UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington,
WASHINGTON, D.C. 20549
_____________________
FORMFORM 10-Q
_____________________
| þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended DecemberMarch 31, 20172021
OR
| o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _____________________ to _____.________________
Commission file number 001-34780
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 | |
| incorporation or organization) | Identification No.) | |
| 700 Veterans Memorial Highway, Suite 100, Hauppauge, NY | 11788 | |
| (Address of principal executive offices) | (Zip Code) |
477 S. Rosemary Ave., Suite 219, West Palm Beach, FL 33401(Address of principal executive offices, including zip code)
(561) 465-0030(Registrant’s telephone number, including area code)code: (631) 547-3041
_____________________
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 (The Nasdaq Capital Market) |
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 twelve12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X]x No [ ]o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X]x No [ ]o
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”,filer,” “accelerated filer”,filer,” “smaller reporting company,” and “smaller reporting“emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer¨ | Accelerated filer | ||
| Non-accelerated filerx | Smaller reporting company | ||
| Emerging growth company |
If an emerging growth company, indicate by checkmarkcheck mark if the registrant has elected not elected to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B)13(a) of the SecuritiesExchange Act. ☐¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ]o No [X]x
The
Indicate the number of shares outstanding of each of the registrant’sissuer’s classes of common stock, par value $0.01 per share, on February 12, 2018, which isas of the latest practical date prior to the filingpracticable date: 9,952,766 shares as of this report, was 9,516,554 shares.April 30, 2021.
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
1
Note Regarding Use of Certain Terms
In this Quarterly Report on Form 10-Q, unless the context otherwise requires, the following terms have the meanings assigned to them as set forth below:
“Forward”, “Forward Industries”, “we”, “our”, and the “Company” refer to Forward Industries, Inc., a New York corporation, together with its consolidated subsidiaries;
“Common stock” refers to the common stock, $.01 par value per share, of Forward Industries, Inc.;
“Forward US” refers to Forward Industries’ wholly owned subsidiary Forward Industries (IN), Inc., an Indiana corporation;
“Forward Switzerland” refers to Forward Industries’ wholly owned subsidiary Forward Industries (Switzerland) GmbH, a Swiss corporation;
“Forward China” refers to Forward Industries Asia-Pacific Corporation (f/k/a Seaton Global Corporation), a British Virgin Islands registered corporation that is Forward’s exclusive sourcing agent in the Asia Pacific Region;
“U.S. GAAP” refers to accounting principles generally accepted in the United States of America;
“Commission” refers to the United States Securities and Exchange Commission;
“Exchange Act” refers to the United States Securities Exchange Act of 1934, as amended;
“Fiscal 2018” refers to our fiscal year ending September 30, 2018;
“Fiscal 2017” refers to our fiscal year ended September 30, 2017;
“Europe” refers to the countries included in the European Union;
“EMEA Region” refers to the geographic area encompassing Europe, the Middle East and Africa;
“APAC Region” refers to the Asia Pacific Region, consisting of Australia, New Zealand, Hong Kong, Taiwan, China, South Korea, Japan, Singapore, Malaysia, Thailand, Indonesia, India, the Philippines and Vietnam;
“Americas” refers to the geographic area encompassing North America, Central America, and South America; and
“OEM” refers to Original Equipment Manufacturer.
| 1 |
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
| PART I. FINANCIAL INFORMATION | |||||||||||||||
| ITEM 1. FINANCIAL STATEMENTS | |||||||||||||||
| FORWARD INDUSTRIES, INC. AND SUBSIDIARIES | |||||||||||||||
| CONDENSED CONSOLIDATED BALANCE SHEETS | |||||||||||||||
| December 31, | September 30, | March 31 | September 30, | ||||||||||||
| 2017 | 2017 | 2021 | 2020 | ||||||||||||
| (Unaudited) | (Note 1) | (Unaudited) | |||||||||||||
| Assets | |||||||||||||||
| Current assets: | |||||||||||||||
| Cash | $ | 5,904,425 | $ | 4,622,981 | $ | 1,529,165 | $ | 2,924,627 | |||||||
| Accounts receivable | 5,599,751 | 6,218,563 | |||||||||||||
| Accounts receivable, net | 6,331,832 | 7,602,316 | |||||||||||||
| Inventories | 2,061,052 | 2,120,971 | 2,149,454 | 1,275,694 | |||||||||||
| Prepaid expenses and other current assets | 106,273 | 157,930 | 385,245 | 419,472 | |||||||||||
| Total current assets | 13,671,501 | 13,120,445 | 10,395,696 | 12,222,109 | |||||||||||
| Property and equipment, net | 33,458 | 20,658 | 187,744 | 215,323 | |||||||||||
| Intangible assets, net | 1,425,036 | 1,531,415 | |||||||||||||
| Goodwill | 1,758,682 | 1,758,682 | |||||||||||||
| Operating lease right of use assets, net | 3,359,946 | 3,512,042 | |||||||||||||
| Other assets | 12,843 | 12,843 | 72,251 | 116,697 | |||||||||||
| Total assets | $ | 13,717,802 | $ | 13,153,946 | $ | 17,199,355 | $ | 19,356,268 | |||||||
| Liabilities and shareholders' equity | |||||||||||||||
| Current liabilities: | |||||||||||||||
| Line of credit | $ | – | $ | 1,000,000 | |||||||||||
| Current portion of note payable to Forward China | – | 1,600,000 | |||||||||||||
| Accounts payable | $ | 120,903 | $ | 67,351 | 324,673 | 197,022 | |||||||||
| Due to Forward China | 4,418,200 | 3,736,451 | 3,890,219 | 3,622,401 | |||||||||||
| Deferred income | 137,446 | 485,078 | |||||||||||||
| Current portion of notes payable | 72,341 | 983,395 | |||||||||||||
| Current portion of finance lease liability | 9,449 | 18,411 | |||||||||||||
| Current portion of deferred consideration | – | 45,000 | |||||||||||||
| Current portion of operating lease liability | 261,536 | 259,658 | |||||||||||||
| Accrued expenses and other current liabilities | 172,556 | 382,759 | 454,876 | 615,401 | |||||||||||
| Total current liabilities | 4,711,659 | 4,186,561 | 5,150,540 | 8,826,366 | |||||||||||
| Other liabilities | 33,008 | 36,963 | |||||||||||||
| Other liabilities: | |||||||||||||||
| Note payable to Forward China, less current portion | 1,600,000 | – | |||||||||||||
| Notes payable, less current portion | – | 529,973 | |||||||||||||
| Operating lease liability, less current portion | 3,232,169 | 3,359,088 | |||||||||||||
| Finance lease liability, less current portion | 2,324 | 12,769 | |||||||||||||
| Deferred consideration, less current portion | 60,000 | 45,000 | |||||||||||||
| Total other liabilities | 4,894,493 | 3,946,830 | |||||||||||||
| Total liabilities | 4,744,667 | 4,223,524 | 10,045,033 | 12,773,196 | |||||||||||
| Commitments and contingencies | |||||||||||||||
| Shareholders' equity: | |||||||||||||||
| Common stock, par value $0.01 per share; 40,000,000 shares authorized; | |||||||||||||||
| 8,850,830 and 8,920,830 shares, issued and outstanding, respectively | 88,508 | 89,208 | |||||||||||||
| Common stock, par value $0.01 per share; 40,000,000 shares authorized; 9,952,766 and 9,883,851 shares issued and outstanding at March 31, 2021 and September 30, 2020, respectively | 99,528 | 98,838 | |||||||||||||
| Additional paid-in capital | 17,932,835 | 17,936,673 | 19,785,936 | 19,579,684 | |||||||||||
| Accumulated deficit | (9,048,808 | ) | (9,095,459 | ) | (12,731,142 | ) | (13,095,450 | ) | |||||||
| Accumulated other comprehensive income | 600 | - | |||||||||||||
| Total shareholders' equity | 8,973,135 | 8,930,422 | 7,154,322 | 6,583,072 | |||||||||||
| Total liabilities and shareholders' equity | $ | 13,717,802 | $ | 13,153,946 | $ | 17,199,355 | $ | 19,356,268 | |||||||
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
| 2 |
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(UNAUDITED)
| For the Three Months Ended December 31, | ||||||
| 2017 | 2016 | |||||
| Net revenues | $ | 6,336,467 | $ | 6,591,248 | ||
| Cost of goods sold | 5,333,871 | 5,432,419 | ||||
| Gross profit | 1,002,596 | 1,158,829 | ||||
| Operating expenses: | ||||||
| Sales and marketing | 278,062 | 417,527 | ||||
General and administrative | 673,461 | 593,180 | ||||
Total operating expenses | 951,523 | 1,010,707 | ||||
| Operating income | 51,073 | 148,122 | ||||
| Other income (expense), net | (4,422 | ) | 3,370 | |||
| Income before income taxes | 46,651 | 151,492 | ||||
| Provision for income taxes | - |
| - | |||
| Net income | $ | 46,651 | $ | 151,492 | ||
| Net income | $ | 46,651 | $ | 151,492 | ||
| Other comprehensive income: | ||||||
| Translation adjustments | 600 | - | ||||
| Comprehensive income | $ | 47,251 | $ | 151,492 | ||
| Earnings per share: | ||||||
| Basic | $ | 0.01 | $ | 0.02 | ||
| Diluted | $ | 0.01 | $ | 0.02 | ||
| Weighted average number of common and | ||||||
| common equivalent shares outstanding: | ||||||
| Basic | 8,760,830 | 8,621,513 | ||||
| Diluted | 8,895,456 | 8,757,728 | ||||
| For the Three Months Ended March 31, | For the Six Months Ended March 31, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Revenues, net | $ | 8,395,379 | $ | 7,931,377 | $ | 18,112,982 | $ | 16,324,231 | ||||||||
| Cost of sales | 6,651,933 | 6,478,228 | 14,106,650 | 13,151,073 | ||||||||||||
| Gross profit | 1,743,446 | 1,453,149 | 4,006,332 | 3,173,158 | ||||||||||||
| Sales and marketing expenses | 578,436 | 479,461 | 1,181,397 | 1,014,633 | ||||||||||||
| General and administrative expenses | 1,981,186 | 1,625,385 | 3,808,604 | 2,839,351 | ||||||||||||
| Goodwill impairment | – | 1,015,000 | – | 1,015,000 | ||||||||||||
| Loss from operations | (816,176 | ) | (1,666,697 | ) | (983,669 | ) | (1,695,826 | ) | ||||||||
| Gain on forgiveness of note payable | – | – | (1,356,570 | ) | – | |||||||||||
| Fair value adjustment of earnout consideration | – | (350,000 | ) | (30,000 | ) | (350,000 | ) | |||||||||
| Fair value adjustment of deferred cash consideration | – | 9,000 | – | 9,000 | ||||||||||||
| Interest income | (33,554 | ) | – | (56,301 | ) | – | ||||||||||
| Interest expense | 46,714 | 44,178 | 93,106 | 95,127 | ||||||||||||
| Other expense, net | 5,392 | 1,739 | 1,788 | 3,318 | ||||||||||||
| (Loss)/income before income taxes | (834,728 | ) | (1,371,614 | ) | 364,308 | (1,453,271 | ) | |||||||||
| Provision for/(benefit from) income taxes | – | – | – | – | ||||||||||||
| Net (loss)/income | $ | (834,728 | ) | $ | (1,371,614 | ) | $ | 364,308 | $ | (1,453,271 | ) | |||||
| (Loss)/earnings per share: | ||||||||||||||||
| Basic | $ | (0.08 | ) | $ | (0.14 | ) | $ | 0.04 | $ | (0.15 | ) | |||||
| Diluted | $ | (0.08 | ) | $ | (0.14 | ) | $ | 0.04 | $ | (0.15 | ) | |||||
| Weighted average common shares outstanding: | ||||||||||||||||
| Basic | 9,909,497 | 9,533,851 | 9,897,385 | 9,533,851 | ||||||||||||
| Diluted | 9,909,497 | 9,533,851 | 10,378,733 | 9,533,851 | ||||||||||||
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
| 3 |
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTSTATEMENTS OF SHAREHOLDERS' EQUITY
(UNAUDITED)
| For the Three and Six Months Ended March 31, 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 | – | – | 41,457 | – | 41,457 | |||||||||||||||
| Stock options exercised | 2,500 | 25 | 1,650 | – | 1,675 | |||||||||||||||
| Net income | – | – | – | 1,199,036 | 1,199,036 | |||||||||||||||
| Balance at December 31, 2020 | 9,886,351 | 98,863 | 19,622,791 | (11,896,414 | ) | 7,825,240 | ||||||||||||||
| Share-based compensation | – | – | 21,287 | – | 21,287 | |||||||||||||||
| Stock options exercised | 66,415 | 665 | 141,858 | – | 142,523 | |||||||||||||||
| Net loss | – | – | – | (834,728 | ) | (834,728 | ) | |||||||||||||
| Balance at March 31, 2021 | 9,952,766 | $ | 99,528 | $ | 19,785,936 | $ | (12,731,142 | ) | $ | 7,154,322 | ||||||||||
| Accumulated | |||||||||||||||||
| Additional | Other | ||||||||||||||||
| Common Stock | Paid-In | Accumulated | Comprehensive | ||||||||||||||
| Shares | Amount | Capital | Deficit | Loss | Total | ||||||||||||
| Balance - September 30, 2017 | 8,920,830 | $ | 89,208 | $ | 17,936,673 | $ | (9,095,459 | ) | $ | - | $ | 8,930,422 | |||||
| Restricted stock award forfeitures | (70,000 | ) | (700 | ) | 700 | - | - | - | |||||||||
| Share-based compensation | - | - | (4,538 | ) | - | - | (4,538 | ) | |||||||||
| Foreign currency translation | - | - | - | - | 600 | 600 | |||||||||||
| Net income | - | - | - | 46,651 | - | 46,651 | |||||||||||
| Balance - December 31, 2017 | 8,850,830 | $ | 88,508 | $ | 17,932,835 | $ | (9,048,808 | ) | $ | 600 | $ | 8,973,135 | |||||
| For the Three and Six Months Ended March 31, 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 | – | – | 33,179 | – | 33,179 | |||||||||||||||
| Net loss | – | – | – | (81,657 | ) | (81,657 | ) | |||||||||||||
| Balance at December 31, 2019 | 9,533,851 | 95,338 | 18,969,309 | (11,401,826 | ) | 7,662,821 | ||||||||||||||
| Share-based compensation | – | – | 36,260 | – | 36,260 | |||||||||||||||
| Net loss | – | – | – | (1,371,614 | ) | (1,371,614 | ) | |||||||||||||
| Balance at March 31, 2020 | 9,533,851 | $ | 95,338 | $ | 19,005,569 | $ | (12,773,440 | ) | $ | 6,327,467 | ||||||||||
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
| 4 |
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
| For the Six Months Ended March 31, | ||||||||
| 2021 | 2020 | |||||||
| Operating Activities: | ||||||||
| Net income/(loss) | $ | 364,308 | $ | (1,453,271 | ) | |||
| Adjustments to reconcile net income/(loss) to net cash used in operating activities: | ||||||||
| Share-based compensation | 62,744 | 69,439 | ||||||
| Depreciation and amortization | 171,836 | 138,711 | ||||||
| Bad debt expense/(recovery) | 513,691 | (109,914 | ) | |||||
| Gain on forgiveness of note payable | (1,356,570 | ) | – | |||||
| Change in fair value of earn-out consideration | (30,000 | ) | (350,000 | ) | ||||
| Change in fair value of deferred cash consideration | – | 9,000 | ||||||
| Goodwill impairment | – | 1,015,000 | ||||||
| Impairment of investment | – | 326,941 | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | 756,793 | (563,850 | ) | |||||
| Inventories | (873,760 | ) | 972,775 | |||||
| Prepaid expenses and other current assets | 34,227 | (168,401 | ) | |||||
| Other assets | 44,446 | 70,806 | ||||||
| Accounts payable and due to Forward China | 395,469 | (985,936 | ) | |||||
| Deferred income | (347,632 | ) | 488,156 | |||||
| Operating lease liabilities | 27,055 | 18,831 | ||||||
| Accrued expenses and other current liabilities | (160,525 | ) | (32,632 | ) | ||||
| Net cash used in operating activities | (397,918 | ) | (554,345 | ) | ||||
| Investing Activities: | ||||||||
| Purchases of property and equipment | (37,878 | ) | (27,207 | ) | ||||
| Net cash used in investing activities | (37,878 | ) | (27,207 | ) | ||||
| Financing Activities: | ||||||||
| Proceeds from line of credit borrowings | 150,000 | 200,000 | ||||||
| Repayment of line of credit borrowings | (1,150,000 | ) | (1,100,000 | ) | ||||
| Repayment of notes payable | (84,457 | ) | (46,674 | ) | ||||
| Proceeds from stock options exercised | 144,198 | – | ||||||
| Repayments of finance leases | (19,407 | ) | (16,488 | ) | ||||
| Payment of deferred cash consideration | – | (200,000 | ) | |||||
| Net cash used in financing activities | (959,666 | ) | (1,163,162 | ) | ||||
| Net decrease in cash | (1,395,462 | ) | (1,744,714 | ) | ||||
| Cash at beginning of period | 2,924,627 | 3,092,813 | ||||||
| Cash at end of period | $ | 1,529,165 | $ | 1,348,099 | ||||
| Supplemental Disclosures of Cash Flow Information: | ||||||||
| Cash paid for interest | $ | 88,479 | $ | 95,127 | ||||
| Cash paid for taxes | $ | 5,636 | $ | 1,524 | ||||
| Supplemental Disclosures of Non-Cash Information: | ||||||||
| Lease assets recorded upon adoption of ASC 842 | $ | – | $ | 3,648,582 | ||||
| Lease liabilities recorded upon adoption of ASC 842 | $ | – | $ | 3,729,341 | ||||
| FORWARD INDUSTRIES, INC. AND SUBSIDIARIES | |||||||
| CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS | |||||||
| (UNAUDITED) | |||||||
| For the Three Months Ended December 31, | |||||||
| 2017 | 2016 | ||||||
| Cash Flows From Operating Activities: | |||||||
| Net income | $ | 46,651 | $ | 151,492 | |||
| Adjustments to reconcile net income to net cash | |||||||
| provided by (used in) operating activities: | |||||||
| Share-based compensation | (4,538 | ) | 49,529 | ||||
| Depreciation and amortization | 6,092 | 5,995 | |||||
| Deferred rent | (3,307 | ) | (2,680 | ) | |||
| Changes in operating assets and liabilities: | |||||||
| Accounts receivable | 618,812 | (902,317 | ) | ||||
| Inventories | 59,919 | 22,827 | |||||
| Prepaid expenses and other current assets | 51,657 | 11,967 | |||||
| Accounts payable and due to Forward China | 735,901 | 389,045 | |||||
| Accrued expenses and other current liabilities | (210,851 | ) | (245,668 | ) | |||
| Net cash provided by (used in) operating activities | 1,300,336 | (519,810 | ) | ||||
| Cash Flows From Investing Activities: | |||||||
| Purchases of property and equipment | (18,892 | ) | - | ||||
| Net cash used in investing activities | (18,892 | ) | - | ||||
| Net increase (decrease) in cash | 1,281,444 | (519,810 | ) | ||||
| Cash at beginning of period | 4,622,981 | 4,760,620 | |||||
| Cash at end of period | $ | 5,904,425 | $ | 4,240,810 | |||
| Supplemental Disclosure of Cash Flow Information: | |||||||
| Cash paid for interest | $ | - | $ | - | |||
| Cash paid for taxes | $ | - | $ | - | |||
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
| 5 |
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 OVERVIEW
Business
Forward Industries, Inc. (“Forward”, “we” or the “Company”) designsis a fully integrated design, development and distributes carrymanufacturing solution provider for top tier medical and protective solutions, primarily for hand held electronic devices. The Company’s principal customer market is original equipment manufacturers, or “OEMs” (ortechnology customers worldwide. As a result of the contract manufacturing firmscontinued expansion of these OEM customers), that either package their products as accessories “in box” together with their branded product offerings, or sell themour design development capabilities 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 customersour wholly-owned subsidiaries, we are located in: (i) the Asia-Pacific Region, which we refer to as the “APAC Region”; (ii) Europe, the Middle East, and Africa, which we refer to as the “EMEA Region”; and (iii) the Americas. The Company does not manufacture any of its OEM products and sources substantially all of its OEM products from independent suppliers in China, through Forward China (refer to Note 6 – Buying Agency and Supply Agreement).
On January 18, 2018, the Company acquired Intelligent Product Solutions, Inc. (“IPS”), a single source solution for the full spectrum of hardware and software product design and engineering services. The acquisition gives Forward the opportunitynow able to introduce proprietary productproducts to the market from concepts brought to themus from a number of different sources. The Forward/IPS combination provides clients,sources, both biginside and small, a true, authentic “one-stop-shop” for product design, development, manufacturing, and distribution (See Note 8).outside the Company.
In
Impact of COVID-19
The outbreak of the opinion of management, the accompanying condensed consolidated financial statements presented in this Quarterly Report on Form 10-Q reflect all normal recurring adjustments necessaryCOVID-19 virus continues to present fairly the financial position andimpact our results of operations and cash flows foroperations. While the interim periods presented herein, but are not necessarily indicative ofmost significant impact was realized in Fiscal 2020, the virus had a less significant effect on our results of operations for the year ending September 30, 2018 nor dofirst half of Fiscal 2021. The business shutdowns resulting from the pandemic 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. Additionally, demand for our design and development services continues to be reduced or delayed as a result of the pandemic as certain customers have reduced discretionary spending. While revenues for the three and six months ended March 31, 2021 increased as compared to the three and six months ended March 31, 2020, they includewere lower than anticipated due in part to the impact of COVID-19 and the IPS acquisition.resulting economic conditions. The impact of lower than anticipated revenue was further complicated by a significant increase in freight costs due to the global shipping container shortage caused by the pandemic. These condensed consolidatedchallenges were partially offset by a reduction in certain selling and travel related expenses resulting from government mandated travel restrictions.
The economy has continued to open in more jurisdictions. However, there continue to be areas impacted by new strains of the virus that could cause government officials to enact more restrictions on how businesses operate. The future 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 resulting economic impact may negatively impact our results of operations, cash flows and financial statements shouldposition in future periods as well as that of our customers, including their ability to pay for our services and choosing to allocate their budgets to new or existing projects which may or may not require our services. The long-term financial impact on our business cannot be readreasonably estimated at this time. As a result, the effects of COVID-19 may not be fully reflected in conjunctionour financial results until future periods. Refer to “Part II, Item 1A — Risk Factors” for a description of the material risks that the Company currently faces in connection with COVID-19.
Until the Company’s audited consolidated financial statements includedpandemic is under control, 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; aligning our design and development schedules with demand in its Annual Report on Form 10-Ka 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 strategy. To help mitigate the impact of these challenging business conditions, we have implemented cost cutting initiatives and reduced executive pay and Board of Directors compensation for the fiscal year ended September 30, 2017,an undetermined period of time. There is no assurance these measures will be successful. See “Liquidity and with the disclosuresCapital Resources” section of Item 2. “Management’s Discussion and risk factors presented therein. The September 30, 2017 condensed consolidated balance sheet has been derived from the audited consolidated financial statements.Analysis of Financial Condition and Results of Operations” for further description of these cost cutting measures.
NOTE 2 ACCOUNTING POLICIES
Basis of Presentation
The accompanying condensed consolidated financial statements include the accounts of Forward Industries, Inc. and all of its 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”). The terms “Forward”, “we” or the “Company” as used throughout this document are used to indicate Forward Industries, Inc. and all of its subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation.
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Accounting EstimatesFORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The acquisition of Kablooe took place in August 2020 and its results of operations have been included in our condensed consolidated financial statements since the acquisition date. Accordingly, our results of operations for the three and six months ended March 31, 2021 include Kablooe’s results of operations, while our results of operations for the three and six months ended March 31, 2020 do not. Key terms of the acquisition are contained in our Form 10-K filed with the Securities and Exchange Commission on December 17, 2020.
In the opinion of management, the accompanying condensed consolidated financial statements presented in this Quarterly Report on Form 10-Q reflect all normal recurring adjustments necessary to present fairly the financial position and results of operations and cash flows for the interim periods presented herein, but are not necessarily indicative of the results of operations for the year ending September 30, 2021. These condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements included in its Annual Report on Form 10-K for the fiscal year ended September 30, 2020, and with the disclosures and risk factors presented therein. The September 30, 2020 condensed consolidated balance sheet has been derived from the audited consolidated financial statements. Certain dollar amounts and percentages have been rounded to their approximate value.
For the six months ended March 31, 2021, the Company generated net income of $364,000 and used $398,000 of cash flows in operating activities. The Company has an accumulated deficit of $12,731,000 at March 31, 2021. We believe our existing cash balance and working capital will be sufficient to meet our liquidity needs through at least June 30, 2022.
Accounting Estimates
The preparation of the Company’s condensed 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 condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates and assumptions.
Basis
Revenue Recognition
Distribution Segment
The Company generally recognizes revenue in its distribution segment when: (i) finished goods are shipped to our distribution customers (in general, these conditions occur at either point of Presentation
Theshipment or point of destination, depending on the terms of sale, i.e., transfer of control); (ii) there are no other deliverables or performance obligations; and (iii) there are no further obligations to the customer after title to the goods has transferred. 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 condensed consolidated balance sheets. The distribution segment had no contract liabilities at March 31, 2021 or September 30, 2019 and $75,000 of contract liabilities at September 30, 2020.
Design Segment
The Company applies the “cost to cost” and “right to invoice” methods of revenue recognition to the contracts with customers in the design segment. The design segment typically engages in two types of contracts: (i) time and material and (ii) fixed price. 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 condensed consolidated balance sheets. The design segment had contract assets of $863,000, $649,000 and $611,000 at March 31, 2021, September 30, 2020 and September 30, 2019, 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 condensed consolidated balance sheets. The design segment had contract liabilities of $137,000, $410,000 and $220,000 at March 31, 2021, September 30, 2020 and September 30, 2019, respectively.
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FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Accounts Receivable
Accounts receivable consist of unsecured trade accounts with customers. The Company maintains an allowance for doubtful accounts, which is recorded as a reduction to accounts receivable on the condensed consolidated financial statements includestatements. Collectability of accounts receivable is estimated by evaluating the number of days accounts are outstanding, customer payment history, recent payment trends and perceived creditworthiness, adjusted as necessary based on specific customer situations. At March 31, 2021 and September 30, 2020, the Company had allowances for doubtful accounts of Forward Industries, Inc.$249,000 and $249,000, respectively, for the distribution segment and $861,000 and $347,000, respectively, for the design segment.
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 its wholly owned subsidiaries (Forward USacquisitions of IPS in January 2018 and Forward Switzerland). AllKablooe in August 2020.
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 and Kablooe) 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 a 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 perform 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, no impairment charge is recognized. If the fair value of the reporting unit is less than its carrying value, an impairment charge will be recognized for the amount by which the reporting unit’s carrying amount exceeds its fair value. A significant intercompany transactionsamount of judgment is required in performing goodwill impairment tests including estimating the fair value of a reporting unit. See Note 3.
Intangible Assets
Intangible assets include trademarks and balancescustomer relationships, which resulted from the acquisitions of IPS in January 2018 and Kablooe in August 2020 and are recorded based on their estimated fair value determined in conjunction with the purchase price allocations. 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 been eliminateda 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 consolidation.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 our intangible assets. Management evaluated and concluded that there were no impairments of intangible assets at March 31, 2021.
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. As of DecemberAt March 31, 2017,2021, 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. No current book income tax provision was recorded against book net income due to the existence of significant net operating loss carryforwards.
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FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 ACCOUNTING POLICIES (CONTINUED)
Revenue Recognition
In December 2020, the Company’s application for forgiveness of its loan received as part of the Payroll Protection Program (“PPP loan”) pursuant to the U.S. Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was approved. The Company generally recognizes revenueaggregate loan principal amount forgiven was $1,357,000. The total amount forgiven will not be recognized as taxable income pursuant to the CARES Act. Pursuant to the Consolidated Appropriations Act, 2021, which was enacted by Congress and signed into law by the President on December 27, 2020, all expenses utilizing funds from product salesPPP loans will be deductible against taxable income.
Fair Value Measurements
We perform fair value measurements in accordance with the guidance provided by Accounting Standards Codification (“ASC”) 820, “Fair Value Measurement.” ASC 820 defines fair value as the price that would be received from selling an asset or paid to its customers when: (i) titletransfer 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 loss are transferred (in general, these conditions occur at either pointnonperformance.
ASC 820 establishes a fair value hierarchy that requires an entity to maximize the use of shipmentobservable inputs and minimize the use of unobservable inputs when measuring fair value. An asset's or pointliability's categorization within the fair value hierarchy is based upon the lowest level of destination, depending on the terms of sale); (ii) persuasive evidence of an arrangement exists; (iii) the Company has no continuing obligationsinput that is significant to the customer; and (iv) collection of the related accounts receivable is reasonably assured. The Company defers revenue when it receives consideration before achieving the criteria previously mentioned.
Reclassifications
Certain amounts in the accompanying fiscal 2017 financial statements have been reclassified to conform to the fiscal 2018 presentation.
Share-Based Compensation Expense
The Company recognizes employee and director share-based compensation in its condensed consolidated statements of operations and comprehensive income at the grant-date fair value measurement. ASC 820 establishes three levels of stock optionsinputs 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. |
Leases
Lease assets and other equity-based compensation. The determination of stock option grant-date fair value is estimated using the Black-Scholes option pricing model, which includes variables such as the expected volatility of the Company’s share price, the exercise behavior of its grantees, interest rates, and dividend yields. These variablesliabilities are projectedrecognized at commencement date based on the present value of lease payments over the lease term, using the Company’s historical data, experience,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 other factors. In the case of awards with multiple vesting periods,when it is reasonably probable to exercise such option, the Company has electedwill 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 graded vesting attribution method, which recognizes compensation costlease 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 eachthe lease term. Operating lease assets are shown as right of use assets and finance lease assets are a component of property and equipment on the condensed consolidated balance sheets. The current and long-term portions of operating and finance lease liabilities are shown separately vesting portion ofas such on the award as if the award was, in-substance, multiple awards. Refer to Note 3 - Share-Based Compensation. In addition, the Company recognizes share-based compensation to non-employees based upon the fair value, using the Black-Scholes option pricing model, determined at the deemed measurement dates over the related contract service period.
Recent Accounting Pronouncementscondensed consolidated balance sheets.
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers (Topic 606),” which supersedes the revenue recognition requirements in Accounting Standards Codification (“ASC”) 605-Revenue Recognition and most industry-specific guidance throughout the ASC. ASU 2014-09 establishes principles for recognizing revenue upon the transfer of promised goods or services to customers, in an amount that reflects the expected consideration received in exchange for those goods or services. In July 2015, the FASB deferred the effective date for annual reporting periods beginning after December 15, 2017 (including interim reporting periods within those periods). Early adoption is permitted to the original effective date for annual reporting periods beginning after December 15, 2016 (including interim reporting periods within those periods). The amendments may be applied retrospectively to each prior period (full retrospective) or retrospectively with the cumulative effect recognized as of the date of initial application (modified retrospective).
Business Combinations
The Company will adopt ASU 2014-09 in the first quarter of fiscal 2019 and plans to apply the full retrospective approach. Because the Company's primary source of revenues is from the sale of finished goods, the Company does not anticipate that the adoption of ASU 2014-09 will have a material impact on its existing business, consolidated financial statements, disclosures or process. The Company is evaluating the potential impact of the acquired IPS business.
In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842),” which will require lessees to report most leases as assets and liabilities on the balance sheet, while lessor accounting will remain substantially unchanged. This ASU requires a modified retrospective transition approach for existing leases, whereby the new rules will be applied to the earliest year presented. The new standard is effective for reporting periods beginning after December 15, 2018 and early adoption is permitted. The Company is currently evaluating the potential impact of adopting this guidance on its consolidated financial statements.
FORWARD INDUSTRIES, INC. AND SUBSIDIARIESNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 ACCOUNTING POLICIES (CONTINUED)
Recent Accounting Pronouncements (Continued)
In May 2017, the FASB issued ASU No. 2017-09, “Scope of Modification Accounting”, to provide guidance on which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. This ASU is effective for interim and annual periods beginning after December 15, 2017. Early adoption is permitted. Adoption of this ASU is prospective. The Company does not believe the adoption of this ASU will have a significant impact on its consolidated financial statements.
Business Combinations and Asset Acquisitions
We allocateallocates the fair value of purchase consideration to the tangible assets acquired, liabilities assumed 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, we makethe Company makes significant estimates and assumptions, especially with respect to intangible assets.
We recognize the purchase of assets and the assumption of liabilities as an asset acquisition, if the transaction does not constitute a business combination. The excess of the fair value of the purchase price is allocated on a relative fair value basis to the identifiable assets and liabilities. No goodwill is recorded in an asset acquisition.
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FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 condensed consolidated financial statements for the three and six months ended March 31, 2020 have been reclassified to conform to the March 31, 2021 presentation.
Recent Accounting Pronouncements
In August 2018, 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 adopted this guidance in the first quarter of Fiscal 2021 with no material impact to its condensed 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 adopted this guidance in the first quarter of Fiscal 2021 with no material impact to its condensed 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 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 condensed 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 adopted this guidance in the first quarter of Fiscal 2021 with no material impact to its condensed 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 evaluating the effects of the pronouncement on its condensed consolidated financial statements.
NOTE 3 INTANGIBLE ASSETS AND GOODWILL
The Company’s intangible assets are all held under the design segment of our business. Amortization expense related to intangible assets was $53,000 and $41,000 for the three months ended March 31, 2021 and 2020, respectively, and $106,000 and $81,000 for the six months ended March 31, 2021 and 2020, respectively, which is included in general and administrative expenses on the condensed consolidated statements of operations.
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FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The Company’s intangible assets consist of the following:
| March 31, 2021 | September 30, 2020 | |||||||||||||||||||||||
| 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 | (106,000 | ) | (444,000 | ) | (550,000 | ) | (86,000 | ) | (358,000 | ) | (444,000 | ) | ||||||||||||
| Net carrying amount | $ | 479,000 | $ | 946,000 | $ | 1,425,000 | $ | 499,000 | $ | 1,032,000 | $ | 1,531,000 | ||||||||||||
At March 31, 2021, estimated amortization expense for the Company’s intangible assets for each of the next five years and thereafter is as follows:
| Remainder of Fiscal 2021 | $ | 107,000 | ||
| Fiscal 2022 | 213,000 | |||
| Fiscal 2023 | 213,000 | |||
| Fiscal 2024 | 213,000 | |||
| Fiscal 2025 | 213,000 | |||
| Thereafter | 466,000 | |||
| Total | $ | 1,425,000 |
During the three months ended March 31, 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 continent earnout consideration discussed in Note 4 and revised revenue and operational projections for IPS for the remainder of the 2020 fiscal year and future periods. Based on these factors, the Company 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. The estimates and assumptions utilized in the estimated fair value calculation include 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. The Company 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 the three months ended March 31, 2020. Based on management’s evaluation, there were no further impairments to goodwill at September 30, 2020 and there were no triggering events leading to an interim impairment analysis at March 31, 2021.
NOTE 4 FAIR VALUE MEASUREMENTS
The deferred consideration of $60,000 and $90,000 at March 31, 2021 and September 30, 2020, respectively, represents the fair value of the contingent earnout consideration related to the acquisition of Kablooe. The current and non-current portions of this liability are shown in the corresponding categories on the condensed consolidated balance sheets in each period presented. In December 2020, the Company reduced this liability from $90,000 to $60,000 based on the low likelihood of Kablooe reaching the first year’s earnings target.
In connection with the acquisition of IPS in January 2018, the Company agreed to pay deferred cash consideration and contingent earnout consideration to the selling shareholders of IPS and these liabilities were measured at fair value each reporting period. In March 2020, the fair value of the earnout consideration was reduced from $350,000 to $0 due to the low likelihood of IPS reaching the underlying earnings target. At September 30, 2020, the Company had no remaining obligation for consideration payments related to the acquisition of IPS.
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FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following table presents the placement in the fair value hierarchy and summarize the changes in fair value of the aforementioned liabilities for the three and six months ended March 31, 2021:
| 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) | |||||||||||||
| Deferred consideration at September 30, 2020 | $ | 90,000 | $ | – | $ | – | $ | 90,000 | ||||||||
| Decrease in fair value of Kablooe contingent earnout consideration | (30,000 | ) | – | – | (30,000 | ) | ||||||||||
| Deferred consideration at December 31, 2020 | 60,000 | – | – | 60,000 | ||||||||||||
| Change in fair value of Kablooe contingent earnout consideration | – | – | – | – | ||||||||||||
| Deferred consideration at March 31, 2021 | $ | 60,000 | $ | – | $ | – | $ | 60,000 | ||||||||
During Fiscal 2019, the Company received common stock from a customer as compensation for services provided, which was recorded as a cost-method investment with an estimated fair value of $327,000. This initial fair value was 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. Management determined that the inputs used to value the investment were observable, either directly or indirectly, and therefore classified as a level 2 valuation measurement. In March 2020, due to the performance of the business in which the Company was invested, it concluded the investment was impaired and recorded an impairment charge of $327,000, which was recorded as a component of general and administrative expenses on the condensed consolidated statement of operations.
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FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 SEGMENT INFORMATION
The Company has two reportable segments: distribution and design. 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 as well as smart-enabled and other products. The design segment provides a full spectrum of hardware and software product design and engineering services. We measure the performance of our operating segments based upon revenue and operating income or loss. Operating income/(loss) and net income/(loss) are shown in the table below:
| For the Three Months Ended March 31, | For the Six Months Ended March 31, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Revenues, net | ||||||||||||||||
| Distribution | $ | 4,483,000 | $ | 4,624,000 | $ | 10,088,000 | $ | 9,320,000 | ||||||||
| Design | 3,912,000 | 3,307,000 | 8,025,000 | 7,004,000 | ||||||||||||
| Total revenues, net | $ | 8,395,000 | $ | 7,931,000 | $ | 18,113,000 | $ | 16,324,000 | ||||||||
| Cost of sales | ||||||||||||||||
| Distribution | $ | 3,911,000 | $ | 4,063,000 | $ | 8,791,000 | $ | 8,156,000 | ||||||||
| Design | 2,741,000 | 2,415,000 | 5,316,000 | 4,995,000 | ||||||||||||
| Total cost of sales | $ | 6,652,000 | $ | 6,478,000 | $ | 14,107,000 | $ | 13,151,000 | ||||||||
| Loss from operations | ||||||||||||||||
| Distribution | $ | (528,000 | ) | $ | (378,000 | ) | $ | (872,000 | ) | $ | (821,000 | ) | ||||
| Design | (288,000 | ) | (1,289,000 | ) | (112,000 | ) | (875,000 | ) | ||||||||
| Total loss from operations | $ | (816,000 | ) | $ | (1,667,000 | ) | $ | (984,000 | ) | $ | (1,696,000 | ) | ||||
| Other expense/(income), net | ||||||||||||||||
| Distribution | $ | 45,000 | $ | (307,000 | ) | $ | 44,000 | $ | (274,000 | ) | ||||||
| Design | (26,000 | ) | 12,000 | (1,392,000 | ) | 31,000 | ||||||||||
| Total other expense/(income), net | $ | 19,000 | $ | (295,000 | ) | $ | (1,348,000 | ) | $ | (243,000 | ) | |||||
| Net (loss)/income | ||||||||||||||||
| Distribution | $ | (573,000 | ) | $ | (71,000 | ) | $ | (916,000 | ) | $ | (547,000 | ) | ||||
| Design | (262,000 | ) | (1,301,000 | ) | 1,280,000 | (906,000 | ) | |||||||||
| Total net (loss)/income | $ | (835,000 | ) | $ | (1,372,000 | ) | $ | 364,000 | $ | (1,453,000 | ) | |||||
The following table presents total assets by operating segment:
| March 31, 2021 | September 30, 2020 | |||||||
| Distribution | $ | 7,685,000 | $ | 8,289,000 | ||||
| Design | 9,514,000 | 11,067,000 | ||||||
| Total | $ | 17,199,000 | $ | 19,356,000 | ||||
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FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 36 SHARE-BASED COMPENSATION
Stock Options
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 1,291,000 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 eachthe common stock as quoted on the Nasdaq stock market on the grant date and the expiration date of option award is estimated onawards may not exceed 10 years.
Stock Options
No options were granted during the three or six months ended March 31, 2021.
In February 2020, the Company granted options to non-employee directors to purchase an aggregate of 248,000 shares of its common stock at an exercise price of $1.13 per shares. The options vested one year from the date of grant, usingexpire five years from the Black-Scholes option pricing model that uses the following assumptions. The expected term represents the period over which the stock option awards are expected to be outstanding. The Company utilizes the “simplified” method to develop an estimatedate of the expected term of “plain vanilla” employee option grants. The expected volatility used is based on the historical price of the Company’s stock over the most recent period commensurate with the expected term of the award. The risk-free interest rate used is based on the implied yield of U.S. Treasury zero-coupon issues with a remaining term equivalent to the award’s expected term. The Company historically has not paid any dividends on its common stockgrant and had no intention to do so on thean aggregate grant date the share-based awards were granted. The estimated annual forfeiture rate is based on management’s expectations and will reduce expensefair value of $145,000, which was recognized ratably over the vesting period. The forfeiture rate will be adjusted periodically based onThese options, which were the extent to which actual option forfeitures differ, or are expected to differ, from the previous estimate, when it is material.
There were noonly options granted during the three and six months ended DecemberMarch 31, 2017 and 2016.2020, had a grant-date fair value of $0.58 per share.
During the six months ended March 31, 2021, the Company issued 69,000 shares of its common stock pursuant to the exercise of stock options for aggregate cash proceeds of $144,000. There were no options exercised during the six months ended March 31, 2020.
The following table summarizesCompany recognized compensation expense for stock option activityawards of $21,000 and $36,000 during the three months ended DecemberMarch 31, 2017:
FORWARD INDUSTRIES, INC. AND SUBSIDIARIESNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 SHARE-BASED COMPENSATION (CONTINUED)
| Weighted | |||||||||
| Weighted | Average | ||||||||
| Average | Remaining | ||||||||
| Number of | Exercise | Life | Intrinsic | ||||||
| Options | Price | In Years | Value | ||||||
| Outstanding, September 30, 2017 | 246,000 | $ | 2.19 | ||||||
| Granted | - | ||||||||
| Exercised | - | ||||||||
| Forfeited | - | ||||||||
| Expired | - | ||||||||
| Outstanding, December 31, 2017 | 246,000 | $ | 2.19 | 3.7 | $ | 33,700 | |||
| Exercisable, December 31, 2017 | 223,498 | $ | 2.35 | 3.3 | $ | 20,499 | |||
The Company recognized compensation expense of approximately $1,0002021 and $2,0002020, respectively, and $63,000 and $69,000 during the threesix months ended DecemberMarch 31, 20172021 and 2016,2020, respectively, for stock option awards in its condensed consolidated statements of operations and comprehensive income.operations.
As of December
At March 31, 2017,2021, there was approximately $2,000$10,000 of total unrecognized compensation cost related to nonvested stock option awards. That costawards that is expected to be recognized over a weighted average period of 0.5 years.1.0 year.
The following table provides additional information regarding stock option awards that were outstanding and exercisable at December 31, 2017:
| Options Outstanding | Options Exercisable | |||||||||||
| Weighted | Weighted | Weighted | ||||||||||
| Average | Outstanding | Average | Average | Exercisable | ||||||||
| Exercise | Exercise | Number of | Exercise | Remaining Life | Number of | |||||||
| Price | Price | Options | Price | In Years | Options | |||||||
| $0.64 to $1.80 |
| $ | 1.00 |
| 97,500 | $ | 1.11 |
| 5.1 | 74,998 | ||
| $2.20 to $2.85 | 2.41 |
| 86,000 | 2.41 |
| 1.8 | 86,000 | |||||
| $3.73 to $3.79 | 3.74 |
| 62,500 | 3.74 |
| 3.1 | 62,500 | |||||
| 246,000 | 3.3 | 223,498 | ||||||||||
Restricted Stock AwardsNOTE 7 EARNINGS/(LOSS) PER SHARE
The Company recognized compensation expense of approximately $(5,000) and $48,000 during the three months ended December 31, 2017 and 2016, respectively, for restricted stock awards in its condensed consolidated statements of operations and comprehensive income.
As of December 31, 2017, there was approximately $15,000 of total unrecognized compensation cost related to nonvested restricted stock awards. That cost is expected to be recognized over a weighted average period of 0.2 years.
The following table summarizes restricted stock activity during the three months ended December 31, 2017:
FORWARD INDUSTRIES, INC. AND SUBSIDIARIESNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
| Weighted | |||||||||
| Average | Total | ||||||||
| Number of | Grant Date | Grant Date | |||||||
| Shares | Fair Value | Fair Value | |||||||
| Non-vested, September 30, 2017 | 160,000 | $ | 1.02 | $ | 162,600 | ||||
| Granted | - | ||||||||
| Vested | - | ||||||||
| Forfeited | (70,000 | ) | 1.07 | (74,900 | ) | ||||
| Non-vested, December 31, 2017 | 90,000 | $ | 0.97 | $ | 87,700 |
NOTE 4 EARNINGS PER SHARE
Basic earningsearnings/(loss) per share data for each period presented is computed using the weighted-averageweighted average number of shares of common stock outstanding during each such period. Diluted earningsearnings/(loss) per share data is computed using the weighted-averageweighted average number of common and dilutive common-equivalentcommon equivalent shares outstanding during each period. Dilutive common-equivalentcommon equivalent shares consist of: (i)of shares that would be issued upon the exercise of stock options and warrants, computed using the treasury stock method;method. A reconciliation of basic and (ii) shares of nonvested restricted stock. The Company calculated the potential diluted earningsearnings/(loss) per share in accordance with ASC 260,is as follows:
| For the Three Months Ended March 31, | For the Six Months Ended March 31, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Numerator: | ||||||||||||||||
| Net (loss)/income | $ | (835,000 | ) | $ | (1,372,000 | ) | $ | 364,000 | $ | (1,453,000 | ) | |||||
| Denominator: | ||||||||||||||||
| Weighted average common shares outstanding | 9,909,000 | 9,534,000 | 9,897,000 | 9,534,000 | ||||||||||||
| Dilutive common share equivalents | – | – | 482,000 | – | ||||||||||||
| Weighted average diluted shares outstanding | 9,909,000 | 9,534,000 | 10,379,000 | 9,534,000 | ||||||||||||
| (Loss)/earnings per share | ||||||||||||||||
| Basic | $ | (0.08 | ) | $ | (0.14 | ) | $ | 0.04 | $ | (0.15 | ) | |||||
| Diluted | $ | (0.08 | ) | $ | (0.14 | ) | $ | 0.04 | $ | (0.15 | ) | |||||
| For the Three Months Ended | |||||
| December 31, | |||||
| 2017 | 2016 | ||||
| Numerator: | |||||
| Net income | $ | 46,651 | $ | 151,492 | |
| Denominator: | |||||
| Weighted average shares outstanding - basic | 8,760,830 | 8,621,513 | |||
| Effects of dilutive securities: | |||||
| Assumed exercise of stock options, treasury stock method | 26,404 | 23,859 | |||
| Assumed vesting of restricted stock, treasury stock method | 108,222 | 112,356 | |||
| Weighted average dilutive potential common shares | 134,626 | 136,215 | |||
| Weighted average shares outstanding - diluted | 8,895,456 | 8,757,728 | |||
| Basic earnings per share | $ | 0.01 | $ | 0.02 | |
| Diluted earnings per share | $ | 0.01 | $ | 0.02 | |
| 14 |
The following securities were excluded from the calculation of diluted earnings per share because their inclusion would have been anti-dilutive:
| As of December 31, | |||
| 2017 | 2016 | ||
| Options | 168,500 |
| 178,500 |
| Warrants | 723,846 |
| 723,846 |
| Total potentially dilutive shares | 892,346 |
| 902,346 |
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following securities were excluded from the calculation of diluted earnings/(loss) per share in each period because their inclusion would have been anti-dilutive:
| For the Three Months Ended March 31, | For the Six Months Ended March 31, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Options | 1,049,000 | 1,004,000 | 10,000 | 1,004,000 | ||||||||||||
| Warrants | 151,000 | 151,000 | – | 151,000 | ||||||||||||
| Total potentially dilutive shares | 1,200,000 | 1,155,000 | 10,000 | 1,155,000 | ||||||||||||
NOTE 58 CONCENTRATIONS
Concentration of Revenues and Accounts Receivable
For the three and six months ended DecemberMarch 31, 20172021 and 2016,2020, the Company had significant customers withwhose individual percentage of totaltheir respective segment’s revenues equaling 10% or greater as follows:
For the Three Months Ended | |||||
December 31, | |||||
2017 | 2016 | ||||
| Customer 1 | 31.0 | % | 20.3 | % | |
| Customer 2 | 27.7 | % | 23.0 | % | |
| Customer 3 | 17.4 | % | 27.7 | % | |
| Customer 4 | 10.7 | % | 12.7 | % | |
| Totals | 86.8 | % | 83.7 | % | |
At December 31, 2017 and September 30, 2017, concentration of accounts receivable with significant customers representing 10% or greater of accounts receivable was 10% or greater. The concentrations of revenues and accounts receivable for each reportable segment are as follows:
Distribution Segment Revenues Concentration
| For the Three Months Ended March 31, | For the Six Months Ended March 31, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Customer A | 28% | 37% | 28% | 35% | ||||||||||||
| Customer B | 19% | 20% | 18% | 17% | ||||||||||||
| Customer C | 28% | 16% | 25% | 24% | ||||||||||||
| Customer D | 7% | 12% | 9% | 8% | ||||||||||||
| Totals | 82% | 85% | 80% | 84% | ||||||||||||
Design Segment Revenues Concentration
| For the Three Months Ended March 31, | For the Six Months Ended March 31, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Customer 1 | 6% | 21% | 9% | 15% | ||||||||||||
| Customer 2 | 9% | 16% | 11% | 13% | ||||||||||||
| Customer 3 | 10% | 14% | 9% | 18% | ||||||||||||
| Customer 4 | 20% | – | 17% | – | ||||||||||||
| Customer 5 | 1% | 9% | 1% | 11% | ||||||||||||
| Total | 46% | 60% | 47% | 57% | ||||||||||||
| December 31, 2017 | September 30, 2017 | ||||
| Customer 2 | 31.3 | % | 18.0 | % | |
| Customer 3 | 23.7 | % | 35.5 | % | |
| Customer 4 | 15.9 | % | 14.1 | % | |
| Customer 1 | 11.4 | % | 13.3 | % | |
| Totals | 82.3 | % | 80.9 | % |
| 15 |
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Distribution Segment Accounts Receivable Concentration
| March 31, 2021 | September 30, 2020 | |||||||
| Customer A | 23% | 23% | ||||||
| Customer B | 30% | 22% | ||||||
| Customer C | 19% | 20% | ||||||
| Customer D | 13% | 17% | ||||||
| Totals | 85% | 82% | ||||||
Design Segment Accounts Receivable Concentration
| March 31, 2021 | September 30, 2020 | |||||||
| Customer 1 | 20% | 24% | ||||||
| Customer 3 | 11% | 5% | ||||||
| Customer 4 | 12% | 6% | ||||||
| Customer 5 | 2% | 10% | ||||||
| Customer 6 | – | 14% | ||||||
| Totals | 45% | 59% | ||||||
NOTE 69 RELATED PARTY TRANSACTIONS
Buying Agency and Supply Agreement
On March 12, 2012, the
The Company entered intohas a Buying Agency and Supply Agreement (the “Supply Agreement”) with Forward Industries Asia-Pacific Corporation a British Virgin Islands corporation (“Forward China”). The Supply Agreement as amended, 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 PacificAsia-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;$100,000 and (ii) 4% of “Adjusted Gross Profit”, which is defined as the selling price less the cost from Forward China. The amended Supply Agreement expires on March 8, 2019, subject to renewal.October 22, 2023. Terence Bernard Wise, Chief Executive Officer and Chairman of the Company, is a principalthe owner of Forward China. In addition, Jenny P. Yu, a Managing Director of Forward China, beneficially owns more than 5% of the Company’s shares of common stock. The Company recognized approximately $360,000recorded service fees to Forward China of $340,000 and $363,000$339,000 during the three months ended DecemberMarch 31, 20172021 and 2016,2020, respectively, in service fees paid to Forward China,and $683,000 and $676,000 during the six months ended March 31, 2021 and 2020, respectively, which are included as a component of cost of goods soldsales upon sales of the related products.
The Company has a separate agreement with Forward China to address the potential impact of customers sourcing directly from Forward China. In the event a customer bypasses the services of the Company and does business directly with Forward China, Forward China will pay a commission of 50% of the net revenue, less direct costs, generated from the products or services sold. The Company recognized $12,000 of commissions related to this agreement during the six months ended March 31, 2021. No commissions were recognized during the three or six months ended March 31, 2020.
The Company had no prepayments to Forward China for inventory purchases at March 31, 2021 and $107,000 of prepayments for inventory purchases at September 30, 2020, which are included in prepaid expenses and other current assets on the accompanying condensed consolidated statementsbalance sheets.
| 16 |
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Promissory Note
On January 18, 2018, the Company issued a $1,600,000 promissory note payable to Forward China to fund the acquisition of operationsIPS. The promissory note bears an interest rate of 8% per annum and comprehensive income. Duringhad an original maturity date of January 18, 2019. Monthly interest payments commenced on February 18, 2018. The Company incurred and paid $32,000 for the three months ended March 31, 2021 and 2020 and $64,000 for the six months ended March 31, 2021 and 2020 in interest expense associated with this note. The maturity date of this note was extended to December 31, 20172022.
Related Party Sales
The Company’s design division provided services to a customer whose former Chief Operating and 2016,Financial Officer and equity owner is an immediate family member of a director on the Company’s Board of Directors. The director is a member of the Board’s Audit, Governance and Compensation Committees. The Company sold design services to this customer of $6,000 and $44,000 for the three and six months ended March 31, 2020, respectively. There were no sales to this customer for the three or six months ended March 31, 2021.
Related Party Activity
In October 2020, the Company received commissions frombegan selling smart-enabled furniture, which is sourced by Forward China of $0 and $12,904, respectively, whichsold in the U.S. under the Koble brand name. The Koble brand is included in net revenues.
See Note 8 below regardingowned by The Justwise Group Ltd., a promissory note issued to Forward China as partcompany owned by Terrence Wise, Chief Executive Officer and Chairman of the IPS acquisition.Company. The Company recognized revenues from the sale of Koble products in the U.S. of $154,000 and $339,000 during the three and six months ended March 31, 2021, respectively.
NOTE 710 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 claimed 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 filed a motion to dismiss the complaint on December 14, 2020. The court has not yet ruled on the Company’s motion.
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 DecemberAt March 31, 2017,2021, there were no such actions or proceedings, either individually or in the aggregate, that, if decided adversely to the Company’s interests, the Company believes would be material to its business.
NOTE 11 LINE OF CREDIT
The Company, specifically IPS, has a $1,300,000 revolving line of credit with a bank which was renewed at the discretion of the lender on August 5, 2020. The line of credit had a maturity date of May 31, 2021 at March 31, 2021, 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 4.0% at both March 31, 2021 and September 30, 2020. In March 2021, the Company paid down the outstanding balance on the line of credit and $1,300,000 was available at March 31, 2021. The Company is subject to certain debt-service ratio requirements which are measured annually. At September 30, 2020, the Company was in violation of the required debt-service ratio covenants but was granted a waiver of the violation from the lender. In May 2021, the bank renewed the line of credit with a maturity date of May 31, 2022.
| 17 |
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 SUBSEQUENT EVENTS
NOTE 12 DEBT
On JanuaryApril 18, 2018,2020, the Company entered into a Stock Purchaseloan in an aggregate principal amount of $1,357,000 under the Paycheck Protection Program of the CARES Act. The loan was unsecured, bore interest at a rate of 1% per annum, and was scheduled to mature on April 18, 2022. In October 2020, the Company filed for forgiveness of this loan and in December 2020, the Small Business Administration (“SBA”) approved our forgiveness request for this loan. The forgiveness has been accounted for as an extinguishment of debt and the resulting gain has been recorded as forgiveness of note payable on the condensed consolidated statement of operations for the six months ended March 31, 2021. There is a six-year period during which the SBA can review the Company’s forgiveness.
In connection with the acquisition of Kablooe, the Company assumed a loan 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 March 31, 2021 and September 30, 2020 was $72,000 and $156,000, respectively.
NOTE 13 MOONI AGREEMENT
On January 29, 2019, the Company entered into a three-year Distribution Agreement (the “Agreement”) bywith Mooni International AB (“Mooni”) and amongits owner. In accordance with the Agreement, the Company Intelligent Product Solutions, Inc. (“IPS”),(i) was appointed as the holdersexclusive distributor of allMooni'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, 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 have been effective on the 12-month anniversary of the common stock of IPS, Inc. (the “Sellers”) and Mitchell Maiman, President, representing the Sellers. In consideration for the acquisition of all of IPS’ outstanding securities, the Company: (i) paid approximately $1.9 million in cash; (ii) assumed approximately $1.5 million of outstanding debt; (iii) issued a total of 401,836 shareseffective date of the Company’s common stock to the two owners of IPS; (iv) agreed to pay $1,000,000 of deferred cash compensation (with the first payment of $500,000 due on May 31, 2018, the second payment of $200,000 due on September 30, 2019,Agreement. This option was not exercised and third payment of $300,000 due on September 30, 2020); and (v) agreed to pay up to $2.2 million of earnout payments based upon IPS meeting certain EBITDA milestones (as defined in the Agreement) over a three-year period.therefore expired. Additionally, the Company entered into three-year employment agreements with both Mitchell Maiman (President of IPS) and Paul Severino (Chief Operating Officer of IPS), and agreed to pay them each $256,000 per year. In order to fund the acquisition of IPS, the Company issued a $1.6 million promissory note payable to Forward China, due January 18, 2019. The promissory note bears an interest rate of 8% per annum and requires monthly interest payments commencing February 18, 2018. Forward China is an entity which is principallya company owned by Terence Wise, the Company’sCompany's Chairman and Chief Executive Officer. As partOfficer, was named the designated supplier under the Agreement.
The Company generated revenues from this agreement of $454,000 since it began selling Mooni products in Fiscal 2020. The current and long-term portions of the Agreement, IPS entered into at-will employment agreements with two additional key employees. Pursuant tounamortized fee of $111,000 and $0, respectively, at March 31, 2021 and $133,000 and $45,000, respectively, at September 30, 2020, are included in prepaid expenses and other current assets and other assets, respectively, in the employment agreements, the employees were issued a total of 40,184 sharesaccompanying condensed consolidated financial statements. Amortization of the cost for the three and six months ended March 31, 2021 of $33,000 and $67,000, respectively, and for the three and six months ended March 31, 2020 of $33,000 and $67,000, respectively, is included in sales and marketing expenses in the accompanying condensed consolidated statements of operations.
NOTE 14 LEASES
The Company’s common stock of which 40% vested immediately withoperating leases are primarily for corporate, sales and administrative office space. Total operating lease expense was $152,000 and $304,000 for the remainder vestingthree and six months ended March 31, 2021, respectively, and $122,000 and $255,000 for the three and six months ended March 31, 2020, respectively, and is recorded in two equal incrementsgeneral and administrative expenses on the six-monthcondensed consolidated statements of operations.
The Company leases certain computer equipment through various finance lease agreements expiring through July 2022. The net book value of assets under finance leases was $18,000 and twelve-month anniversary$23,000 at March 31, 2021 and September 30, 2020, respectively.
In March 2021, the Company signed a renewal to extend the term of its lease in Minnesota for an additional 60 months. The renewal of this operating lease commences July 1, 2021 and payments under it escalate 2.75% per year. The monthly rent payment is $10,000 per month, which includes taxes and operating expenses as defined in the grant date, subject to continued employment on such vesting dates.agreement.
Effective January 22, 2018 through February 12, 2018, ten warrant holders exercised (via cashless exercises) an aggregate of 521,621 warrants with an exercise price of $1.84 per share
| 18 |
FORWARD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Additional information related to operating and finance leases at March 31, 2021 and September 30, 2020 is as follows:
| March 31, | September 30, | |||||||
| 2021 | 2020 | |||||||
| Weighted Average Remaining Lease Term (Yrs): | ||||||||
| Operating leases | 10.5 | 10.9 | ||||||
| Finance leases | 0.9 | 0.9 | ||||||
| Weighted Average Discount Rate: | ||||||||
| Operating leases | 5.7% | 5.7% | ||||||
| Finance leases | 5.8% | 5.8% | ||||||
At March 31, 2021, future minimum payments under non-cancellable operating and finance leases were issued an aggregate of 223,704 shares of the Company’s common stock.as follows:
| Operating Leases | Finance Leases | |||||||
| Remainder of Fiscal 2021 | $ | 232,000 | $ | 5,000 | ||||
| Fiscal 2022 | 430,000 | 10,000 | ||||||
| Fiscal 2023 | 426,000 | – | ||||||
| Fiscal 2024 | 433,000 | – | ||||||
| Fiscal 2025 | 395,000 | – | ||||||
| Thereafter | 2,805,000 | – | ||||||
| Total future minimum lease payments | 4,721,000 | 15,000 | ||||||
| Less imputed interest | (1,227,000 | ) | (3,000 | ) | ||||
| Present value of lease liabilities | $ | 3,494,000 | $ | 12,000 | ||||
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
| 19 |
| ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The following discussion and analysis should be read in conjunction with our unaudited condensed consolidated financial statements, and the notes thereto, and other financial information appearing elsewhere in this Quarterly Report on Form 10-Q and the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2017.2020. The following discussion and analysis compares our consolidated results of operations for the three and six months ended DecemberMarch 31, 20172021 (the “2018“2021 Quarter”) and the “2021 Period”, respectively) with those for the three and six months ended DecemberMarch 31, 20162020 (the “2017“2020 Quarter”). All figures in and the following discussion are presented on a consolidated basis.“2020 Period”, respectively). All dollar amounts and percentages presented herein have been rounded to approximate values.
Business Overview
Forward Industries, Inc. (“Forward” or the “Company”) designs and distributes carry and protective solutions, primarily for hand held electronic devices. The Company’s principal customer market is original equipment manufacturers, or “OEMs” (or the contract manufacturing firms of these 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, firearms). The Company’s OEM customers are located in: (i) the Asia-Pacific Region, which we refer to as the “APAC Region”; (ii) Europe, the Middle East, and Africa, which we refer to as the “EMEA Region”; and (iii) the Americas. The Company does not manufacture any of its OEM products and sources substantially all of its OEM products from independent suppliers in China, through Forward China.
On January 18, 2018, we acquired Intelligent Product Solutions, Inc. (“IPS”). This was a significant strategic acquisition for Forward and creates noteworthy cross selling opportunities for the combined companies. Both companies have a reputation for achieving a very high level of customer satisfaction by providing excellent customer service in both design and the sourcing of manufactured finished goods. The acquisition allows us to bring design and development solutions to our existing multinational client base and expand beyond the diabetic product line. Similarly, IPS can now position themselves as a fully integrated design, development and manufacturing solution to their existing top tier customers and the considerable new projects in their pipeline. Additionally, the acquisition gives Forward the opportunity to introduce proprietary product to the market from concepts brought to them from a number of different sources. The Forward/IPS combination provides clients, both big and small, a true, authentic “one-stop-shop” for product design, development, manufacturing, and distribution.
As a result of our acquisition of IPS on January 18, 2018, our business has been augmented. Key terms of the acquisition are contained in a Form 8-K filed with the SEC on January 18, 2018. IPS’ financial results are not included in this report. Our results of operations in this report solely relate to our historical business.
Variability of Revenues and Results of Operations
Because a high percentage of our net revenues is highly concentrated in a few large customers, and because the volumes of these customers’ order flows to us are highly variable, with short lead times, our quarterly revenues, and consequently our results of operations, are susceptible to significant variability over a relatively short period of time. We believe this variability will be less in the future when IPS’ financial results are consolidated with the Company’s financial results.
Critical Accounting Policies and Estimates
We discuss the material accounting policies that are critical in making the estimates and judgments in our Annual Report on Form 10-K for the fiscal year ended September 30, 2017, under the caption “Management’s Discussion and Analysis—Critical Accounting Policies and Estimates”. There has been no material change in critical accounting policies or estimates during the period covered by this report.
Recent Accounting Pronouncements
For information on recent accounting pronouncements, see Note 2 to the unaudited condensed consolidated financial statements.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED DECEMBER 31, 2017 COMPARED TO THE THREE MONTHS ENDED DECEMBER 31, 2016
The results of operations disclosed below is based upon the historical business of Forward (prior to the acquisition of IPS) and does not include the financial results of IPS and is not indicative nor representative of the results of operations of Forward when it is consolidated with the results of IPS’ operations.
Net Income
Net income was approximately $47,000 in the 2018 Quarter compared to approximately $151,000 in the 2017 Quarter. The decline in net income in the 2018 Quarter was primarily due to a decline in both net revenues and gross profit and an increase in general and administrative expenses, partially offset by a decrease in sales and marketing expenses, as reflected in the table below.
Main Components of Net Income | ||||||||||
(amounts in thousands) | ||||||||||
| 2018 | 2017 | Increase | ||||||||
| Quarter | Quarter | (Decrease) | ||||||||
| Net revenues | $ | 6,336 |
| $ | 6,591 | $ | (255 | ) | ||
| Gross profit | $ | 1,003 |
| $ | 1,159 | $ | (156 | ) | ||
| Less: | ||||||||||
| Sales and marketing expenses | 278 | 418 | (140 | ) | ||||||
| General and administrative expenses | 674 | 593 | 81 | |||||||
| Other expense (income), net | 4 | (3 | ) | 7 | ||||||
| Net Income | $ | 47 |
| $ | 151 | $ | (104 | ) | ||
Basic and diluted earnings per share was $0.01 per share for the 2018 Quarter and $0.02 per share for the 2017 Quarter.
Net Revenues
Net revenues declined $0.3 million, or 4%, to $6.3 million in the 2018 Quarter from $6.6 million in the 2017 Quarter due to reduced revenues in Other Products, partially offset by increased revenues from Diabetics Products. Revenues from Other Products declined $0.4 million whereas revenues from Diabetic Products increased $0.1 million. The following tables set forth revenues by channel, product line and geographic location of our customers for the periods indicated:
| Net Revenues for 2018 Quarter | |||||||||||
| (amounts in thousands) | |||||||||||
| EMEA | APAC | Americas | Total | ||||||||
| Diabetic products | $ | 2,262 | $ | 1,820 | $ | 1,580 | $ | 5,662 | |||
| Other products | 103 | 230 | 341 | 674 | |||||||
| Total net revenues | $ | 2,365 | $ | 2,050 | $ | 1,921 | $ | 6,336 | |||
| Net Revenues for 2017 Quarter | |||||||||||
| (amounts in thousands) | |||||||||||
| EMEA | APAC | Americas | Total | ||||||||
| Diabetic products | $ | 1,935 | $ | 1,562 | $ | 2,025 | $ | 5,522 | |||
| Other products | 168 | 608 | 293 | 1,069 | |||||||
| Total net revenues | $ | 2,103 | $ | 2,170 | $ | 2,318 | $ | 6,591 | |||
Diabetic Product Revenues
We design to the order of, and sell carrying cases for blood glucose diagnostic kits directly to, OEMs (or their contract manufacturers). The OEM customer or its contract manufacturer packages our carry cases “in box” as a custom accessory for the OEM’s blood glucose testing and monitoring kits, or to a lesser extent, sell them through their retail distribution channels.
Revenues from Diabetic Products increased $0.1 million to $5.6 million in the 2018 Quarter from $5.5 million in the 2017 Quarter. This increase was primarily due to higher revenues derived from two of our major Diabetic Products customers (Diabetics Products Customers A and B) and a slight increase in revenues from our Other Diabetic Products customers. The increase was offset, in part, by a decrease in revenues from two of our major Diabetic Products customers (Diabetic Products Customers C and D).
The following table sets forth our net revenues by Diabetic Products customer for the periods indicated:
| (amounts in thousands) | |||||||||
| 2018 | 2017 | Increase | |||||||
| Quarter | Quarter | (Decrease) | |||||||
| Diabetic Products Customer A | $ | 1,967 | $ | 1,339 | $ | 628 | |||
| Diabetic Products Customer B | 1,755 | 1,517 | 238 | ||||||
| Diabetic Products Customer C | 1,103 | 1,826 | (723 | ) | |||||
| Diabetic Products Customer D | 678 | 838 | (160 | ) | |||||
| All other Diabetic Products Customers | 159 | 2 | 157 | ||||||
| Totals | $ | 5,662 | $ | 5,522 | $ | 140 | |||
Revenues from Diabetic Products represented 89% of our net revenues in the 2018 Quarter compared to 84% of our net revenues in the 2017 Quarter.
Other Product Revenues
We design and sell cases and protective solutions to OEMs for a diverse array of portable electronic devices (such as bar code scanners, GPS devices, cellular phones, tablets and cameras), as well as a variety of other products (such as sporting and recreational products and firearms) on a made-to-order basis that are customized to fit the products sold by our OEM customers.
Revenues from Other Products declined $0.4 million to $0.7 million in the 2018 Quarter from $1.1 million in the 2017 Quarter. This is primarily due to overall net decreases of $0.6 million from existing customers, partially offset by the addition of $0.2 million from some new customers. We will continue to focus on our sales and sales support teams in our attempt to expand and diversify our Other Products customer base.
Revenues from Other Products represented 11% of our net revenues in the 2018 Quarter compared to 16% of our net revenues in the 2017 Quarter.
Gross Profit
Gross profit decreased $0.2 million, or 13%, to $1.0 million in the 2018 Quarter from $1.2 million in the 2017 Quarter. As a percentage of revenues, our gross margin declined to 15.8% in the 2018 Quarter, compared to 17.6% in the 2017 Quarter.
The gross profit decline was driven primarily by a year over year decrease in volumes related to global revenues. Quarter 2018 revenues in the Americas declined 17% to $1.9 million primarily due to decreased revenues from Diabetic Products Customers C and D, partially offset by increased revenues from Diabetic Products Customer A and Other Products customers. Quarter 2018 revenues in the APAC Region declined 6% to $2.0 million primarily due to decreased revenues from Other Products customers, partially offset by increased revenues from Diabetic Products Customer B. Quarter 2018 revenues in the EMEA Region increased 12% to $2.4 million primarily due to increased revenues from Diabetic Products Customer A and other Diabetic Products customers, partially offset by decreased revenues from Diabetic Products Customers C and D and Other Products customers.
Sales and Marketing Expenses
Sales and marketing expenses decreased approximately $140,000, or 33%, to approximately $278,000 in the 2018 Quarter from approximately $418,000 in the 2017 Quarter, primarily due to decreased personnel expenses of approximately $94,000, decreased other expenses of approximately $23,000 and decreased travel expenses of approximately $22,000. Fluctuations in other components of “Sales and Marketing Expenses” were not material individually or in the aggregate.
General and Administrative Expenses
General and administrative expenses increased approximately $81,000, or 14%, to approximately $674,000 in the 2018 Quarter from approximately $593,000 in the 2017 Quarter, primarily due to increased professional fees (stemming from the IPS Acquisition) of approximately $116,000 and director reimbursement costs of approximately $33,000, partially offset by decreased director share-based compensation of approximately $52,000 and directors and officers insurance of approximately $12,000. Fluctuations in other components of “General and Administrative Expenses” were not material individually or in the aggregate.
Other Income (Expense)
Other income (expense), net, changed to approximately $(4,000) for the 2018 Quarter from approximately $3,000 in the 2017 Quarter, primarily due to income from the property subleased in Santa Monica, California that expired in September 2016 of approximately $11,000, partially offset by decreased realized losses on foreign currency transactions of approximately $3,000.
Income Taxes
For the three months ended December 31, 2017, the Company generated net income of approximately $47,000. While the Company maintains significant net operating loss carryforwards, no income tax expense (benefit) was recognized as the Company’s deferred tax provision is completely offset by a full valuation allowance. As a result of The 2017 Tax Cuts and Jobs Act, we expect no tax impact to the financial statements stemming from: (i) the mandatory deemed repatriation of cumulative earnings and profits for a controlled foreign corporation; or (ii) the change in the corporate income tax rate. However, the reduction in the corporate income tax rate will reduce the amount of net operating losses available for use in the future.
LIQUIDITY AND CAPITAL RESOURCES
Our primary source of liquidity is our operations. The primary demand on our working capital will be: (i) operating losses, should they occur; (ii) any increases in accounts receivable and inventories arising in the ordinary course of business; and (iii) repayments of debts as they mature. Historically, our sources of liquidity have been adequate to satisfy working capital requirements arising in the ordinary course of business. We anticipate that our liquidity and financial resources for the next twelve months from the date of this filing will be adequate to manage our operating and financial requirements.
At December 31, 2017, our current ratio (current assets divided by current liabilities) was 2.9; our quick ratio (current assets less inventories divided by current liabilities) was 2.5; and our working capital (current assets less current liabilities) was $9.0 million. As of December 31, 2017, we had no short or long-term debt outstanding. As part of the IPS acquisition, (i) we borrowed $1.6 million from Forward China and issued them an 8% one-year note (due January 18, 2019) with interest due monthly; (ii) we assumed approximately $1.5 million of debt (due at various dates through 2020) some of which was in default as a result of a covenant violation; and (iii) we agreed to pay $1,000,000 of deferred cash compensation (with the first payment of $500,000 due on May 31, 2018, the second payment of $200,000 due on September 30, 2019, and third payment of $300,000 due on September 30, 2020).
We do not anticipate the need to purchase additional material capital assets in order to carry out our business.
During the three months ended December 31, 2017 and 2016, our sources and uses of cash were as follows:
Cash Flows from Operating Activities
During the 2018 Quarter, cash provided by operating activities of approximately $1,300,000 resulted primarily from an increase in accounts payable (including due to Forward China) of approximately $736,000, a decrease in accounts receivable of approximately $619,000, a decrease in inventories of approximately $60,000, a decrease in prepaid expenses and other current assets of approximately $52,000 and net income of approximately $47,000, partially offset by a decrease in accrued expenses and other current liabilities of approximately $211,000.
During the 2017 Quarter, cash used in operating activities of approximately $520,000 resulted primarily from an increase in accounts receivable of approximately $902,000 and a decrease in accrued expenses and other current liabilities of approximately $246,000, partially offset by an increase in accounts payable (including due to Forward China) of approximately $389,000, net income of approximately $151,000, and the add back of non-cash share-based compensation of approximately $50,000.
Cash Flows from Investing Activities
In the 2018 Quarter, cash used in investing activities of approximately $19,000 resulted from purchases of property and equipment.
In the 2017 Quarter, there was no cash used in investing activities.
Cash Flows from Financing Activities
In the 2018 Quarter, there was no cash used in financing activities.
In the 2017 Quarter, there was no cash used in financing activities.
Related Party Transactions
For information on related party transactions and their financial impact, see Notes 6 and 8 to the unaudited condensed consolidated financial statements contained herein.
Cautionary Note Regarding Forward-Looking Statements
This report contains “forward-looking statements”, as such term is used within the meaning of the Private Securities Litigation Reform Act of 1995, including1995. These statements include, among other things, statements regarding:
| · | our liquidity, |
| · | expectations regarding the impact of the pandemic on our business, |
| · | expectations regarding the length of the pandemic’s business disruption, |
| · | expectations regarding revenues, |
| · | plans regarding the repayment of debt, and |
| · | beliefs regarding our capital |
as well as other statements regarding our liquidity, anticipated synergies from the acquisition of IPSfuture operations, financial condition and working capital.prospects and business strategies. Forward-looking statements can be identified by words such as “anticipates,” “intends,” “plans,” “seeks,” “believes,” “estimates,” “expects”“expects,” “predicts,” “projects,” “will be” and “will continue” and similar references to future periods.expressions. Forward-looking statements are based on our current expectations and assumptions regarding our business, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict. Our actual results may differ materially from those contemplated by the forward-looking statements. We caution you therefore against relying on any of these forward-looking statements. They are neither statements of historical fact nor guarantees or assurances of future performance. Important factors that could cause actual results to differ materially from those in the forward-looking statements include the failure to receive material orders, our ability to successfully integrate IPS,market and sell products that we develop, the effects of the COVID-19 outbreak, including levels of consumer, business and economic confidence generally, the duration of the COVID-19 outbreak and severity of such outbreak, the pace of recovery following the COVID-19 outbreak, the effect on our supply chain, our ability to implement cost containment; and the adverse effects of the COVID-19 outbreak on our business or the market price of our common stock, failure to diversify the industries in which we sell our products, potential imposed tariffs or other restrictions placed on imports by the U.S. government, and continued pricing pressure on our products. Further information on our risk factors is contained in our filings with the SEC, including our Form 10-K for the year ended September 30, 2017.2020. Any forward-looking statement made by us speaks only as of the date on which it is made. Factors or events that could cause our actual results to differ may emerge from time to time, and it is not possible for us to predict all of them. We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required by law.
Business Overview
Forward Industries, Inc. is a fully integrated design, development and manufacturing solution provider for top tier medical and technology customers worldwide. As a result of the continued expansion of our design development capabilities through our wholly-owned subsidiaries, IPS and Kablooe, we are now able to introduce proprietary products to the market from concepts brought to us from a number of different sources, both inside and outside the Company.
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The acquisition of Kablooe took place in August 2020 and its results of operations have been included in our condensed consolidated financial statements since the acquisition date. Accordingly, our results of operations for the 2021 Quarter and the 2021 Period include Kablooe’s results of operations, while our results of operations for the 2020 Quarter and the 2020 Period do not. Key terms of the acquisition are contained in our Form 10-K filed with the Securities and Exchange Commission on December 17, 2020.
The future impacts of the COVID-19 pandemic and any resulting economic impact are largely unknown and could be significant. It is possible that the COVID-19 pandemic, the measures taken by the governments of countries affected and the resulting economic impact 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 services and choosing to allocate their budgets to new or existing projects which may or may not require our 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 the pandemic is under control, 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; 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 strategy. To help mitigate the impact of these challenging business conditions, we have implemented cost cutting initiatives and reduced executive pay and Board of Directors compensation for an undetermined period of time. There is no assurance these measures will be successful. See “Liquidity and Capital Resources” section for further description of these cost cutting measures.
Refer to “Part II, Item 1A — Risk Factors” for a description of the material risks that the Company currently faces in connection with COVID-19.
Variability of Revenues and Results of Operations
A significant portion of our revenue is concentrated with several large customers, some of which are the same and some 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, to vary over a relatively short period of time.
Critical Accounting Policies and Estimates
We discuss the material accounting policies that are critical in making the estimates and judgments in our Annual Report on Form 10-K for the fiscal year ended September 30, 2020, under the caption “Management’s Discussion and Analysis—Critical Accounting Policies and Estimates”. There has been no material change in critical accounting policies or estimates during the period covered by this report.
Recent Accounting Pronouncements
For information on recent accounting pronouncements and impacts, see Note 2 to the unaudited condensed consolidated financial statements.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2021 COMPARED TO THE THREE MONTHS ENDED MARCH 31, 2020
Net Loss
Distribution Segment
Distribution segment net loss was $573,000 in the 2021 Quarter compared to $71,000 in the 2020 Quarter. The increase to the net loss was primarily due to a reduction in the non-cash fair value adjustments to reduce acquisition-related earnout liabilities (see Note 4) coupled with higher sales and marketing expenses, as reflected in the table below.
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Design Segment
Design segment net loss was $262,000 in the 2021 Quarter compared to $1,301,000 in the 2020 Quarter. The reduction to the net loss was primarily due to a reduction in impairment charges (see Notes 3 and 4) and higher gross profit, partially offset by higher general and administrative expenses, as reflected in the table below:
| Main Components of Net Loss | ||||||||||||||||||||||||||||
| (amounts in thousands) | ||||||||||||||||||||||||||||
| 2021 Quarter | 2020 Quarter | Increase (Decrease) | ||||||||||||||||||||||||||
| Consolidated | Distribution | Design | Consolidated | Distribution | Design | Consolidated | ||||||||||||||||||||||
| Net revenues | $ | 8,395 | $ | 4,483 | $ | 3,912 | $ | 7,931 | $ | 4,624 | $ | 3,307 | $ | 464 | ||||||||||||||
| Gross profit | $ | 1,743 | $ | 572 | $ | 1,171 | $ | 1,453 | $ | 561 | $ | 892 | $ | 290 | ||||||||||||||
| Sales and marketing expenses | 578 | 480 | 98 | 480 | 351 | 129 | 98 | |||||||||||||||||||||
| General and administrative expenses | 1,981 | 620 | 1,361 | 1,625 | 588 | 1,037 | 356 | |||||||||||||||||||||
| Goodwill impairment | – | – | – | 1,015 | – | 1,015 | (1,015 | ) | ||||||||||||||||||||
| Operating loss | (816 | ) | (528 | ) | (288 | ) | (1,667 | ) | (378 | ) | (1,289 | ) | 851 | |||||||||||||||
| Other expense/(income), net | 19 | 45 | (26 | ) | (295 | ) | (307 | ) | 12 | 314 | ||||||||||||||||||
| Net loss | $ | (835 | ) | $ | (573 | ) | $ | (262 | ) | $ | (1,372 | ) | $ | (71 | ) | $ | (1,301 | ) | $ | 537 | ||||||||
Basic and diluted loss per share were $0.08 and $0.14, respectively, for the 2021 Quarter and the 2020 Quarter.
Net Revenues
Distribution Segment
Net revenues in the distribution segment decreased $141,000, or 3.0%, to $4,483,000 in the 2021 Quarter from $4,624,000 in the 2020 Quarter, the result of a decrease in diabetic product line revenue, partially offset by an increase in other product revenue. Revenues from diabetic products decreased $252,000 and revenue from other products increased $111,000. In future periods, we believe other product sales will continue to increase while diabetic product sales will continue to decline.
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 the 2021 Quarter | ||||||||||||||||
| (amounts in thousands) | ||||||||||||||||
| Americas | APAC | EMEA | Total | |||||||||||||
| Diabetic products | $ | 882 | $ | 1,405 | $ | 1,549 | $ | 3,836 | ||||||||
| Other products | 473 | 168 | 6 | 647 | ||||||||||||
| Total net revenues | $ | 1,355 | $ | 1,573 | $ | 1,555 | $ | 4,483 | ||||||||
| Net Revenues for the 2020 Quarter | ||||||||||||||||
| (amounts in thousands) | ||||||||||||||||
| Americas | APAC | EMEA | Total | |||||||||||||
| Diabetic products | $ | 1,342 | $ | 842 | $ | 1,904 | $ | 4,088 | ||||||||
| Other products | 337 | 166 | 33 | 536 | ||||||||||||
| Total net revenues | $ | 1,679 | $ | 1,008 | $ | 1,937 | $ | 4,624 | ||||||||
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Diabetic Product Revenues
Our distribution segment manufactures to the order of, and sells carrying cases for, blood glucose diagnostic kits directly to original equipment manufacturers (“OEM”s) or their contract manufacturers. The OEM customer or its contract manufacturer packages our carrying cases “in box” as a custom accessory for the OEM’s blood glucose testing and monitoring kits, or to a lesser extent, sells them through their retail distribution channels.
Revenues from diabetic products decreased $252,000, or 6.2%, to $3,836,000 in the 2021 Quarter from $4,088,000 in the 2020 Quarter. This decrease was primarily due to lower revenues from three major diabetic customers (Diabetic Products Customers A, B and D), partially offset by an increase in revenue from Diabetic Products Customer C. As mentioned above, management believes that revenues from diabetic customers will continue to decline in future periods.
The following table sets forth our distribution segment net revenues by diabetic products customer for the periods indicated:
| Diabetic Revenues | ||||||||||||
| (amounts in thousands) | ||||||||||||
| 2021 Quarter | 2020 Quarter | Increase (Decrease) | ||||||||||
| Diabetic Products Customer A | $ | 1,275 | $ | 1,709 | $ | (434 | ) | |||||
| Diabetic Products Customer B | 869 | 948 | (79 | ) | ||||||||
| Diabetic Products Customer C | 1,244 | 735 | 509 | |||||||||
| Diabetic Products Customer D | 304 | 537 | (233 | ) | ||||||||
| All other Diabetic Products Customers | 144 | 159 | (15 | ) | ||||||||
| Total Diabetic Revenue | $ | 3,836 | $ | 4,088 | $ | (252 | ) | |||||
Revenues from diabetic products represented 86% of our distribution segment’s net revenues in the 2021 Quarter compared to 88% in the 2020 Quarter.
Other Product Revenues
Other product revenues include cases and protective solutions sourced and sold to OEMs for a diverse array of portable electronic and non-electronic products (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. Other product revenues also include sales of smart-enabled and other products sold through our retail distribution network.
Revenues from other products increased $111,000, or 20.7%, to $647,000 in the 2021 Quarter from $536,000 in the 2020 Quarter, primarily due to the increase in sales of smart-enabled and other products sold through our retail distribution network, driven by new product offerings and the expansion of our retail distribution network. This increase was partially offset by a decline in sales of non-medical cases and protective solutions. We will continue to focus on our sales and sales support teams in our continued efforts to expand and diversify our other products customer base as well as take advantage of opportunities to source other products.
Revenues from other products represented 14% of our net revenues in the 2021 Quarter compared to 12% of our net revenues in the 2020 Quarter.
Design Segment
Net revenues in the design segment increased $605,000, or 18.3%, to $3,912,000 in the 2021 Quarter from $3,307,000 in the 2020 Quarter, primarily driven by revenues generated by Kablooe, which was acquired in August 2020. The remaining variance was driven by new business from existing customers, partially offset by a decline in revenue from certain other customers as projects were either completed or spending was reduced in response to COVID-19. The following table sets forth our design segment net revenues by major customers for the 2021 Quarter:
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| Design Revenues | ||||||||||||
| (amounts in thousands) | ||||||||||||
| 2021 Quarter | 2020 Quarter | Increase (Decrease) | ||||||||||
| Design Segment Customer 1 | $ | 225 | $ | 700 | $ | (475 | ) | |||||
| Design Segment Customer 2 | 364 | 540 | (176 | ) | ||||||||
| Design Segment Customer 3 | 409 | 452 | (43 | ) | ||||||||
| Design Segment Customer 4 | 773 | – | 773 | |||||||||
| Design Segment Customer 5 | 22 | 287 | (265 | ) | ||||||||
| All other Design Segment Customers | 2,119 | 1,328 | 791 | |||||||||
| Total design segment revenues | $ | 3,912 | $ | 3,307 | $ | 605 | ||||||
Gross Profit
Distribution Segment
Gross profit for the distribution segment increased $11,000, or 2.0%, to $572,000 in the 2021 Quarter as compared to $561,000 in the 2020 Quarter, and gross margin improved from 12.1% to 12.8% in the same period. The increase in both gross profit and margin are driven by higher margins on the sale of non-medical cases and other products. This increase in profit margin was partially offset by the continued decline in gross margin on diabetic products due to a shift to lower margin cases and pricing pressures on diabetic products from customers. We continue to work on expanding our product offering to include higher margin products and enhancing our sales efforts to grow revenue and increase gross profit.
Design Segment
Gross profit for the design segment increased $279,000, or 31.3%, to $1,171,000 in the 2021 Quarter from $892,000 in the 2020 Quarter. Gross margin improved from 27.0% to 29.9% in the same period. The acquisition of Kablooe in August 2020 accounted for the improvement in both gross profit and margin in the 2021 Quarter, which was partially offset by lower utilization rates in the beginning of the 2021 Quarter. Depreciation expense, which is allocated to cost of sales for the design segment, was $24,000 and $28,000 for the 2021 Quarter and 2020 Quarter, respectively.
Sales and Marketing Expenses
Distribution Segment
Sales and marketing expenses for the distribution segment increased $129,000, or 36.8%, to $480,000 in the 2021 Quarter from $351,000 in the 2020 Quarter. The increase was primarily due to expenses associated with growing our retail distribution network. Sales and marketing expenses for the distribution segment increased to 10.7% of revenues in the 2021 Quarter as compared to 7.6% of revenues in the 2020 Quarter.
Design Segment
Sales and marketing expenses for the design segment decreased $31,000, or 24.0%, to $98,000 in the 2021 Quarter from $129,000 in the 2020 Quarter. The decrease in sales and marketing expenses is primarily due to lower payroll costs. Sales and marketing expenses for the design segment decreased to 2.5% of revenues in the 2021 Quarter from 3.9% of revenues in the 2020 Quarter.
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General and Administrative Expenses
Distribution Segment
General and administrative expenses in the distribution segment increased $32,000, or 5.4%, to $620,000 in the 2021 Quarter from $588,000 in the 2020 Quarter. The increase was primarily comprised of an insurance settlement recovery of $80,000 received in the 2020 Quarter, an increase in professional fees and higher insurance premiums, partially offset by a $55,000 decrease in software implementation costs and a $52,000 reduction in Board of Director expenses. General and administrative expenses for the distribution segment increased to 13.8% of revenues in the 2021 Quarter as compared to 12.7% of revenues in the 2020 Quarter.
Design Segment
General and administrative expenses for the design segment increased $324,000, or 31.2%, to $1,361,000 in the 2021 Quarter from $1,037,000 in the 2020 Quarter. The increase is primarily driven by a $470,000 increase in bad debt expense, general and administrative costs of $267,000 generated by Kablooe, which was acquired in August 2020, partially offset by a decrease in investment impairment expense of $327,000 (see Note 4) and an $85,000 reduction in professional fees, primarily due to reduced software implementation costs. General and administrative expenses for the design segment increased to 34.8% of revenues in the 2021 Quarter as compared to 31.4% of revenues in the 2020 Quarter.
Other Income / (Expense)
Distribution Segment
The distribution segment reported other expense of $45,000 in the 2021 Quarter as compared to other income of $307,000 in the 2020 Quarter. The variance is primarily due the net $341,000 fair value adjustments recorded in the 2020 Quarter associated with the reduction of the IPS contingent earnout liability (see Note 4).
Design Segment
The design segment reported other income of $26,000 in the 2021 Quarter as compared to other expense of $12,000 in the 2020 Quarter, primarily related to interest income on the note receivable from a customer which was fully reserved in Fiscal 2019 and lower interest expense due to a reduction in the average amount of debt outstanding.
Income Taxes
For the 2021 Quarter, the Company generated a net loss of $835,000. The Company maintains significant net operating loss carryforwards and does not recognize income tax expense / (benefit) as its deferred tax provision is typically offset by a full valuation allowance on its net deferred tax asset.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED MARCH 31, 2021 COMPARED TO THE SIX MONTHS ENDED MARCH 31, 2020
Net Income/(Loss)
Distribution Segment
Distribution segment net loss was $916,000 in the 2021 Period compared to $547,000 in the 2020 Period. The increase to the net loss was primarily due to a reduction in other income resulting from non-cash fair value adjustments to acquisition related earnout liabilities (see Note 4) and an increase in sales and marketing expenses, partially offset by higher gross profit, as reflected in the table below.
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Design Segment
Design segment net income was $1,280,000 in the 2021 Period compared to a net loss of $906,000 in the 2020 Period. The net income generated in the 2021 Period resulted from the $1,357,000 forgiveness of note payable associated with the PPP loan. A reduction in impairment charges (see Notes 3 and 4) and higher gross profit, primarily due to the acquisition of Kablooe in August 2020, were partially offset by higher general and administrative expenses, as reflected in the table below:
| Main Components of Net Income/(Loss) | ||||||||||||||||||||||||||||
| (amounts in thousands) | ||||||||||||||||||||||||||||
| 2021 Period | 2020 Period | Increase (Decrease) | ||||||||||||||||||||||||||
| Consolidated | Distribution | Design | Consolidated | Distribution | Design | Consolidated | ||||||||||||||||||||||
| Net revenues | $ | 18,113 | $ | 10,088 | $ | 8,025 | $ | 16,324 | $ | 9,320 | $ | 7,004 | $ | 1,789 | ||||||||||||||
| Gross profit | $ | 4,006 | $ | 1,297 | $ | 2,709 | $ | 3,173 | $ | 1,164 | $ | 2,009 | $ | 833 | ||||||||||||||
| Sales and marketing expenses | 1,181 | 967 | 214 | 1,014 | 742 | 272 | 167 | |||||||||||||||||||||
| General and administrative expenses | 3,809 | 1,202 | 2,607 | 2,840 | 1,243 | 1,597 | 969 | |||||||||||||||||||||
| Goodwill impairment | – | – | – | 1,015 | – | 1,015 | (1,015 | ) | ||||||||||||||||||||
| Operating loss | (984 | ) | (872 | ) | (112 | ) | (1,696 | ) | (821 | ) | (875 | ) | 712 | |||||||||||||||
| Other (income)/expense, net | (1,348 | ) | 44 | (1,392 | ) | (243 | ) | (274 | ) | 31 | (1,105 | ) | ||||||||||||||||
| Net income/(loss) | $ | 364 | $ | (916 | ) | $ | 1,280 | $ | (1,453 | ) | $ | (547 | ) | $ | (906 | ) | $ | 1,817 | ||||||||||
Basic and diluted earnings/(loss) per share were $0.04 and $(0.15), respectively, for the 2021 Period and the 2020 Period.
Net Revenues
Distribution Segment
Net revenues in the distribution segment increased $768,000, or 8.2%, to $10,088,000 in the 2021 Period from $9,320,000 in the 2020 Period, primarily due to an increase in other product revenue. Revenues from other products increased $731,000 and revenue from diabetic products increased $37,000. In future periods, we believe other product sales will increase while diabetic product sales will decline.
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 the 2021 Period | ||||||||||||||||
| (amounts in thousands) | ||||||||||||||||
| Americas | APAC | EMEA | Total | |||||||||||||
| Diabetic products | $ | 2,552 | $ | 2,813 | $ | 2,940 | $ | 8,305 | ||||||||
| Other products | 1,316 | 421 | 46 | 1,783 | ||||||||||||
| Total net revenues | $ | 3,868 | $ | 3,234 | $ | 2,986 | $ | 10,088 | ||||||||
| Net Revenues for the 2020 Period | ||||||||||||||||
| (amounts in thousands) | ||||||||||||||||
| Americas | APAC | EMEA | Total | |||||||||||||
| Diabetic products | $ | 2,667 | $ | 2,460 | $ | 3,141 | $ | 8,268 | ||||||||
| Other products | 635 | 322 | 95 | 1,052 | ||||||||||||
| Total net revenues | $ | 3,302 | $ | 2,782 | $ | 3,236 | $ | 9,320 | ||||||||
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Diabetic Product Revenues
Our distribution segment manufactures 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 carrying cases “in box” as a custom accessory for the OEM’s blood glucose testing and monitoring kits, or to a lesser extent, sells them through their retail distribution channels.
Revenues from diabetic products increased $37,000, or 0.4%, to $8,305,000 in the 2021 Period from $8,268,000 in the 2020 Period. This increase was primarily due to higher revenues from three major diabetic customers (Diabetic Products Customers B, C and D). The higher revenue from these three customers was partially offset by revenue declines from Diabetic Products Customer A and other diabetic customers, which were less significant. As mentioned above, management believes that revenues from diabetic customers will decline in future periods.
The following table sets forth our distribution segment net revenues by diabetic products customer for the periods indicated:
| 2021 Period | 2020 Period | Increase (Decrease) | ||||||||||
| Diabetic Products Customer A | $ | 2,849 | $ | 3,316 | $ | (467 | ) | |||||
| Diabetic Products Customer B | 1,770 | 1,577 | 193 | |||||||||
| Diabetic Products Customer C | 2,523 | 2,201 | 322 | |||||||||
| Diabetic Products Customer D | 952 | 770 | 182 | |||||||||
| All other Diabetic Products Customers | 211 | 404 | (193 | ) | ||||||||
| Total Diabetic Revenue | $ | 8,305 | $ | 8,268 | $ | 37 | ||||||
Revenues from diabetic products represented 82% of our distribution segment’s net revenues in the 2021 Period compared to 89% in the 2020 Period.
Other Product Revenues
Other product revenues include cases and protective solutions sourced and sold to OEMs for a diverse array of portable electronic and non-electronic products (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. Other product revenues also include sales of smart-enabled and other products sold through our retail distribution network.
Revenues from other products increased $731,000, or 69.5%, to $1,783,000 in the 2021 Period from $1,052,000 in the 2020 Period, due to the increase in sales of non-medical cases and protective solutions and smart enabled products, both driven by an increase in customers and higher sales volume. We will continue to focus on our sales and sales support teams in our continued efforts to expand and diversify our other products customer base as well as take advantage of opportunities to source other products.
Revenues from other products represented 18% of our net revenues in the 2021 Period compared to 11% of our net revenues in the 2020 Period.
Design Segment
Net revenues in the design segment increased $1,021,000, or 14.6%, to $8,025,000 in the 2021 Period from $7,004,000 in the 2020 Period, primarily driven by revenues generated by Kablooe, which was acquired in August 2020. The remaining variance was driven by a decline in revenue from certain existing customers as projects were either completed or customer spending was reduced in response to COVID-19, partially offset by new business from both new and existing customers. The following table sets forth our design segment net revenues by major customers for the 2021 Period:
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| Design Revenues | ||||||||||||
| (amounts in thousands) | ||||||||||||
| 2021 Period | 2020 Period | Increase (Decrease) | ||||||||||
| Design Segment Customer 1 | $ | 689 | $ | 1,083 | $ | (394 | ) | |||||
| Design Segment Customer 2 | 864 | 898 | (34 | ) | ||||||||
| Design Segment Customer 3 | 755 | 1,297 | (542 | ) | ||||||||
| Design Segment Customer 4 | 1,371 | – | 1,371 | |||||||||
| Design Segment Customer 5 | 54 | 746 | (692 | ) | ||||||||
| All other Design Segment Customers | 4,292 | 2,980 | 1,312 | |||||||||
| Total design segment revenues | $ | 8,025 | $ | 7,004 | $ | 1,021 | ||||||
Gross Profit
Distribution Segment
Gross profit for the distribution segment increased $133,000, or 11.4%, to $1,297,000 in the 2021 Period as compared to $1,164,000 in the 2020 Period, and gross margin improved from 12.5% to 12.9% in the same period. The increase in both gross profit and margin are driven by higher margins on the sale of non-medical cases and other products. This increase in profit margin was partially offset by the continued decline in gross margin on diabetic products due to a shift to lower margin cases and pricing pressures on diabetic products from customers. We continue to work on expanding our product offering to include higher margin products and enhancing our sales efforts to grow revenue and increase gross profit.
Design Segment
Gross profit for the design segment increased $700,000, or 34.8%, to $2,709,000 in the 2021 Period from $2,009,000 in the 2020 Period. Gross margin improved from 28.7% to 33.8% in the same period. The acquisition of Kablooe accounted for the majority of the increase in both gross profit and margin in the 2021 Period. Gross margin gains in the first quarter of Fiscal 2021 resulting from higher billing rates were partially offset by lower utilization rates in the 2021 Quarter. Depreciation expense, which is allocated to cost of sales for the design segment, was $62,000 and $54,000 for the 2021 Period and 2020 Period, respectively.
Sales and Marketing Expenses
Distribution Segment
Sales and marketing expenses for the distribution segment increased $225,000, or 30.3%, to $967,000 in the 2021 Period from $742,000 in the 2020 Period. The increase was primarily due to expenses associated with growing our retail distribution network. Sales and marketing expenses for the distribution segment increased to 9.6% of revenues in the 2021 Period as compared to 8.0% of revenues in the 2020 Period.
Design Segment
Sales and marketing expenses for the design segment decreased $58,000, or 21.3%, to $214,000 in the 2021 Period from $272,000 in the 2020 Period. The decrease in sales and marketing expenses is primarily due to lower payroll costs. Sales and marketing expenses for the design segment decreased to 2.7% of revenues in the 2021 Period from 3.9% of revenues in the 2020 Period.
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General and Administrative Expenses
Distribution Segment
General and administrative expenses in the distribution segment decreased $41,000, or 3.3%, to $1,202,000 in the 2021 Period from $1,243,000 in the 2020 Period. The decrease was primarily driven by a $66,000 reduction in Board of Directors costs and a $60,000 reduction in technology expenses, primarily due to lower software implementation costs, partially offset by an $80,000 insurance recovery received in the 2020 Period. General and administrative expenses for the distribution segment decreased to 11.9% of revenues in the 2021 Period as compared to 13.3% of revenues in the 2020 Period.
Design Segment
General and administrative expenses for the design segment increased $1,010,000, or 63.2%, to $2,607,000 in the 2021 Period from $1,597,000 in the 2020 Period. The increase is primarily driven by a $228,000 increase in payroll related costs, general and administrative costs of $507,000 generated by Kablooe, which was acquired in August 2020, and a $613,000 increase in bad debt expense, partially offset by a decrease in impairment charges (see Note 4) and lower professional fees related to a reduction in software implementation costs. General and administrative expenses for the design segment increased to 32.5% of revenues in the 2021 Period as compared to 22.8% of revenues in the 2020 Period.
Other Income / (Expense)
Distribution Segment
The distribution segment reported other expense of $44,000 in the 2021 Period as compared to other income of $274,000 in the 2020 Period. The variance is primarily due to the decrease in other income related to fair value adjustments associated with the Kablooe and IPS contingent earnout liabilities (see Note 4).
Design Segment
The design segment reported other income of $1,392,000 in the 2021 Period as compared to other expense of $31,000 in the 2020 Period. The primary component of other income in the 2021 Period was the $1,357,000 forgiveness of note payable related to the PPP loan. Other less significant factors contributing to the change were interest income on the note receivable from a customer which was fully reserved for in Fiscal 2019 and lower interest expense due to a reduction in the average amount of debt outstanding.
Income Taxes
For the 2021 Period, the Company generated net income of $364,000, primarily resulting from the $1,357,000 forgiveness of the PPP loan, which will not be recognized as taxable income per the CARES Act. The Company maintains significant net operating loss carryforwards and does not recognize income tax expense / (benefit) as its deferred tax provision is typically offset by a full valuation allowance on its net deferred tax asset.
LIQUIDITY AND CAPITAL RESOURCES
Our primary source of liquidity is our operations. The primary demands on our working capital have 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. At March 31, 2021, our working capital was $5,245,000 compared to $3,396,000 at September 30, 2020.
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In an abundance of caution and to proactively conserve the Company’s cash flow, we implemented certain cost-cutting measures which became effective in April 2021. These cost cutting measures included (i) our executive officers agreeing to a temporary pay cut and our Chief Executive Officer temporarily forgoing his base salary, (ii) a reduction in our head count and amounts paid to outside consultants and (iii) non-employee Board members agreeing to reduce their board fees for the remainder of the fiscal year. The Company anticipates that these pay cuts and other reductions will last for three months and result in approximately $200,000 of cash savings in the third quarter of Fiscal 2021. The Company will reevaluate the continuing need for these measures. In light of these circumstances, the Compensation Committee of the Board of Directors deferred a recommendation for director equity compensation until such time as the Company’s performance improved. Therefore, in addition to cash savings, the resulting reduction in equity compensation will lower the Company’s non-cash expenses in future periods.
At April 30, 2021, we had approximately $1,300,000 cash on hand and $1,300,000 available under our line of credit which matures May 31, 2022. Additionally, Forward China holds a $1,600,000 promissory note which matures December 31, 2022. Although this note has been extended on multiple occasions to assist us with our liquidity position, we plan on funding the repayment at maturity using existing cash balances and/or obtaining an additional credit facility as deemed necessary. We can provide no assurance that Forward China will extend the note again if we request an extension nor that any such credit facility will be available on terms acceptable to us or at all.
We anticipate that our liquidity and financial resources will be adequate to manage our operating and financial requirements until at least June 30, 2022. 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.
Although we do not anticipate the need to purchase 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 the six months ended March 31, 2021 and 2020, our sources and uses of cash were as follows:
Operating Activities
During the 2021 Period, cash used in operating activities of $398,000 primarily resulted from an operating loss of $984,000, a decrease in deferred income of $348,000, an increase in inventories of $874,000, a decrease in accrued expenses of $161,000, partially offset by non-cash expenses of $748,000 relating to depreciation, amortization, share-based compensation and bad debt expense, a decrease of $757,000 in accounts receivable, an increase of $395,000 in accounts payable and amounts due to Forward China and the net change in other operating assets and liabilities of $69,000.
During the 2020 Period, cash used in operating activities of $554,000 primarily resulted from an operating loss of $1,696,000, an increase in accounts receivable of $564,000, a decrease in accounts payable, accrued expenses and amounts due to Forward China of $1,019,000, an increase in prepaid expenses and other current assets of $168,000, bad debt recoveries of $110,000 and net changes in other operating assets and liabilities of $7,000, partially offset by a decline in inventories of $972,000, an increase in deferred income of $488,000, non-cash impairment charges of $1,342,000, and other non-cash expenses of $208,000 relating to depreciation, amortization, and share-based compensation.
Investing Activities
Cash used in investing activities in the 2021 Period and the 2020 Period of $38,000 and $27,000, respectively, resulted from purchases of property and equipment.
Financing Activities
In the 2021 Period, cash used in financing activities of $960,000 consisted of net repayments of the line of credit of $1,000,000, repayments of notes payable and finance leases of $104,000, partially offset by proceeds from stock options exercised of $144,000.
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In the 2020 Period, cash used in financing activities of $1,163,000 consisted of $900,000 in net repayments on the line of credit, $200,000 paid out on deferred cash consideration and $63,000 in repayments of notes payable and finance leases.
Related Party Transactions
For information on related party transactions and their financial impact, see Note 9 to the unaudited condensed consolidated financial statements contained herein.
| ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
| ITEM 4. | CONTROLS AND PROCEDURES |
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures.Procedures. Our management carried out an evaluation, with the participation of our Principal Executive Officer and Principal Financial Officer, required by Rule 13a-15 and Rule 15d-15 of the Securities Exchange Act of 1934 (the “Exchange Act”) of the effectiveness of our disclosure controls and procedures as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Exchange Act. Based on theirits evaluation, our management has concluded that our disclosure controls and procedures are effective as of the end of the period covered by this report to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and is accumulated and communicated to our management, including our Principal Executive Officer and Principal Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting. There were no changes in our internal control over financial reporting as defined in Rule 13a-15(f) and Rule 15d-15(f) under the Exchange Act that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Limitations of the Effectiveness of Controls and Procedures. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations of any control system, no evaluation of controls can provide absolute assurance that all control issues, if any, within a company have been detected.
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| ITEM 1. | LEGAL PROCEEDINGS |
ITEM 1. 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 claimed 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 filed a motion to dismiss the complaint on December 14, 2020. The court has not yet ruled on the Company’s motion.
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 DecemberAt March 31, 2017,2021, 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 1A. | RISK FACTORS |
ITEM 1A. RISK FACTORS
The COVID-19 pandemic has spread across the globe and continues to negatively impact worldwide economic activity and has impacted Risks Relatingour 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 to the Acquisitionspread of IPSthe disease or shutdowns requested or mandated by governmental authorities. Specifically, COVID-19 has increased the risk of customers’ inability to pay for our products and services and has the potential to impact collections of accounts receivable. The Company has transitioned some of its employees to working remotely, which subjects the Company to increased cybersecurity risks and may reduce workplace efficiency. 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.
The full extent of COVID-19’s negative impact on our business remains uncertain and it is not possible at this time to estimate the full impact that COVID-19 will have on our business. 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 are unableincur significant declines in customer orders, increased aging of accounts receivable or other negative consequences due to successfully integrate Intelligent Product Solutions, Inc. (“IPS”) with Forward, we may not realize allCOVID-19, the extent of the anticipated benefits of the Acquisition.
The success of the IPS acquisition (the “Acquisition”)which remains highly uncertain, it will depend, in large part,have a material adverse effect on the ability of Forward to realize the anticipated benefits from the Acquisition. To realize the anticipated benefits of the Acquisition, the combined company must successfully integrate the sales, marketing, accounting, executiveour business, financial condition and technology teams. This integration may be complex and time-consuming.
Potential difficulties Forward may encounter include, among others:
unanticipated issues in integrating logistics, information, communications and other systems;
integrating personnel from the two companies while maintaining focus on providing a consistent, high quality level of service and product;
integrating complex systems in a seamless manner that minimizes any adverse impact on customers, employees and vendors;
potential unknown liabilities, liabilities that are significantly larger than anticipated, or unforeseen expenses or delays associated with the Acquisition and the integration process;
unanticipated changes in applicable laws and regulations; and
complexities associated with managing the larger business.
Some of these factors are outside the control of either company.
Forward has not completed an acquisition comparable in size or scope to the Acquisition. The failure of Forward to successfully integrate IPS or otherwise to realize any of the anticipated benefits of the Acquisition could adversely affect its results of operations. The integration process maybe more difficult, costly or time-consuming than anticipated,
While we attempt to identify, manage, and mitigate risks and uncertainties associated with our business to the extent practical under the circumstances, some level of risk and uncertainty will always be present. Item 1A - “Risk Factors” in the Form 10-K describes some of the risks and uncertainties associated with our business, which could cause Forward’s stock pricewe strongly encourage you to decline.review. These risks and uncertainties have the potential to materially affect our business, financial condition, results of operations, cash flows, projected results, and future prospects. There have been no material changes in our risk factors from those disclosed in the Form 10-K.
| ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
We have previously disclosed allThere were no unregistered sales of securities without registration under the Securities Act of 1933 (the “Act”), other than the following: Effective January 22, 2018 through February 12, 2018, ten warrant holders exercised (via cashless exercises) an aggregate of 521,621 warrants with an exercise price of $1.84 per share and were issued an aggregate of 223,704 shares of the Company’s common stock. Theequity securities during the 2021 Quarter that were issued and soldnot previously disclosed in reliance upon the exemption from registration contained in Section 3(a)(9) of the Act.a Current Report on Form 8-K.
| ITEM 3. | DEFAULTS UPON SENIOR SECURITIES |
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
| ITEM 4. | MINE SAFETY DISCLOSURES |
ITEM 4. MINE SAFETY DISCLOSURES
Not Applicable.
| ITEM 5. | OTHER INFORMATION |
ITEM 5. OTHER INFORMATION
None.
| ITEM 6. | EXHIBITS |
ITEM 6. EXHIBITS
The exhibits listed in the accompanying “Index to Exhibits” are filed or incorporated by reference as part of this Form 10-Q.
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Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, hereunto duly authorized.
Dated: February 14, 2018May 13, 2021
| FORWARD INDUSTRIES, INC. | |
By:/s/ Terence Wise Terence Wise Chief Executive Officer (Principal Executive Officer) | |
| By:/s/ | |
| Anthony Camarda | |
| Chief Financial Officer | |
| (Principal Financial and Accounting Officer) |
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EXHIBIT INDEX
* This exhibit is being furnished rather than filed
+ Certain schedules, appendices and shall not be deemed incorporated by reference into any filing,exhibits to this agreement have been omitted in accordance with Item 601 of Regulation S-K. A copy of any omitted schedule and/or exhibit will be furnished supplementally to the Securities and Exchange Commission staff upon request.
Copies of this reportfiling (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., 477 S. Rosemary Ave. Ste. 219, West Palm Beach, Florida 33401,; 700 Veterans Memorial Hwy, Suite 100, Hauppauge, NY 11788; Attention: Corporate Secretary.
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