operating segment) that source and distributesells carrying cases and other accessories for medical monitoring and diagnostic kits and a variety of other portable electronic and non-electronic devices.devices (such as sporting and recreational products, bar code scanners, GPS location devices, tablets and firearms) on a made-to-order basis that are customized to fit the products sold by our OEM customers worldwide. The retail distribution segment sources and sells smart-enabled furniture, hot tubs and a variety of other products through various online retailer websites to customers predominantly located in the U.S. The design segment consists of two operating segments (IPS and Kablooe, which have been aggregated into one reportable segment) that provide a full spectrum of hardware and software product design and engineering services.services to customers predominantly located in the U.S. See Note 15 for more information on segments.
Organizing our business through these operating segments allows us to align our resources and manage our operations. Our chief operating decision maker regularly reviews operating segment revenue and profitability 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 or loss. Segment operating income or loss includes revenues earned and expenses incurred directly by the operating segment, including cost of sales and selling, marketing, and general and administrative expenses (see Note 16 for more discussion on operating segments).
Goodwill
The Company reviews goodwill for impairment at least annually, or more often if triggering events occur. The Company has two reporting units with goodwill (IPS(the IPS and Kablooe)Kablooe operating segments) and we perform our annual goodwill impairment test on September 30, the end of the fiscal year, or upon the occurrence of a triggering event. 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 thea quantitative 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 compareperform the quantitative impairment test by comparing 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,amount, no impairment charge is recognized. If the fair value of the reporting unit is less than its carrying value,amount, 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 unitunit. Management evaluated and the implied fair valueconcluded there were no indications of goodwill. Duringimpairment of goodwill in Fiscal 2020, the Company recorded an impairment charge of $1,015,000 related to goodwill (See Note 4).2022 or 2021.
F-8 |
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Intangible Assets
Intangible assets include trademarks and customer relationships, which were acquired as part of the acquisitions of IPS in Fiscal 2018 and Kablooe in Fiscal 2020 (see Note 3) and are recorded based on their estimated fair value determined in conjunction with the purchase price allocation. These 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 itsour intangible assets. Management evaluated and concluded that there were no indications of impairments of intangible assets at September 30, 2020.2022 or 2021.
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Cash and Cash Equivalents
The Company considers all highly liquid investmentsmaintains cash deposits in banks with an original maturity of three months or less when purchased to be cash equivalents. There were no cash equivalents at September 30, 2020 and 2019. The Company maintains its cash in bank and financial institution depositsinstitutions in the United States (that at times may exceed federally insured limits of $250,000 per financial institution) and Switzerland. At September 30, 20202022 and 2019,2021, there were deposits totaling $2,300,000$2,037,000 (which includes $770,000$467,000 in a foreign bank) and $2,800,000$805,000 (which includes $650,000$436,000 in a foreign bank), respectively, held in excess of federally insured limits. Historically, we have not experienced any losses due to such cash concentrations.
Accounts Receivable
Accounts receivable consist of unsecured trade accounts with customers or theirin amounts that have been invoiced ($7,861,000 and $8,864,000 at September 30, 2022 and 2021, respectively) and contract manufacturers.assets as described further below under the heading “Revenue Recognition.” The Company performs periodic credit evaluationsmaintains an allowance for doubtful accounts, which is recorded as a reduction to accounts receivable on the consolidated balance sheets. Collectability of its customers including an evaluationaccounts receivable is estimated by evaluating the number of days accounts are outstanding, customer 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.adjusted as necessary based on specific customer situations. At September 30, 2020,2022 and 2021, the Company had allowances for doubtful accounts of $249,000$0 and $347,000 related to$90,000, respectively, for the Company’sOEM distribution segment, $20,000and $0, respectively, for the retail segment and $852,000 and $706,000, respectively, for the design segment accounts receivable, respectively.segment.
The Company has agreements with various retailers which contain different terms for trade discounts, promotional and other sales allowances. At September 30, 2022, 2021 and 2020, the Company recorded accounts receivable allowances of $55,000, $0 and $0, respectively, for the retail distribution segment.
In Fiscal 2019, the Company had allowances for doubtful accountsrecorded bad debt expense of $159,000 and $2,033,000 relating$1,626,000 to the Company’s distribution segment and design segmentfully reserve accounts receivable respectively. The decrease indeemed uncollectible from a customer. In Fiscal 2020, the Company converted the amount outstanding from this customer into a non-negotiable secured promissory note with interest that accrues at a rate of 8% per annum and reclassified the related allowance for doubtful accounts foraccounts to an allowance on the design segment is primarilynote receivable. The Company received $101,000 from this customer in Fiscal 2021, of which $89,000 was applied to past due interest and penalties and recorded as interest income, and $12,000 was applied to the conversionprincipal and recorded as a recovery of the accounts receivable balancebad debt expense as a reduction of general and administrative expense. No payments were received from athis customer and the associated allowance for doubtful accounts, of $1,626,000, to a note receivable (see Note 6).in Fiscal 2022.
F-9 |
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Inventories
Inventories consist primarily of finished goods and are stated at the lower of cost (determined by the first-in, first-out method) or net realizable value. Based on management’s estimates, an allowance is made to reduce excess, obsolete, or otherwise un-saleableunsellable inventories to net realizable value. The allowance is established through charges to cost of goods soldsales in the Company’s consolidated statements of 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, 20202022 and 2019, there was no2021, the allowance for obsolete inventory.slow-moving inventory, which relates entirely to our retail segment, was $535,000 and $50,000, respectively.
Property and Equipment
Property and equipment consist of computer hardware and software, furniture, fixtures equipment and leasehold improvementsequipment 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, fixturesall property and equipment ranges from three to five 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.
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSLeases
Leases
The Company adopted Accounting Standards Codification (“ASC”) 842, "Leases", effective October 1, 2019 using the modified retrospective transition method and elected to apply the available practical expedients to enable the preparation of financial information on adoption. The practical expedients applied under the new standard allow the Company to carry forward the historical lease classification and not reassess its prior conclusions about lease identification or initial direct costs. In accordance with this guidance, leaseLease assets and liabilities are recognized at lease commencement date based on the present value of lease payments over the lease term, using the Company’s incremental borrowing rate commensurate with the lease term, since the Company’s lessors do not provide an implicit rate, nor is one readily available. The Company has certain leases that may include an option to renew and when it is reasonably probable to exercise such option, the Company will include the renewal option terms in determining the lease asset and lease liability. Lease assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Lease expense for lease payments is recognized on a straight-line basis over the lease term. Operating lease assets are shown as right of use assets and financing lease assets are a component of property and equipment on the consolidated balance sheets. The current and long-term portions of operating and financing lease liabilities are shown separately as such on the consolidated balance sheets. Upon adoption of ASC 842, the Company recognized right of use assets of $3,649,000 and corresponding lease liabilities of $3,729,000 pertaining to its operating leases on its consolidated balance sheets.
Income Taxes
The Company recognizes 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 carryforwards to the extent that realization of these benefits is more likely than not. At September 30, 2020,2022, there was no change to our assessment that a full valuation allowance was required against all net deferred tax assets.assets as it is not probable that such deferred tax assets will be realized. Accordingly, any deferred tax provision or benefit was offset by an equal and opposite change to the valuation allowance. Our income tax provision or benefit is generally not significant due to the existence of significant net operating loss carryforwards.
Revenue Recognition
OEM Distribution Segment
The Company adopted ASC 606, “Revenue Recognition” effective October 1, 2018. In accordance with this guidance, the Company generallyOEM distribution segment recognizes revenue in its distribution segment when: (i) finished goods are shipped to our distributionits customers (in general, these conditions occur at either point of shipment or point of destination, depending on the terms of sale i.e.,and transfer of control); (ii) there are no other deliverables or performance obligations; and (iii) there are no further obligations to the customer after the title of the goods has transferred. If the Company receives consideration before achieving the criteria previously mentioned, it records a contract liability, which is classified as a component of deferred income in the accompanying consolidated balance sheets. The OEM distribution segment had no contract liabilities at September 30, 2022, 2021 or 2020.
F-10 |
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Retail Distribution Segment
The retail distribution segment sells products primarily through online websites operated by authorized third-party retailers. Revenue is recognized when control (as defined in ASC 606, “Revenue from Contracts with Customers”) of the related goods is transferred to the retailer, which generally occurs upon shipment to the end customer. Other than product delivery, the retail distribution segment does not typically have other deliverables or performance obligations associated with its products. Revenue is measured as the amount of consideration expected to be received in exchange for the products provided, net of allowances taken by retailers for product returns and any taxes collected from customers that will be remitted to governmental authorities. When the Company receives consideration before achieving the criteria previously mentioned, it records a contract liability, which is classified as a component of deferred income in the accompanying consolidated balance sheets. ContractThe retail distribution segment had contract liabilities of $0, $0 and $75,000 at September 30, 2022, 2021 and 2020, and 2019 were $75,000 and $0 for the distribution segment.respectively.
Design Segment
Under ASC 606, theThe 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.price. 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 fixed price 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.
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. ContractThe design segment had contract assets of $609,000, $693,000, $649,000 at September 30, 20202022, 2021 and 2019 were $649,000 and $611,000,2020, respectively. 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. ContractThe design segment had contract liabilities at of $439,000, $188,000, $410,000 at September 30, 20202022, 2021 and 2019 were $410,000 and $220,000,2020, respectively.
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.sales.
Foreign Currency Transactions
The Company’s functional currency is the U.S. dollar. Foreign currency transactions may generate receivables or payables that are fixed in terms of the amount of foreign currency that will be received or paid. Fluctuations in exchange rates between such foreign currency and the functional currency increase or decrease the expected amount of functional currency cash flows upon settlement of the transaction. These increases or decreases in expected functional currency cash flows are foreign currency transaction gains or losses that are included in other income or expense in the accompanying consolidated statements of operations. The approximate net losses from foreign currency transactions were $3,000$13,000 and $14,000$5,000 for the fiscal years ended September 30, 2020Fiscal 2022 and 2019,2021, respectively. Such foreign currency transaction losses were primarily the result of Euroeuro denominated revenues from certain customers.
Fair Value Measurements
We perform fair value measurements in accordance with the guidance provided by ASC 820, “Fair Value Measurement.” 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.
F-11 |
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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:
· | 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. |
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Share-Based Compensation Expense
The Company estimates the fair value of employee and non-employee director share-based compensation on the date of grant 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. The fair value of employee and non-employee director share-based compensation is recognized in the consolidated statements of operations over the related service or vesting period of each grant. 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 (see Note 9)8).
Business Combinations
The Company allocates the fair value of purchase consideration to the tangible and intangible assets acquired and liabilities assumed 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.
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 estimateestimates of fair value isare based upon assumptions believed to be reasonable, but actual results may differ from estimates.
Other estimates associated with the accounting for acquisitions may change as additional information becomes available regarding the assets acquired and liabilities assumed.
Reclassifications
Certain amounts in the accompanying Fiscal 2019 financial statements have been reclassified to conform to the Fiscal 2020 presentation.
RecentRecent Accounting Pronouncements
In August 2018, the FASB issued ASU 2018-13 “Fair Value Measurement – Disclosure Framework (Topic 820)” to improve 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 does not expect the adoption of this guidance to have a material impact on its consolidated financial statements.
In November 2019, the FASB issued ASU 2019-08, “Compensation - Stock Compensation (Topic 718) and Revenue from Contracts with Customers (Topic 606)” 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, 2019 and interim periods within those fiscal years. The Company does not expect the adoption of this guidance to have a material impact on its consolidated financial statements.
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 provides clarity to and amends earlier guidance on this topic and would be effective concurrently with the adoption of such earlier guidance. This pronouncement is effective for the Company for fiscal years beginning after December 15, 2022 and interim periods within those fiscal years. The Company is currently evaluating the effects of this pronouncement on its consolidated financial statements.
In August 2018, the FASB issued ASU 2018-15 “Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40)” addressing customers’ accounting for implementation costs incurred in a cloud computing arrangement that is a service contract, which requires customers to apply internal-use software guidance to determine the implementation costs that are able to be capitalized. Capitalized implementation costs are required to be amortized over the term of the arrangement, beginning when the cloud computing arrangement is ready for its intended use. The effective date of the new guidance for public companies is for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years. Early adoption is permitted. The Company does not expect the adoption of this guidance to have a material impact on its consolidated financial statements.
In December 2019, the FASB issued ASU 2019-12 “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.” This guidance removes certain exceptions to the general principles in Topic 740 and provides consistent application of U.S. GAAP by clarifying and amending existing guidance. The effective date of the new guidance for public companies is for fiscal years beginning after December 15, 2020 and interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluatingadopted this guidance in the timingfirst quarter of adoption andfiscal 2022 with no material impact of the updated guidance onto its consolidated financial statements.
NOTE 3 ACQUISITION
On August 17, 2020, in order to further diversify its customer base and the industries in which it sells its products, the Company and Kablooe, Inc. (a newly formed wholly-owned subsidiary of the Company) entered into an Asset Purchase Agreement (the “Agreement”) with Kablooe Design, Inc. (“Kablooe Design”) and its sole shareholder. Kablooe Design is an innovative medical and consumer design and development company whose clients include leading brands in medical devices. In consideration for the acquisition of substantially all of the assets of Kablooe Design, the Company: (i) paid $353,000 in cash; (ii) issued 300,000 shares of its common stock; (iii) agreed to pay up to an aggregate $500,000 in contingent earnout payments based on Kablooe meeting certain earnings milestones (as defined in the Agreement) over a five-year period; and (iv) agreed to make two additional $50,000 retention payments to Kablooe’s Chief Executive Officer on the fourth and fifth anniversaries of the acquisition based on his continued employment with Kablooe and the achievement of the earnings milestones (as defined in the Agreement). Additionally, in conjunction with this acquisition, the Company entered into a five-year employment agreement with Kablooe’s Chief Executive Officer and agreed to pay him a salary of $250,000 per year.
At the date of acquisition, the consideration transferred consisted of cash, shares of Forward’s common stock, and contingent consideration based on the earnings performance of Kablooe over a five-year period. The acquisition date fair value of consideration transferred consisted of the following:
Cash at closing (1) | $ | 353,000 | ||
Value of Forward's common stock (2) | 370,000 | |||
Fair value of contingent earnout consideration (3) | 90,000 | |||
$ | 813,000 |
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed on the acquisition date:
Cash | $ | 31,000 | ||
Accounts receivable | 96,000 | |||
Customer relationships (8 yr life) | 340,000 | |||
Trademark (15 yr life) | 110,000 | |||
Property and equipment | 9,000 | |||
Other assets | 9,000 | |||
Total identifiable assets acquired | 595,000 | |||
Accounts payable | (22,000 | ) | ||
Accrued liabilities | (135,000 | ) | ||
Deferred revenue | (46,000 | ) | ||
Debt | (170,000 | ) | ||
Total liabilities assumed | (373,000 | ) | ||
Net identifiable assets acquired | 222,000 | |||
Goodwill | 591,000 | |||
Net assets acquired | $ | 813,000 |
In relation to our acquisition of Kablooe, we incurred $78,000 of acquisition related costs in Fiscal 2020, including legal and valuation costs. These costs were expensed as incurred and included as a component of general and administrative expenses on the consolidated statement of operations. Kablooe’s results of operations have been included in the consolidated financial statements since the acquisition date. Our consolidated statement of operations for Fiscal 2020 includes revenue of $172,000 for Kablooe.
NOTE 4 3 INTANGIBLE ASSETS AND GOODWILL
Intangible Assets
The Company’s intangible assets consist of the following:
September 30, 2020 | September 30, 2019 | |||||||||||||||||||||||
Trademark | Customer Relationships | Total Intangible Assets | Trademark | Customer Relationships | Total Intangible Assets | |||||||||||||||||||
Gross carrying amount | $ | 585,000 | $ | 1,390,000 | $ | 1,975,000 | $ | 475,000 | $ | 1,050,000 | $ | 1,525,000 | ||||||||||||
Less accumulated amortization | (86,000 | ) | (358,000 | ) | (444,000 | ) | (54,000 | ) | (222,000 | ) | (276,000 | ) | ||||||||||||
Net carrying amount | $ | 499,000 | $ | 1,032,000 | $ | 1,531,000 | $ | 421,000 | $ | 828,000 | $ | 1,249,000 |
Schedule of intangible assets | ||||||||||||||||||||||||
September 30, 2022 | September 30, 2021 | |||||||||||||||||||||||
Trademarks | Customer Relationships | Total Intangible Assets | Trademarks | Customer Relationships | Total Intangible Assets | |||||||||||||||||||
Gross carrying amount | $ | 585,000 | $ | 1,390,000 | $ | 1,975,000 | $ | 585,000 | $ | 1,390,000 | $ | 1,975,000 | ||||||||||||
Less accumulated amortization | (164,000 | ) | (705,000 | ) | (869,000 | ) | (125,000 | ) | (531,000 | ) | (656,000 | ) | ||||||||||||
Net carrying amount | $ | 421,000 | $ | 685,000 | $ | 1,106,000 | $ | 460,000 | $ | 859,000 | $ | 1,319,000 |
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company’s intangible assets were acquired as a result of the acquisitions of Kablooe and IPS in Fiscal 2020 and Fiscal 2018, respectively, and relate to the design segment of our business. Intangible assets are amortized over their expected useful lives. The useful lives are of 15 years for the trademarks and 8 years for the customer relationships. The intangible assets are held under the design segment of our business. During Fiscal 20202022 and Fiscal 2019,2021, the Company recorded amortization expense related to intangible assets of $167,000 and $162,000, respectively,$213,000, which is included in general and administrative expenses in the Company’s consolidated statements of operations.
At September 30, 2020,2022, estimated amortization expense for the Company’s intangible assets for each of the next five years and thereafter is as follows:
Years Ending September 30, | Amount | |||
2021 | $ | 213,000 | ||
2022 | 213,000 | |||
2023 | 213,000 | |||
2024 | 213,000 | |||
2025 | 213,000 | |||
Thereafter | 466,000 | |||
Total | $ | 1,531,000 |
Estimated amortization expense | ||||
Fiscal 2023 | $ | 213,000 | ||
Fiscal 2024 | 213,000 | |||
Fiscal 2025 | 213,000 | |||
Fiscal 2026 | 121,000 | |||
Fiscal 2027 | 81,000 | |||
Thereafter | 265,000 | |||
Total | $ | 1,106,000 |
Goodwill
Goodwill represents the future economic benefits of assets acquired in a business combination that are not individually identified or separately recognized. The Company’s goodwill resulted from the acquisitions of Kablooe and IPS in Fiscal 2020 and Fiscal 2018, respectively. The goodwill associated with the IPS acquisition is not deductible for tax purposes, but the goodwill associated with the Kablooe acquisition is deductible for tax purposes. All of the Company’s goodwill is held under the design segment of our business. Goodwill is not deductible for tax purposes.
During Fiscal 2020, the Company experienced triggering events that prompted the testing of its goodwill for impairment. Those triggering events included the reduction in fair value of the IPS contingent earn-out consideration discussed in Note 6 and revised revenue and operational projections for IPS for the later part of Fiscal 2020 and future periods. Based on these factors, we concluded that it was more likely than not that the fair value of the IPS reporting unit had declined below its carrying amount. The Company then calculated the fair value of this reporting unit using Level 3 inputs, which is a combination of asset-based, income and market approaches. These estimates and assumptions included discount rate, terminal growth rate, selection of peer group companies and control premium applied as well as forecasts of revenue growth rates, gross margins, operating margins, and working capital requirements. Any changes in the judgments, estimates, or assumptions used could produce significantly different results. We concluded the IPS reporting unit’s fair value was below its carrying value by $1,015,000 and an impairment charge was recognized for this amount in Fiscal 2020. The Company performed the annual goodwill impairment test for Fiscal 2019 and determined there was no impairment.
Below is the rollforward of goodwill for the design segment, the only reportable segment with goodwill:
Design Segment | Consolidated | |||||||
Balance at September 30, 2019 | $ | 2,183,000 | $ | 2,183,000 | ||||
Acquisition of Kablooe | 591,000 | 591,000 | ||||||
IPS goodwill impairment | (1,015,000 | ) | (1,015,000 | ) | ||||
Balance September 30, 2020 | $ | 1,759,000 | $ | 1,759,000 |
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 4 PROPERTY AND EQUIPMENT
Property and equipment and related accumulated depreciation and amortization are summarized by reportable segment in the table below:
Schedule of property and equipment | ||||||||
September 30, | ||||||||
2022 | 2021 | |||||||
Computer hardware and software | $ | 473,000 | $ | 483,000 | ||||
Furniture and fixtures | 67,000 | 159,000 | ||||||
Equipment | 74,000 | 52,000 | ||||||
Property and equipment, cost | 614,000 | 694,000 | ||||||
Less accumulated depreciation and amortization | (373,000 | ) | (526,000 | ) | ||||
Property and equipment, net | $ | 241,000 | $ | 168,000 |
September 30, | ||||||||||||||||||||||||
2020 | 2019 | |||||||||||||||||||||||
Consolidated | Distribution | Design | Consolidated | Distribution | Design | |||||||||||||||||||
Computer software and hardware | $ | 488,000 | $ | 146,000 | $ | 342,000 | $ | 312,000 | $ | 278,000 | $ | 34,000 | ||||||||||||
Furniture and fixtures | 147,000 | 28,000 | 119,000 | 199,000 | 79,000 | 120,000 | ||||||||||||||||||
Equipment | 61,000 | – | 61,000 | 308,000 | 4,000 | 304,000 | ||||||||||||||||||
Leasehold improvements | 2,000 | – | 2,000 | 42,000 | 42,000 | – | ||||||||||||||||||
Property and equipment, cost | 698,000 | 174,000 | 524,000 | 861,000 | 403,000 | 458,000 | ||||||||||||||||||
Less: accumulated depreciation and amortization | (483,000 | ) | (151,000 | ) | (332,000 | ) | (618,000 | ) | (385,000 | ) | (233,000 | ) | ||||||||||||
Property and equipment, net | $ | 215,000 | $ | 23,000 | $ | 192,000 | $ | 243,000 | $ | 18,000 | $ | 225,000 |
Depreciation expense was $105,000$96,000 and $149,000$115,000 for Fiscal 20202022 and Fiscal 2019,2021, respectively.
NOTE 6 5 FAIR VALUE MEASUREMENTS
The deferredearnout consideration of $90,000$70,000 at September 30, 20202022 and 2021 represents the fair value of the contingent earnout consideration related to the acquisition of Kablooe.Kablooe, which provides annual contingent earnout payments based on results of operations through August 2025. The current and non-current portions of this liability of $45,000 each are shown in the corresponding categories on the consolidated balance sheet at September 30, 2020. The deferred consideration of $834,000 on our consolidated balance sheet at September 30, 2019 was the $484,000 present value of the deferred cash consideration related to the acquisition of IPS and the $350,000 estimated fair value of the contingent earnout consideration related to the acquisition of IPS. The IPS earnout consideration was adjusted down to $0sheets in Fiscal 2020 due to the low likelihood of IPS reaching the earnings targets outlined in the Stock Purchase Agreement.
The following table presents the placement in the fair value hierarchy and summarizes the change in fair value of the earn-out consideration for Fiscal 2020 and Fiscal 2019:
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 | $ | 538,000 | $ | – | $ | – | $ | 538,000 | ||||||||
Increase in fair value of IPS deferred cash consideration | 36,000 | – | – | 36,000 | ||||||||||||
Increase in fair value of IPS earn-out consideration | 260,000 | – | – | 260,000 | ||||||||||||
September 30, 2019 | 834,000 | – | – | 834,000 | ||||||||||||
Increase in fair value of IPS deferred cash consideration | 16,000 | – | – | 16,000 | ||||||||||||
Decrease in the fair value of IPS earnout consideration | (350,000 | ) | – | – | (350,000 | ) | ||||||||||
Payout of IPS deferred cash consideration | (500,000 | ) | – | – | (500,000 | ) | ||||||||||
Fair value of Kablooe contingent earnout consideration | 90,000 | – | – | 90,000 | ||||||||||||
September 30, 2020 | $ | 90,000 | $ | – | $ | – | $ | 90,000 |
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
each period presented. The fair value of the Kablooe contingent earn-out consideration will beearnout liability is measured on a recurring basis at each reporting date. Thedate using a Black-Scholes valuation model with the following inputs and assumptions, were used in the Black-Scholes valuation model to estimatewhich are categorized within level three of the fair value of the Kablooe earn-out consideration at September 30, 2020:hierarchy:
Fair value assumptions | |||
September 30, | |||
2022 | 2021 | ||
Volatility | 40% | 40% | |
Risk-free interest rate | 4.1% | 0.3% | |
Expected term in years | 0.4 - 2.4 | 0.5 - 3.4 | |
Dividend yield | - | - |
During
In Fiscal 2019,2022, there were no changes to 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 less than a 2% ownership interest in the customer. Pursuant to ASC 820, management estimated the initialtotal fair value of this earnout liability. In Fiscal 2021, the investmentCompany reduced this liability from $90,000 to be $327,000,$70,000 based on a private placement round of common stock issued to third party private investors of the customer at a time close to the valuation date. Based on this valuation, the Company recognized revenue and a cost method investment for that amount in Fiscal 2019. Management determined that the inputs used to value the investment 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:
On January 21, 2020, the Company executed a non-negotiable promissory note with a principal amount of $1,626,000 with the same design segment customer in which we are invested to recover accounts receivable which had been reserved as bad debt in Fiscal 2019. Beginning on April 1, 2020, monthly interest and principal payments, based on a one-year amortization schedule, were due and payable in arrears on the first day of the month until March 1, 2021. Interest accrues at a rate of 8% per annum. Since no payments were received through June 30, 2020, the note receivable is fully reserved on the Company’s consolidated balance sheets. In the fourth quarter of Fiscal 2020, the Company received $134,000 from this customer, of which $61,000 was applied to past due interest and penalties and recorded as interest income, and $73,000 was applied to principal and recorded as a recovery of bad debt expense as a reduction of general and administrative expense.
During Fiscal 2020, as a result of the customer’s default on the promissory note, the impact of COVID-19, and performance of the business in which the Company is invested, including its inability to generate revenue, management concluded the investment was also impaired and it recorded an impairment charge of $327,000 to fully reserve the investment on the Company’s consolidated balance sheet at September 30, 2020. The impairment charge is includedchanges in the general and administrative expensesexpected likelihood of Kablooe reaching the consolidated statement of operations.specified earnings targets.
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents the placement in the fair value hierarchy and summarizes the change in fair value of the cost method investment during Fiscal 2020 and Fiscal 2019:
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, 2019 | $ | 327,000 | $ | – | $ | 327,000 | $ | – | ||||||||
Impairment of cost method investment | (327,000 | ) | – | (327,000 | ) | – | ||||||||||
September 30, 2020 | $ | – | $ | – | $ | – | $ | – |
NOTE 76 ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities by operating segment at September 30, 20202022 and 20192021 are as follows:
Schedule of accrued expenses and other accrued liabilities | ||||||||
September 30, | ||||||||
2022 | 2021 | |||||||
Accrued commissions/bonuses | $ | 722,000 | $ | 127,000 | ||||
Paid time off | 228,000 | 241,000 | ||||||
Other | 201,000 | 161,000 | ||||||
Total | $ | 1,151,000 | $ | 529,000 |
September 30, | ||||||||||||||||||||||||
2020 | 2019 | |||||||||||||||||||||||
Consolidated | Distribution | Design | Consolidated | Distribution | Design | |||||||||||||||||||
Paid time off | $ | 296,000 | $ | 36,000 | $ | 260,000 | $ | 170,000 | $ | 40,000 | $ | 130,000 | ||||||||||||
Other payroll related costs | 178,000 | 58,000 | 120,000 | 187,000 | 33,000 | 154,000 | ||||||||||||||||||
Legal fees | 18,000 | – | 18,000 | 154,000 | 154,000 | – | ||||||||||||||||||
Other | 123,000 | 14,000 | 109,000 | 184,000 | 31,000 | 153,000 | ||||||||||||||||||
Total | $ | 615,000 | $ | 108,000 | $ | 507,000 | $ | 695,000 | $ | 258,000 | $ | 437,000 |
F-14 |
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 87 SHAREHOLDERS’ EQUITY
Anti-Takeover Provisions
Shareholder Rights Plan
On April 26, 2013, the Board of Directors (the "Board") adopted a Shareholder Rights Plan, as set forth in the Rights Agreement between the Company and American Stock Transfer & Trust Company, LLC, as Rights Agent. Pursuant to the Rights Agreement, the Board declared a dividend distribution of one Right (a "Right") for each outstanding share of Company Common Stock, par value $0.01 per share (the "Common Stock") to shareholders of record at the close of business on May 6, 2013, which date will be the record date, and for each share of Common Stock issued (including shares distributed from treasury) by the Company thereafter and prior to the Distribution Date (as described below and defined in the Rights Agreement). Each Right entitles the registered holder, subject to the terms of the Rights Agreement, to purchase from the Company one one-thousandth of a share of Series A Participating Preferred Stock, $0.01 par value per share (the "Series A Preferred Stock"), at an exercise price of $4.00 per one one-thousandth of a share of Series A Preferred Stock, subject to adjustment.
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 "Distribution Date"), which will occur on the earlier of (i) the 10th business day (or such later date as may be determined by the Board) after the public announcement that an Acquiring Person (as defined in the Rights Agreement) has acquired beneficial ownership of 20% or more of the Common Stock then outstanding; or (ii) the 10th business day (or such later date as may be determined by the Board) after a person or group announces a tender or exchange offer that would result in a person or group of affiliated and associated persons beneficially owning 20% or more of the Common Stock then outstanding.
“Blank Check” Preferred Stock
The Company is authorized to issue up to "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, shares have been authorized as the Series A Participating Preferred Stock. There were no shares of preferred stock issued or outstanding at September 30, 2020 and 2019.2022 or 2021.
Warrants
At September 30, 2020,2022, the Company had 151,335151,000 warrants outstanding and exercisable. The warrants have exercise prices ranging from $1.75$1.75 to $1.84$1.84 per share and have a weighted average exercise price of $1.80$1.80 per share. At September 30, 2020, 76,3352022, 76,000 of these warrants have a remaining life of 3.3 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 plan) is declared effective by the Securities and Exchange Commission.
Other Activity
In Fiscal 2020,2021, the Company issued 300,000 shares of its common stock in connection with the Kablooe acquisition (see Note 3) and issued 50,000 shares of its common stock pursuant to the exercise of stock options (see Note 9)8).
2021 Equity Incentive Plan
In February 2021, shareholders of the Company approved the 2021 Equity Incentive Plan (the “2021 Plan”), which is administered by the Compensation Committee of the Board of Directors and authorizes
shares of common stock for grants of various types of equity awards to officers, directors, employees and consultants. Upon approval of the 2021 Plan, no additional awards were granted under the 2011 Long Term Incentive Plan (the “2011 Plan”), which expired according to its terms in March 2021. Shares authorized under the 2021 Plan include 1,000,000 new shares and 291,000 shares that remained available under the 2011 Plan. Awards which are forfeited or expire are eligible for regrant under the 2021 Plan. The exercise prices of stock options granted may not be less than the fair market value of the common stock as quoted on the Nasdaq stock market on the grant date and the expiration date of option awards may not exceed 10 years. At September 30, 2022, there were shares of common stock available for grants under the 2021 Plan.
2011 Long Term Incentive Plan
In March 2011, shareholders of the Company approved the 2011 Long Term Incentive Plan, (the "2011 Plan"), which originally authorized 850,000 shares of common stock for grants of various types of equity awards to officers, directors, employees, consultants, and independent contractors. OnIn 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 shares of common stock. Forfeited awards are eligible for re-grant under the 2011 Plan. The exercise prices of stock options granted may not be less than the fair market valueUpon approval of the common stock as quoted at the close on the Nasdaq Stock Market on the grant date. The Compensation Committee administers the 2011 Plan. Options generally expire five to ten years after the date of grant. The total shares of common stock available for grants of equity2021 Plan, no additional awards were granted under the 2011 Plan, was 291,000 as of September 30, 2020.
which expired according to its terms in March 2021.
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2007 Equity Incentive Plan
The 2007 Equity Incentive Plan (the "2007 Plan"), which was approved by shareholders of the Company in May 2007, and, as amended in February 2010, expired in accordance with its terms in May 2017. However, there remain 2,500 shares associated with unexercised options as of September 30, 2020. 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.
Stock Options
The fair value of each option awardawards is estimated on the date of grant using the Black-Scholes option pricing model that uses the assumptions in the following table. The expected term represents the period over which the stock option awards are expected to be outstanding. The Company utilizes the simplified method to develop an estimate of the expected term of “plain vanilla” option grants. The expected volatility used is based on the historical price of the Company’s stock over the most recent period commensurate with the expected term of the award. The risk-free interest rate used is based on the implied yield of U.S. Treasury zero-coupon issues with a remaining term equivalent to the award’s expected term. The Company historically has not paid any dividends on its common stock and had no intention to do so on the date the share-based awards were granted. The estimated annual forfeiture rate is based on management’s expectations and will reduce expense ratably overCompany accounts for forfeitures in 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.period they occur.
In applying the Black-Scholes option pricing model to options granted, the Company used the following assumptions:
Assumptions used for options | |||||||
Fiscal 2020 | Fiscal 2019 | Fiscal 2022 | Fiscal 2021 | ||||
Expected term (years) | 2.5-3.0 | 2.50-2.75 | |||||
Expected volatility | 65%-79% | 82% | % - % | ||||
Risk free interest rate | 0.15%-1.39% | 2.53% | % - % | ||||
Expected dividends | 0% | 0% | |||||
Estimated annual forfeiture rate | 0%-10% | 0% |
The Company made no grants of stock options or other equity awards in Fiscal 2021. In Fiscal 2020,2022, the Company made the following option grants:
· | Options to current and former non-employee directors to purchase an aggregate of |
· |
Options to an employee to purchase |
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In Fiscal 2019, the Company made the following option grants:
The options granted during Fiscal 2020 and Fiscal 20192022 had a weighted average grant date fair value of $0.58 and $0.78$ per share, respectively.share. The Company recognized compensation expense for stock option awards of $245,000$ and $212,000$ during Fiscal 20202022 and Fiscal 2019,2021, respectively, which was recorded as a component of general and administrative expenses in its consolidated statements of operations.
2020,2021, the Company issued 50,000 shares of its common stock pursuant to the exercise of stock options at an exercise price of $0.64 per share for aggregate cash proceeds of $32,000. The$268,000, which had an aggregate intrinsic value of the options exercised was $33,000. No options were exercised in Fiscal 2019.$ .
At September 30, 2020,2022, there was $75,000$ of unrecognized compensation cost related to nonvested stock option awards that is expected to be recognized over a weighted average period of years.
The following table summarizes stock option activity during Fiscal 2020:
Weighted | Weighted | |||||||||||||||
Average | Average | Aggregate | ||||||||||||||
Number of | Exercise | Remaining | Intrinsic | |||||||||||||
Options | Price | Life (Yrs.) | Value | |||||||||||||
Outstanding, September 30, 2019 | 813,000 | $ | 1.69 | |||||||||||||
Granted | 456,000 | $ | 1.25 | |||||||||||||
Exercised | (50,000 | ) | $ | 0.64 | ||||||||||||
Forfeited | (16,000 | ) | $ | 2.97 | ||||||||||||
Expired | (65,000 | ) | $ | 2.64 | ||||||||||||
Outstanding, September 30, 2020 | 1,138,000 | $ | 1.49 | 3.7 | $ | 73,000 | ||||||||||
Exercisable, September 30, 2020 | 844,000 | $ | 1.61 | 3.5 | $ | 8,600 |
Options outstanding at September 30, 2020 and September 30, 2019 have an exercise price between $0.64 and $3.73 per share.
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Restricted Stock AwardsThe following table summarizes stock option activity during Fiscal 2022:
Schedule of stock option activity | ||||||||||||||||
Weighted | Weighted | |||||||||||||||
Average | Average | Aggregate | ||||||||||||||
Number of | Exercise | Remaining | Intrinsic | |||||||||||||
Options | Price | Life (Yrs.) | Value | |||||||||||||
Outstanding at September 30, 2021 | 928,000 | $ | 1.43 | |||||||||||||
Granted | 324,000 | $ | 1.73 | |||||||||||||
Exercised | – | $ | – | |||||||||||||
Forfeited | (23,000 | ) | $ | 1.90 | ||||||||||||
Expired | (144,000 | ) | $ | 1.60 | ||||||||||||
Outstanding at September 30, 2022 | 1,085,000 | $ | 1.48 | $ | 26,920 | |||||||||||
Exercisable at September 30, 2022 | 938,000 | $ | 1.45 | $ | 26,920 |
Options outstanding at September 30, 2022 have an exercise price between $1.13 and $2.39 per share.
The Company recognized compensation expense of $0 and $3,000 during Fiscal 2020 and Fiscal 2019, respectively, for restricted stock awards in its consolidated statements of operations. At September 30, 2020, there was no unrecognized compensation expense related to nonvested restricted stock awards.
NOTE 109 INCOME TAXES
The following table summarizes the Company’s consolidated provision/(benefit)provision for U.S. federal, state and foreign taxes on income:
Fiscal 2020 | Fiscal 2019 | |||||||
Current: | ||||||||
Federal | $ | (4,000 | ) | $ | (4,000 | ) | ||
State | 13,000 | – | ||||||
Foreign | – | – | ||||||
Deferred: | ||||||||
Federal | 414,000 | (713,000 | ) | |||||
State | 82,000 | (127,000 | ) | |||||
Foreign | 283,000 | (46,000 | ) | |||||
788,000 | (890,000 | ) | ||||||
Change in valuation allowance | (779,000 | ) | 886,000 | |||||
Income tax provision/(benefit) | $ | 9,000 | $ | (4,000 | ) |
Schedule of income tax provision | ||||||||
Fiscal 2022 | Fiscal 2021 | |||||||
Current: | ||||||||
Federal | $ | – | $ | – | ||||
State | 3,000 | – | ||||||
Foreign | – | – | ||||||
Deferred: | ||||||||
Federal | (224,000 | ) | (506,000 | ) | ||||
State | 6,000 | (47,000 | ) | |||||
Foreign | (22,000 | ) | (146,000 | ) | ||||
Deferred Income Tax Expense (Benefit) | (237,000 | ) | (699,000 | ) | ||||
Change in valuation allowance | 240,000 | 699,000 | ||||||
Income tax provision | $ | 3,000 | $ | – |
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The deferred tax provision/(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:
Schedule of deferred income taxes | ||||||||||||||||
September 30, | September 30, | |||||||||||||||
2020 | 2019 | 2022 | 2021 | |||||||||||||
Deferred tax assets | ||||||||||||||||
Net operating losses | $ | 1,812,000 | $ | 2,311,000 | $ | 2,006,000 | $ | 2,093,000 | ||||||||
Capital loss carryforwards | – | 38,000 | ||||||||||||||
Share-based compensation | 180,000 | 169,000 | 220,000 | 175,000 | ||||||||||||
Alternative minimum and other tax credits | 5,000 | 9,000 | ||||||||||||||
Excess tax over book basis in inventory | 20,000 | 32,000 | 101,000 | 43,000 | ||||||||||||
Reserves and other allowances | 155,000 | 535,000 | 649,000 | 569,000 | ||||||||||||
Deferred rent | 13,000 | 19,000 | ||||||||||||||
Accrued compensation | 70,000 | 9,000 | 70,000 | 15,000 | ||||||||||||
Accrued expenses | – | 151,000 | ||||||||||||||
Depreciation | 31,000 | 27,000 | ||||||||||||||
Charitable contributions | 3,000 | 1,000 | ||||||||||||||
Interest expense limitation | 48,000 | 40,000 | ||||||||||||||
Other items | 18,000 | 16,000 | ||||||||||||||
Total deferred tax assets | 2,289,000 | 3,301,000 | 3,112,000 | 2,951,000 | ||||||||||||
Deferred tax liabilities | ||||||||||||||||
Depreciation | (12,000 | ) | (18,000 | ) | ||||||||||||
Prepaid expenses | (58,000 | ) | (141,000 | ) | (96,000 | ) | (131,000 | ) | ||||||||
Intangible assets | (245,000 | ) | (298,000 | ) | (178,000 | ) | (216,000 | ) | ||||||||
481 Election (IPS) | (99,000 | ) | (196,000 | ) | ||||||||||||
Total deferred tax liabilities | (402,000 | ) | (635,000 | ) | (286,000 | ) | (365,000 | ) | ||||||||
Valuation allowance | (1,887,000 | ) | (2,666,000 | ) | (2,826,000 | ) | (2,586,000 | ) | ||||||||
Net deferred tax assets | $ | – | $ | – | $ | – | $ | – |
For Fiscal 2020 and Fiscal 2019, the
The Company recorded a provision for income taxes which includes net expense of $9,000$3,000 and $0 in Fiscal 2020,2022 and a benefit of $4,000 in Fiscal 2019.2021, respectively. The Fiscal 2020 net2022 expense of $9,000 includes$3,000 is for state income tax expenses of $13,000, partially offset by a $4,000 refund of the remaining unused balance of alternative minimum tax (“AMT”) credits. The $4,000 tax benefit recorded in Fiscal 2019 related to a partial refund of AMT tax. Under the Tax Cuts and Jobs Act of 2017, AMT was repealed. The tax code in turn provided for a refund of the tax credits that existed on December 31, 2017 at a 50% rate in tax years 2018, 2019 and 2020, with any remaining credits being fully refundable in 2021. The CARES Act now allows corporations to immediately claim unused AMT credits on their current year tax return. State income tax expense is the result of taxable income in states where net operating loss carryforwards (“NOLs”) arewere not available.
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At September 30, 2020,2022, the Company had available net NOLs for U.S. federal income tax purposes of $7,020,000.$6,940,000 and NOLs for state income tax purposes of $978,000. NOLs generated prior to 2018 expire beginning in 2031 while NOLs generated after 2018 have an indefinite carryforward period. The NOLs result in a deferred tax asset of $1,680,000with respect to U.S. federal income taxes of $1,700,000.and $40,000 with respect to state income taxes. In addition, at September 30, 2020,2022, the Company had available NOLs for foreign income tax purposes of $610,000,$1,569,000, resulting in a deferred tax asset of $114,000,$283,000, expiring through 2024. The Company has capital loss carryovers of $160,000, which expired in Fiscal 2020, as no capital gain has been recognized to utilize this deferred tax asset.2028. Total net deferred tax assets, before valuation allowance, were $1,887,000$2,826,000 and $2,666,000$2,586,000 at September 30, 20202022 and 2019,2021, respectively. Undistributed earnings of the Company's foreign subsidiaries are considered permanently reinvested; therefore, in accordance with U.S. GAAP, no provision for U.S. federal andor state income taxes would result. In Fiscal 2020,2022, Forward Switzerland had a net loss for tax purposes of $45,000and Forward U.K.UK had net income for tax purposes of $116,000 and $13,000, respectively.$150,000.
At September 30, 2020,2022, 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, including, among others, projections of future taxable income, current year NOL utilization and the extent of the Company's cumulative losses in recent years, the Company determined that, on a more likely than not basis, it would not be able to use remaining deferred tax assets, except with respect to the U.S. federal income taxes in the event the Company elects to effect repatriation of certain foreign source income of Forward Switzerland, which income is currently considered to be permanently reinvested and for which no U.S. tax liability has been accrued. Accordingly, the Company has determined to maintain a full valuation allowance against its net deferred tax assets. At September 30, 20202022 and 2019,2021, the valuation allowance was $1,887,000$2,826,000 and $2,666,000,$2,586,000, respectively. In the future, the utilization of the Company's NOLs may be subject to certain change of control limitations. If the Company determines 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 income tax expense and increase after-tax income.
F-18 |
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The significant elements contributing to the difference between the U.S. federal statutory tax rate and the Company’s effective tax rate are as follows:
Fiscal 2020 | Fiscal 2019 | |||||||
U.S. federal statutory rate | 21.0% | 21.0% | ||||||
State tax rate, net of federal benefit | (1.9% | ) | 2.8% | |||||
Foreign rate differential | (14.9% | ) | 1.4% | |||||
Other | (10.6% | ) | 1.9% | |||||
Change in tax credits | (0.2% | ) | (0.1% | ) | ||||
Effect of state tax rate change | 1.5% | – | ||||||
Capital loss - expiration | (2.1% | ) | – | |||||
Change in valuation allowance | 41.1% | (26.6% | ) | |||||
State income taxes | (0.7% | ) | – | |||||
Federal AMT | 0.2% | 0.1% | ||||||
Permanent differences | (33.9% | ) | (0.4% | ) | ||||
Effective tax rate | (0.5% | ) | 0.1% |
Reconciliation of effective tax rate | ||||||||
Fiscal 2022 | Fiscal 2021 | |||||||
U.S. federal statutory rate | 21.0% | 21.0% | ||||||
State tax rate, net of federal benefit | 3.0% | (8.3% | ) | |||||
Foreign rate differential | 2.9% | (2.6% | ) | |||||
Tax return to provision adjustments | (1.9% | ) | (78.8% | ) | ||||
Effect of state tax rate change | (3.8% | ) | (7.8% | ) | ||||
Change in valuation allowance | (20.3% | ) | 129.9% | |||||
Permanent differences | (1.1% | ) | (53.4% | ) | ||||
Effective tax rate | (0.2% | ) | 0.0% |
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In NovemberDecember 2020, the IRS issued Revenue Ruling 2020-27, providingCompany received approval of its position regardingapplication for forgiveness of its note payable related to the deductibility for federal income tax purposes of otherwise deductible expenses incurred when a taxpayer receives a PPP loan. This ruling states the taxpayer may not deduct those expensesPaycheck Protection Program (the “PPP loan”) in the taxable year inaggregate principal amount of $1,357,000, which the expenses were paid or incurred if the taxpayer reasonably expects to receive forgiveness of the covered loan. In accordance with this ruling, the Company has excluded these qualifying expenses fromwas not recognized as taxable income pursuant to the CARES Act. Pursuant to the Consolidated Appropriations Act, 2021, which was enacted by Congress and recorded this difference as a permanent item.signed into law by the President on December 27, 2020, all expenses utilizing funds from PPP loans will be deductible against taxable income.
At September 30, 20202022 and 2019,2021, the Company hashad not accrued any interest or penalties related to uncertain tax positions. It is the Company's policy to recognize interest and/or penalties, if any, related to income tax matters in income tax expense in the consolidated statements of operations. For the periods presented in the accompanying consolidated statements of operations, no material income tax related interest or penalties were assessed or recorded. All fiscal years prior to the fiscal year ended September 30, 20172019 are closed to federal and state examination.
Basic lossearnings per share data for each period presented is computed using the weighted average number of shares of common stock outstanding during each such period. Diluted lossearnings per share data is computed using the weighted average number of common and dilutive common equivalent shares outstanding during each period. Dilutive common-equivalentcommon equivalent shares consist of shares that would be issued upon the exercise of stock options and warrants, computed using the treasury stock method. A reconciliation of basic and diluted earnings/loss per share is as follows:
Schedule of earnings (loss) per share | ||||||||
For the Fiscal Years Ended | ||||||||
September 30, | ||||||||
2022 | 2021 | |||||||
Numerator: | ||||||||
Net (loss)/income | $ | (1,378,000 | ) | $ | 524,000 | |||
Denominator: | ||||||||
Weighted average common shares outstanding | 10,061,000 | 9,950,000 | ||||||
Dilutive common share equivalents | – | 493,000 | ||||||
Weighted average dilutive shares outstanding | 10,061,000 | 10,443,000 | ||||||
(Loss)/earnings per share: | ||||||||
Basic | $ | (0.14 | ) | $ | 0.05 | |||
Diluted | $ | (0.14 | ) | $ | 0.05 |
F-19 |
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
There were no anti-dilutive securities excluded from the calculation of diluted earnings per share in Fiscal 2021. The following securities were excluded from the calculation of diluted earnings per share in Fiscal 2022 because their inclusion would have been anti-dilutive:
Fiscal 2020 | Fiscal 2019 | |||||||
Options | 1,138,000 | 813,000 | ||||||
Warrants | 151,000 | 151,000 | ||||||
Total potentially dilutive shares | 1,289,000 | 964,000 |
Schedule of anti dilutive securities excluded | ||||
Fiscal 2022 | ||||
Options | 1,085,000 | |||
Warrants | 151,000 | |||
Total potentially dilutive shares | 1,236,000 |
NOTE 12 11 COMMITMENTS AND CONTINGENCIES
Guarantee Obligation
In February 2010, Forward Switzerland and its European logistics provider (freight forwarding and customs agent) entered into a Representation Agreement (the “Representation Agreement”) whereby, among other things, the European logistics provider agreed to act as Forward Switzerland's fiscal representative in The Netherlands for the purpose of providing services in connection with any value added tax matters. As part of this agreement, 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.
In February 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 $88,000$77,000 at September 30, 2020)2022) paid by such bank to the logistics provider in order to satisfy such undertaking pursuant to the bank letter of guarantee. Forward Switzerland would be required to perform under the guarantee agreement only in the event that (i) a value added tax liability is imposed on the Company's 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.
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The initial term of the bank letter of guarantee expired February 28, 2011, but it 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 $770,000$467,000 at September 30, 2020)2022). At September 30, 2020,2022, the Company had not incurred a liability in connection with this guarantee.
Legal Proceedings
On August 21, 2020, IPS was named a third-party defendant in a patent dispute claim currently pending in the U.S. District Court for the Eastern District of New York. The complaint, which contains no specific amount of monetary damages, asserts that certain intellectual property was misappropriated by IPS and one of its former employees. IPS denies the allegations, believes the action is without merit and intends to vigorously defend it. The Company received permission from the District Court to file a motion to dismiss the complaint and filed such motion on December 14, 2020.
From time to time, the Company may become a party to other legal actions or proceedings in the ordinary course of its business. At September 30, 2020,2022, there were no such actions or proceedings, either individually or in the aggregate, that, if decided adversely to its interests, the Company believes would be material to its business.
NOTE 13 LEASES
On October 1, 2019, the Company adopted the updated guidance on leases using the modified retrospective transition method. Results for Fiscal 2020 are presented under the updated guidance, while Fiscal 2019 is reported in accordance with historical lease accounting guidance.
The Company’s operating leases are primarily for corporate, sales and administrative office space. Total operating lease expense was $562,000 in Fiscal 2020 and total rent expense was $473,000 in Fiscal 2019. These expenses are recorded in general and administrative expenses on the consolidated statements of operations.
The Company leases certain computer equipment through finance lease agreements expiring through July 2024. Amortization expense related to assets under finance leases was $42,000 for Fiscal 2020. Interest expense related to assets under finance leases was $3,000 for Fiscal 2020. The following is a summary of computer equipment held under capital leases:
September 30, | ||||||||
2020 | 2019 | |||||||
Cost | $ | 203,000 | $ | 203,000 | ||||
Accumulated depreciation | (180,000 | ) | (138,000 | ) | ||||
Net book value | $ | 23,000 | $ | 65,000 |
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 LEASES
The Company’s operating leases are primarily for corporate, engineering and administrative office space. Total operating lease expense in Fiscal 2022 was $631,000, of which $57,000 was recorded in sales and marketing expenses and $574,000 was recorded in general and administrative expenses on the consolidated statements of operations. Total operating lease expense in Fiscal 2021 was $611,000, of which $55,000 was recorded in sales and marketing expenses and $556,000 was recorded in general and administrative expenses on the consolidated statements of operations. Cash paid for amounts included in operating lease liabilities in Fiscal 2022 and Fiscal 2021, which have been included in cash flows from operating activities, was $601,000 and $489,000, respectively.
At September 30, 2020, additional information related to2022, the Company’s operating leases had a weighted average remaining lease term of 8.4 years and finance leases was as follows:a weighted average discount rate of 5.7%.
Future minimum payments under non-cancellable operating and finance leases are as follows:
Fiscal Years Ended September 30, | Operating Leases | Finance Leases | ||||||
2021 | $ | 458,000 | $ | 24,000 | ||||
2022 | 430,000 | 10,000 | ||||||
2023 | 426,000 | – | ||||||
2024 | 433,000 | – | ||||||
2025 | 395,000 | – | ||||||
Thereafter | 2,805,000 | – | ||||||
Total future minimum lease payments | 4,947,000 | 34,000 | ||||||
Less imputed interest | (1,328,000 | ) | (3,000 | ) | ||||
Total | $ | 3,619,000 | $ | 31,000 |
Schedule of Future Minimum Rental Payments for Operating Leases | ||||
Fiscal 2023 | $ | 575,000 | ||
Fiscal 2024 | 592,000 | |||
Fiscal 2025 | 556,000 | |||
Fiscal 2026 | 510,000 | |||
Fiscal 2027 | 419,000 | |||
Thereafter | 1,979,000 | |||
Total future minimum lease payments | 4,631,000 | |||
Less imputed interest | (1,003,000 | ) | ||
Total | $ | 3,628,000 |
NOTE 1413 RELATED PARTY TRANSACTIONS
Buying Agency and Supply Agreement
The Company has a Buying Agency and Supply Agreement (the “Supply Agreement”) with Forward China. The Supply Agreement provides that, upon the terms and subject to the conditions set forth therein, Forward China will act as the Company’s exclusive buying agent and supplier of Products (as defined in the Supply Agreement) in the Asia-Pacific region. The Company purchases products at Forward China’s cost and also pays to Forward China a monthly service fee equal to the sum of (i) $100,000, and (ii) 4% of “Adjusted Gross Profit”, which is defined as the selling price less the cost from Forward China. The Supply Agreement expires October 22, 2023. Terence Wise, Chief Executive Officer and Chairman of the Company, is the owner of Forward China. In addition, Jenny P. Yu, a Managing Director of Forward China, beneficially owns more than 5% of the Company’s common stock. The Company recorded service fees to Forward China of $1,363,000 $1,398,000 and $1,398,000 $1,404,000 during Fiscal 20202022 and Fiscal 2019,2021, respectively, which are included as a component of cost of sales when revenue is recognized onupon sales of the related products.
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On August 14, 2018, theThe Company entered intohas a formalseparate agreement confluent with the Supply Agreement noted above,Forward China to address the potential impact of customers sourcing directly from Forward China. Although unlikely, customers may be introduced directly or indirectly by the Company to Forward China. In the event a customer determines to bypassbypasses the services of the Company and dodoes business directly with Forward China, Forward China has agreed towill pay a commission of 50% of the net revenue, less direct costs, generated from the products or services soldsold. The Company recognized revenue of $12,000 of commissions related to the customer after deduction of direct costs.this agreement in Fiscal 2021. No commissions have been received per this agreement duringwere recognized in Fiscal 2020 or Fiscal 2019.2022.
At September 30, 2020, theThe Company made $107,000 in prepayments to Forward China for inventory purchases of $20,000 and $317,000 at September 30, 2022 and 2021, respectively, which isare included in prepaid expenses and other current assets on the consolidated balance sheet.sheets.
F-21 |
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Promissory Note
On January 18, 2018, the Company issued a $1,600,000$1,600,000 unsecured promissory note payable to Forward China in order to fund the acquisition of IPS. The promissory note bears interest at a rate of 8%8% per annum and had an original maturity date of January 18, 2019.2019. Monthly interest payments commenced on February 18, 2018.2018, with the principal due at maturity. The Company incurred and paid $128,000 in interest expense associated with this note of $122,000 and $128,000in both Fiscal 20202022 and Fiscal 2019. At September 30, 2020, after being extended, the2021, respectively. The maturity date of this note was extended to December 30, 2020.31, 2024. The maturity date of the note has been extended on several occasions to assist the Company with liquidity. The Company made principal payments of $200,000 on this note during Fiscal 2022.
Other Related Party Activity
In DecemberOctober 2020, the maturity dateCompany began selling smart-enabled furniture, which is sourced by Forward China and sold in the U.S. under the Koble brand name. The Koble brand is owned by The Justwise Group Ltd. (“Justwise”) a company owned by Terence Wise, Chief Executive Officer and Chairman of this note was extended to December 31, 2021.the Company. The Company recognized revenues from the sale of Koble products of $1,741,000 and $1,493,000 in Fiscal 2022 and Fiscal 2021, respectively.
Related Party SalesThe Company entered into an agreement with Justwise effective March 1, 2022, under which (i) Justwise will perform design and marketing services related to the Koble products sold by the Company and (ii) the Company was granted a license to sell Koble products. In exchange for such services, the Company will pay Justwise $10,000 per month plus 1% of the cost of Koble products purchased from Forward China. This agreement is effective until August 31, 2023, may be extended thereafter for a mutually agreed upon term and can be terminated thereafter by either party giving three months’ notice. The Company incurred costs of $90,000 under this agreement for Fiscal 2022, of which $84,000 was included in selling and marketing expenses and $6,000 is included as a component of cost of sales upon sales of the related products. The Company had accounts payable to Justwise of $15,000 and $1,000 at September 30, 2022 and 2021, respectively.
During Fiscal 2019, the Company’s design division provided services toThe Company recorded revenue from a customer whose Chief Operating and Financial Officer and equityprincipal owner is an immediate family member of Jenny P. Yu, a shareholder of the Company and managing director on the Company’s Board of Directors and a member on the Board’s Audit and Compensation committees.Forward China. The Company sold design services torecognized revenues from this customer of $44,000$780,000 and $150,000$418,000 in Fiscal 20202022 and Fiscal 2019,2021, respectively. AtThe Company had no accounts receivable from this customer at September 30, 2020 and 2019, respectively, there was $0 and $9,000 in outstanding receivables from this customer.2022 or 2021.
A member of the Company’s Audit, Governance and Compensation Committees of its Board of Directors is also a member of the Board of Directors of a company to whom the Company’s OEM distribution segment sold products during Fiscal 2021. The Company recognized revenue of $13,000 and $63,000 from the sale of such products during Fiscal 2022 and 2021, respectively.
NOTE 15 14 401(k) PLAN
The Company maintains a 401(k) benefit plan allowing eligible employees to make pre-tax and/or after-tax contributions of a portion of their salary in amounts subject to IRS limitations. The Company made immediately vested contributions of $379,000 during Fiscal 2022, of which $313,000 was recorded to cost of sales, $16,000 was recorded to sales and marketing expense and $50,000 was recorded to general and administrative expense on the consolidated statement of operations. The Company made immediately vested matching contributions of $269,000 and $226,000 during$331,000 in Fiscal 2020 and Fiscal 2019, respectively,2021, of which vested immediately and are reflected in the accompanying consolidated statements of operations as a components of$260,000 was recorded to cost of sales and $71,000 was recorded to general and administrative expenses.
NOTE 16 SEGMENT AND GEOGRAPHIC INFORMATION
The Company has two reportable segments: distribution and design. See Note 1 for more informationexpenses on the compositionconsolidated statement of our reportable segments. The distribution segment sources and distributes carrying cases and other accessories for medical monitoring and diagnostic kits and a variety of other portable electronic and non-electronic devices. This segment operates in the EMEA Region, the Americas and the APAC Region. Geographic regions are defined by reference primarily to the location of the customer or its contract manufacturer. The design segment provides a full spectrum of hardware and software product design and engineering services. This segment operates predominantly in the Americas region.
operations.
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 SEGMENTS AND CONCENTRATIONS
Segments
The Company has three reportable segments: OEM distribution, retail distribution and design. See Note 2 for more information on the composition and accounting policies of our reportable segments.
Our chief operating decision maker (“CODM”) regularly reviews revenue and operating income for each segment to assess financial results and allocate resources. For our OEM and retail distribution segments, we exclude general and administrative and general corporate expenses from their measure of profitability as these expenses are not allocated to the segments and therefore not included in the measure of profitability used by the CODM. For the design segment, general and administrative expenses directly attributable to that segment are included in its measure of profitability as these expenses are included in the measure of its profitability reviewed by the CODM. We do not include intercompany activity in our segment results shown below to be consistent with the information that is presented to the CODM. Segment assets consist of accounts receivable and inventory, which are regularly reviewed by the CODM, as well as goodwill and intangible assets resulting from design segment acquisitions.
Information by segment and related reconciliations are shown in tables below:
Segment operating income (loss) | ||||||||
Revenues | ||||||||
Fiscal 2022 | Fiscal 2021 | |||||||
OEM distribution | $ | 18,036,000 | $ | 19,290,000 | ||||
Retail distribution | 4,130,000 | 3,183,000 | ||||||
Design | 20,171,000 | 16,549,000 | ||||||
Total segment revenues | $ | 42,337,000 | $ | 39,022,000 |
Operating Income/(Loss) | ||||||||
Fiscal 2022 | Fiscal 2021 | |||||||
OEM distribution | $ | 905,000 | $ | 1,479,000 | ||||
Retail distribution | (1,809,000 | ) | (779,000 | ) | ||||
Design | 2,148,000 | 603,000 | ||||||
Total segment operating income | 1,244,000 | 1,303,000 | ||||||
General corporate expenses | (2,484,000 | ) | (2,068,000 | ) | ||||
Total loss from operations | (1,240,000 | ) | (765,000 | ) | ||||
Other expense/(income), net | 136,000 | (1,289,000 | ) | |||||
(Loss)/income before income taxes | $ | (1,376,000 | ) | $ | 524,000 |
Depreciation and Amortization | ||||||||
Fiscal 2022 | Fiscal 2021 | |||||||
OEM distribution | $ | 8,000 | $ | 7,000 | ||||
Retail distribution | – | 1,000 | ||||||
Design | 301,000 | 319,000 | ||||||
Total | $ | 309,000 | $ | 327,000 |
F-23 |
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Condensed Balance Sheet | ||||||||
Segment Assets | ||||||||
September 30, | ||||||||
2022 | 2021 | |||||||
OEM distribution | $ | 4,276,000 | $ | 5,898,000 | ||||
Retail distribution | 3,816,000 | 2,178,000 | ||||||
Design | 6,116,000 | 5,824,000 | ||||||
Total segment assets | 14,208,000 | 13,900,000 | ||||||
General corporate assets | 6,731,000 | 5,956,000 | ||||||
Total assets | $ | 20,939,000 | $ | 19,856,000 |
Geographic Concentrations
The Company’s long-lived assets consist of property and equipment and operating lease right of use assets, all of which are located in the United States. The following table sets forth our consolidated net revenues by country for Fiscal 2022 and Fiscal 2021:
Revenues from External Customers | ||||||||
Revenues | ||||||||
Fiscal 2022 | Fiscal 2021 | |||||||
United States | $ | 29,490,000 | $ | 25,670,000 | ||||
China | 5,325,000 | 5,640,000 | ||||||
Germany | 2,976,000 | 2,787,000 | ||||||
Poland | 2,643,000 | 3,111,000 | ||||||
Other foreign countries | 1,903,000 | 1,814,000 | ||||||
Total | $ | 42,337,000 | $ | 39,022,000 |
Customer Concentrations
In Fiscal 2022 and Fiscal 2021, the Company had certain customers in the OEM distribution segment whose individual percentage of the Company’s consolidated revenues was 10% or greater. Revenues from two of these customers or their affiliates or contract manufacturers represented 23.0% of the Company’s consolidated net revenues in Fiscal 2022 and revenues from three of these customers or their affiliates or contract manufacturers represented 36.8% of the Company’s consolidated net revenues in Fiscal 2021.
In Fiscal 2022, the Company had one customer in the design segment whose individual percentage of the Company’s consolidated revenues was 10% or greater. Revenues from this customer represented 10.6% of the Company’s consolidated net revenues in Fiscal 2022. There were no customers in the design segment whose individual percentage of the Company’s consolidated net revenues was 10% or greater in Fiscal 2021.
At September 30, 2022 and 2021, the Company had customers in the OEM distribution segment whose accounts receivable balances accounted for 10% or more of the Company’s consolidated accounts receivable. Accounts receivable from two customers or their affiliates or contract manufacturers represented 28.1% of the Company’s consolidated accounts receivable at September 30, 2022 and accounts receivable from three customers or their affiliates or contract manufacturers represented 44.0% of the Company’s consolidated accounts receivable at September 30, 2021.
F-24 |
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Segment operating loss and net loss before income taxes are shown in table below:
Fiscal 2020 | Fiscal 2019 | |||||||
Revenues, net | ||||||||
Distribution | $ | 20,752,000 | $ | 21,988,000 | ||||
Design | 13,726,000 | 15,421,000 | ||||||
Total revenues, net | $ | 34,478,000 | $ | 37,409,000 | ||||
Cost of sales | ||||||||
Distribution | $ | 17,978,000 | $ | 18,613,000 | ||||
Design | 9,862,000 | 12,215,000 | ||||||
Total cost of sales | $ | 27,840,000 | $ | 30,828,000 | ||||
Loss from operations | ||||||||
Distribution | $ | (1,604,000 | ) | $ | (1,377,000 | ) | ||
Design | (378,000 | ) | (1,720,000 | ) | ||||
Total loss from operations | $ | (1,982,000 | ) | $ | (3,097,000 | ) | ||
Other (income)/expense, net | ||||||||
Distribution | $ | (202,000 | ) | $ | 438,000 | |||
Design | (14,000 | ) | 73,000 | |||||
Total other (income)/expense, net | $ | (216,000 | ) | $ | 511,000 | |||
Loss before income taxes | ||||||||
Distribution | $ | (1,402,000 | ) | $ | (1,815,000 | ) | ||
Design | (364,000 | ) | (1,793,000 | ) | ||||
Total loss before income taxes | $ | (1,766,000 | ) | $ | (3,608,000 | ) |
Segment assets are shown in the table below:
September 30, | ||||||||
2020 | 2019 | |||||||
Distribution | $ | 8,289,000 | $ | 9,554,000 | ||||
Design | 11,067,000 | 6,540,000 | ||||||
Total | $ | 19,356,000 | $ | 16,094,000 |
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Revenues from External Customers
Consolidated
The following table sets forth our consolidated net revenues by geographic region for Fiscal 2020 and Fiscal 2019. All of the design segment customer revenues are classified under the United States within the Americas region:
Fiscal 2020 | Fiscal 2019 | |||||||
EMEA Region: | ||||||||
Germany | $ | 3,375,000 | $ | 3,875,000 | ||||
Poland | 2,675,000 | 3,355,000 | ||||||
Great Britain | 267,000 | – | ||||||
Switzerland | – | 297,000 | ||||||
Austria | 406,000 | 186,000 | ||||||
Other | 362,000 | 166,000 | ||||||
Total EMEA Region | 7,085,000 | 7,879,000 | ||||||
Americas: | ||||||||
United States [1] | 21,017,000 | 21,730,000 | ||||||
Other | 44,000 | 4,000 | ||||||
Total Americas | 21,061,000 | 21,734,000 | ||||||
APAC Region: | ||||||||
Hong Kong | 4,876,000 | 6,017,000 | ||||||
Malaysia | 200,000 | 153,000 | ||||||
China | 217,000 | 318,000 | ||||||
Singapore | 228,000 | 564,000 | ||||||
Taiwan | 162,000 | 164,000 | ||||||
Other | 649,000 | 580,000 | ||||||
Total APAC Region | 6,332,000 | 7,796,000 | ||||||
Total Net Revenues | $ | 34,478,000 | $ | 37,409,000 |
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Major Customers and Concentrations by Geographic Region
In Fiscal 2020 and Fiscal 2019, the Company had significant customers whose individual percentage of the Company’s total revenues was 10% or greater. The risk of collecting accounts receivable from all customers is enhanced as a result of the economic impact of the COVID-19 pandemic. The concentrations of revenues and accounts receivable for each operating segment are detailed below.
Distribution Segment Revenues Concentration
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 Fiscal 2020 and Fiscal 2019:
Fiscal 2020 | ||||||||||||||||
EMEA | Americas | APAC | Total | |||||||||||||
Customer A | 46% | 39% | 1% | 29% | ||||||||||||
Customer B | 24% | 16% | 9% | 17% | ||||||||||||
Customer C | – | 1% | 76% | 24% | ||||||||||||
Customer D | 14% | 11% | 2% | 9% | ||||||||||||
Totals | 84% | 67% | 88% | 79% |
Fiscal 2019 | ||||||||||||||||
EMEA | Americas | APAC | Total | |||||||||||||
Customer A | 42% | 42% | – | 30% | ||||||||||||
Customer B | 29% | 22% | 6% | 19% | ||||||||||||
Customer C | – | 3% | 76% | 28% | ||||||||||||
Customer D | 13% | 15% | 3% | 10% | ||||||||||||
Totals | 84% | 82% | 85% | 87% |
Design Segment Revenues Concentration
All of our design segment customers operate in the United States. The following customers accounted for more than 10% of the design segment’s net revenues for Fiscal 2020 and Fiscal 2019:
Fiscal 2020 | Fiscal 2019 | |||||||
Customer 1 | 19% | 1% | ||||||
Customer 2 | 13% | 9% | ||||||
Customer 3 | 14% | 19% | ||||||
Customer 4 | – | 17% | ||||||
Total | 46% | 46% |
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Distribution Segment Accounts Receivable Concentration
At September 30, 2020 and 2019, concentrations of accounts receivable with significant customers representing 10% or more of distribution segment accounts receivable were as follows:
September 30, | ||||||||
2020 | 2019 | |||||||
Customer A | 23% | 29% | ||||||
Customer B | 22% | 21% | ||||||
Customer C | 20% | 16% | ||||||
Customer D | 17% | 24% | ||||||
Totals | 82% | 90% |
Design Segment Accounts Receivable Concentration
At September 30, 2020 and 2019, concentrations of accounts receivable with significant customers representing 10% or greater of design segment accounts receivable were as follows:
September 30, | ||||||||
2020 | 2019 | |||||||
Customer 1 | 24% | 3% | ||||||
Customer 3 | 5% | 19% | ||||||
Customer 4 | – | 44% | ||||||
Customer 5 | 14% | 5% | ||||||
Customer 6 | 10% | 3% | ||||||
Totals | 53% | 74% |
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Long-Lived Assets
Identifiable long-lived assets, consisting predominantly of property, plant and equipment, by operating segment are presented net of accumulated depreciation and amortization. All of the Company’s long-lived assets are geographically located in the Americas region. See table below:
September 30, | ||||||||||||||||||||||||
2020 | 2019 | |||||||||||||||||||||||
Consolidated | Distribution | Design | Consolidated | Distribution | Design | |||||||||||||||||||
Americas | $ | 215,000 | $ | 23,000 | $ | 192,000 | $ | 243,000 | $ | 18,000 | $ | 225,000 | ||||||||||||
APAC | – | – | – | – | – | – | ||||||||||||||||||
EMEA | – | – | – | – | – | – | ||||||||||||||||||
Total long-lived assets (net) | $ | 215,000 | $ | 23,000 | $ | 192,000 | $ | 243,000 | $ | 18,000 | $ | 225,000 |
Total Liabilities
The following table presents total liabilities by operating segment for the years ended September 30, 2019 and 2018:
September 30, | ||||||||
2020 | 2019 | |||||||
Distribution | $ | 5,780,000 | $ | 6,061,000 | ||||
Design | 6,993,000 | 2,322,000 | ||||||
Total | $ | 12,773,000 | $ | 8,383,000 |
Supplier Concentration
The Company procuresCompany’s OEM and retail distribution segments procure substantially all its supply of carrying solutionstheir products for the distribution segment fromthrough 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 100% of its OEM products from Forward China in Fiscal 2020 and 2019.
The Company procures materials and supplies used to build prototypes and “mock-ups” for design service projects. Vendors are from the United States.
NOTE 17 16 LINE OF CREDIT
The Company, specifically IPS, has a $1,300,000$1,300,000 revolving line of credit with a bank which was renewed at the discretion of the lender on August 5, 2020.in February 2022. The line of credit has a maturity date of May 31, 2021,2023, is guaranteed by the Company 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 was 7.0% and 4.0% at September 30, 20202022 and 2019 was 4.0% and 5.75%,2021, respectively. As of September 30, 2020,In March 2021, the Company had $300,000 available underpaid down the outstanding balance on the line of credit.credit and $1,300,000 was available at September 30, 2022 and 2021. The Company is subject to certain debt-service ratio requirements which are measured annually. At September 30, 2020 and 2019 theThe Company was in violation of the required debt-service ratiocompliance with such covenants but was granted a waiver of the violation from the lender in both years.at September 30, 2022.
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 18 17 DEBT
On April 18, 2020, the Company entered into a PPP loan in an aggregate principal amount of $1,357,000 under the Paycheck Protection Program (the “PPP Loan”) pursuant to the recently enacted U.S. Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”)$1,357,000. The loan matureswas unsecured, bore interest at a rate of 1.0% per annum and was scheduled to mature on April 18, 2022 and bears an interest rate of 1.00% per annum. The Company was originally scheduled to pay monthly principal and interest payments on the outstanding principal balance of this loan beginning November 18, 2020 until maturity when the entire principal balance remaining unpaid, along with all accrued and unpaid interest, was to be due and payable in full. This loan is unsecured, and subject to forgiveness in accordance with the terms of the CARES Act. We have accounted for these proceeds as a loan and the current and long-term portions of $827,000 and $530,000, respectively, are included in the corresponding categories of notes payable on the consolidated balance sheets.. In October 2020, the Company filed for forgiveness of this loan and in December 2020, the Small Business Administration (“SBA”) approved ourits forgiveness requestrequest. The forgiveness has been accounted for this loan.
In connection withas an extinguishment of debt and the acquisitionresulting gain has been recorded as forgiveness of Kablooe, the Company assumed a loannote payable with a principal amount of $170,000. The loan matures in August 2021, bears interest at a rate of 6.0% per annum and is secured by all of Kablooe’s assets. Interest and principal payments of $15,000 are payable monthly until maturity. The outstanding balance at September 30, 2020 was $156,000.
On April 1, 2016, IPS entered into a term loan with a lender in the amount of $325,000. The loan matured on April 1, 2020 and bore interest at a rate of 4.215% per annum. Interest and principal of $7,378 were paid on a monthly basis through maturity. This loan was secured by all of IPS’ assets and was guaranteed by the Company. The outstanding balance at September 30, 2020 and 2019 was $0 and $52,000, respectively.
On December 11, 2017, IPS entered into an installment payment financing arrangement with a lender in the amount of $23,000. IPS made monthly payments of $1,035, which includes an implied interest rate of 9.5%, for 24 months. The last payment was made in December 2019. The loan balance was $0 and $3,000 at September 30, 2020 and 2019, respectively.
Future minimum principal payment requirements on our notes payable (including the PPP loan) are as follows:
Fiscal 2021 | $ | 983,000 | ||
Fiscal 2022 | 530,000 | |||
Total | $ | 1,513,000 |
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. 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 anniversaryconsolidated statement of the effective date of the Agreement. This option was not exercised and therefore expired. The Company generated $263,000 of revenue from this agreement in Fiscal 2020. 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. The current and long-term portions of the unamortized fee of $133,000 and $45,000, respectively, at September 30, 2020 and $133,000 and $178,000, respectively, at September 30, 2019, are included in prepaid and other current assets and other assets, respectively, in the accompanying consolidated balance sheets. Amortization of the costoperations for Fiscal 2020 and Fiscal 2019 of $133,000 and $89,000, respectively,2021. There is included in sales and marketing expenses ina six-year period during which the accompanying consolidated statements of operations.
SBA can review the Company’s forgiveness.